Answer to Question #146890 in Microeconomics for zohan

Question

b) Economy can be represented by economic models. One of the models we use to understand economy is a “Circular Flow Diagram”. Sketch a Circular flow model and explain the flow of money and flow of goods and services and factors of production caused by the following activities.
i. Kaleem pays a shopkeeper Rs.150 for a liter of milk. (1 Mark)
ii. Mustaqeem while working at a fast-food restaurant earns Rs.500 per hour. (1 Mark)
iii. Sana spends Rs.500 on a haircut. (1 Mark)
iv. Mustafa receives Rs.200,000 from his 10 percent ownership of Salman Chemicals Ltd

Answer 1

I. Kaleem purchases milk from the product's market. Thus money flows from households through the product market to firms and product goes from firms to household from the product market.

II. Mustaqeem is working that he supplying his labor force to the firm through factors market and in exchange for his human resource the Mustaqeem is receiving wages through factors market.

III. Sana is spending Rs. 500 on her haircut. So, she is making the purchase from the product market. In exchange for the service, she pays Rs 500. The firm receives the amount from Sana through the product market.

IV. The amount the household receives in exchange for the resources provided to the firm through the capital market.