Answer to Question #155310 in Microeconomics for jack

Question

Show the following transaction in the circular flow diagram. Birbhum oil

mill produces and sells 300 litres of oil at a price of Rs. 110/litre per day.

Birbhum oil mill engages 4 persons in his factory with a wage of Rs. 500/-

per day.

Answer 1

A circular flow diagram is an economic model that simplifies major exchanges, represented in terms of goods and services and money among economic agents in an economy.

In this case, the main agents are the firm (Birbhum oil mill) and the households.

The circular flow of the above transactions is simplied in the diagram below.

Birbhum produces and sell 300 liters of oil to consumers through the oil market daily. In turn, households supply a factor of production, labor. The labor supplied is 4 people per day.

On another flow, Birbhum pays wages for labor services.

Total wages = 4 people × Rs. 500 per day

= Rs. 2,000 per day.

Households use their income to pay Birbhum for the consumption of oil.

Total consumption = 300 litres × Rs. 110 per liter

= Rs. 33,000 per day .