Answer to Question #180309 in Microeconomics for michele ford

Question

Using a circular flow diagram, illustrate how households and firms interact via the goods market and factor market. Clearly describe and indicate the direction of the flows

Answer 1

circular-flow diagram

The circular-flow diagram (or circular-flow model) depicts the flow of goods and money between two separate sections of the economy:-goods and services sector, in which households buy goods and services from businesses in exchange for money;Firms buy factors of production (such as labor or capital) from households in exchange for money in a factor of production market.

 The market for goods and services is the place where households spend their money buying goods and services produced by firms. In other words, is the place where firms sell the goods and services they have produced, receiving a revenue paid by households.

This market is the location where goods and money are traded. In this case, money flows from households to firms (green arrow in diagram below) in exchange for finished goods, which flow from firms to households (red arrow) The market for factors of production is a place where households sell their labor, capital, and other factors of production, such as land, in exchange for money. These elements are used by businesses in their development..Money flows from companies to households in this case (green arrow in diagram below) in the form of wages for labor, interest for capital, and rent for the use of land. Factors of output flow from households to businesses (red arrow), allowing them to generate more products and services. It's worth noting that, as is customary, diagrams do not depict how the economy functions in practice. There are a few items not seen in this illustration that must be considered in order to truly comprehend how a country's economy operates. Take, for example, government interference. In this case, money flows from businesses to households in the form of wages in return for labor.Money flows from firms to households in the form of , interest on capital, and rent for the use of land in this case (green arrow in the diagram below). Factors of production move from households (red arrow) to businesses, allowing them to manufacture more products and services. It's worth noting that, as is typical, diagrams do not depict how the economy works in practice. There are a few items not seen in this illustration that must be considered in order to truly comprehend how a country's economy operates. Take, for example, government action. In this case, money flows from companies to households in the form of wages in return for labor (green arrow in the diagram below).

.The diagram does not depict government spending (in the form of unemployment insurance, for example) or government revenue (taxes).

This diagram, on the other hand, provides a good picture of how the economy functions. The gross domestic product is a way of calculating all of these money flows (GDP). It can be calculated using one of three methods: total expenditure, total revenue, or production data.