Answer to Question #145670 in Economics for Shivani Lohiya

Question

Explain how firms and individuals participate and interact in the product market and in the factor market.

Answer 1

The circular flow diagram offers a simple way of organizing the economic transactions that occur between households and firms in the economy.

Households are buyers and firms are sellers in the product market. In particular, households buy the output of goods and services that firms produce.

Households are sellers, and firms are buyers in the factor market. In this market households provide the inputs that firms use to produce goods and services.