2.5 The Circular Flow Model

What does the circular flow model show in economics?

It illustrates the continuous flow of goods, services, resources, and money between households and businesses in a market economy.

What role do households play in the circular flow model?

Households own all resources and sell them in the resource market to earn income, which they use to buy goods and services in the product market.

What role do businesses play in the circular flow model?

Businesses buy resources to produce goods and services, sell those goods in the product market, and earn revenue.

What happens in the product market?

Businesses sell goods and services to households. Households spend income, and businesses receive revenue.

What happens in the resource market?

Households sell labor, land, capital, and entrepreneurship to businesses. Businesses pay wages, rents, interest, and profits.

What are the two types of flows in the circular flow model?

• Real flows: Resources and goods

• Monetary flows: Income and spending (money)

How do households get money in the circular flow model?

By selling resources (labor, land, capital, entrepreneurship) to businesses in the resource market.

How do businesses get money in the circular flow model?

By selling goods and services to households in the product market.

How are households and businesses both buyers and sellers?

• Households sell resources and buy products

• Businesses buy resources and sell products

What do the red and blue arrows represent in the circular flow diagram?

• Red arrows: Real flows (resources and products)

• Blue arrows: Monetary flows (income and expenditures)