Question

Draw, label and explain the Circular Flow Model (CFM). Include the following: firms, households, product market, and factor (or resource) market. Who owns the productive resources? What are those resources?
What payment does each type of resource earn?
Explain the two markets in the CFM and explain the roles that firms and household each play in the CFM.

Answer 1

Answer:

Productive Resources Owners : Households

Resources : Land, Labour, Capital, Entrepreneur [paid rent, wages, interest, profit]

Explanation:

Simple (Two Sector) Circular Flow of Income : shows how receipts & payments for factor services, goods & services revolve within two sectors of economy.

Here, the two sectors are :

• Households : Owners of factors of production & consumers of final goods & services
• Firms : Buyers of factors of production & providers (sellers) of final goods & services

Households provide firms with factors of production : Land, Labour, Capital, Entrepreneur. In return, firms pay them with respective factor payments : Rent, Wages, Interest, Profit. They produce final goods & services by utilising the productive factors.

Firms sell these final goods & services to households. In return, households pay them prices for the for their purchased goods & services, through the factor incomes they had earned from firms.