Question

Describe the circular flow model of the free-market system.

Answer 1

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The circular flow model in economics describes how resources, money, goods, and services flow through an economy. ... Therefore, the circular motion shows the flow of money to households then into goods and services and back into households.

Answer 2

The circular flow model of a free-market economy represents the real (goods and services) and monetary flows exchanged between the three types of economic agents existing in an economy (households, firms and public entities).

• Households are consumers of products and services, for which they pay a price, while they are owners of the factors of production (land, labor, capital and entrepeneurship) and offer them in exchange for a retribution (rent, interest, wage or profit).

• Firms produce goods and service and sell them in the markets. On the other hand, they demand factors of production for their manufacturing activities and they have to pay for them.
• Public sector entities can act as producers or consumers and therefore can adopt any of the roles abovementioned for firms and households.