Question

In three to five sentences, explain the role of the household in the circular flow model. Which role is the most important? Why?

Answer 1

In economics, a circular flow model is a diagram that is used to represent the monetary transactions in an economy.

National income, output, and expenditure are generated by the activities of the two most vital parts of an economy, its households and firms, as they engage in mutually beneficial exchange.

Households

The primary economic function of households is to supply domestic firms with needed factors of production - land, human capital, real capital and enterprise. The factors are supplied by factor owners in return for a reward. Land is supplied by landowners, human capital by labor, real capital by capital owners (capitalists) and enterprise is provided by entrepreneurs. Entrepreneurs combine the other three factors, and bear the risks associated with production.