Circular flow elaborates on the factors of production and income


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Circular flow elaborates on the factors of production and income .In simple terms it describes the flow of money and products in an economy which shows the relationships between firms and households. The model shows how income between producers and consumers.

46228037020500 Goods and services





170243541465500170243521272500 Consumer Expenditure

39941523368000 Wage, rent, dividends

Factors for production

The above model is represented in two market economies mainly households and business firms. This is because it represents the members in an economy as mentioned in the above statement (Tucker, 2012). The product market is where all businesses made by the firms are exchanged, in an economy where the economy is regarded as a free market. This is because decisions made in an economy are the ones influenced by price. The relationship between market price and quantity demand helps analyze income, wealth ,prices, taste as long as the mentioned are held constant(Oslo ,2009).

In the model households provide labor to business in exchange for income and the income is used to purchase the product the firms produce. Money that flows from households to business firms is consumption spending and can also be declared revenue to business firms. The firm is the supplier thus if price of the product increases there will be an eventual decrease in demand, but if income increase there will be increase in demand (Mankiw, 2014).

The resource market is where money is given to households in exchanged for economical resources used as factors of production. This is where inputs like land labor capital and other resources are exchanged. Since households spend on purchasing goods and services they can as well create savings. This can be classified as financial capital when a firm decides to borrow money (Tucker, 2012). The interest charged acts as a compensation to the borrower as banks will pay interest on the household deposit. The factors of production that flow from households to businesses are a source of income and inputs in the firms.


Tucker, I. (2012). Survey of economics (8 ed., pp. 176-126). Boston: Cengage Learning,

Mankiw, N. (2014). Principles of economics (p. 234). Boston: Cengage Learning

BIBLIOGRAPHY Oslo, C. F. (2009). Principles of micro Economics. New Jersey: Pearson Prentice Hall.

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