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#1 Based on this model, households earn income when purchase in factor markets
#2 Identify whether each of the following events in this scenario occurs in the factor market or the product market
#3 Which of the elements of this scenario represents a flow from a firm to a household? This could be a flow of dollars input or output check all that apply
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2. The circular-flow model
The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs.
Markets for Goods and Services
Firms
Households
Markets for Factors of Production
Based on this model, households earn income when purchase in factor markets. Suppose Susan earns $625 per week working as an analyst for A-Plus Accountants. She uses $10 to order a mojito cocktail at Little Havana. Little Havana pays Raphael $325 per week to wait tables. Raphael uses $150 to purchase tax services from
A-Plus Accountants.
Identify whether each of the following events in this scenario occurs in the factor market or the product market.
Event
Susan spends $10 to order a mojito cocktail.
Raphael earns $325 per week working for Little Havana.
Susan earns $625 per week working for A-Plus Accountants.
Which of the elements of this scenario represent a flow from a firm to a household? This could be a flow of dollars, inputs, or outputs. Check all that apply.
Susan’s labor
The mojito Susan receives
The $325 per week Raphael earns working for Little Havana
The $150 Raphael spends to purchase tax services from A-Plus Accountants
♦ Relevant knowledge
Income from households is defined as the total net income of the entire members of a household over an age limit. It is not required for the individuals concerned to be connected in any way to be considered to be members in the household.
The circular flow diagram shows that households make income when they purchase firms in factors markets.
Event 1 takes place in the product market when Susan purchases mojito cocktails (mojito cocktail, a good and not a production factor) in the goods-services market.
Event 2 takes place in the factors market, Raphael earning money for his labor on the market for factors production.
Event 3 takes place in the factors market, as Susan earns in exchange for her labor.
These scenarios represent a flow of money from one household to another:
Susan gets a mojito. It’s a flow from household to firm (Susan).
Raphael makes $325 per Week working for little Havana. This is the flow of dollars between firm (little Havana), and household (Raphael).