A Circular Flow Diagram Is A Visual Model Of How The...

A circular flow diagram is simply a visual model of how the economy works (cite school book). It also shows the players and how they interact with each other to organize to make up the economy. It is a valuable tool for micro-economic understanding. The models have two sections; expenditure and output. All of this is an important factor since a circular diagram does create a pattern. There is production, income, spending and back to production. The players or participants of a circular diagram are households, firms, the resource market, government and the rest of the world. Some models even incorporate financial institutions like banks and Wall Street. The households and firms interact with each other in the marketplace regularly. Households need goods and services and firms supply them. Firms need the money and the households pay them for their goods and services. It can get a lot more technical with the wording, but this is the basic idea. The household sector deals with the firms in two unique ways: the household sector supplies things such as a labor force to the firms in exchange for a paycheck or income, then the households spend their money to buy goods and services (Buck, J., blog) Connected to these two vital participants are the markets for goods and services and the markets for factors of production. The markets for goods and services use things such as labor, buildings and equipment, and land (book). Consequently, the markets for factors of production can beShow MoreRelatedCircular Flow Diagrams893 Words   |  4 Pages Circular Flow Diagrams Introduction Money flows into and out of the economy. The circular flow diagram explains how money moves through the economic system involving households, businesses, the government, and foreign agents (Editorial Board, 2011). Circular flow diagrams are visual models that show firms who employ workers, the workers then spend on goods produced by firms, and the money is then used to compensate the worker and buy raw materials to make the goods and the circle continuesRead MoreThe Circular Flow Diagram Analysis1034 Words   |  5 PagesThe circular Flow diagram that I created above contains these sectors such as Domestic firms, Household, the rest of the world and Government. The diagram illustrates the continuous movement of money for goods and services between producers and consumers. The household sector includes everyone; such as you and me we are buying products from everyone and selling our work. So this is everyone who may be seeking to satisfy unlimited wants and needs. Households are responsible for consumption. 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