Understanding the circular flow of

income

HOUSEHOLDS RESOURCE OWNERS

Business firms

Money payments

Income paymentsWages, Rent, Interest, Profits

Consumer Purchases

Productive ResourcesL. L. C. E.

Goods & Services

The product market

The factor market

1. Give three examples of resource owners

• 1.

• 2.

• 3.

2. Define a business firm

3. What is the product market?

4. Give three examples of transactions you made this week in

the product market:

• 1.

• 2.

• 3.

5. What is the factor market?

6. Give an example of a transaction you or your family made this week

in the factor market:• 1.

• 2.

7. How are business firms connected to the factor and

product markets?

8. How are households connected to the factor and

product markets?

9. Where do resource owners get the money to buy goods and services in the product

market?

10. Where do business firms get the money to pay resource

owners for their land, labor, capital and entrepreneurship in

the factor market?

11. Why is it important to know that a market economy is

characterized by interdependence?

HOUSEHOLDSSELL, LOAN, LEASE, RENTTHE FOUR FACTORS OF

PRODUCTIONTO BUSINESS FIRMS

HOUSEHOLDS receive income from selling productive resources

to firms, which allows them to purchase final goods and services

Business firms sell finished goods to households

BUSINESS FIRMS earn income from selling products to households, which allows them to

purchase productive resources

12. What determines the prices of land, labor, capital and

entrepreneurship in a factor market?