Answer to Question #109007 in Microeconomics for Tonoy

Question

Explain the flow of the markets for goods and services and markets for factors of production in a simple economy with the help of the Circular flow diagram.

Answer 1

Economy may be taken as cycles that are in a continues movement in two different directions, goods and services move from an a person, flowing all the way to business field and back to the individuals.

We also experience money movement from households to businesses and back again. And this represents the renumerations that we earn through work, but at the end of the day we need to buy items which accounts back to completion of the cycle.

The circular flow is majorly affected by factors of production that include, labour, Land, capital and entrepreneurs

The process can be summarized as follows,