Question

3. 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 Outputs Sales receipts Goods and services Expenditures Goods and services Households Businesses Labor, capital, etc. Incomes Labor, capital, etc. Markets for Inputs Wages, interest, etc.

Answer 1

Based on this circular model, households earn income when firms purchase resources in the resource market
		Resource market ( Market for factors of production)	Product Market (Market for goods and services).
Teresa earns $650 working as a analyst		Market for factors of production		Teresa supplies labor in the resource market
Teresa uses $10 to order a mojito cocktail from Little Havana			Market for goods and services	Teresa buys final good from the product market.
Little Havana pays Sam $350 per week to wait on tables		Market for factors of production		Sam supplies labor in the resource market
Sam uses $150 to purchase tax services from A plus accountants			Market for goods and services	Sam buys final good from the product market.
Factor market is where factors of production like labor, capital are bought and sold.
Product market is where final products and services are exchanged.
Flow from households to firms
The $150 Sam spends to purchase tax services
The mojito Teresa receives
This is flow from firm to household
The $350 per week that Sam earns
This is a flow from firm to household