Textbook Guide Economics: Opportunity Cost, Scientific Method, Macroeconomics
Document Summary
This model assumes there are only two type of decision makers: households and firms. Firms produce goods and services using inputs such as land, labor (the workforce) and capital (buildings and machines), otherwise known as the factors of production. Households own the factors of production and consume the output (goods and services) that firms produce. In a market for goods and services, households are buyers of goods and services while firms are sellers of their produced output. In a market for factors of production, households are sellers of inputs to produce goods and services while firms are buyers of input. The circular-flow diagram is a visual model of an economy that expresses how currency flows between households and firms in a market. This model assumes that an economy only produces two goods. An economy must balance its production of goods and services because of the scarcity of resources. Assuming the two goods in allocation are cars and computers:
