The economy's income and expenditure 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.
Based on this model, households earn income when ________ purchase _________ in markets for factors of production.
(i) firms; labor and capital
(ii) households; goods and services
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A. Based on the model, firms earn revenue when ______________(firms, households) purchase ___________(goods and services, labor and capital) in markets for goods and services.
B. Suppose Kate earns $800 per week working as a doctor for the Medical Clinic. She uses $9 to order a mojito cocktail at Little Havana. Little Havana pays Hubert $300 per week to wait tables. Hubert uses $175 to purchase medical services from the Medical Clinic.
a. Identify whether each of the following events in the scenario occurs in the market for factors of production or the market for goods and services.
| Event | The market for Factors of Production | The market for goods and services |
| Kate spends $9 to order a mojito cocktail. | ||
| Hubert spends $175 to purchase medical services for the Medical Clinic. | ||
| Hubert earns $300 per week working for Little Havana. |
b. Which of the elements of this scenario represent a flow from a firm to a household? This could be a flow of dollars, inputs, or output.
Kate's labor, The Mojito Kate receives, The $175Hubert's spend to purchase Medical services from the Medical Clinic.
c. The actual economy is more complicated than the one illustrated in the previous circular-flow diagram of a simple economy. True/False.
