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.
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Based on this model, households earn income when purchase in factor markets.
Suppose Maria earns $775 per week working as a doctor for the Medical Clinic. She uses $8 to have breakfast at Dinah’s Diner. Dinah’s Diner pays Kevin $475 per week to work as a short-order cook. Kevin uses $250 to purchase medical services from the Medical Clinic.
Identify whether each of the following events in this scenario occurs in the factor market or the product market.
Event
Factor Market
Product Market
Kevin spends $250 to purchase medical services from the Medical Clinic.
Maria spends $8 to have breakfast.
Kevin earns $475 per week working for Dinah’s Diner.
Which of the elements of this scenario represent a flow from a household to a firm? This could be a flow of dollars, inputs, or outputs. Check all that apply.
Maria’s labor
The breakfast Maria receives
The $250 Kevin spends to purchase medical services from the Medical Clinic
The $475 per week Kevin earns working for Dinah’s Diner
