Explain the Circular Flow Diagram Model presented on Figure 1 according to 2 types of flows. Define what is an economic model and why economists use economic models.

MARKETS Revenue FOR Spending GOODS AND SERVICES Firms sell Households buy Goods Goods and and services services sold bought FIRMS HOUSEHOLDS Produce and sell goods and services Hire and use factors of production Buy and consume goods and services Own and sell factors of production Factors of MARKETS Labor, land, production FOR and capital FACTORS OF PRODUCTION Wages, rent, and profit Households sell Firms buy Income = Flow of inputs and outputs = Flow of dollars Figure 1.