Question 3.

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.

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