# The Circular-Flow Model### OverviewThe diagram illustrates a circular-flow model of a simple economy. This model depicts interactions between different economic sectors, demonstrating how money and resources circulate within an economy.### Diagram Explanation- **Components:** - **Firms**: Represent companies that produce goods and services. - **Households**: Represent consumers who own factors of production and consume goods and services. - **Markets for Goods and Services**: Where firms sell and households buy finished products. - **Markets for Factors of Production**: Where households supply and firms purchase resources needed to produce.- **Arrows:** - **Green Arrows (Outer Set)**: Represent the flow of dollars. - From Firms to Households: Payments for labor, land, and capital. - From Households to Firms: Spending on goods and services. - **Red Arrows (Inner Set)**: Indicate the flow of inputs and outputs. - From Households to Firms: Supplying factors like labor and capital. - From Firms to Households: Delivering goods and services.### ApplicationBased on this model, households earn income when **firms purchase factors** in factor markets.#### Example Scenario:- Teresa earns $775 per week working as a jewelry appraiser for Classy’s Jewelry Store. - She spends $9 to buy aspirin at Pillmart Pharmacy.- Sam earns $450 per week working at Pillmart Pharmacy. - He spends $325 to purchase a necklace from Classy’s Jewelry Store. This interaction exemplifies the flow of money and resources within the circular-flow model, illustrating how households earn and spend their income in an economy. Suppose Teresa earns $775 per week working as a jewelry appraiser for Classy’s Jewelry Store. She uses $9 to buy a box of aspirin at Pillmart Pharmacy. Pillmart Pharmacy pays Sam $450 per week to work the cash register. Sam uses $325 to purchase a necklace from Classy’s Jewelry Store.**Identify whether each of the following events in this scenario occurs in the factor market or the product market.**| Event | Factor Market | Product Market ||---------------------------------------------------------------|---------------|----------------|| Sam earns $450 per week working for Pillmart Pharmacy. | ● | || Teresa spends $9 to buy a box of aspirin. | | ● || Sam spends $325 to purchase necklace from Classy’s Jewelry Store. | | ● |**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 outputs. *Check all that apply.***- [ ] The $450 per week Sam earns working for Pillmart Pharmacy- [x] Teresa’s labor- [ ] The aspirin Teresa receives- [ ] The $325 Sam spends to purchase necklace from Classy’s Jewelry Store

In a closed two sector economy, there are only households and businesses. Households provide labor…

Suppose Teresa earns $775 per week working as jewelry appraiser for Classy's Jewelry Store. She uses $9 to buy a box of aspirin at Pillmart Pharmacy. Pillmart Pharmacy pays Sam $450 per week to work the cash register. Sam uses $325 to purchase necklace from Classy's Jewelry Store. Identify whether each of the following events in this scenario occurs in the factor market or the product market. Event Factor Market Product Market Sam earns $450 per week working for Pillmart Pharmacy. Teresa spends $9 to buy a box of aspirin. Sam spends $325 to purchase necklace from Classy's Jewelry Store. 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 outputs. Check all that apply. O The $450 per week Sam earns working for Pillmart Pharmacy O Teresa's labor O The aspirin Teresa receives O The $325 Sam spends to purchase necklace from Classy's Jewelry Store

Suppose Teresa earns $775 per week working as jewelry appraiser for Classy's Jewelry Store. She uses $9 to buy a box of aspirin at Pillmart Pharmacy. Pillmart Pharmacy pays Sam $450 per week to work the cash register. Sam uses $325 to purchase necklace from Classy's Jewelry Store. Identify whether each of the following events in this scenario occurs in the factor market or the product market. Event Factor Market Product Market Sam earns $450 per week working for Pillmart Pharmacy. Teresa spends $9 to buy a box of aspirin. Sam spends $325 to purchase necklace from Classy's Jewelry Store. 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 outputs. Check all that apply. O The $450 per week Sam earns working for Pillmart Pharmacy O Teresa's labor O The aspirin Teresa receives O The $325 Sam spends to purchase necklace from Classy's Jewelry Store

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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