PPE0044 circular flow diagram

PPE0044

​Circular Flow Diagram

​Circular Flow Diagram

​A diagram that shows how resources, money, goods and services flow between households and firms through resources (factor) and product markets.

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Explanation...

​Businesses/Firms need resources in order to produce goods and services. Households provide resources to businesses/firms through the resource/factor market. Businesses/firms convert those resources into goods and services.

Households purchase goods and services, which businesses/firms provide through the product market.

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​Payment for each factor of production:

1. Labor. These are workers. Factor payment is referred to as “wages.”

2. Land. This includes land that is rented or purchased, also include natural resources and raw materials. Factor payment for land is referred to as “rent.”

3. Capital. Goods that can be used as inputs for further production, example machines, equipments. The factor payment for capital is refered to as "interest"

4. Entrepreneurs. These are the people who put the other three resources together to create a successful business. The factor payment for entrepreneurs is called “profit.”

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​Explanation...