How money and goods flow in a Market Economy

What is a Market?

A market is an arrangement that allows buyers and sellers to exchange things

Why Do Markets Exist?

Because we are not self-sufficient!Doing everything yourself is too time consuming!

Specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities

Specialization makes us more efficient

Because we specialize we need markets to sell what we have and buy what we need

The Factor Market

Firms purchase factors of production from households—this arena is called the factor market

Individuals/HouseholdsBusiness

Firms Firms pay households for land, labor, & capital

Households sell firms land, labor, capital

The Product MarketThe goods and services that firms produce are purchased by households in the product market

Households purchase the products made by firms with the money they received from firms in the factor market

Individuals/Households

Business Firms

Households pay firms for goods and services

Firms sell goods and services to households

Free Market is Represented as a

Circular Flow Diagram

Individuals/HouseholdsBusiness

Firms

Monetary flow

Physical flow

Firms pay households for l, l, & capital

Households pay for goods and services from firms

Households sell firms land, labor, capital

Firms sell goods and services to households

Circular Flow Diagram

Individuals/HouseholdsBusine

ss Firms

Individuals pay taxes

Businesses pay taxes

Gov provides benefits

Gov provides benefits

Product Market

Factors Market