Question

In the circular flow diagram who are the three main participants in the domestic economy. Describe what each participant is trying to maximize and what constraints do each face in trying to maximize those goals?

Answer 1

In circular flow diagram three main participants are firms, household, and government.

These participants are trying to maximize the following things.

firm- it is trying to maximize its profit. constraints are factors of production, demand for the product.

household- it is trying to maximize its income and consumption. constraints are factor of production that it can supply and income that it gets.

government- maximizing the tax collection. with reasonable taxrate its tax collection depends on firms profit and income of the households.