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Explain in detail the interaction between households and firms in the output and input markets. Draw...

Explain in detail the interaction between households and firms in the output and input markets. Draw the circular flow diagram

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Answer #1

Households and firms constitute to be the to players in the basic circular flow of income model. This model has two markets. One market is input market. Here, the households sell their factors of production and they are paid by the firms. Afterwards, these people work in the firms and produce goods and services. It constitutes output market where the firms sell goods and services to the households and get paid for their products. It completes the circular flow of income. It is demonstrated as follows.

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