The following diagram presents a circular-flow model of a simple economy. The ou
ID: 1162435 • Letter: T
Question
The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Based on this model, households earn income when __(firms / households)__ purchase ___(factors / goods or services)__in factor markets.
Suppose Juanita earns $650 per week working as a corporate attorney for Rowan and Martin Associates. She uses $9 to buy a box of aspirin at Pillmart Pharmacy. Pillmart Pharmacy pays Gilberto $350 per week to work the cash register. Gilberto uses $250 to purchase legal service from Rowan and Martin Associates.
Identify whether each of the following events in this scenario occurs in the factor market or the product market. Event Factor Market Product Market
Gilberto spends $250 to purchase legal service from Rowan and Martin Associates.
Juanita spends $9 to buy a box of aspirin.
Gilberto earns $350 per week working for Pillmart Pharmacy.
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 aspirin Juanita receives
The $250 Gilberto spends to purchase legal service from Rowan and Martin Associates
The $350 per week Gilberto earns working for Pillmart Pharmacy
Juanita's labor
Explanation / Answer
1) Under simple circular flow model firms provide goods and services to housholds for which in return the households supplies prices to firms. On other hand firms receive factors of production like man, capital, labor, land from households and in return give factor payment like wages, interest, rent etc. The income hence received by households is the factor oyament that they receive from firms from which they pay price of goods and services to firm.
Thus, households earn income when firms purchase factors in factor markets.
2)
Gilberto spends $250 to purchase legal service from Rowan and Martin Associates: Product market as the legal service is product not factor of production and Gilberto pay price of product not of factor of production
Juanita spends $9 to buy a box of aspirin: Product market as the laspirin is product not factor of production and Juanita pay price of product not of factor of production.
Gilberto earns $350 per week working for Pillmart Pharmacy: Factor market as the service Gilberto provide is labor service and gets wages in return.
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 aspirin Juanita receives : Flow of output from firm to household.
The $250 Gilberto spends to purchase legal service from Rowan and Martin Associates: Flow of dollar as price of product from household to firm.
The $350 per week Gilberto earns working for Pillmart Pharmacy: Flow of dollars (as factor payment) from firm to household.
Juanita's labor: Flow of input from households to firm.
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