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
Business Firms
Firms pay
households for
land, labor, &
capital
Households
sell firms land,
labor, capital
Individuals/
Households
The Product Market
The 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
Firms sell goods
and services to
households
Households pay
firms for goods
and services
Business Firms
Individuals/
Households
Free Market is Represented as
a Circular Flow Diagram
Firms sell goods
and services to
households
Physical flow
Monetary flow
Households pay for
goods and services
from firms
Business Firms
Firms pay
households for
l, l, & capital
Individuals/
Households
Households sell firms
land, labor, capital
Circular Flow Diagram
Product Market
Gov provides
benefits
Business
Firms
Businesses pay
taxes
Gov provides
benefits
Individuals pay
taxes
Factors Market
Individuals/
Households