The Circular Flow Diagram - Essay Example

The households in turn spend the money paid to them by firms in the form of wages and salaries to purchase finished products from firms. The firm also uses the proceeds from sales of products to buy raw materials for further production of goods, which will require human effort (labour). This relationship is repetitive making the circular flow continuous. Households sell resources or factors of production in the factor market and use the money obtained to purchase products sold by the firm in the product market.

My family as a household provides labour to the firm. The family is then rewarded for the labour it sells to the firm through wages and salaries. After payment, the family uses the payment from the firm to purchase goods manufactured by the firm, hence the firm gets proceeds from the sales of products. This money obtained from the family through product purchase is again used to purchase raw materials for producing goods and also used to pay workers (my family). This relationship is continuously resulting in an endless circular flow pattern of income. Read More