The circular flow model is a representation of an economy that shows the relationship of businesses and household and through their interaction through market for resources and products. Economy has two agents, which are business firms and households. The first agent is households that are social units comprising of people staying together in the same place. While, business firms are the companies that are involved in the production of products to make profits. Households interact with businesses through two ways; the first way is where households work for business to get income. The second way is when the household uses the income they got to buy products that businesses sell. The first way of interaction occurs in markets for resources while the second way of interaction occurs in markets for products (Amacher & Pate, 2013).
My parents work in a supermarket where they get their monthly income from the labor they give. The money that the supermarket flows they get from the business flows in an anticlockwise direction since the money they get is expenditures from the business. They are the suppliers of labor as a factor of production and so the business pays them for the resources they provide. The money the business gives out to the employees is expenditure to them and income to employees. When they need to buy products from the supermarket, it becomes an expenditure to them, while for the supermarket it is an income. The money now goes through a clockwise direction because families give money to the business. Businesses are suppliers of products to the families who in the case of market for products are demanders (Amacher & Pate, 2013). The products that flow from the business to the household are bring income to the business while to the households they become purchases.
References
Amacher, R., & Pate, J. (2013). Microeconomics principles and policies. San Diego, CA:Bridgepoint Education, Inc.
