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 Individuals/ Households Business Firms Firms pay households for land, labor, & capital Households sell firms land, labor, capital

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 Individuals/ Households Business Firms Households pay firms for goods and services Firms sell goods and services to households

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

Circular Flow Diagram Individuals/ Households Business Firms Individuals pay taxes Businesses pay taxes Gov provides benefits Product Market Factors Market