1. The Circular Flow
The circular flow of economic activity shows how firms and households interact in input and output markets.

2. Product Markets and Factor Markets: The Circular Flow
Product or output markets are the markets in which goods and services are exchanged.
Factor markets are the markets in which resources—labor, capital, and land—used to produce products, are exchanged.

3. The Circular Flow
Goods and services flow clockwise. Firms provide goods and services; households supply labor services.
Payments (usually money) flow in the opposite direction (counterclockwise) as the flow of labor services, goods, and services.

4. The Circular Flow Labor Capital Land
Factor markets are the markets in which the resources used to produce products are exchanged. They include:
Labor
Capital
Land

5. The Circular Flow
1. The labor market, in which households supply work for wages to firms that demand labor.

6. The Circular Flow
2. The capital market, in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.

7. The Circular Flow
3. The land market, in which households supply land or other natural resources.

8. Government