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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

The circular-flow diagram illustrates that, in markets for the factors of production.

a. households are sellers, and firms are buyers.

b. households are buyers, and firms are sellers.

c. households and firms are both buyers.

d. households and firms are both sellers.

To determine
The role of households and firms in the market for factors of production in circular flow.

Explanation

Option (a):

Circular flow is a visual model of the economy. In this model, the only two types of decision makers are firms and households. In the market for factors of production, the firms produce goods and services using inputs such as labor, land, and capital. These inputs are called the factors of production. Households own the factors of production and they are given to the firms for production. Then, households consume all the finished goods and services that the firms produce. Thus, option “a” is correct.

Option (b):

In the market for goods and services, households are buying goods services and from firms. Thus, households are considered as buyers and firms are considered as sellers...

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