3. The circular flow model The following diagram presents a circular flow model
ID: 1137412 • Letter: 3
Question
3. The circular flow model The following diagram presents a circular flow model of a simple economy. The Inner set of arrows (shown in green) shows the flow of dollars, and the outer set of arrows (shown in red) shows the corresponding flow of inputs and outputs Produc Based on this model, households eam income firmsY purchase goods and services. in the resource markets. when firns resources s9 to order a mojito cocktail at Little Suppose Ana earns $850 per week working as a corporate attorney for Rowan Havana·Little Havana pays Yakov $425 per week to wait tables. Yakov uses $27 lhe uses goods and services ice from Rowan and Martin AssociatesExplanation / Answer
Answer - 'Circular flow model' give us the idea how income flows from business sector to household sector and from household sector to business sector. Business sector needs resource in order to produce 'goods and services' and pays to resources as resource income. This resource income is spent on goods and service. In form of price of goods and services the income returns back to business sector.
In above diagram,
Based on this model, household earn income when firm purchase resources in the resources market.
Identify whether...
Event
Market (Resource/Product)
Reason (Details)
Yakov earns $425 per week working for little Havana.
Resource Market
Yakov is earning wages from Little Havana because he is selling his service to the restaurant. Yakov is a resource for Little Havana. This event is the part of 'resource market'
Ana Earns $850 per week working for Rowan and Martin associates.
Resource Market
Ana earns wage from Rowan and Martin associates because she is selling her services to the legal firm. This is a part of resource market also. Ana is working as a labor for Rowan and Martin associates.
Yakov spends $275 to purchase legal services from Rowan and Martin associates.
Product Market
Yakov is purchasing legal services from Rowan and Martin associates. Rowan and Martin associate is a firm which is selling its service to customers, thus Yakov is buying legal services from product market and paying price to the firm. This is the part of product market.
which of the elements of the scenario represents a flow from a household to a firm?
(a) Ana's labor - This is the flow of input from household to firm. It applies
(b) The $275 Yakov spends to purchase legal services from Rowan and Martin associates. This is the flow of 'dollar' from household to firm. It applies.
(c) The $425 per week Yakov earns working for Little Havana. This is the flow of 'input' from household to firm. it applies.
Event
Market (Resource/Product)
Reason (Details)
Yakov earns $425 per week working for little Havana.
Resource Market
Yakov is earning wages from Little Havana because he is selling his service to the restaurant. Yakov is a resource for Little Havana. This event is the part of 'resource market'
Ana Earns $850 per week working for Rowan and Martin associates.
Resource Market
Ana earns wage from Rowan and Martin associates because she is selling her services to the legal firm. This is a part of resource market also. Ana is working as a labor for Rowan and Martin associates.
Yakov spends $275 to purchase legal services from Rowan and Martin associates.
Product Market
Yakov is purchasing legal services from Rowan and Martin associates. Rowan and Martin associate is a firm which is selling its service to customers, thus Yakov is buying legal services from product market and paying price to the firm. This is the part of product market.
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