The relationship between the factor market at the product market is determined by derived demand, or the demand for productive resources, as determined by the demand for goods and services output, or products.

The factors of production are resources that are the building blocks of the economy; they are what people use to produce goods and services. Economists divide the factors of production into four categories: land, labor, capital, and entrepreneurship.

In a simplified model of an economy, known as a circular flow diagram, households own the factors of production. They sell or lend these factors to firms, which produce goods and services that households buy.

Flows of Products, Resources, and Money Payments The circular flow model also shows the two other flows: the flow of products (goods and services) and resources on the outer circle, and the flow of money payments on the inner circle.

What two markets are represented in the circular-flow diagram? The market for goods and services and the market for factors.

The two flows in the circular flow model are the real flow and money flow. Real flow being counterclockwise of economic resources and finished goods and services.

The circular flow model demonstrates how money moves through society. Money flows from producers to workers as wages and flows back to producers as payment for products. In short, an economy is an endless circular flow of money. For that reason, the model is also referred to as the circular flow of income model.

The model represents all of the actors in an economy as either households or firms (companies), and it divides markets into two categories: Markets for goods and services.

In economics, the circular flow diagram represents the organization of an economy in a simple economic model. This diagram contains, households, firms, markets for factors of production, and markets for goods and services.

The Major Lesson Of The Circular Flow Diagram Is That One Person’s Expenditure Is Someone Else’s Receipt. The Total Demand For Goods And Services In An Economy Is Known As National Demand.

Four sector model studies the circular flow in an open economy which comprises of the household sector, business sector, government sector, and foreign sector.

Firms (also known as businesses) pay wages to households in a circular flow diagram.

The key feature of this circular flow is the market. We are referring to the circular flow model that explains the way money moves in an economy. In the model of the free market, money is spent by people that need to buy things. Economists called it consumer pending.

Ans: There are two types of circular flow.

• Real Flow- The term real flow means the flow of factor services from household to firms. Similarly, the flow of goods and services from firms to household.
• Money Flow- The Money flow refers to the flow of factor payments from firm to household for factor services.

The circular flow of income illustrates the links between income and spending in an economy. In its simplest form, revenue earned by firms by selling their output ultimately flows to households, which spend this income on the output produced by firms.

There are four key elements to this study: description, analysis, expla- nation, and prediction. Economics deals with the description of eco- nomic activity.

There are five fundamental principles of economics that every introductory economics begins with at the start of the semester: rationality, costs, benefits, incentives, and marginal analysis.

Rational people think at the margin. People respond to incentives. Trade can make everyone better off. Markets are usually a good way to organize economic activity.

Nine Principles of Economics

• People Act.
• Every Action Has a Cost.
• People Respond to Incentives.
• People make decisions at the margin.
• Trade makes people better off.
• People are Rational.
• Using markets is costly, but using government can be costlier still.

• People choose.
• All choices involve cost.
• People respond to incentives in predictable ways.
• Economic systems influence individual choices and incentives.
• Voluntary trade creates wealth.
• The future consequences of choices are the ones that matter.

To discover and elaborate three rules Consumption and Management discovers and elaborates three rules: natural economic law, market regulation law, and the law of macro-economic control.

SEVEN ECONOMIC RULES: A set of seven fundamental notions that reflect the study of economics and how the economy operates. They are: (1) scarcity, (2) subjectivity, (3) inequality, (4) competition, (5) imperfection, (6) ignorance, and (7) complexity. The value of goods and services is subjective.

Gossen’s laws, named for Hermann Heinrich Gossen (1810–1858), are three laws of economics: Gossen’s First Law is the “law” of diminishing marginal utility: that marginal utilities are diminishing across the ranges relevant to decision-making.

Law & Economics, with its positive economic analysis, seeks to explain the behaviour of legislators, prosecutors, judges, and bureaucrats. The model of rational choice, which underlies much of modern economics, proved to be very useful for explaining (and predicting) how people act under various legal constraints.