Question

Identify each of the following as involving either demand or supply. Draw a circular flow diagram and label the flows A through F. (Some choices can be on both sides of the goods market.)

a. Households in the labor market

b. Firms in the goods market

c. Firms in the financial market

d. Households in the goods market

e. Firms in the labor market

f. Households in the financial market

Short answer

Firms and households can be on either side of the financial market. The other given options are either on the supply side or the demand side.

Step-by-step solution

Step 1. Definition

In economics, the term circular flow can be defined as a model that represents the flow of goods and services between different sectors of the economy. This flow describes the demand and supply of various factors of production.

Step 2. Diagram

Step 3. Explanation

a. Households in the labor market are on the supply side. They provide the supply of labor to organizations.

b. Firms in the goods market are on the supply side. They sell all goods and services to individuals.

c. Firms in the financial market can be on the demand side because they demand money to fund their operation. Firms can also be on the supply side because they can invest their money in the financial market.

d. Households in the goods market are on the demand side. Individuals living in those households need food and other things.

e. Firms in the labor market are on the demand side. Firms need labor in order to complete their production and services.

f. Households in the financial market can be on the supply side when they supply the financial market with savings. Households can also be on the demand side when they rely on their credit cards to make purchases, for example.