The Circular Flow Model of a Market Economy

By this point in your course you may have learned the definition of a market: A place where buyers and sellers meet to engage in mutually beneficial exchanges. But what is a market economy? Two basic types of markets exist in any market economy: resource markets and product markets. The exchanges that take place in these markets benefit both the households and the firms that engage in exchanges.

This lesson will introduce the circular flow of money, resources and goods and services in a market economy. We will examine how resources flow from households to firms, and goods and services from firms to households. We will also seek to explain why individuals are willing to engage in the exchanges that characterize the market system.

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