| Circular Flow Diagram |
The circular flow diagram is a model of a specific goods market. Households provide the factors of production (Land, Labor, Capital and Entrepreneurship] in factor markets. Firms buy those factors and produce goods and services in the goods market which is then bought by Households. The expenditure from the Households provide the Firms with ways to repay the Factors of Production (through Wages, Rent, Interest, and Profit) which means that the profit from the Goods Market is circulating to the Factor Markets while the produces of the Factor Markets is circulating to the Goods Market. As a circle is infinite and continuing; so is the circular flow diagram.
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