Question

1. Describe the economic characteristics of the household and personal products market. (500 words)

2. Define the forces driving change in the household and personal products market and the impact each is likely to have. (500 words)

Answer 1

Answer 1
Economic activity in a market economy is based on the free flow of products and resources in free markets. A simplified circular flow model illustrates how goods and services are exchanged in free markets. Like any economic model, the circular flow model is a simplification of reality. The circular flow model shown in Figure 2.3 illustrates exchanges in two markets, the product market and the factor market. The primary actors in the circular flow model are households and business firms—the two main components of the private sector in the U.S. domestic economy. More detailed circular flow models sometimes include the role of government, financial institutions, and foreign firms in the conduct of business.

•Product Market

The product market represents the purchases of finished goods and services in an economy. Households are the main buyers of goods and services in the product market, and businesses are the sellers of goods and services, as shown in the top half of Figure 2.3. From the circular flow model, it appears that the product market is a single physical location where products are bought and sold. But this is clearly not the case. Instead, the product market represents the millions of buy-sell transactions that are made every day in supermarkets, gas stations, convenience stores, department stores, bakeries, laundries, dentist and doctor offices, delis, and coffee shops.

The transactions that take place in the product market are based on the principle of voluntary exchange. That is, both the buyer (household) and the seller (business firm) believethey will benefit from an exchange; otherwise, it will not take place. The spending by a household becomes revenue earned by a business. In an expanded version of the circular flow model, the government also appears as an important buyer of goods and services in the product market. For example, the government purchases military goods such as submarines and aircraft from private firms. Household and government spending become important sources of revenue for businesses.