Question

10. In the circular flow model, what are the two markets? Define households and describe the three basic forms of businesses. What roles do households play and what roles do businesses play in each market?

Answer 1

In the circular Flow of model two markets are : (1) Households (2) Firms or businesses

All those people living under one roof are considered a household.

Three kind of firms are :

1. Sole Proprietorships: A firm with a single owner who has the right to all profits and who bears unlimited liability for the firm's debts. (plumber, doctor). It Must raise all the money to start business, is solely responsible for all debts.

2. Partnerships: A firm with multiple owners who share the firm's profits and each of who bears unlimited liability for the firm's debts. Two or more people agree to contribute resources in return for a share of the profit or loss. (law, accounting, medical partnerships)

3. Corporations: A legal entity owned by stockholders whose liability is limited to the value of their stock. Owners issued stocks that entitle them to profits in proportion to their stock ownership. It is easy to amass large funds, limited liability.stockholder has little influence over corporate policy. corporate income taxed twice

Households do two fundamental things vital to the economy.

1. Demand goods and services from product markets

2. Supply labor, capital, land, and entrepreneurial ability to resource markets.

Firms have evolved as providers of goods and service.Firms are economic units, formed by profit-seeking entrepreneurs who employ resources to produce goods and services for sale.

1. Demand factors of production like labour from factor markets.

2. Supply goods and services to product market.