in a circular flow diagram factor owners pay for goods and services.
in a circular flow diagram who pays for goods and services?
factor owners
the circular flow diagram is an abstraction of the economy as a whole. the diagram suggests that the economy can reproduce itself. the idea is that as households spend money of goods and services from firms, the firms have the means to purchase labor from the households, which the households to then purchase goods and services. suggesting that this process can and will continuously go on as a perpetual motion machine. however, according to the laws of thermodynamics perpetual motion machines do not exist. the first laws says matter and energy cannot be created or destroyed, and the second laws says that matter and energy move from a low entropy, useful, state towards a less useful higher entropy state. thus, no system can continue without inputs of new energy that exit as high entropy waste. just as no animal can live on its own waste, no economy can recycle the waste it produces without the input of new energy to reproduce itself. the economy therefore cannot be the whole. it must be a subsystem of the larger ecosystem.
circular flow of income
the circular flow of income is a concept for better understanding of the economy as a whole and for example the national income and product accounts (nipas). in its most basic form it considers a simple economy consisting solely of businesses and individuals, and can be represented in a so-called "circular flow diagram." in this simple economy, individuals provide the labour that enables businesses to produce goods and services. these activities are represented by the green lines in the diagram.
circular flow of income