1 Describe how the circularflow diagram works 2 Name the par

1. Describe how the circular-flow diagram works.

2. Name the parts of the diagram that correspond to the flow of goods and services if you were to pay $50 for a new pair of shoes at a local shop.

3. Name the parts of the circular-flow diagram that correspond to the flow of dollars for your $50 pair of shoes.

4. Using the circular-flow diagram, explain how your purchase of the $50 new shoes is helping the business from which you bought them make decisions.

5. Describe how businesses use the production possibilities frontier to make decisions.

Solution

Q.1) The circular flow diagram in economics works in terms of i) the flow of goods and services from producers to the households, and ii) the flow of factor services as land, labor, capital and entrepreneurship from the households to the producers. This is known as Real Flow.

The circular flow diagram in economics also works in terms of i) flow of factor income i.e., rent, interest, profits and wages from producers to household sector as monetary rewards for their factor services (land, labor, capital and entrepreneurship). and ii) Households spend their incomes on goods and services produced by the producing sector. This is known as Money Flow.

Q. 2) The parts of the circular-flow diagram that correspond to the flow of goods and services if you were to pay $50 for a new pair of shoes at a local shop is ii) Households spend their incomes on goods and services produced by the producing sector.

Q. 3)  The parts of the circular-flow diagram that correspond to the flow of dollars for your $50 pair of shoes is ii) Households spend their incomes on goods and services produced by the producing sector.

Q. 5) Business can use the production possibilities frontier to make decisions by selecting the optimum combinations of goods than it can produce in an economy with the given resources.