Distinguish between the resource market and product market

Question

Distinguish between the resource market and product market in the circular flow model.  In what way are businesses and households both sellers and buyers in this model?  What are the flows in the circular flow model?

Answer 1

The resource markets are where the owners of the resources (the households) sell their resources to the buyers of the resources (businesses).  In the merchandise markets, businesses sell the goods and services they have produced to the buyers of the goods and services, the households. Households (individuals) either own all economic resources directly or own them indirectly through their ownership of business corporations.  These households are willing to sell their resources to businesses because attractive prices draw them into specific resource markets.  Businesses buy resources because they are necessary for producing goods and services. The interaction of the buyers and sellers establishes the price of each resource.

In the product market, businesses are the sellers and householders are the buyers; their role in the market has been reversed.  Each group of economic units both buys and sells. One flow is the flow of real goods and services (including resource services) and the other flow is the flow of money (revenue, money income, production costs, consumption expenditures).