![]() In its purest form, a command economy answers the three economic questions by making allocation decisions centrally by the government. In its purest form, a market economy answers the three economic questions by allocating resources and goods through markets, where prices are generated. The payment to entrepreneurs who start or own businesses The payment firms make to households in exchange for capital The payment firms make to households in exchange for land The payment firms make to households in exchange for their labor Where firms supply goods and services to households in exchange for moneyĪ system of allocating the means of production and the goods and services produced in an economy It pictures the economy as consisting of two groupshouseholds and firmsthat interact in two markets: the goods and services market in which firms sell and households buy and the labor market in which households sell labor to business firms or other employees. Where households supply land, labor, capital, and entrepreneurship/technology to firms in exchange for money In economics, a good model to start with is the circular flow diagram, shown below. ![]() The owners of resources-supplied to firms in the resource market-and the buyers of goods and services-demanded from firms in the product marketīusiness entities that demand land, labor, and capital from households in the resource market and produce goods and services, which they supply to households in the product market politico-economic models Among the many different interpretations of Keynes economic ideas, two aspects are of special importance for present-day reality and economic theory: (a) the idea of circular flow, and (b) the idea that economics extends beyond the market. A place where buyers and sellers meet to engage in mutually beneficial, voluntary exchanges of goods, services, or productive resources
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