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Please refer to the link below for a diagram of the circular flow model.
In the circular flow model, we see how businesses and households are connected to one another. In the product market, households buy goods and services from businesses in exchange for money. In the factor market, the businesses buy labor from households in exchange for money. This flow continues perpetually.
Households interact with businesses in the products market every time anyone buys anything from a business. When I go to the store and buy groceries for my family, I am participating in the product market. I give money to the grocery store, and it allows me to have the goods that I want.
Households interact with businesses in the factor market every time a person does paid work for a company. When a person goes to work at a company, they are providing the company with their labor, which is a factor of production. In return, the company pays them. They will go out and use the money to buy things from other companies and the circle will continue.
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