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What is exchanged between households and firms in the product market

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user2339855 | eNotes Newbie

Posted May 21, 2013 at 7:46 AM via web

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What is exchanged between households and firms in the product market

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 21, 2013 at 2:02 PM (Answer #1)

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The answer to this is that firms give goods and services to households in this market while households give money to the firms.

The product market is one part of the circular flow diagram.  An example of this diagram can be found at the link below.  A circular flow diagram illustrates how both firms and households are integral parts of the economy and how they are linked together.  This linkage happens in two ways.

One of these ways is in the resource market.  Here, households sell labor to firms who give them money in exchange for their work.  The other way is in the product market.  Here, households give money to firms who give them goods and services in exchange.  When you go to the grocery store and buy food, you are giving them money in exchange for a good.  When you go and pay someone to cut your hair, you are giving them money in exchange for a service.  In both of these cases, you are interacting with a firm in the product market, exchanging money with them in return for goods and services.

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