In the circular flow model, firms are buyers in which market and sellers in which market?

• A. Firms are buyers in the factor market and sellers in the product market.
• B. Firms are buyers in both the product and factor markets.
• C. Firms are buyers in the product market and sellers in the factor market.
• D. Firms are sellers in both the product and factor markets.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the two main markets in the circular flow model: the product market and the factor market. The product market is where goods and services produced by firms are sold to households, while the factor market is where resources (like labor, land, and capital) are bought and sold.
2. Step 2: Identify the role of firms in the product market. Firms produce goods and services and sell them to households, so in the product market, firms act as sellers.
3. Step 3: Identify the role of firms in the factor market. Firms need resources to produce goods and services, so they buy factors of production (labor, capital, land) from households. Therefore, in the factor market, firms act as buyers.
4. Step 4: Summarize the roles: Firms are buyers in the factor market because they purchase inputs, and firms are sellers in the product market because they sell finished goods and services.
5. Step 5: Use this understanding to select the correct answer: Firms are buyers in the factor market and sellers in the product market.