In the simple circular-flow diagram, which of the following best describes the flow of goods and services between households and firms?

• A. Firms buy goods and services from households in the markets for goods and services.
• B. Households buy factors of production from firms in the markets for factors of production.
• C. Firms sell goods and services to households in the markets for goods and services.
• D. Households sell goods and services to firms in the markets for goods and services.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the roles of households and firms in the circular-flow diagram. Households own factors of production (like labor, land, and capital), and firms use these factors to produce goods and services.
2. Step 2: Identify the two main types of markets in the circular-flow model: the markets for goods and services, and the markets for factors of production.
3. Step 3: Recognize that in the markets for goods and services, firms are sellers because they produce and sell goods and services, while households are buyers because they consume these goods and services.
4. Step 4: In the markets for factors of production, households are sellers because they provide labor, land, and capital, and firms are buyers because they need these inputs to produce goods and services.
5. Step 5: Conclude that the correct description of the flow of goods and services is that firms sell goods and services to households in the markets for goods and services.