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

• A. Firms sell goods and services to households in the product market.
• B. Households sell goods and services to firms in the product market.
• C. Firms buy goods and services from households in the factor market.
• D. Households buy goods and services from firms in the factor market.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the circular-flow diagram, which illustrates the movement of goods, services, and money between households and firms in an economy.
2. Step 2: Identify the two main markets in the diagram: the product market (where goods and services are bought and sold) and the factor market (where factors of production like labor, land, and capital are bought and sold).
3. Step 3: Recognize that firms produce goods and services and sell them to households in the product market, meaning the flow of goods and services in the product market goes from firms to households.
4. Step 4: Understand that households provide factors of production (such as labor) to firms in the factor market, so the flow of goods and services in the factor market goes from households to firms.
5. Step 5: Conclude that the correct description of the flow of goods and services in the product market is: 'Firms sell goods and services to households in the product market.'