Which of the following is true according to the circular flow model?

• A. Households supply factors of production to firms in the factor market.
• B. Firms purchase goods and services from households in the product market.
• C. Firms supply factors of production to households in the factor market.
• D. Households receive revenue from firms in the product market.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the circular flow model, which illustrates the movement of resources, goods, services, and money between households and firms through two main markets: the factor market and the product market.
2. Step 2: Identify the role of households in the factor market: households own and supply factors of production (such as labor, land, and capital) to firms.
3. Step 3: Recognize the role of firms in the factor market: firms demand and purchase factors of production from households to produce goods and services.
4. Step 4: Understand the product market: firms supply goods and services to households, and households purchase these goods and services from firms.
5. Step 5: Use this understanding to evaluate each statement: the true statement is that households supply factors of production to firms in the factor market, as this aligns with the flow of resources in the circular flow model.