Which of the following correctly identifies the two main types of markets in the circular flow diagram?

• A. Goods markets and government markets
• B. Consumer markets and producer markets
• C. Financial markets and labor markets
• D. Product markets and factor markets

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the circular flow diagram, which illustrates how money, goods, and services move through an economy between different agents such as households and firms.
2. Step 2: Identify the two main types of markets in this model: one where goods and services are bought and sold, and another where factors of production (like labor, land, and capital) are exchanged.
3. Step 3: Recognize that the market where goods and services are exchanged is called the 'product market'. This is where households purchase finished goods and services from firms.
4. Step 4: Recognize that the market where factors of production are bought and sold is called the 'factor market'. This is where firms acquire inputs like labor and capital from households.
5. Step 5: Conclude that the two main types of markets in the circular flow diagram are the 'product markets' and 'factor markets', which together facilitate the flow of resources and products in the economy.