In the circular flow diagram, which of the following best describes the role of households?

• A. They produce goods and services for firms to sell in markets.
• B. They set prices for goods and services in the product market.
• C. They supply factors of production to firms and receive income in return.
• D. They act as intermediaries between firms and the government.

Answer: (C)

Verified step by step guidance

1. Understand the circular flow diagram, which illustrates the movement of goods, services, and money between different sectors of the economy, primarily households and firms.
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 supplied and demanded).
3. Recognize that households own and supply factors of production (such as labor, land, and capital) to firms through the factor market.
4. Note that firms use these factors of production to produce goods and services, which they sell in the product market to households and other buyers.
5. Understand that in return for supplying factors of production, households receive income (wages, rent, interest, and profits), which they then use to purchase goods and services, completing the circular flow.