HouseholdsThe people of the economy. They buy goods and services and own the resources.
FirmsThe businesses of the economy. They make goods and services.
Product marketWhere firms sell goods and services to households.
Factor marketWhere households sell factors of production to firms.
The four flows 4
Goods and servicesWhat firms produce and households buy. They flow from firms to households.
SpendingMoney households pay for goods and services. It flows from households to firms.
Factors of productionLabor, capital and natural resources. Households supply them to firms.
IncomeMoney firms pay households for their factors of production.
How this list was compiled: Every name checked on 2026-10-02 in both of these. (1) Principles of Economics, an openly licensed textbook (CC BY-NC-SA), section 3.3, An Overview of Demand and Supply: The Circular Flow Model, and section 21.1, Measuring Total Output (households and firms trade with each other; firms sell goods and services to households; households provide what firms need to produce: labor, capital and natural resources; what firms pay for them is household income; goods and services are supplied in product markets and factors of production in factor markets; in its figure the inner arrows show goods and services and factors of production and the outer flows show the payments; spending for goods flows from households to firms and factor incomes flow from firms to households; the simple model omits the government and foreign sectors). (2) Wikipedia, Circular flow of income, Factor market and Product market (a two-sector model of households and firms; money moves the opposite way to goods and services; all household expenditures become income for firms, which spend it on factors of production such as labor and capital; a factor market is where factors of production, including land, labor and capital, are bought and sold and income such as wages and rents is distributed; the product market is where households buy final goods or services). Licence: own work
The drawing: Drawn for this site on 2026-10-02 from plain geometry. Own original chart; nothing traced or copied. Licence: own work
How it works
This circular flow diagram quiz has eight boxes to name: households, firms, the product market, the factor market and the four flows between them. Solid arrows carry goods and resources; dashed arrows carry the money that pays for them.
Read the full guide
Start with the house and the factory
The house stands for households and the factory for firms. The stall with shopping bags is the product market. The stall with a worker, a gear and a tree is the factor market.
Follow the solid arrows
Firms sell goods and services to households through the product market. Households sell factors of production (natural resources, labor and capital) to firms through the factor market.
Then the dashed arrows
Money runs the other way. Household spending pays for the goods and services, and firms pay income to households for their factors of production.
This is the simple model of two sectors. It leaves out the government and trade with other countries.
Questions and answers
What are the components of the circular flow diagram?
Two sectors, households and firms, and two markets, the product market and the factor market. Four flows join them: goods and services, the spending that pays for them, factors of production, and the income firms pay for those factors.
What is the difference between the product market and the factor market?
In the product market firms sell goods and services to households. In the factor market households sell factors of production, such as labor, to firms.
What are the factors of production?
The resources firms need to produce goods and services: labor, capital and natural resources, which some texts call land. In the model households own them and supply them to firms.
Why is it called a circular flow?
Households spend the income their factors of production earn on goods and services. Firms use those payments to pay for the factors, so the money comes around again.
Which way does money flow in the circular flow model?
Opposite to the goods and resources it pays for. Spending flows from households to firms, and income flows from firms back to households.