In the circular flow model, what role do households play in the economy?

Households play a dual role in the economy within the circular flow model. They are essential as both suppliers of factors of production and as demanders of goods and services. This interaction establishes the foundational dynamics of the economy.

As suppliers, households provide labor, land, and capital, which are the key factors of production utilized by firms to create goods and services. In return for their contributions, households receive income in the form of wages, rent, and profit.

On the demand side, households use this income to purchase goods and services from firms. This consumer spending drives economic activity, as firms respond to the demand by producing more goods and services.

This comprehensive role of households highlights the interconnectedness of production and consumption in the economy, underscoring how both aspects are crucial for economic stability and growth.