Figure 1-4 The Circular Flow of Income and Expenditure
These are their incomes. Producers use the factor services they buy to
make goods and services. They sell these to individuals, receiving
payments in return. These are the incomes of producers. These basic
flows of income and expenditure pass through markets. Individuals sell
the services of the factor they own in what are collectively called factor
markets. When you get a part-time job during university, you are
participating in the factor market—in this case, a market for labour.
Producers sell their outputs of goods and services in what are collectively
called goods markets. When you purchase a haircut, an airplane ticket, or a
new pair of shoes, for example, you are participating as a consumer in the
goods market.
The red line shows the flow of goods and services; the blue line shows
the payments made to purchase these. Factor services flow from
individuals who own the factors (including their own labour) through
factor markets to firms that use them to make goods and services. These
goods and services then flow through goods markets to those who
consume them. Money payments flow from firms to individuals through
factor markets. These payments become the income of individuals. When