One of the main basic economic models is the circular-flow model, which describes the flow of money and products throughout the economy in a very simplified way. The model represents all of the actors in an economy as either households or firms (companies), and it divides markets into two categories:
- markets for goods and services
- markets for factors of production (factor markets)
(Remember, a market is just a place where buyers and sellers come together to generate economic activity.) The model is illustrated by the diagram above.