It’s interesting to note that there are four places where government could be inserted into the model, and each point of intervention is realistic for some markets and not for others. (For example, an income tax could be represented by a government entity being inserted between households and factor markets, and a tax on a producer could be represented by inserting government between firms and goods and services markets.)
In general, the circular-flow model is useful because it informs the creation of the supply and demand model- when discussing the supply and demand for a good or service, it is appropriate for households to be on the demand side and firms to be on the supply side, but the opposite is true when modeling the supply and demand for labor or another factor of production.
