Microeconomics

Firms are entities established by entrepreneurs, or individuals from households who want to start a business to earn money. Funds flow from households to firms every time individuals invest in firms through bonds, stocks, or other types of investment.

In a market economy, there is a product market and a resource market. Firms sell products and buy resources. Households buy products and sell resources. Specifically, households sell four resources: labor, capital, land, and entrepreneurial activity. These resources are called the factors of production.

A market is a place where buyers and sellers meet to engage in mutually beneficial exchanges with one another.

In product markets

• firms supply and sell goods and services; and
• households demand and buy goods and services.

In resource markets

• households supply and sell labor, capital, land, and entrepreneurial activity in exchange for income: wages, rent, and interest; and
• firms demand and buy labor, capital, land, and entrepreneurial activity.

In its simplest form, the circular flow model shows that goods and services flow through the economy in one direction while money flows in the opposite direction.

The goal of firms is to maximize profits. To do this, firms must sell their goods and services for more than they spent on resources to produce these goods and services. The goal of households is to maximize utility, or happiness. Happiness is achieved through consumption of goods and services.

Circular flow is ongoing between firms and households. The circular flow of income is important within an economy because it

• measures the national income;
• explains the nonstop nature of economic activities;
• provides understanding of economic interdependence; and
• shows injections (investment, government spending, and exports) and leakages (households and firms save part of their incomes).

A monopoly and an oligopoly are economic market structures. In a monopoly, there is one firm in the market. Therefore, that firm has no competition. In an oligopoly, fewer than 10 large producers work together to set pricing that is beneficial to all of them.