Lying behind these real flows and money flows are millions of individual choices about what to consume and what and how to produce. These choices result in buying plans by households and selling plans by firms in goods markets. And the choices result in selling plans by households and buying plans by firms in factor markets that interact to determine the prices that people pay and the incomes they earn, and so determine for whom goods and services are produced. You’ll learn in Chapter 4 how





markets coordinate the buying plans and selling plans of households and firms and make them compatible.

Firms produce most of the goods and services that we consume, but governments provide some of the services that we enjoy. Governments also play a big role in modifying for whom goods and services are produced by changing the personal distribution of income. We’re now going to look at the role of governments in the U.S. economy and add them to the circular flow model.

Governments More than 86,000 organizations operate as governments in the United States. Some are tiny like the Yuma, Arizona, school district and some are enormous like the U.S. federal government. We divide governments into two levels:

Federal government State and local government Federal Government