The all-pervasive economic problem is that of scarcity which is solved by three institutions (or decision-making agents) of an economy. They are households (or individuals), firms, and government. They are actively engaged in three economic activities of production, consumption, and exchange of goods and services. These decision-makers act and react in such a manner that all economic activities move in a circular flow. Use the following circular-flow diagram to identify the parts and discuss the organization of the economy.

a.

MARKETS FOR GOODS AND SERVICES r = Flow of inputs FIRMS and outputs HOUSEHOLDS = Flow of dollars MARKETS FOR J FACTORS OF PRODUCTION