Final answer:
The Modified Circular Flow Model explains the roles of households, businesses, and the government in the factor market. Households supply factors of production and receive payments, while businesses demand factors and transform them into goods and services. The government collects taxes, provides subsidies, and consumes factors and goods/services.
Step-by-step explanation:
The Modified Circular Flow Model is a diagram that shows the flow of resources and money in an economy. In the factor market, there are three main participants: households, businesses, and the government.
Households are the suppliers of factors of production (land, labor, capital, and entrepreneurship) in the factor market. They receive payments from businesses in the form of wages, rent, interest, and profit for providing these factors. The households then use this income to buy goods and services in the product market.
Businesses are the demanders of factors of production in the factor market. They pay households for the use of these factors and transform them into goods and services that they sell in the product market. Businesses also interact with the government through taxes and subsidies.
The government plays a role in the factor market by collecting taxes from both households and businesses and providing subsidies to support certain industries. It also acts as a consumer of factors by purchasing goods and services from businesses. Additionally, the government may provide public goods and services that benefit households and businesses.
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