Final answer:
Firms are the actors in the simplified circular flow model that buy or rent land, labor, and capital from households. Households supply these resources as factors of production, for which firms pay wages, rent, and interest. This creates a complete cycle of economic activity with firms and households participating in both the goods market and the labor market.
Step-by-step explanation:
In the simplified circular flow model, firms are the actors that buy or rent land, labor, and capital. These resources, which are collectively known as the factors of production, are essential for firms to produce goods and services. In the economic context of the circular flow model, households supply these resources through the factor market, where firms in the labor market pay for labor, and households are compensated for the other resources they provide. Firms then sell the produced goods and services to households in the goods market.
Firms are essentially the demand side of the factor market because they demand resources like land, labor, and capital to produce goods and services. On the other hand, households constitute the supply side of this market, as they supply their labor and other resources to firms. In return, firms compensate households with wages, rent, and interest, which households then use to purchase goods and services from firms, completing the circular flow of economic activity.