Final answer:
The circular flow diagram is the economic model that effectively represents the interactions between households and firms within the goods and services market and the labor market.
Step-by-step explanation:
The economic model that best represents the factor and product market is the circular flow diagram. This model visualizes the economy as comprising two main groups: households and firms. They interact within two markets: the goods and services market, where firms sell products and services that households purchase, and the labor market, where households offer labor to firms or other employers. The circular flow diagram is an essential tool for understanding how these two markets operate and how firms and households depend on each other.
Although the circular flow diagram can be simplified to just the interactions between households, firms, and the two markets, it can also be expanded to include additional elements such as financial markets, governments, and foreign trade, which introduce imports and exports into the economic flow. This versatility makes it an invaluable framework for both foundational and advanced economic analysis.