We can picture the circular flow of economic life in the picture above. The diagram provides an overview of how consumers and producers interact to determine prices and quantities for both inputs and outputs. Note the two different kinds of markets in the circular flow at the top are the product markets,or the flow of outputs like pizza and shoes, at the bottom are the markets for inputs or factors of production like land and labor. Further, See how decisions are made by two different entities ,consumers and business.
Consumers buy good and sell factors of production, Business sell goods and buy factors of production. Consumers use their income from the sale of labor and property. Price in good markets are set to balance consumer demand with business supply; Price in factor markets are set to balance household supply with business demand.
All this sounds complicated. But it is simply the total picture of the intricate web of interdependent supplies and demands, Interconected through a market mechanism to solve the economic problems of what how and for whom. Look at the picture carefully.a few minutes spent studying it will surely help you understand the working of market economy
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