provide labor and receive payment from firms through wages, salaries, and benefits.

Firms produce and sell goods and services to households in the market for goods and services (or product

market). Arrow “A” indicates this. Households pay for goods and services, which becomes the revenues to

firms. Arrow “B” indicates this. Arrows A and B represent the two sides of the product market. Where do

households obtain the income to buy goods and services? They provide the labor and other resources (e.g.,

land, capital, raw materials) firms need to produce goods and services in the market for inputs (or factors of

production). Arrow “C” indicates this. In return, firms pay for the inputs (or resources) they use in the form of

wages and other factor payments. Arrow “D” indicates this. Arrows “C” and “D” represent the two sides of the

factor market.

Of course, in the real world, there are many different markets for goods and services and markets for many
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