See the below image for the Circular flow of economy diagram. Circular Flow Model of Economy. Circular flow model is the basic economic model and it describes the flow of money and products throughout the economy in a very simplified manner.
The most common form of this model shows the circular flow of income between the household sector and the business sector. Between the two are the product market and the resource market. Households purchase goods and services, which businesses provide through the product market.
They are actively engaged in three economic activities of production, consumption and exchange of goods and services. These decision-makers act and react in such a manner that all economic activities move in a circular flow. First, we discuss their nature and role in decision-making. Households are consumers.