Question

Who demands the factors of production in the circular flow of income of a simple economy?

• A. Household sector
• B. Business sector
• C. Foreign sector
• D. None of these

Hint:

The business sector demands factors of production from households to produce goods and services, which are then sold in the economy.

Answer 1

The Correct Option is B

Step 1: Understanding the circular flow of income.
In a simple economy, the circular flow of income refers to the movement of money and resources between households and businesses. Households provide the factors of production (such as labor, capital, and land) to businesses, and in return, they receive income in the form of wages, rent, and profits.

Step 2: Analyzing the options.
(A) Household sector: The household sector provides the factors of production but does not demand them. It is the business sector that demands these factors.
(B) Business sector: Correct. In the circular flow of income, businesses demand the factors of production (land, labor, capital) from the household sector in order to produce goods and services.
(C) Foreign sector: The foreign sector does not directly participate in the simple circular flow of income in a closed economy.
(D) None of these: This is incorrect, as the correct answer is (B) Business sector.

Step 3: Conclusion.
The correct answer is (B) Business sector, as it demands the factors of production in the circular flow of income in a simple economy.