Circular Flow of Income. A model of the economy that shows how households sell their labour to firms for an income and then use this income to buy goods and services produced by firms.
Assume a simple model of the economy with just households and firms, there is no government and no foreign trade. Households own the factors of production (land, labour and capital) and supply these to firms in return for income (rent, wages and profit). Households spend all of their income on goods and services. Firms use the factors of production to produce goods and services and sell these to households. Firms spend all of their revenue on the factors of production.