Identify the incorrect statement in the context of circular flow of income :

(A) Household provides factor services to firms

(B) Household receives goods and services from firms

(C) Firms receives factor payments from households

(D) Factor services includes : land, labour, Capital and Entrepreneur

(E) In a simple economy, there are three sectors : households, Firms & Government

Choose the correct answer from the options given below :

(C) and (E) only

The correct answer is option (3) : (C) and (E) only

The circular flow model depicts the flow of money and resources between two main sectors: households and firms. Households are the providers of factor services (land, labor, capital, and entrepreneurship). They offer these resources to firms in exchange for income. Firms are the users of factor services. They use these resources to produce goods and services, which they then sell to households. So, the flow of factor payments goes from firms to households, not the other way around.

(A) Household provides factor services to firms : This is correct. This is a core concept in the circular flow model.

(B) Household receives goods and services from firms : This is correct. Firms use factor services to produce goods and services that households consume.

(C) Firms receives factor payments from households : This is incorrect because firms pay factor payments to households for the use of factors of production.

(D) Factor services includes : Land, Labour, Capital and Entrepreneur: This is correct. These are the four basic factors of production that households contribute to the economy.

(E) In a simple economy, there are three sectors : Households, Firms & Government: This is incorrect because a simple economy typically includes households and firms only.