Microeconomics Book: www.librodemicroeconomia.com/
The diagram establishes two groups that are households and companies that interact with each other in two markets: markets for goods and services where companies sell their products and families buy these products.
And the labor market where families sell their labor to companies.
The Circular Flow Diagram shows how households and companies interact in the market for goods and services and in the labor market.
The direction of the arrows indicates how, in the market for goods and services, households buy products and pay for them to the companies that produce and sell these products.
While in the labor market, families offer their services as a productive resource to companies. Companies hire them, offering wages or income to families.
The Circular Flow model seeks to graphically represent an economic phenomenon between companies and households in two markets: the labor market and the market for goods and services.
And its layout is enough to understand how the economy works in these markets.
Economists are always in search of economic phenomena that seek to be supported by theories for their understanding and explanation. And they also seek to consolidate the explanation with graphs, diagrams and even mathematical models.
This is why microeconomics and macroeconomics seek to be explained in theoretical terms, graphic and mathematical models.