Short Answer 
The circular flow model illustrates the relationship between households and firms, where households provide essential production factors like labor and capital to firms. In return, firms provide goods and services, generating income for households, which they then spend on these offerings, sustaining economic activity in a continuous cycle.
1. Households Provide Production Factors
The circular flow model begins with households supplying essential factors of production to firms. These factors include resources such as labor, land, and capital, which are crucial for firms to create goods and services. By contributing to production, households play a vital role in enabling firms to operate efficiently and meet market demands.
2. Firms Offer Goods and Income
In exchange for the production factors provided by households, firms deliver goods and services back to households. This exchange not only satisfies consumer needs but also results in firms distributing income, typically in the form of wages, to households for their labor and contributions. Thus, a continuous flow of products and income is established between these two sectors.
3. Households Spend on Firms
The final step in this circular flow is where households utilize their earned income to make expenditures on goods and services offered by firms. This spending is crucial as it injects money back into the economy, allowing firms to receive payment for their offerings. This cycle repeats, sustaining economic activity and demonstrating the interconnectedness of households and firms in the economy.