Answer to Question 1
Students should describe all aspects of the model, including the two participants, firms and
households, the two markets resource and product/services, as well as the flow of monies in the
forms of wages, income, profits, revenues, dividends, etc. Movement should be clockwise for
resources and products, counter clockwise for monies.
Answer to Question 2
As fashion is not a necessity companies must adjust to higher prices. This impacts the company in
that investments such as factory or store expansion will cost more, and sales will be down.
Companies may lay off employees to cut labor costs, decrease production and inventories, and lower
future projections for sales and profits. Fashion companies will analyze product offerings and
pricing to accommodate the changing marketplace. Discount retailers such as Target, Walmart, and
TJX (T. J. Maxx and Marshalls) usually thrive during inflationary periods due to their pricing
policies and mass purchasing power. Other companies may look for value items, new suppliers to
adapt to the changing consumer demand and habits to survive, others may close stores or go out of
business.
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