Answer to Question #174299 in Microeconomics for belinda

Question

The main participants in the economy are households and firms.

Discuss the important role that households play in an economy.

Answer 1

Households own factors of production, and their main function is to provide those factors (land, labor, capital and entrepreneurial activities).

Households are sellers in the market for resources. They sell factors of production in exchange for income and exchange income for goods and services.

 

 

Households play a significant role in the economy.

(i)Act as producers: Many families own several small production units. These households work as entrepreneurs or producers of a variety of marketable goods and services.

 some of the reasons for household production:

1. No special skills or resources are needed.

2. Taxes are reduced by household production.

3. Domestic production reduces transaction costs.

4. More control over the final product is attained from domestic production.

(ii) Act as consumers and demanders: Households are the main buyers of the firms' goods and services. They create demand in the market based on their preferences and tastes. Firms produce and supply goods in the market in response to customer demand, dictating demand and supply patterns.

(iii) Pay taxes: Households are the main source of tax revenue for the government. They are the main taxpaying entity. A household pays direct taxes to the state in the form of income tax, wealth tax, estate duty, gift tax, and the like. Similarly, a household pays the government some indirect taxes such as sales tax, customs duty, and so on. All of these tax revenues are collected for the economy's welfare and growth.

(iv) Act as a professional base: Households provide all of a country's professionals and manpower. Their activities are important to the country's continued economic growth. People's standard of living are raised as a result of these professional services.

(v) Take on the duties as income savers and spenders: The cash left over after consumption is saved. After consumption, the portion of their income is saved in banks or financial institutions. These savings are considered as the household's main source of capital.

(vi) Resource suppliers : Households supply the market economy with limited factors of production (labor, capital, land, and entrepreneurial ability). They will use these resources at home or sell them in the resource market to earn money to spend on items in the product market.

vii) They are Innovators: Households provide people who work for themselves rather than for employers, who are an integral part of the economy.

 Households are rational utility maximizers:

Households, are presumed to attempt to maximize their utility by economists.

If a householder's opportunity cost of performing a task is below the task's market price, the householder will typically do it themselves.

Economists also believe that each household in the economy acts as a single independent decision-maker.