Consumers, households, firms, and the government are the four basic entities of an economy because they perform the basic economic activities of production and consumption in an economy.
Consumers are the basic economic entities in an economy. They consume goods and services in the market. Generally, consumers consist of institutions, groups of individuals, and individuals. Hence, economists have replaced the concept of the consumer with that of households.
Classification of Consumers
- Direct consumer: In the process of providing an income to people, a variety of goods and services are produced in an economy. Initially goods are produced for self-consumption. The producers for selfconsumption are called direct producers.
- Consumers by exchanging goods: Gradually man realised that he cannot produce everything that he wants. Therefore, he has to depend on others to satisfy his wants. Some people were specialised in the production of wheat, while few others specialised in the production of cloth. Each one of them produced more than his own requirements to exchange the surplus and obtain other goods of his requirement. Such a system is called the barter system.
- Modern consumers: In the modern economy, producers produce goods and services and make them available in the market for sale. Consumers purchase these goods and services from the market at the best bargain prices. These goods and services are purchased through the exchange of mone
Importance of Consumers
- Consumers are the source of demand for various goods and services produced in an economy.
- Different consumers have different preferences. Hence, producers are encouraged to diversify their products.
- The consumer also demands services such as transport, banking and communication. Hence, the growth of the service sector would depend on the number of consumers of these services.
A household refers to a group of people living under a single roof and taking economic decisions jointly. Thus, a household is primarily a unit relating to consumption. Households are consumption units. The dual roles played by households are
- They purchase different consumer goods for self-consumption and pay prices for these goods.
- They are also the owners of different factors of production and sell these factors to firms. They earn factor income for supplying these factors.
Households and firms interact with each other in two kinds of markets. They are product markets and factor markets. When they interact in a market for factors of production, they are called factor markets.
Producers | Classification, and Importance of Producers
Role of government in the economy
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