Lesson 4: Decision-Making Units
Lesson objective
Dear learner,
At the end of this lesson, you will be able to:
- Identify the decision-making units of an economy.
- Explain the objectives of each decision-making unit.
Brainstorming Question
What are the basic decision-making units of an economy?
Key Terms and Concepts
- household
- Firms
- Government
- decision-making units
- Taxes
A household is a group of people who share a dwelling and typically pool their resources to manage consumption, savings, and other economic activities.
In economics, a firm is an organization that produces goods or services with the aim of earning profits.
In economics, government is taken in the sense of ‘general government’ in order to disregard government enterprises.
In economics, decision-making units (DMUs) are entities that make choices regarding the allocation of resources, production, and onsumption. The primary DMUs include households, firms, and governments, each playing a distinct role in the economy.
Taxes are compulsory financial charges imposed by governments on individuals, businesses, and other entities to fund public expenditures and services
Dear Learner,
In the previous lesson, we learned about the approaches and methods of economics. I hope you gained good insight and can understand economics well. In this lesson, we will learn about the main actors in economics. Please read the provided notes with attention and answer the quiz questions.
Student, the basic decision-making units of an economy are households, business firms, and the government. We will discuss these in detail below.
Decision-making units of an economy
An economy is divided into different sections, sometimes known as decision-making units or economic agents. The basic decision-making units of an economy are:
- Households
- Business Firms
- The Government
Let’s discuss each of these decision-making units in detail:
Households:
- Households are the chief owners of the factors of production, which include land, labor, capital, and entrepreneurship.
- They sell the services of these factors (termed “factor services”) to producers and, in return, receive their income in the form of rent, wages, interest, and profit.
- Households spend a significant portion of their income on purchasing goods and services from producers.
- They also save part of their income and pay taxes to the government on their income.
Business Firms:
- Business firms and producers are used interchangeably in economics.
- Firms hire the services of factors of production from households to produce commodities that they sell to households, other firms, the government, or other countries.
- Firms are the principal buyers of factors of production and the leading producers of commodities.
- Business firms consist of both private and government enterprises.
The Government
- In economics, the government is considered in the sense of ‘general government’ to disregard government enterprises.
- The government purchases goods and services from producers and factor services from households.
- It uses these commodities and factor services to provide free services, such as police, education, medical facilities, sanitation facilities, judicial services, etc., to the people to satisfy their combined needs for those services.
- The general government gets its income mainly from taxes levied on households and business firms in the form of direct and indirect taxes.
- By understanding the decision-making units of an economy and their objectives, we can better analyze and comprehend the economic processes and interactions within an economy.