Dear learner,

The key decision-making units of an economy are households, business firms, and the government. Households are the owners of the factors of production (land, labor, capital, and entrepreneurship), and they sell these factor services to producers in exchange for income. Households then use this income to purchase goods and services from businesses, while also saving a portion and paying taxes to the government. Business firms, comprising both private and public enterprises, hire the factor services from households to produce goods and services, which they then sell to households, other firms, the government, and foreign markets. The government, on the other hand, purchases goods, services, and factor services to provide public services and infrastructure, and it generates its income primarily through taxes levied on households and businesses. These three decision-making units – households, firms, and the government – interact and make economic decisions that shape the overall functioning of the economy.