Basic Economic Entities in an Economy

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An economy is a system in which people and organisations produce, distribute, and consume goods and services in an area such as a nation or a small town. It is also a system that helps people produce …

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An economy has two main functions: producing goods and services to satisfy human wants, and providing employment or income-earning opportunities to people.

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An economic entity is an institutional unit capable of doing economic activities independently. It can acquire assets, take up responsibilities, incur liabilities, participate in economic activities, …

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The four basic economic entities are households, firms, government, and the external sector. These are the main groups that take economic decisions in an economy.

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A household is a group of people living under a single roof and taking economic decisions jointly. A household is mainly a unit of consumption and decides how to spend and save income.

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Households are important because they create demand for goods and services, supply factor services like labour, save part of their income for capital formation, and pay taxes that provide revenue to t…

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The main objective of every household is to maximise satisfaction with limited income or means. Households must decide how much to spend, how much to save, and what to buy.

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Households save part of their income. These savings become the basis of capital formation and flow into the producing sector through the financial market.