Explain how activities of the government are related to other sectors of the economy engaged in the circular flow of income and production
Answers
ANSWER
The all pervasive economic problem is that of scarcity which is solved by three institutions (or decision-making agents) of an economy. They are households (or individuals), firms and government. They are actively engaged in three economic activities of production, consumption and exchange of goods and services. These decision-makers act and react in such a manner that all economic activities move in a circular flow.
Households:
Households are consumers. They may be single-individuals or group of consumers taking a joint decision regarding consumption. They may also be families. Their ultimate aim is to satisfy the wants of their members with their limited budgets.
Households are the owners of factors of production—land, labour, capital and entrepreneurial ability. They sell the services of these factors and receive income in return in the form of rent, wages, and interest and profit respectively.