Explain interaction between households and firms
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Answers
Answer:
Households and firms interact with each other in two types of markets: ‘Product
or commodity markets' and 'factor markets'. Commodity markets are the markets
where goods and services are bought and sold. Factor markets are the markets where
factor services like labour, land, etc., are bought and sold. For example, labour
market is one type of factor market where labour services are bought and sold. In
the capital markets, funds are lent and borrowed. In the commodity markets, firms
sell and households buy the commodities. But in the factor markets, the roles of
the households and firms are reversed - households are the sellers and firms are
the buyers of factor services. Thus, household sector sells the factor services to the
firms and receives factor incomes from them in the form of wages, rent, interest
and profits. Firms or the production units use the factor inputs to produce goods
and services which are sold to the households. The household sector pays for these
goods with money and thereby firms receive money payments from the households.
Explanation:
Hitesh here
Households and firms interact in two markets: the market for goods and services and the market for factors of production. In the market for goods and services, firms are sellers and households are buyers. In the market for factors of production, firms are buyers and households are sellers.