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Answers
Households, firms and the government are the three basic entities of an economy because they perform the basic economic activities of production and consumption in an economy. The producers or the firms produce different types of goods with the help of different factors of production. They sell these goods to different consumers or households. In this way, an exchange relationship is established between the firms and the households. However, there are certain goods and services which are not produced by private firms. These include defence services, telecommunication services, etc., which are provided by the government. Also, the government regulates the money supply and frames broad economic policies regarding domestic and international trade, taxation, etc.