Households and Firms

Households are individuals or groups who live together and consume goods and services to meet their needs and wants. Firms are businesses that produce goods or provide services to satisfy those needs by using resources like labor, capital, and raw materials. In an economy, households provide firms with labor and earn income, which they then spend on products created by firms. This interaction creates a continuous cycle of supply, demand, and income, forming the foundation of economic activity. Essentially, households consume while firms produce, and their relationship drives the economy.