The Role of Households & Businesses The Matrix Microeconomics The Role of Households & Businesses The Matrix

Microeconomics Study of the economic behavior of individual units of an economy (such as a person, household, firm, or industry) “Economics of everyday people”

Microeconomics There are sectors within the economy that have specific roles to play In order to play their roles effectively these sectors are dependent on each other two main sectors within microeconomics Households Businesses (firms)

Interdependence of Households & Businesses Households need businesses for Goods & Services (To Consume) Income (To purchase goods/services) Businesses need households for Labor (to produce goods) Markets (To Sell goods)

Circular flow diagram

Circular Flow Diagram With Factor & Product markets Factor Markets Include Households as providers of land, labor, capital, & entrepreneurship to businesses Households earn income in exchange for providing factors of production Businesses as consumers of the land, labor, capital, & entrepreneurship of Households Businesses pay (wages) households for use of factors of production

Circular Flow Diagram With Factor & Product markets Product Markets Include Households as consumers of goods & services provided by businesses Households spend money earned in factor market to purchase goods & services Businesses as providers of goods & services to households. Businesses earn revenue in return for providing goods & services