There are three decision making units in a economy. These are households, firms and the government.

Lets start by explaining what they are

Household: A household can be one person or more who live under one roof and make joint financial
decisions.

Firm: A firm is a production unit that uses economic resources to produce goods and services.

Government: A government is an organization that has legal and political power to control or influence
households, firms and markets. The three economic agents interact in two markets. The first one is
called product market and the second one is called factor market. Now lets see the role of each
economic units in the two markets.

Factor market

Factor market or input market is a market where economic units exchange factors of production. Factor
of production can be land, labour, capital or enterpreunership. Now let's see the role of each economic
unit in the factor market

The role of households in the factor market

In factor market households sell their resources to business firms and governments.They sell their land,
labor, capital, and entrepreneurship to businesses (firms) in the factor market in exchange for income
payments. simply we can say households, in the factor market , are the owners of the productive
resources (factors of production).

The role of firm in factor market

In the factor market, firms are the buyers. They may buy, rent, or hire raw materials, land, or labor.
Whatever a firm needs in order to build, package, and deliver the products or services they provide must
be obtained in the factor market. To produce goods firms employ different factors of production. This
includes employing workers(labour). By employing labour, firms pay wages creating a flow of income to
households, which ultimately can be spent by households on goods produced by different firms.

The role of government in factor market

Governments buy resouces from households to produce government services in factor market

product market

The product market is the place where supply and demand of final goods interact with each other.It is a
market where goods and services are transacted or exchanged. Now let's see the role each economic
decision units play in product market.

The role of households in product market

In the product market, households act as buyers purchasing the goods and services businesses are
willing to sell. Households determine what goods and services they need and want, thus driving the
economy. Essentially, households can create a demand for a certain product, and firms will supply it.

The role of firms in product market

Firms in the Product Market are producers of goods and services in the circular flow model. They sell
goods and services to households and governments . They earn revenue in exchange for their goods and
services. the products can be:

Consumer products (hygiene products, clothing...).

Raw materials (metals, timber, minerals...).

Agricultural products (wheat, corn, animal products...).

Technology products (phones, cameras, laptops...).

The role of governments in product market

Governments purchase both goods and services from firms in product market.The government uses
those goods, services, and resources to provide “public goods” like education, roads, and police
services.They also play crutial role by creating subsidies, taxing the public and giving the money to an
industry, or tariffs, adding taxes to foreign products to lift prices and make domestic products more
appealing.

Beyond the two markets

Households: Beside providing factors of production and other things housholds are the main sources of
the government tax-revenue. They are the main tax-payer. A household pays income tax, wealth tax,
estate tax and etc. They also help the economy through their savings in Banks which can be used as the
main source of capital formation.

Firms: Firms provide jobs, career advancement, information, and training for employees. They do this in
areas of low, middle, and high income. This contributes to socioeconomic development by giving
community members the opportunity to learn new skills, gain income, and improve their standard of
living. Also Having more firms in the local economy can boost tax income for local governments, bringing
in more money to repair roads, develop schools and improve public services. They also increase the
standard of life by developing new products.

Governments: The government: provides the legal and social framework within which the economy
operates, maintains competition in the marketplace, redistributes income, cor- rects for externalities,
and takes certain actions to stabilize the economy.