APPLICATION 6.

EVERY HOUSEHOLD IS A
FIRM
-BY ANKIT POKHREL
 Table of contents
00 01
PRODUCTION HOUSEHOLD
FUNCTION PRODUCTION

02 03
THE AMOUNT OF PRODUCTION OF
HOME PRODUCTION HOUSING SERVICES

04 05
PRODUCTION OF HEALTH PRODUCTION OF CHILDREN
 00
PRODUCTION
FUNCTION
● The mathematical relationship between inputs and outputs.
q = f(K, L, M ...)
where q represents the output of a particular good during a period, K represents the
capital used during the period, L represents hours of labor input, and M represents
raw materials used.

● For simplification, we work with

Two-Input Production Function :

q = f(K, L)
 01
HOUSEHOLD
PRODUCTION
● Household production is the production of goods and services by the members of a
household, for their own consumption, using their own capital and their own unpaid
labor.

● The process of household production involves the transformation of purchased

intermediate commodities (for example, supermarket groceries and power-utility
electricity) into final consumption commodities (meals and clean clothes).
Households use their own capital (kitchen equipment, tables and chairs, kitchen and
dining room space) and their own labor (hours spent in shopping, cooking, laundry
and ironing).

● The outputs from this activity is not traded in organized markets; but there is not
very much difference between providing ‘‘taxi services’’ to yourself or selling them
to someone else. In both cases, you are performing the economic role that
economists assign to firms.
 02
The Amount of Home
Production
● Economists have tried to estimate the amount of production that people do
for themselves by including child care, home maintenance, commuting,
physical maintenance (for example, exercise), and cooking, they arrive at
quite substantial magnitudes—perhaps more than half of traditionally
measured GDP.

● The time people spend in home production is only slightly less than time
spent working (about 30 percent of total time in both cases). Also, people’s
investment in home-related capital (such as houses, cars, and appliances) is
probably larger than business firms’ investment in buildings and equipment.
 03
Production of Housing
Services
● People combine the capital invested in their homes with some purchased
inputs and with their own time to produce living accommodations.

● People are both producers of housing services and consumers of those same
services.

● In 2004, for example, people spent about $1 trillion in (implicitly) renting

houses from themselves. They also spent $400 billion on household
operations.
 04
Production of Health
● The production function concept is also used in thinking about health issues.

● People combine inputs of purchased medical care (such as medicines or

physicians’ services) together with their own time in order to ‘‘produce’’
health.

● An important implication of this approach is that people may to some extent

find it possible to substitute their own actions for purchased medical care
while remaining equally healthy.
 05
Production of Children
● Somewhat more far-fetched application of the home production concept is to
view families as producers of children.

● One of the most important observations about this output is that it is not
homogeneous (children have both ‘‘quantity’’ and ‘‘quality’’ dimensions)

● From an economic point of view, one of the more interesting issues involved
in producing children concerns the fact that such investments are irreversible
(unlike, say, housing, where one can always opt for a smaller house).

● This may cause some people to view this production as quite risky, as any
parent of a surly teen can attest.
THANK
YOU !