Question

Describe briefly the role of households in an economy.

Answer 1

The various aspects of the importance of households are discussed below:

1. Source of Demand: Consumers are the biggest source of demand for various goods and services produced in an economy. The greater the demand, the larger will be the production of goods and services. 
2. Diversification in Production: Different consumers have different preferences or likings. Some consumers like butter while others prefer ice cream. Some consumers prefer scooters whereas others like motorbikes, etc. As a result, producers are encouraged to diversify their products. They tend to produce goods of different designs and colours to attract the consumers towards their products. 
3. Demand for Services: The consumer demand is just not confined to consumer goods. It extends to services too, say like transport services, banking services, health, education, etc. Thus, the growth of service sector in an economy would depend upon the number of consumers of such services.
4. Supply of Factor Services: As owners of factors of production, they supply factor services to the firms.
5. Source of Capital Formation: Households save a part of their income which becomes the basis of capital formation. They save money in the financial market from where it goes to the producing sector. 
6. Revenue to Government: Households are also tax payers. They pay taxes to the government such as income tax, sales tax, etc. Thus, they contribute revenue to the government.