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Economic unit

DEFINITION of Economic unit

In an economy, production, consumption and exchange are carried out by two basic economic units: the firm and the household.

1. Firm

The firm makes production decisions. These include what goods to produce, how these goods are to be produced and what prices to charge. It employs the various factors in production, and it sells the finished goods too the household for consumption.

2. Household

The household is responsible for making consumption decisions and owns factors of production. It provides the firm with factor services in production, and buys the finished goods from the firm for consumption.




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