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The Explanation of Simple Economy

By on February 21, 2017
The Explanation of Simple Economy

The Explanation of Simple Economy

This is the simplest form of an economy. It bothers itself with only two sectors: the household sector and the firm sector. The flow of circulation borders only on this two sectors. The assumption of how the real flow works in a simple economy is as follows:

1. HOUSEHOLD SECTOR: They are the ones who own land, labor, capital, and entrepreneurship. In addition to owning the four factors of production just listed, they also happen to be the sole consumers of the goods and services that are produced in the simple economy.

2. FIRM SECTOR: Their role like that of the household sector is straightforward. the firm produces all the goods and services which are sold to the household sector for consumption.

WHAT THIS MEANS:

It means that what happens in a simple economy is not affected by any other factor except the household and the firm sectors. This system of operating an economy that has nothing to do with a third party or foreign body, not to mention the interference of the government of the day, is called a closed economy. Closed because the simple economy does not work in the knowledge that a need for economic relations exists.

THE IMPLICATIONS:

– There is no need for the government or a foreign sector. The economy is okay with the household and firm sectors only.
– The factors of production is supplied by the household sector with the firms hiring the four factors of production in return from the household sector.
– All the goods produced and services provided by the firm sector is entirely consumed by the household sector.
– All the income generated by the household sector when they hired the four factors of production to the firm sector is consumed when they consume the goods and services of the firm sector.
– The simple economy does not believe in the need to save. When the household sector consumes the firm sector’s good and services, it uses all the income gotten from the firm sector when they hired the four factors of production.

In a simple economy, money never ceases to circulate. If the firm sector is not using all its income from the sales of goods and services to pay for the four factors of production; then the household sector is using all the money paid to it by the firm sector when they hired the four factors of production to pay for the goods and services of the firm sector consumed. Since human wants are endless, the circulation never stops because production will always take place.

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