Economic activity: households, businesses and the state

Remember the holiday job in “What is economics? Needs, goods and scarcity”? Let's take a closer look: during the summer holidays, you work in the village bakery, stocking shelves and serving customers. At the end of the month, you receive your wages. On the way home, you buy a sandwich – and walk along a road that neither you nor the bakery built.

This little scene already involves all three economic actors – the name for those who take part in the economy:

• Households – you and your family, for example: you consume goods and supply labour.
• Businesses – the bakery, for example: it produces goods and services and pays wages.
• The state – the national and local authorities: it sets rules, collects taxes and provides public services, such as schools and roads.

In “What is economics? Needs, goods and scarcity”, you learnt why people engage in economic activity: unlimited needs meet limited resources. This module looks at who is actually taking part – and what these three actors exchange with one another.

A household consists of all the people who live together and manage their resources together – whether a family with children, a couple without children, people sharing a flat or someone living alone. Everyone belongs to a household. Despite the word 'house', you do not have to live in one: people who live in a rented flat form a household too.

Households have two roles in the economy:

• They consume: households buy goods and services to meet their needs – bread from the baker, a winter jacket, a streaming subscription, a haircut. Consuming means buying goods and using them or using them up.
• They supply labour: adults (and you in your holiday job!) make their time, skills and energy available to businesses or the state – their labour. In return, they receive wages.

These two roles are connected: households pay for their consumption with the wages they earn from work. They can save what is left – another economic decision, like those you know from “What is economics? Needs, goods and scarcity”: resources are limited, so the household must choose what to spend its money on.

Businesses are the economy's producers: they make physical goods (the bakery bakes bread, the furniture factory makes tables) or provide services (the hairdresser cuts hair, the bus company takes you to school). Businesses come in all sizes – from a one-person business to a manufacturing company with thousands of employees.

Businesses also have two main roles:

• They produce goods and services and sell them – to households, other businesses or the state. They aim to earn more from sales than production costs them: they want to make a profit. Profit is to businesses what wages are to you – without it, they could not survive.
• They pay wages: to produce anything, businesses need the labour supplied by households. The bakery needs bakers and shop assistants; the furniture factory needs carpenters and lorry drivers. Businesses pay wages for this work.

Businesses and households therefore depend on each other: without workers, there would be no bread on the shelves – and without wages, there would be no money to buy it.

The third actor is the state – here, that means the national and local authorities and everything that belongs to them: the government, the Landtag, public administration, schools and the police. The state has a special role in the economy because, unlike businesses, it does not aim to make a profit. Its tasks are:

• It sets rules: laws determine what is allowed in the economy – for example, how many hours young people may work in a holiday job, that food must be inspected, or that advertising must not lie. Without these rules, exchanging goods and doing business would be risky.
• It collects taxes: households pay part of their income to the state, and businesses pay part of their profits. Taxes are neither a punishment nor a voluntary donation – they are everyone's contribution to shared tasks.
• It provides public services: the state uses tax revenue to fund things that benefit everyone and that hardly anyone could pay for alone – schools, roads, the police, hospitals and bus services. Remember the collective needs in “What is economics? Needs, goods and scarcity”? These are exactly what the state takes care of.

Watch out for this common misconception: 'The state is a business too – after all, it pays teachers' wages.' That is not true: paying wages does not make an organisation a business. What matters is its aim: businesses produce things to make a profit. The state provides services so that society can function – your school is there to give you an education, not to make a profit. That does not mean it costs nothing: everyone pays for it together – through taxes.

The three actors do not operate separately – they constantly exchange with one another. You will come across three simple exchanges again and again:

• Work for wages: a household supplies labour to a business – the business pays wages in return. That is exactly what happens in your holiday job: you give your time and effort, and the bakery gives you money at the end of the month.
• Goods for money: a household gives money to a business – the business provides a good or a service in return. A sandwich for francs, a haircut for francs.
• Taxes for public services: households and businesses pay taxes to the state – in return, the state provides services that are available to everyone: a school, a tarmacked road, police assistance. This exchange does not work item by item, as at a shop checkout – nobody gets exactly 100 francs' worth of road for 100 francs in taxes. But taken as a whole, everyone contributes and everyone can use the services.

One person, several roles: the actors are roles, not fixed groups of people. The shop assistant in the bakery is part of the business while she is at work – when she does her own shopping after work, she acts as a consumer for her household. A teacher works for the state – in his private life, he is part of a household and pays taxes himself. Ask yourself in each example: what role is this person acting in right now?

If you link all these exchanges together, you get a network in which money and goods circulate. You will take a closer look at how this network works as a whole – the circular flow of the economy – in “The simple circular flow of the economy”.