Understanding Economics: Household Management

When we think of economics, the terms like   banks, money, trade,debt, government regulation ,fiscal  and monetary policy pop-up into our mind. This is because these terms are  frequently used in economics and infact ,they form a significant part of our economic system.

 Economics has both micro-aspect as well as macro. -aspect. Microeconomics relates to individuals while as macroeconomics tells us about the economy as a whole. The way family is fundamental unit for society, household is  for the economy. The same economic activities are performed by an individual household which are done for the whole economy. Infact, Management of Household is termed as economics. So understanding the individual household can be very much useful for understanding the economics.

As  the student of Economics,I have often been questioned that why people studying economics become  penny-pincher.It is very hard to draw a penny out of the pocket of the student of economics.Yes, it is their perception but labelling us as “penny-pincher”  is not good because to us this is called rationality i.e to make judicious use of scarce resources.We shouldn’t be spendthrift and waste the money of our parents lavishly.

Father or the head of a family is like an economist because he is a rational person as well as a policy maker. Have you ever noticed that you asked your father some money and he  pretended to be quite hard up?  Despite the fact that he has some money in the pocket but he refuses .Does he hate you?  No ,this is because he has scarce resources ( money) While you are asking him for  money his mind is busy in allocating the resources (money) for different exigencies .At that point of time,he considers the other needs as well which are more important then your pocket money.

Our economy  is producing goods and services for us. Households offer factor services to firms (producers) like land , labour, capital,and entrepreneur and in return receive factor payments like  rent, wages ,profits and interest .The firms use labour services to produce goods and then households buy those goods by income they received.This is a simplest two sector  model  called “Circular flow of Income”. It shows us the continuous flow how the income is generated and how it is spent .This is the flow of income between two sectors only without incorporating  financial institutions , government ,banks and international trade.

Sometimes households save a part of their income in order to meet the unforeseen events like accidents, illness, acute shortage etc. They save it in the banks. Businessmen also save a part of their income which they later use to buy houses,shops,machines and other assets.This is called Investment and investment helps us to generate more and more income.

Sometimes, In an acute shortage of money  a household approaches to a  well-off person living in his vicinity. In the same way, when commercial banks run out of money, they approach to RBI which lends them money  at certain rates.

We make plans to accomplish the work step by step.For example, this year  we will build  a new house, next year our brother will get married, then we shall repay our loan and so on. Our economy also works on the same line and government with the assistance of economists , Statisticians and policy makers make Five year plans and annual plans to attain certain goals and targets which are predetermined. They may develope health sector in this year and industrial sector in the next year.At the end of the fiscal year we summarise the all what our targets were and how much successful we have been in attaining those targets.then accordingly we make  fresh statement of expenditure and revenue  i.e budget. The same thing happens in our homes,we consider our sources of income and  our expenditures and formulate new future plans.

Likewise, a household reduces consumption during inflation and postpone the demand for luxurious goods . Speculators like “bulls and bears”   in the stock exchange market  keep eyes on the price fluctuations in the same manner the household keeps on the prices of gold and construction goods like cement, bricks, furniture ,etc. Farmers and apple growers act as speculators , who remain abreast with  the current price of apples and fluctuations in prices caused by the demand for and supply for apple boxes.

To conclude, a household is a base of an economy . Therefore, economic transactions  and activities performed by an individual household is economics. Although  it is a small  component of any economic system  yet it has a large contribution in the savings as per  indian economy is concerned.


Author is Post Graduate Student at Department of Economics, University of Kashmir.


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