The Household
Households play the starring role in a market economy. Their demand for goods and services determines what gets produced. And their supply of labor, capital, natural resources, and entrepreneurial ability produces that output. As demanders of goods and services and suppliers of resources, households make all kinds of choices, such as what to buy, how much to save, where to live, and where to work. Although a household usually consists of several individuals, we will view each household as acting like a single decision maker.
The Evolution of the Household
In earlier times, when the economy was primarily agricultural, a farm household was largely self-sufficient. Each family member often specialized in a specific farm task cooking meals, making clothes, tending livestock, planting crops, mending fences, and so on. These early households produced what they consumed and consumed what they produced. With the introduction of new seed varieties, better fertilizers, and laborsaving machinery, farm productivity increased sharply. Fewer farmers were needed to grow enough food to feed a nation. At the same time, the growth of urban factories increased the demand for factory labor. As a result, many workers moved from farms to urban factories, where they became more specialized but less self-sufficient.
Households evolved in other ways. For example, in 1950, only about 15 percent of married women with young children were in the labor force. Since then, higher levels of education among women and a growing demand for their labor increased women’s earnings, thus raising their opportunity cost of working in the home. This higher opportunity cost contributed to their growing labor force participation. Today about 70 percent of women with children under 18 are in the labor force. The rise of two-earner households has affected the family as an economic unit. Households produce less for themselves and demand more from the market. For example, child-care services and fast-food restaurants have displaced some household production (Americans now consume at least one-third of their calories away from home). The rise in two-earner families has reduced specialization in householdproduction a central feature of the farm family. Nonetheless, some production still occurs in the home, as we’ll explore later.
Households play the starring role in a market economy. Their demand for goods and services determines what gets produced. And their supply of labor, capital, natural resources, and entrepreneurial ability produces that output. As demanders of goods and services and suppliers of resources, households make all kinds of choices, such as what to buy, how much to save, where to live, and where to work. Although a household usually consists of several individuals, we will view each household as acting like a single decision maker.
The Evolution of the Household
In earlier times, when the economy was primarily agricultural, a farm household was largely self-sufficient. Each family member often specialized in a specific farm task cooking meals, making clothes, tending livestock, planting crops, mending fences, and so on. These early households produced what they consumed and consumed what they produced. With the introduction of new seed varieties, better fertilizers, and laborsaving machinery, farm productivity increased sharply. Fewer farmers were needed to grow enough food to feed a nation. At the same time, the growth of urban factories increased the demand for factory labor. As a result, many workers moved from farms to urban factories, where they became more specialized but less self-sufficient.
Households evolved in other ways. For example, in 1950, only about 15 percent of married women with young children were in the labor force. Since then, higher levels of education among women and a growing demand for their labor increased women’s earnings, thus raising their opportunity cost of working in the home. This higher opportunity cost contributed to their growing labor force participation. Today about 70 percent of women with children under 18 are in the labor force. The rise of two-earner households has affected the family as an economic unit. Households produce less for themselves and demand more from the market. For example, child-care services and fast-food restaurants have displaced some household production (Americans now consume at least one-third of their calories away from home). The rise in two-earner families has reduced specialization in householdproduction a central feature of the farm family. Nonetheless, some production still occurs in the home, as we’ll explore later.
Households Maximize Utility
There are about 120 million U.S. households. All those who live together under one roof are considered part of the same household. What exactly do households attempt to accomplish in making decisions? Economists assume that people try to maximize their level of satisfaction, sense of well-being, happiness, and overall welfare. In short, households attempt to maximize utility. Households, like other economic decision makers, are viewed as rational, meaning that they try to act in their best interests and do not deliberately try to make themselves less happy. Utility maximization depends on each household’s subjective goals, not on some objective standard. For example, some households maintain neat homes with well-groomed lawns; others pay little attention to their homes and use their lawns as junkyards.
There are about 120 million U.S. households. All those who live together under one roof are considered part of the same household. What exactly do households attempt to accomplish in making decisions? Economists assume that people try to maximize their level of satisfaction, sense of well-being, happiness, and overall welfare. In short, households attempt to maximize utility. Households, like other economic decision makers, are viewed as rational, meaning that they try to act in their best interests and do not deliberately try to make themselves less happy. Utility maximization depends on each household’s subjective goals, not on some objective standard. For example, some households maintain neat homes with well-groomed lawns; others pay little attention to their homes and use their lawns as junkyards.
H ouseholds as Resource Suppliers
Households use their limited resources labor, capital, natural resources, and entrepreneurial ability in an attempt to satisfy their unlimited wants. They can use these resources to produce goods and services in their homes. For example, they can cook, wash, sew, dust, iron, sweep, vacuum, mop, mow, paint, and fix a leaky faucet. They can also sell these resources in the resource market and use the income to buy goods and services in the product market. The most valuable resource sold by most households is labor.
Households use their limited resources labor, capital, natural resources, and entrepreneurial ability in an attempt to satisfy their unlimited wants. They can use these resources to produce goods and services in their homes. For example, they can cook, wash, sew, dust, iron, sweep, vacuum, mop, mow, paint, and fix a leaky faucet. They can also sell these resources in the resource market and use the income to buy goods and services in the product market. The most valuable resource sold by most households is labor.
Panel (a) of Exhibit 1 shows the sources of personal income received by U.S. households in 2011, when personal income totaled $13.0 trillion. As you can see, 59 percent of personal income came from wages and salaries. A distant second was transfer payments (to be discussed next), at 17 percent of personal income, followed by proprietors’ income at 8 percent. Proprietors are people who work for themselves rather than for employers; farmers, plumbers, and doctors are often self-employed. Proprietors’ income should also be considered a form of labor income. Thus, twothirds of personal income in the United States comes from labor earnings rather than from the ownership of other resources such as capital or natural resources. Because of a limited education, disability, discrimination, poor health, the time demands of caring for small children, or just bad luck, some households have few resources that are valued in the market. Society has made the political decision that individuals in such circumstances should receive short-term public assistance. Consequently, the government gives some households transfer payments, which are outright grants. Cash transfers are monetary payments, such as welfare benefits, Social Security, unemployment compensation, and disability benefits. In-kind transfers provide for specific
goods and services, such as food, health care, and housing.
goods and services, such as food, health care, and housing.
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Households as Demanders of Goods and Services
What happens to personal income once it comes into the household? Most goes to personal consumption, which sorts into three broad spending categories: (1) durable goods that is, goods expected to last three or more years such as an automobile or a refrigerator; (2) nondurable goods, such as food, clothing, and gasoline; and (3) services, such as haircuts, air travel, and medical care. As you can see from panel (b) of Exhibit 1, spending on durable goods in 2011 claimed 9 percent of U.S. personal income; nondurables, 19 percent; and services, 54 percent. Taxes claimed 11 percent, and all other categories, including saving, claimed just 7 percent. So more than half of all personal income went for services the fastest growing sector, because many services, such as child care, are shifting from do-it-yourself home production to market purchases.
What happens to personal income once it comes into the household? Most goes to personal consumption, which sorts into three broad spending categories: (1) durable goods that is, goods expected to last three or more years such as an automobile or a refrigerator; (2) nondurable goods, such as food, clothing, and gasoline; and (3) services, such as haircuts, air travel, and medical care. As you can see from panel (b) of Exhibit 1, spending on durable goods in 2011 claimed 9 percent of U.S. personal income; nondurables, 19 percent; and services, 54 percent. Taxes claimed 11 percent, and all other categories, including saving, claimed just 7 percent. So more than half of all personal income went for services the fastest growing sector, because many services, such as child care, are shifting from do-it-yourself home production to market purchases.
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