What’s it: Economic actors refer to the participants in economic activities in an economy. They use productive resources and interact with each other with their respective motives and compensation, involving the flow of goods and income. Synonym market participants are economic agents.
Broadly speaking, economic actors consist of individuals, businesses, and governments. In the general literature, economists assume they act rationally by maximizing their own self-interest. For example, the individual will maximize satisfaction (utility) in consuming goods and services. Likewise, businesses try to maximize profits in producing goods and services.
Three economic actors
We group economic actors into the following three categories:
- Household sector
- Business sector
- Government sector
In an open economy, economic activity also involves the external sector. It represents economic actors abroad, which interact with domestic economic actors through international trade and capital flows. However, if we break down its components again, the external sector also consists of the three economic actors mentioned above.
Furthermore, transactions between these sectors involve exchanging goods and services and money as a means of payment. Economists describe the flow of goods and income into a diagram that we call a circular flow diagram.
Apart from the three sectors, several authors added the voluntary sector. Different from the business sector, this sector is neither profit-oriented nor dependent on the government sector. Sometimes we refer to it as the third sector, the community sector, or the non-profit sector. Examples of the voluntary sector are charities, communities, cooperatives, foundations, advocacy groups, and social welfare organizations.
Furthermore, if you dissect economic actors in more detail, you will likely find a wide variety of actors, including:
- Household: lower class, middle class, and upper class
- Company: commercial enterprises, unincorporated businesses, social enterprises
- Public service organizations: educational, health care, utility institutions
- Political bodies: parliaments, central and local governments, international organizations, and government agencies.
- Financial institutions: central banks, financial services authorities, commercial banks, pension funds, stock exchanges, and insurance companies
- Legal institutions: courts and law firms.
- Educational and cultural institutions: universities, R&D organizations, and arts institutions.
- Local community: a community of professions, hobbies, and interests.
- Civil society organizations: non-governmental organizations, ranging from the environment, human rights to culture
- Professional associations: trade unions, business associations, and chambers of commerce.
The household sector consists of individuals. They are the owners of various factors of production available in the economy. They may be workers, landowners, or entrepreneurs.
In the factor market, the household sector offers firms a factor of production. In return, they receive a variety of incomes, including:
- Wages for labor
- Rent for used land
- Profit for entrepreneurship
- Interest for capital
Another source of income is transfer payments from the government, such as pension benefits and unemployment benefits.
Households use that income for consumption or for saving. Before allocating to the two, they must pay taxes. The income remaining after paying taxes is called disposable income.
Households use disposable income to buy several products. They buy it from the business sector in the product market. Products fall into three main categories of durable goods, non-perishable goods, and services.
Households also save some of their disposable income to accumulate wealth. They place it into real assets such as property or financial assets such as time deposits, stocks, mutual funds, and bonds.
Households as rational economic actors
Economists assume the household sector is rational in making economic decisions. They will try to maximize satisfaction (utility) from the consumption of goods and services.
Utilities are subjective. The same item may satisfy you and your friends in different ways. Likewise, your satisfaction may also be different when you are at different times and locations.
The business sector consists of various organizations that produce goods and provide services. Their motive is for profit. They sell goods or provide services to other sectors and earn revenue as compensation.
The business then uses the money to purchase various inputs in the factor market. They recruit workers, buy raw materials, and buy capital goods.
In general, we can group business activities into three sectors based on their stages in the value chain:
- Primary sector. This sector consists of various businesses, with the main activity being the extraction and processing of natural resources. Examples of their activities are mining, forestry, fisheries, plantations, and agriculture.
- Secondary sector. This sector consists of various businesses that produce industrial goods (such as shoes, clothes, cars, and books); build houses and buildings, provide water, electricity, and gas. They process raw materials from the primary sector into semi-finished and finished goods.
- Tertiary industry. This sector covers a wide range of businesses providing services. They serve various activities such as transportation, finance, retail, and health.
Meanwhile, based on the legal form, we can categorize the businesses into the following three groups:
- Sole proprietorship. The owner has the right to all profits and bears unlimited liability on the company’s debt.
- Partnership. Businesses have two or more owners. They share profits and responsibilities as agreed. Each of them has unlimited liability for the company’s debt.
- Corporation. We also often refer to it as a company, where the legal entity is separate from the owner. Owners control the company through the shares they own. They receive a share of the profits (dividends) in proportion to their share ownership. Furthermore, they are not responsible for the company’s debt. Some of these companies sell their shares to the public through stock exchanges (known as public companies). Others do not (referred to as private companies).
The government consists of institutions that are tasked with regulating and issuing policies to influence economic activity. They include the central government, ministries, central banks, and local governments.
The macroeconomic objectives of the government sector are:
- Achieve sustainable economic growth
- Stable inflation
- Full employment
- Balance of payments equilibrium
Apart from going through regulations, the government sector also issues policies. Well-known examples of macroeconomic policy are fiscal and monetary policy. Both affect aggregate demand, which in turn has an impact on production activities and aggregate supply.
To finance operations and macroeconomic policies, the government collects taxes from the business and household sectors. If tax revenues are less than expenditure, the government runs a budget deficit. It must borrow to cover the deficit, for example, by issuing debt securities.
Furthermore, the government also launched structural policies to influence the supply side of the economy. Examples of policies are privatization, infrastructure development, improving the education system, and promoting competition.
In several sectors, the government also carries out various economic activities, especially where they are less attractive for private sectors (business). Examples are infrastructure development, defense, health and education services, and rail transportation. The private sector considers these activities high risk or unprofitable.
What to read next
- Circular Flow of Income: Types and Descriptions
- Economic Actors: Types and Roles
- Macroeconomic Sector: Types, Roles
- Government Sector: Meaning, Budget, and Impact on the Economy
- Household Sector: Definition and Role in the Economy
- Business Sector: Meaning, Types of Companies
- External Sector: Its Effect on the Economy
- 4 Types of Business Sector You Need to Know
- How Does the Government Play A Role In the Economy?