Participants in the economy 
Everyone who produces, consumes or distributes products participates in the economy. We can divide the participants into three types: households, businesses and the government
• A household is all of the people who live together. Normally a household is the same as a family. However, someone who lives by himself is a household, and so are friends who live together. • Businesses buy and sell goods and/or services. • The government includes central, regional and local government. 
THE ROLES OF THE PARTICIPANTS 1Businesses provide goods and services to households, the government and other businesses. In return they receive payment. 2 If they work, the members of the household receive wages in return for their labour. They either work for a business or for the government.3 The government provides services like schools, hospitals, the police force, the fire brigade and the army. It also pays benefits to pensioners and to people who are unemployed. It receives money from taxes (see box below). 
TERMINOLOGY Private sector: all of the households and private businesses in the economy. Public sector. The part of the economy that is controlled by the government. It can also be called the government sector or state sector. 
TAXES There are two main types of taxes: 1. Direct taxes • Income tax: this is the tax that people pay on their wages. The higher their wages, the more tax they pay. • Wealth tax: this is a tax that people pay on the things that they own, like their house and their savings. The more they own, the more they pay. • Company tax: this is the tax that a business pays. The more money it makes, the more tax it pays. 2. Indirect taxes • Sales tax or value added tax (VAT): this is a tax on everything that we buy. VAT is an EU tax, and the standard rate of VAT must be at least 15% in all EU states. • Special taxes: these are high taxes on products like fuel (petrol and diesel), tobacco and alcohol
Factors of production:  The factors of production are the things that you need in order to make o product. The most important factors are natural resources, capital and labour. • Natural resources are things that come from the natural enviroment The main types of natural resources are: 
Rocks, metals and fossil fuels in the ground. 
Land (for agriculture and building) 
Wild animals and fish
• Capital includes the things that you own, and the things that you know. It is provided by investors. There are various types of capital: – Financial capital: the money needed to start and run a business. – Physical capital: the physical things needed to make products and run the business_ This includes buildings, vehicles and machinery. – Human capital: the knowledge and skills of employees. For example, being an engineer, or knowing how to use a particular machine. Human capital is the result of education and training. – Technology and know-how: the inventions that have been introduced over the course of history.This includes old inventions, like the wheel and sail, and newer inventions like cars and computers .These inventions help us to make new products and provide new services. Labour is the work that people do. In return for providing labour, people are paid wages of a salary

State institution 
The state institutions are responsible for the administration of a state. They include a government and a bureaucracy. The most important functions of these institutions are to provide security, to control the state’s borders and to establish laws: 

The armed forces protect the state against its enemies. 
The police maintain public order and protect the people who live in the state against criminals. 
Border controls stop unwanted people from entering the state. if people want to import products into the state, they have to pay taxes. 
Laws are rules that all individual people and organisations (such as companies, political parties, clubs and associations) must obey. 
Embassies are the state institutions responsible for maintaining good relationships with other states. 
All states have institutions to provide security and establish laws. However, some states provide much more: 
Free education at state schools. 
Free medical care
Infrastructure, like  roads and railways. 
Benefits like pensions and unemployment benefits.
Regulation of the economy, for example by setting a minimum wage,

• Richer countries normally provide more services to their citizens than poorer countries. • States with higher taxes provide more services than states with lower taxes. • The countries that provide most services to their citizens are called welfare states, because the state takes responsibility for the basic welfare of the citizens. Welfare states are normally rich states with quite high taxes. 
Not all states are the same 
 We will classify them based on: • the rights of the citizens: democracies, oligarchies and dictatorships • the type of head of state: monarchies and republics • the role of religion: secular, confessional and theocratic states • the organisation of the territory centralised and decentralised states.