The correct option is 1 and 3 only.
Explanation
In a simplified two-sector economy (consisting of households and firms), the household sector plays a dual role. Households are the owners of the factors of production (land, labour, capital, and entrepreneurship) and are also the primary consumers of goods and services produced by firms. This interaction forms the basis of the circular flow of income.
Statement-wise Analysis
- Statement 1 is Correct: Households own factors of production, including land. When households provide land to firms for productive activities, they receive remuneration in the form of rent. Leasing land is a standard economic activity for households to generate factor income.
- Statement 2 is Incorrect: Households are the primary suppliers of capital in an economy (often through savings in financial intermediaries like banks or by purchasing bonds). They are not prohibited from lending capital; rather, they earn interest as a reward for deferring consumption and supplying funds to firms or the government.
- Statement 3 is Correct: Households spend the income earned from factors of production on goods and services produced by firms. By purchasing these goods, households provide the necessary consumption demand that drives production in the business sector.
Key Takeaway
Key Takeaway: The household sector supplies factors of production (earning rent, wages, interest, and profit) and spends this income on consumption, thereby creating demand for the firm sector's output.