Beginning students of economics learn about the circular flow of the economy in which households and business firms are the major sectors, with government in the background as participant and setter of rules. Households provide labor to business firms from which they receive income. This income returns to the firms as consumption expenditures and financial investments (savings). In the basic economic analysis that follows, households are the decision makers in consumer demand and in labor supply. Financial transactions receive less attention in elementary treatments. Economists ignored decisions about formation, dissolution, and size of the household prior to the latter half of the twentieth century.

These omissions are understandable. The traditional treatment of the household as consumer and worker becomes awkward when it recognizes that most households contain more than one person. Indeed, historically, the prototypical household was the extended family, and the economy (Greek for household) was coextensive with it. Moreover, in order to face the issue of decisions about household formation and size, it was necessary to abandon the fallacy that non-market activities are not subject to economic analysis.The New Home Economics (NHE) is the development that followed this recognition.

The New Home Economics is no longer new, but its many insights into the role of the household in the economy are continuously augmented by researchers in economics and in the other social sciences. A brief listing of knowledge acquired by the NHE approach indicates its scope and power: Labor supply analyzed in the family context permits the estimation of income and price effects on labor supply.