Transcript Households

The U. S. Economy: Private and
Public Sectors
Chapter 4
US Economy
• Economists divide the economy into three
groups:
– households
– businesses
– government
Households
Households
• Households are:
– One or more people living together in a housing
unit, supplying the economy with labor and
purchasing products
– There are about 114 million households
Several different ways to measure
and compare household incomes
Households
• The Functional Distribution of Income is;
- How the nation’s earned income is distributed
between the different functions (categories) of
wages, profits, rents and interest.
Households
• The Personal Distribution of Income is;
- How the nation’s earned income is distributed
between different households.
Households
• Households on average:
– Pay 13% of their income in personal taxes
– Save 1% of their income
– Spend 86% of their income
Households
• Households save:
– For security – to have income in retirement, in
case of emergencies, to pay for college
– For speculation – to have more money in the
future
Households
• Household income, savings and
consumption are directly related:
– The higher the income, the more people spend
– The higher the income, the more people save
Businesses
Businesses
• Businesses are:
– An organization, usually in existence to
produce a profit for owners, which combines
labor, capital and other resources to produce
products.
Businesses
• Plant
– A physical establishment
• Firm
– A business organization that owns and operates
plants
• Industry
– A group of firms that produce the same or
similar products
Businesses: Types of Ownership
• Sole proprietorship
– A single owner
• Partnership
– Two or more owners
• Corporation
– A legal entity that can perform the functions of
any business entity. Owned by stockholders
Businesses:
Advantages of Corporations
• Limited liability for stockholders
– They don’t risk anything except the value of
their stocks
• Ability to raise funds
– Large companies find it easier to raise money
• Political and economic power
– Large corporations can alter the marketplace, or
influence government, to meet their desires
The Role of the Government
Government
• Notice that the emphasis is on the minimal
role government plays.
• For some people even this little is too much.
• For others, the government can and should
do more.
Government Functions
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Provide the legal structure
Maintain competition
Redistribute income
Correct market failures
Promote stability
Government: Legal Structure
• The government should provide the legal
structure for the effective functioning of the
capitalist (market) system.
• This includes courts and police to fight
crime and enforce contracts.
Government: Legal Structure
• The legal structure also includes a state
strong enough to pass laws and enforce
contracts.
• Russia is the example of a state that is too
weak: the mafia took over the country.
Government:
Maintain Competition
• The most efficient economic system is
competition. But there appears to be a
natural tendency for competition to end and
monopolies to emerge.
• Government should provide the legal
structure to fight monopolies.
Government:
Redistribute Income
• All democratic governments redistribute
income, as a result of popular beliefs about
fairness, justice, and lobbying for special
groups.
Government:
Correcting Market Failures
• Market failures take place when firms
produce the wrong amount of certain
products
• Or when markets fail to allocate resources
to produce necessary products.
Government:
Correcting Market Failures
• The first leads to spillovers
• The second involves public goods
Spillovers
Correcting Market Failures:
Spillovers
• Spillovers take place when costs or benefits
of an economic activity are passed on to
parties who are neither buyers nor sellers in
that activity.
Correcting Market Failures:
Negative Spillovers
• A negative spillover occurs when economic
activities inflict costs on third parties.
• Examples of negative spillovers include all
types of pollution.
Correcting Market Failures:
Negative Spillovers
• In the case of spillovers, the government
needs to find some mechanism to either
pass the costs onto offending firms, or get
them to change their behavior.
Correcting Market Failures:
Negative Spillovers
• Governments can raise taxes on the
polluting firms.
• Or it can pass laws to force the companies
to change their behavior
Correcting Market Failures:
Positive Spillovers
• A positive spillover occurs when economic
activities benefit someone in addition to the
buyer and seller of a product.
• Examples of positive spillovers include all
types of education, libraries, immunization
shots.
Correcting Market Failures:
Positive Spillovers
• In the case of positive spillover, the market
system doesn’t produce enough of the
product.
Correcting Market Failures:
Positive Spillovers
• In the case of positive spillovers, the
government needs to increase demand, or
increase supply, or produce the product
itself.
Correcting Market Failures:
Negative Spillovers
• Governments can raise taxes on the
polluting firms.
• Or it can pass laws to force the companies
to change their behavior
Public Goods
Correcting Market Failures:
Public Goods
• Public goods are products that are
economically and socially justifiable, but
which no private firm will produce.
Correcting Market Failures:
Private Goods
• Private goods
– Are produced by firms and have two
characteristics
• Private goods have excludability and rivalry
Correcting Market Failures:
Private Goods
• Excludability
– Buyers who are willing and able to pay the
market price enjoy the benefits of buying the
product.
– People who can’t afford the good, don’t enjoy
the benefits
Correcting Market Failures:
Private Goods
• Rivalry
– Means when one person buys the good, no one
else can buy or use them.
– If I buy a pair of jeans, no one else can buy or
use them.
Correcting Market Failures:
Public Goods
• Public goods
– Are usually produced by governments
and have two characteristics
• Public goods have non-excludability and
non-rivalry
Correcting Market Failures:
Public Goods
• Nonexcludability
– People who buy the good or service benefit, but
so do people who don’t buy the product.
– Street lighting, flu shots
Correcting Market Failures:
Public Goods
• Nonrivalry
– If I buy the product, other people can still use
it.
– If I “buy” a national defense, everyone else can
enjoy the benefits as well.
Correcting Market Failures:
Public vs. Private Goods
The line between public and private goods is
not sharp.
It varies from one society to another, and from
one time period to another.
Government:
Promoting Stability
Governments should also control inflation
and reduce unemployment.
Too much of either is bad for the economy,
and ultimately, businesses.
Federal Finance
Government:
Federal Budget
Notice the charts on page 85.
Notice how much goes to defense.
Notice how the tax structure lightly taxes
corporations and the wealthy, compared to
other countries.
Government:
State Budgets
The primary tax revenue for states is sales and
excise taxes.