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Economic Decision Makers

Economic Decision Makers. ECO 2013 Chapter 3. Households. Play a starring role in a market economy Determines what gets produced Supplies labor, capital, natural resources and entrepreneurial ability Maximize utility. Functional Distribution of Income.

Samuel
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Economic Decision Makers

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  1. Economic Decision Makers ECO 2013 Chapter 3

  2. Households Play a starring role in a market economy Determines what gets produced Supplies labor, capital, natural resources and entrepreneurial ability Maximize utility

  3. Functional Distribution of Income • Indicates how the nation’s earned income is apportioned among • Wages labor • Rents  land • Interest owners of property resources • Profit  owners of businesses

  4. Functional Distribution of Income

  5. Personal Distribution of Income • How the nation’s money income is divided among individual households. • Top 20% earn over 50% of the income

  6. Households • Income spent • Personal taxes – 12% • Personal savings – 0% • Personal consumption – 88%

  7. Households • Three categories of spending: • Durable goods • Goods expected to last three or more years

  8. Households • Nondurable goods • Goods such as food and gasoline

  9. Household • Services

  10. Businesses • Constitute the second major part of the private sector • Is a business organization that owns and operates plants.

  11. Types of Firms • Sole proprietorships • A firm with a single owner who has the right to all profits and who bears unlimited liability for the firm’s debts. • Partnerships • A firm with multiple owners who share the firm’s profits and who bears unlimited liability for the firm’s debts. • Corporations • A legal entity owned by stockholders whose liability is limited to the value of their stock. • Distinct and separate from the individual stockholders who own it.

  12. Government • Extensive role of the public sector • Levels of Government • Federal • State • Local

  13. Role of Government • Providing legal structure • Promoting competition • Regulating monopolies • Redistributing income • Transfer payments • Market invention • Taxation • Reallocating resources • Market failure

  14. Role of Government • Externalities • A cost or benefit that falls on a third party and is therefore ignored by the two parties to the market transaction

  15. Externalities • An externality occurs when some of the costs or the benefits of a good are passed to or spill over to someone other than the immediate buyer or seller. • Negative externality • Production or consumption costs inflicted on a third party without compensation • Environmental pollution • Positive externalities • Benefits • education

  16. Role of government • Public good • A good that once produced is available for all to consume regardless of who pays • National defense

  17. Government structure • Federal • National security • Economic stability • Market competition • State • Public higher education • Prisons • Transportation • Local • Education • protection

  18. Size of Government • Government spending has increased over the years • Government is the green in the chart • 1930 – 10% of economy • 2004 – 36% of economy

  19. Government Purchase and Transfers • Government purchases • Exhaustive • Directly absorb resources and are part of the domestic output • Transfer payments • Non-exhaustive

  20. Federal Expenditures • Pension and income security • 35% • National defense • 20% • Health • 21% • Interest on debt • 7%

  21. Sources of Government Revenue • Taxes • Bulk of government revenues at all levels • Tax principles • Ability to pay principle • Benefits received tax principle • Tax incidence • Distribution of tax burden among taxpayers • Proportional tax • Progressive • Regressive • Marginal tax rate

  22. Types of taxes • Personal income tax • Tax on earnings of individuals • Progressive tax • All but six states have it • Single taxpayer

  23. Types of Taxes • Corporate income tax • Tax on earnings of corporations • Progressive tax • Federal and state

  24. Types of taxes • Sales tax • Tax on purchases of goods and services • Some services excluded • Some goods excluded • Flat rate • State and local government

  25. Types of taxes • Property taxes • Tax on the value of real property • Tax on the value of tangible property • Flat rate • Local governments • Excise taxes • Tax on consumption of specific goods • Alcohol, tobacco, and gasoline • Sin taxes • All levels of government

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