Chapter 23- Government and the Economy

Chapter 23- Government and the Economy

Providing Public Goods • Private goods are goods that when consumed by one individual, cannot be consumed by another (Ex. Clothes, food, haircuts, etc.) • These goods are subject to the exclusion principle which means a person is excluded from using the good or service unless they pay for it

Providing Public Goods • Public goods are goods that can be consumed by one person without preventing consumption of the good by another (Ex. Libraries and parks) • These goods are subject to the nonexclusion principle which means no one is excluded from consuming the benefits of the good whether or not they pay

Providing Public Goods • An externality is the unintended side effect of an action that affects someone not involved in the action; they can be positive (bonuses) or negative (pollution)

Maintaining Competition • A monopoly is a sole provider of a good or service, there is no competition and they can charge whatever price they want and consumers could suffer • The government tries to encourage competition through antitrust laws to control monopolies and preserve and promote competition Standard Oil was seen as a monopoly; it controlled 90% of oil refining companies in the US in 1890

Maintaining Competition • In 1890, the federal government passed the Sherman Antitrust Act which banned monopolies and other forms of businesses that prevented competition

Maintaining Competition • A merger is a combination of two or more companies to form a single business, these can sometimes threaten competition

Maintaining Competition • A natural monopoly occurs when the costs of production are minimized by having a single firm produce the product, in exchange for this the firm agrees to government regulation (Ex. Gas, electricity, water services)

Maintaining Competition • The Food and Drug Administration deals with labeling of food, drugs, and cosmetics; the Federal Trade Commission deals with false advertisements and product claims

Maintaining Competition • Product safety is an important area of regulation, if a product poses a safety hazard the government issues a recall where the product is pulled off the market

Measuring Growth • Real GDP shows an economy’s production after distortions of price increase have been removed, this eliminates the impression that output goes up when prices do

Measuring Growth • The economy goes through alternating intervals of growth and decline that we call the business cycle (line moves up, GDP grows, moves down it declines) • An economic peak is the highest point of economic prosperity; a trough is the lowest point in the business cycle

Business Fluctuations • An economic expansion takes place when real GDP goes up; it reaches its highest point and then begins to decline • A recession takes place when real GDP goes down for six straight months

Business Fluctuations • If a recession becomes severe, it may turn into a depression Unemployment during the Depression

Business Fluctuations • The unemployment rate is the percentage of people in the civilian labor force who are not working but are looking for jobs; this is a measure of the economy

Business Fluctuations • Fiscal policy is changes in government spending or tax policies; the government does this to help the economy (Ex. Cutting taxes or increasing spending)

Business Fluctuations • Another important indicator of an economy’s performance is inflation, a sustained increase in the general level of prices, it reduces people’s purchasing power

Business Fluctuations • A way to measure inflation is by studying the Consumer Price Index which is a measure of the price level of 400 products commonly used by consumers

Stocks and Stock Markets • Investors buy stock to make money; profits come in two ways- from dividends or from capital gains • A dividend is a share of the corporation’s profits that are distributed to shareholders; a capital gain occurs when stock can be sold for more than it cost to buy

Stocks and Stock Markets • The price of a stock is determined by supply and demand; investors consult stock indexes to measure stock performance (Ex. Dow-Jones and S&P 500) • Stocks are bought and sold in a stock market, or stock exchange, you can call a stockbroker who can buy or sell your stocks

Stocks and Stock Markets • Most stocks in the US are traded on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ

Income Inequality • Three influences on income: level of education, family wealth, and discrimination

Poverty • The goal of the food stamp program is to alleviate hunger and malnutrition by allowing low-income households to obtain a more healthful diet

Poverty • Another program is the Women Infant and Children program which provides help with nutrition and healthcare to low-income women, infants, and children

Poverty • Supplemental Security Income gives payments to blind or disabled people and to persons 65 and older; Temporary Assistance to Needy Families makes payments to families who need help because a parent is dead, disabled, or absent

Poverty • Workfare describes programs that require welfare recipients to exchange some of their labor in exchange for benefits; it teaches people job skills

Poverty • Another way the government helps the poor is with a progressive income tax the tax rate is lower at lower incomes and higher at higher incomes

Poverty • The Earned Income Tax Credit gives tax credits and cash payments to qualified workers

Chapter 23- Government and the Economy