1 Private Sector Circular Flow

2 Private and Public Sectors Private sector: households, businesses, & the international sector. Household spending  “consumption”. Business spending on capital goods and inventories  “investment”. Sales of goods and services to foreigners  “exports.” Sales of goods and services to foreigners  “exports.” Purchases from foreigners  “imports.” Purchases from foreigners  “imports.” Private sector responds to consumer  Consumer sovereignty Public sector: government activities.

3 A Change in Demand for Restaurant Food: Price Guides Action

4 Wisdom of Adam Smith: The Invisible Hand at Work It is not from the benevolence of the butcher, the brewer, or the baker that we seek our dinner, but from their regard to their own interest.

5 Income Distribution in Market Economy What you own  What you get Firms pay the factors of production according to their marginal products –Workers get wages equal to the marginal product of labor. –Capitalists get interest equal to the marginal product of capital. –Landlords get rents equal to the marginal product of land. –Entrepreneurs get profits equal to the excess of revenues over costs (payments to other factors).

6 Consumption is a Household Decision There are over 104 million households in the U.S.

7 Household Spending and Income

8 Forms of Business Organization Sole Proprietorship Partnership Corporation Corporation –Owners are shareholders who share the profits but enjoy limited liability. –A multinational business operates in several countries. There are far more sole proprietorships and partnerships in the U.S. than corporations. –But corporations are generally bigger.

9 The World’s Ten Largest Corporations

10 U.S. Investment Spending by Businesses (includes all new residential structures)

11 World Economic Development

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13 Income in Industrial Market Economies, 2001 Income in Industrial Market Economies, 2001

14 Direction of U.S. Trade

15 U.S. Net Exports

16 Private Sector Circular Flow

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