1. Economic decision makers
LOs
Explain the role of the household in the economic system.
Identify the different types of firms and describe their roles in the economy.
Outline the ways governments affect their economies.
Outline the international influences on the economy.

2. Households Suppliers of economic resources.
Buyers of goods and services.
Producers of goods and services (household production).

3. Where U.S. personal income comes from and where it goes
Over two-thirds of personal income
in 2006 was from wages, salaries, and
proprietors income
(b) Half of U.S. personal income
in 2006 was spent on services

4. Transfer payments
Cash or in-kind benefits given to individuals as outright grants from the government
Cash transfers: Social security, disability, unemployment compensation, TANF.
In-kind transfers: Medicare, Medicaid, food stamps, school lunch program, subsidized housing.

5. Household Production
Gardening, cooking, ironing, childcare, car repair, painting—many people do these things “in-house.”
Household production makes sense if the opportunity cost is less than market price.

6. The Firm Firms Hire and combine resources Produce goods and services
Maximize profit

7. Types of Firms Sole proprietorship Partnership Corporation
Single owner
Partnership
Two or more owners
Corporation
Legal entity
Shares of stock
Limited liability

8. Number and sales of each type of firm
Most firms are sole proprietorships
(b) Corporations account for most sales

9. The Government Establish & enforce rules of the game
Promote competition
Regulate natural monopolies
Provide public goods
Deal with externalities
More equal distribution of income
Full employment
Price stability
Economic growth

10. Externalities Examples:
Private production and consumption can impose costs on parties “outside the market.” Some costs of production or consumption are thus externalized.
Examples:
Air, water, noise pollution; cigarette smoke; acid rain; mosquitoes.

11. Examples of government policy aimed at externalities:
In a world where externalities occur, market forces cannot always be relied upon to allocate resources efficiently. This creates a legitimate reason for government regulation.
Examples of government policy aimed at externalities:
Effluent taxes
Pollution “permits”
Subsidized vaccinations
Auto emission standards
Open burning ordinances
Smoke free workplaces

12. Public Goods Public goods are subject to a free-rider problem.
A good that, once produced, is available for all to consume regardless of who pays and who doesn’t; such a good is nonrival and nonexclusive.
Public goods are subject to a free-rider problem.
Examples include lighthouses, flood control, and national defense.

13. Components of Federal Spending Since 1960

14. Federal Revenues by Source since 1960

17. Tax Principles and Tax Incidence
Ability-to-pay tax principle
Benefits-received tax principle
Tax incidence
Proportional taxation: Flat tax (as % of income)
Progressive taxation: marginal tax rate
Top 1% of tax filers – paid 36.9% of taxes
Top 10% of tax filers – paid 68.2% of taxes
Bottom 50% of tax fillers – paid 3% of taxes
Regressive taxation

18. for income redistribution
The tax code is a tool
for income redistribution
Needy
Affluent
By making the tax structure “progressive,” governments can make the after-tax distribution of income more equitable (or even).

19. Why a sales tax is regressive
Assume a 7.13 percent excise tax on groceries, gasoline, cigarettes, and liquor
Family
(1) Income
(2) Spending for items subject to excise tax
(3) = (2)/(1)
(4)
Excise Tax Paid
(5)= (4)/(1) ATR
Greens
$27,000
$16,200
.60
$1,188
4.4%
Jones
64,000
25,600
.40
1,871
2.9
Lemons
270,000
40,500
.15
2,961
1.0
Moral of the story: Low income families tend to spend a greater proportion of their income on items subject to excise taxes. Hence excise taxes tend to be regressive.

20. Top marginal rate on federal personal income tax since 1913

21. The rest of the world
Consists of households, firms, and government units in roughly 200 sovereign foreign countries.
Foreign agents buy domestically produced goods and services.
Domestic agents buy goods and services from foreign producers.

22. The Global Economy
The world is more “integrated” than ever before, as measured by the movement of resources, goods and services between countries

23. Distribution of global production

24. Energy Sources in the World Economy

25. Energy Sources in the World Economy

26. Energy Sources in the World Economy

27. Exchange rates
An exchange is a price of one (national) currency expressed in terms of another currency.

28. If the dollar price of the British pound is:
1.45 dollars = 1 pound
Then the pound price of the dollar is given by the reciprocal of the dollar-pound exchange rate. That is:
Pounds per dollar =