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Economic Decision Makers

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Presentation on theme: "Economic Decision Makers"— Presentation transcript:

1 Economic Decision Makers
Chapter 3 Economic Decision Makers © 2009 South-Western/Cengage Learning

2 The Household Demand goods and services Supply resources Choices
What gets produced Supply resources Produce output Choices

3 The Household Utility: Maximize utility Supply resources
Satisfaction gained from the consumption of a good or service Maximize utility Supply resources Demand goods and services

4 Exhibit 1 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

5 Transfer Payment payment to an individual in exchange for no work

6 The Evolution of the Firm
Specialization Comparative advantage Transaction costs Entrepreneur Cottage industry system Technological developments

7 The Evolution of Firm Factories Industrial Revolution
Efficient division of labor Direct supervision of production Reduce transportation costs Bigger machines Industrial Revolution

8 Coordination of tasks Market coordination Managerial coordination
uses price as signals and incentives Managerial coordination uses management within firm Transactions costs costs other than production costs of carrying out a transaction

9 The Firm Firms Economic units Entrepreneurs Combine resources
Produce goods and services Maximize profit

10 Types of Firms Sole proprietorship Partnership
owned and operated by one person who receives all profit and bears all liability Partnership association of 2 or more people who operate a business as co-owners by voluntary legal agreement

11 Types of Firms Corporation
independent legal entity with ownership divided into equal shares and each owner’s liability limited to his/her investment in the company

12 Exhibit 2 Number and sales of each type of firm
Most firms are sole proprietorships (b) Corporations account for most sales

13 Types of Firms Not-for-profit organizations Charitable Educational
Humanitarian Cultural Professional

14 Household Production Opportunity cost
Below market price No skills or special resources are required Avoid taxes Reduce transaction costs Technological advance

15 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

16 The Government Market Failure
market fails to efficiently or equitably allocate scarce resources.

17 Sources of Market Failure
Externalities costs or benefits associated with a transaction not borne by the decision makers Public goods nonrival in consumption nonexclusion Imperfect Competition Income Distribution

18 Government’s Structure, Objectives
National/federal government National security, economic stability, market competition State government Public higher education, prisons, highways, welfare Local government Primary and secondary education, police, fire protection

19 Government’s Structure, Objectives
Difficulty 87,600 jurisdictions 1 nation 50 states 3,034 counties 35,933 cities and towns 13,506 school districts 35,052 special districts Not a single decision maker ‘Vote maximization’

20 Government’s Structure, Objectives
Voluntary exchange vs. coercion Some government coercion Enforced by the police No market prices Public output Zero price Below the production cost

21 The Size and Growth of Government
Government outlays relative to GDP 1929: 10% of GDP Mostly state and local 2007: 37% of GDP Mostly federal Defense Decreased Redistribution Increased

22 Exhibit 3 Redistribution has grown and defense has declined
as share of federal outlays since 1960

23 Sources of Government Revenue
Taxes Individual income tax (federal) Income tax; sales tax (state) Property tax (local) User charges Borrowing Monopolize certain markets

24 Tax Principles Ability-to-pay tax principle
Benefits-received tax principle

25 Tax Incidence Proportional tax tax rate is same for all
Progressive tax tax rate increases as income increases Top 1% of tax filers – paid 36.9% of taxes Top 10% of tax filers – paid 68.2% of taxes Bottom 50% of tax filers – paid 3% of taxes Regressive tax tax rate decreases as income increases

26 Income Tax rate Tax paid $10,000 50,000 100,000 20 $2,000 10,000 20,000 25 30 12,500 30,000 15 10 7,500

27 Exhibit 4 Payroll taxes have grown as a share of federal
revenue since 1960

28 Exhibit 5 Top marginal rate on federal personal income tax since 1913

29 The Rest of the World Foreign households, firms, governments
International trade - different opportunity costs Merchandise trade balance Value of a country’s exports minus the value of its imports Balance of payments

30 Rest of the World Exchange rate Trade restrictions
Shows the price, in terms of one nation’s currency, at which another nation’s currency can be purchased Trade restrictions Tariff tax on imports Quota legal limit on imports

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