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