1. Economic Decision Makers ECO 2013 Chapter 3

2. Households Play a starring role in a market economy Determines what gets produced Supplies labor, capital, natural resources and entrepreneurial ability Maximize utility

3. Functional Distribution of Income Indicates how the nation’s earned income is apportioned among  Wages  labor  Rents  land  Interest  owners of property resources  Profit  owners of businesses

4. Functional Distribution of Income

5. Personal Distribution of Income How the nation’s money income is divided among individual households. Top 20% earn over 50% of the income

6. Households Income spent  Personal taxes – 12%  Personal savings – 0%  Personal consumption – 88%

7. Households Three categories of spending:  Durable goods Goods expected to last three or more years

8. Households Nondurable goods  Goods such as food and gasoline

9. Household Services

10. Businesses Constitute the second major part of the private sector Is a business organization that owns and operates plants.

11. Types of Firms Sole proprietorships  A firm with a single owner who has the right to all profits and who bears unlimited liability for the firm’s debts. Partnerships  A firm with multiple owners who share the firm’s profits and who bears unlimited liability for the firm’s debts. Corporations  A legal entity owned by stockholders whose liability is limited to the value of their stock.  Distinct and separate from the individual stockholders who own it.

12. Government Extensive role of the public sector Levels of Government  Federal  State  Local

13. Role of Government Providing legal structure Promoting competition Regulating monopolies Redistributing income  Transfer payments  Market invention  Taxation Reallocating resources  Market failure

14. Role of Government Externalities  A cost or benefit that falls on a third party and is therefore ignored by the two parties to the market transaction

15. Externalities An externality occurs when some of the costs or the benefits of a good are passed to or spill over to someone other than the immediate buyer or seller.  Negative externality Production or consumption costs inflicted on a third party without compensation Environmental pollution  Positive externalities Benefits education

16. Role of government Public good  A good that once produced is available for all to consume regardless of who pays  National defense

17. Government structure Federal  National security  Economic stability  Market competition State  Public higher education  Prisons  Transportation Local  Education  protection

18. Size of Government Government spending has increased over the years Government is the green in the chart 1930 – 10% of economy 2004 – 36% of economy

19. Government Purchase and Transfers Government purchases  Exhaustive Directly absorb resources and are part of the domestic output Transfer payments  Non-exhaustive

20. Federal Expenditures Pension and income security  35% National defense  20% Health  21% Interest on debt  7%

21. Sources of Government Revenue Taxes  Bulk of government revenues at all levels  Tax principles Ability to pay principle Benefits received tax principle  Tax incidence Distribution of tax burden among taxpayers Proportional tax Progressive Regressive Marginal tax rate

22. Types of taxes Personal income tax  Tax on earnings of individuals  Progressive tax  All but six states have it  Single taxpayer If taxable income is over-- But not over--The tax is: $0$7,15010% of the amount over $0 $7,150$29,050$715.00 plus 15% of the amount over 7,150 $29,050$70,350$4,000.00 plus 25% of the amount over 29,050 $70,350$146,750$14,325.00 plus 28% of the amount over 70,350 $146,750$319,100$35,717.00 plus 33% of the amount over 146,750 $319,100no limit$92,592.50 plus 35% of the amount over 319,100

23. Types of Taxes Corporate income tax  Tax on earnings of corporations  Progressive tax  Federal and state If taxable income (line 30, Form 1120, or line 26, Form 1120-A) on page 1 is: Over—But not over—Tax is: Of the amount over— $0$50,00015%$0 50,00075,000$ 7,500 + 25%50,000 75,000100,00013,750 + 34%75,000 100,000335,00022,250 + 39%100,000 335,00010,000,000113,900 + 34%335,000 10,000,00015,000,000 3,400,000 + 35% 10,000,000 15,000,00018,333,333 5,150,000 + 38% 15,000,000 18,333,333- - - - -35%0

24. Types of taxes Sales tax  Tax on purchases of goods and services  Some services excluded  Some goods excluded  Flat rate  State and local government

25. Types of taxes Property taxes  Tax on the value of real property  Tax on the value of tangible property  Flat rate  Local governments Excise taxes  Tax on consumption of specific goods  Alcohol, tobacco, and gasoline  Sin taxes  All levels of government

26. Level of GovernmentServices ProvidedTaxes Imposed FederalNational defense Transfer payments Transfers to states Personal income tax Corporate income tax Excise taxes StatePublic transportation Welfare Higher education Personal income tax Corporate income tax Excise taxes Sales taxes LocalPolice and fire protection Primary and Secondary education Excise taxes Property taxes