ch 3 economic decision makers
TRANSCRIPT
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Chapter 3
Economic Decision Makers
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The Household
Demand goods and servicesWhat gets produced
Supply resourcesProduce output
Choices (e.g.: what to buy, how much to save,etc)
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The Evolution of the Household
F arm householdSelf-sufficient
B etter technology
Increased productivity (less workers needed)Workers Move to F actories
Specialization; workers less self-sufficient
Women in labor force1950: 15%2 007: 70% (Malaysia: 46%)
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The Household
Maximize utilitySupply resources
To satisfy unlimited wants
Earn incomeDemand goods and services
Durable goods (goods expected to last three or more years)
N ondurable goodsServices
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Exhibit 1Where U.S. personal income comes from and where it goes
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(a) Over two-thirds of personal incomein 2 006 was from wages, salaries, andproprietors income
(b) Half of U.S. personal incomein 2 006 was spent on services
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The Evolution of the Firm
Specialization and Comparative advantageexplain why households no longer self sufficient
Transaction costs if consumer negotiates with each specialistConsumer buys from entrepreneurs who hirethe resources to produce the goodsStarted with the cottage industry system
Technological developments6
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The Evolution of Firm
F actoriesEfficient division of labor
Direct supervision of productionReduce transportation costsB igger machines
Industrial Revolution (development of large-scale factory production) began in GreatB ritain around year 1750
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The Firm
F irmsEconomic units formed by entrepreneurs
Combine resources to produce goods andservicesMaximize profit
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Ty pes of FirmsSole proprietorship
Single owner (face unlimited liability)
PartnershipTwo or more owners (face unlimited liability)
CorporationLegal entityShares of stockLimited liability to value of stock
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Ty pes of FirmsS corporation
do not pay any income taxescorporation's income are divided among and passedthrough to its shareholders who must then report theincome on their own individual income tax returnsLimited liabilityMaximum: 100 stockholders
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Ty pes of Firms in Mala ysia
Sole proprietorshipSingle owner
Partnership
Two or more owners (maximum:2
0)Corporations
Public Limited CompaniesShares of stock
Private Limited CompaniesLimited to 50 membersCannot sell shares to the public
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Exhibit 2
N umber and sales of each type of firm (U.S.)
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(a) Most firms are soleproprietorships
(b) Corporations account for most sales
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Ty pes of Firms
Cooperatives A group of people who cooperate by poolingresources to buy and sell more efficientlyConsumer cooperativesProducer cooperatives
N ot-for-profit organizationsCharitable
EducationalHumanitarianCulturalProfessional
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User generated products
Computer programming: open sourceLinux; Apache; MySQL; F irefox; OpenOfficeWikipedia;
MySpace;F acebook;YouTube
Radio call-in showsInternet increases opportunities to createnew products and improve existingproducts
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Household Production
Opportunity costB elow market price
N o skills or special resources are required
Avoid taxesReduce transaction costsTechnological advance
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The Electronic Cottage
Information revolution ± Telecommute
Doubled in the last decade
± Videoconference ± Online database ± Virtual offices
Cell phones; B lackberries
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The Government
Establish & enforce rules of the gamePromote competition, prohibiting collusion
Regulate natural monopolies ( P; Q)Provide public goods (nonrival, nonexclusive)Deal with externalities (taxes, subsidies,regulations to discourage negativeexternalities and encourage positiveexternalities)
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The Government
More equal distribution of income (transfer payments)
Attempts to promoteF ull employmentPrice stabilityEconomic growth
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Government¶s Structure, Objectives(U.S.)
N ational/federal governmentN ational security, economic stability, marketcompetition
State governmentPublic higher education, prisons, highways,welfare
Local governmentPrimary and secondary education, police, fireprotection
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Government¶s Structure, ObjectivesU.S.
Difficulty87,600 jurisdictions
1 nation50 states3,034 counties35,933 cities and towns13,506 school districts
35,05 2 special districtsN ot a single decision maker
µVote maximization¶
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Government¶s Structure, Objectives
Voluntary exchange vs. coercion
Market transactions : voluntary exchange
Some government coercion used to ensurecompliance of lawEnforced by the police (e.g. if refuse to pay tax,could go to jail)
N o market pricesPublic output (e.g. in-state tuition)
Zero price or below the production cost
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Government¶s Structure, Mala ysia
F ederal Parliamentary Monarchy
F ederal GovernmentSenate (Dewan N egara)House of Representatives (Dewan Rakyat)
F ederalism is highly centralisedState government
excluded from the revenues of income tax, export,import and excise dutiesdepends on revenue from forests, lands, mines,petroleum, the entertainment industry, andtransfer payments from the centralgovernment.
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The Size and Growth of Government(U.S)
Government outlays relative to GDP19 2 9 (Great Depression): 10% of GDP
Mostly state and local2 007: 37% of GDP
Mostly federalDefense spending since 1960
Decreased
Redistribution expenses- social security, medicare,welfare programs etc since 1960
Increased
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Exhibit 3Redistribution has grown and defense has declined
as share of federal outlays since 1960
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Government Expenditure in Mala ysia
Percent of GDP2 006: 2 4% ; 2 007: 2 5%; 2 008 (est): 2 4. 2 %Development Expenditure 2 008 (est): RM 40billion
Economic services 44.7%Transport 16.9%
Social Services 33.7%Education 18.4%
Security 15. 2 %General Administration 6.3%
Operating Expenditure 2 008 (est): RM 1 2 9 billion
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Sources of Government Revenue
TaxesIndividual income tax (federal)Income tax; sales tax (state)Property tax (local)
User charges (eg tolls: payments for the costof collective services; primarily used as afinancing device by local authorities)
B orrowingMonopolize certain markets e.g lottery tickets
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Exhibit 4Payroll taxes have grown as a share of federal
revenue since 1960
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Government Revenue in Mala ysia
2 008: RM 147 billion ( 2 1.6% of GDP)Tax Revenue: RM 10 2 billion (69.3%)
Direct Tax: Companies: 2 3.7%, Petroleum IncomeTax: 15.1%, individuals: 9.1%
Indirect Tax (excise duties, sales tax): 18.4%N on Tax Revenue (e.g. licences, permits): 30.7%
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Tax Principles and Tax Incidence
Ability-to-pay tax principleB enefits-received tax principle
Tax incidenceProportional taxation : F lat tax (as % of income)Progressive taxation : marginal tax rate
Top 1% of tax filers ± paid 36.9% of taxesTop 10% of tax filers ± paid 68. 2 % of taxesB ottom 50% of tax fillers ± paid 3% of taxes
Regressive taxation
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Exhibit 5Top marginal rate on federal personal income tax
since 1913
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Marginal Tax Rate on Income in Mala ysia
Top marginal tax rate: 2 8%11 categories ranging from 0% to 2 8%
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The Rest of the WorldF oreign households, firms, governmentsInternational trade - different opportunity costsacross countries
Merchandise trade balanceB alance of payments (record of all economic transactionsbetween nation¶s residents with residents of the rest of the world
Exchange ratesF oreign exchange markets
Trade restrictions Although gains from trade, nations restrict trade to someextentTariffs; quotas; other trade restrictions
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