Markets & The Private Sector

Chapter 4

Private & Public Sector

The Private Sector is made up of households, businesses, and

the international sector.

The public sector refers to activity by the various levels of

government.

Chapter 4 2

In the market system of the private sector, the consumer is supreme.

In centrally planned economies, a government planning group decides what will and will not be produced.

Chapter 4 3

The Circular Flow Four different groups participate in our

economy: Consumers Business firms Government Foreigners

Chapter 4 4

The Two Markets Factor (Resource) markets are any place where

factors of production are bought and sold. land, labor, capital, know-how

Product Markets are any place where finished goods and services (products) are bought and sold.

Chapter 4 5

Chapter 4 6

The Circular Flow

Resource Market

Businesses Households

Product Market

Government

Foreigners

Factors of Production

The resource inputs used to produce goods and services Land, Labor, Capital, Know-how

Productivity is output per unit of input such as output per labor hour.

Chapter 4 7

Factors of Production Capital-intensive production

uses a lot of tools & equipment Labor-intensive production

uses a lot of people

Human capital is the knowledge, skills & abilities possessed by the workforce. The knowledge and skills workers possess can be

accumulated.Chapter 4 8

Types of Business

Sole Proprietorship Partnership Corporation

Chapter 4 9

Sole Proprietorship

+ Easy+ Freedom+ Fast- Limited Finances- Must make all management decisions- Unlimited liability

Chapter 4 10

Partnership

+ Easy (but written agreements involved)+ Management specialization+ Less limited financial resources- Inconsistencies/disagreements- Still financially limited- Continuity difficult (i.e. death)- Unlimited liability

Chapter 4 11

Corporations legal entities, distinct and separate from

the owners

+ Effective at raising money--stocks, bonds, etc.

+ Easier to expand because easier to get money

+ Limited liability+ Continuity

Chapter 4 12

Corporations

- Legal red tape and expenses- Easier to be abused (i.e. embezzlement)- Double taxation- Separation of ownership and control

Chapter 4 13

Functional Distribution of Income For 2009

64% wages 6% interest 11% corporate profit 9% proprietors profit 2% rent

Chapter 4 14Source: www.bea.gov

Households & Income: 2011

There are over 115 million households in the U.S.

Median Household Income: $50,502/year.

Chapter 4 15Source: factfinder.census.gov table s1901

Age & Households Income

Chapter 4 16

15-24 25-44 45-64 65+ $-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$27,047

$57,034 $63,837

$33,787

Source: factfinder.census.gov

Size of Households

Chapter 4 17

Transitions in Household Types

1970 1980 1990 2000 20080

102030405060708090

100

39.3 30.9 26.3 24.1 23.3

29.629.9

29.8 28.7 26.5

10.312.9 14 16 17

5.2 8.6 9.7 10.7 12

13.9 14 14.9 14.8 15.3

1.7 3.6 4.6 5.7 5.9 Other nonfamily households

Women living alone

Men living alone

Single Parent & other family households

Married couples without children

Married couples with children

Chapter 4 18Source: factfinder.census.gov

Income Distribution

An income quintile is one-fifth of the population, rank-ordered by Income Distribution

Chapter 4 19

The U.S. Distribution of Income

Income Quintile 2006 Income (dollars)

Average Income (dollars)

Share of Total Income (percent)

Lowest fifth 0 – 18,500 11,352 3.4

Second fifth 18,500 – 34,738 28,777 8.6

Third fifth 34,738– 55,331 48,223 14.7

Fourth fifth 55,331– 88,030 76,329 23.3

Highest fifth above 88,030 168,170 50.0

Chapter 4 20Source: www.census.gov

Income Distribution

The top 20 percent (quintile) of U.S. households gets half of all U.S. income.

The top 5% make 21.5% of the income.

Chapter 4 21

Household income: Where does it go?

For 2012: Taxes = 11.0% Savings = 3.5% Consumption = 85.5%

Durable--Autos, furniture Non-durable--Food, clothes, gas Services--Medical care, housing, recreation

Chapter 4 22Data Source: www.bea.gov table 2.1

Consumption Spending: 2009

Durable Goods = 10.8% Non-Durable goods = 22.8% Services = 66.4%

Chapter 4 23Source: www.bea.gov table 1.1.5

The Public Sector

Chapter 4

3 Levels of Government

Federal income tax

State sales tax & income tax

Local property tax & sales tax

Chapter 4 25

Role of Government

1. Providing a Legal Framework2. Control Externalities 3. Protecting Consumers – maintain

Competition4. Protecting Labor

Chapter 4 26

Role of Government5. Redistribution of income

Help Provide for those who can’t provide for themselves

6. Reallocation of resources Pollution Control, Education subsidies,

Research Grants7. Public Goods and Services

Highways, Military and Police Protection8. Stabilization

Control Unemployment, inflation, etc.Chapter 4 27

Economic Tools of Federal Government

Monetary policies – control money & credit

Fiscal policies – spending & taxation

Chapter 4 28

Income Transfers Payments to individuals for which no

current goods or services are exchanged: Social Security Welfare Unemployment benefits

Chapter 4 29