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Economic decision makers

LOsExplain the role of the household in the economic system.Identify the different types of firms and describe their roles in the economy.Outline the ways governments affect their economies.Outline the international influences on the economy.1Households

Suppliers of economic resources.Buyers of goods and services.Producers of goods and services (household production). 23 Where U.S. personal income comes from and where it goesOver two-thirds of personal incomein 2006 was from wages, salaries, andproprietors income(b) Half of U.S. personal incomein 2006 was spent on services

3Transfer paymentsCash or in-kind benefits given to individuals as outright grants from the governmentCash transfers: Social security, disability, unemployment compensation, TANF.

In-kind transfers: Medicare, Medicaid, food stamps, school lunch program, subsidized housing.

4Household Production

Gardening, cooking, ironing, childcare, car repair, paintingmany people do these things in-house.Household production makes sense if the opportunity cost is less than market price.The FirmFirmsHire and combine resourcesProduce goods and servicesMaximize profit6

Types of FirmsSole proprietorshipSingle ownerPartnershipTwo or more ownersCorporationLegal entityShares of stockLimited liability

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8 Number and sales of each type of firmMost firms are sole proprietorships(b) Corporations account for most sales

8The GovernmentEstablish & enforce rules of the gamePromote competitionRegulate natural monopoliesProvide public goodsDeal with externalitiesMore equal distribution of incomeFull employmentPrice stabilityEconomic growth9

Externalities

Private production and consumption can impose costs on parties outside the market. Some costs of production or consumption are thus externalized.Examples:

Air, water, noise pollution; cigarette smoke; acid rain; mosquitoes.

In a world where externalities occur, market forces cannot always be relied upon to allocate resources efficiently. This creates a legitimate reason for government regulation.Examples of government policy aimed at externalities:

Effluent taxesPollution permitsSubsidized vaccinationsAuto emission standardsOpen burning ordinancesSmoke free workplacesPublic Goods

A good that, once produced, is available for all to consume regardless of who pays and who doesnt; such a good is nonrival and nonexclusive.Public goods are subject to a free-rider problem.Examples include lighthouses, flood control, and national defense.

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Components of Federal Spending Since 19601314

Federal Revenues by Source since 196014

Tax Principles and Tax IncidenceAbility-to-pay tax principleBenefits-received tax principleTax incidenceProportional taxation: Flat tax (as % of income)Progressive taxation: marginal tax rateTop 1% of tax filers paid 36.9% of taxesTop 10% of tax filers paid 68.2% of taxesBottom 50% of tax fillers paid 3% of taxesRegressive taxation17

By making the tax structure progressive, governments can make the after-tax distribution of income more equitable (or even). The tax code is a tool for income redistributionAffluentNeedyWhy a sales tax is regressive

Family(1)

Income(2)Spending for items subject to excise tax(3)= (2)/(1)(4)

Excise Tax Paid(5)=(4)/(1)

ATRGreens$27,000$16,200.60$1,1884.4%Jones64,00025,600.401,8712.9Lemons270,00040,500.152,9611.0Assume a 7.13 percent excise tax on groceries, gasoline, cigarettes, and liquorMoral of the story: Low income families tend to spend a greater proportion of their income on items subject to excise taxes. Hence excise taxes tend to be regressive.

20 Top marginal rate on federal personal income tax since 1913

20The rest of the world

Consists of households, firms, and government units in roughly 200 sovereign foreign countries.Foreign agents buy domestically produced goods and services. Domestic agents buy goods and services from foreign producers.The Global Economy

The world is more integrated than ever before, as measured by the movement of resources, goods and services between countries

Distribution of global production

Energy Sources in the World Economy

Energy Sources in the World Economy

Energy Sources in the World EconomyExchange rates

An exchange is a price of one (national) currency expressed in terms of another currency.If the dollar price of the British pound is:1.45 dollars = 1 poundThen the pound price of the dollar is given by the reciprocal of the dollar-pound exchange rate. That is:Pounds per dollar =