Economics:Chapter 3U.S. Private and Public Sectors

U.S. Private Sector

Objectives Describe the evolution of households Explain the evolution of the firm Understand why international trade occurs

Video Clip

Households

Household – all those who live together under one roof makes all different economic choices

What to buy How much to save Where to live Where to work

Have changed dramatically 1850 – worked on farms 1950 – married women didn’t work, they raised babies

Only 15% women in labor force

Reduced household production has led to increased availability of child-care services and a greater variety of restaurants

Households

Utility – household’s level of satisfaction, happiness and sense of well-being Each household is a single decision maker

Maximizing utility depends on the personal goals of the household, not an objective standard

For example, some households maintain neat homes with well-groomed lawns, while other households pay little attention to their yard/home maintenance

Firm

Firm – economic unit formed by a profit (profit = revenue – cost of production) seeking entrepreneur who combines resources to produce goods and services Evolution of factories, (helped the firm) they

Promoted a more efficient division of labor Allowed for direct supervision of production Reduced transportation costs Facilitated the use of specialized machines far larger

than anything that had been used in the homes

Firm

Evolution of the firm

Specialization and comparative advantage help explain why households are no longer self-sufficient But why is the firm a natural outgrowth?

Rather than make a wool sweater from scratch, couldn’t a consumer take advantage of specialization…

By hiring someone to produce the wool Another person spins the wool into yarn A third person to knit the sweater

Based on this, why is the firm necessary? Discuss

Firm

Problems with previous model… Transaction costs, the cost of time and information

required for exchange, erase efficiency gained from specialization

Instead of dealing with each specialist to do this, the consumer can pay an entrepreneur to hire all the necessary resources to make the sweater

Firm

An entrepreneur, by hiring specialists to make many sweaters rather than just one, is able to reduce the transaction cost per sweater

Using raw materials and labor, entrepreneurs were able to make finished products

Led to….

Industrial Revolution – development of large-scale production during the 18th Century

Firm: In pairs - Rows A&B, C&D

Identify a local business you believe is particularly successful. Does this firm offer goods or services that consumers could not produce as

efficiently for themselves? Where does the firm derive its revenue? What might add to the firm’s cost of

production? Which is more important to showing a profit: increasing revenue to cover costs of

production or limiting cost of production? Write a paragraph explaining the advantages the firm has in productive efficiency

that consumers would not share.

Remember…Many Americans are physically able to care for their lawns but choose to hire others to perform this task for them. A truck pulls up to the house with workers and equipment. There is a whirlwind of activity for a period of time, then the job is done, and the workers leave for their next job. Why do you think lawn-care firms can be more efficient than individuals in

producing this service? What does this have to do with entrepreneurship?

The Rest of the World

Foreign decision makers have significant effect on the US economy On what Americans consume and on what they produce

The rest of the world consists of the households, firms and governments in the more than 200 nations throughout the world.

International Trade

Gains from international trade occur because the opportunity cost of specific goods differ across countries

Trade allows the countries involved to specialize and thereby increase production

Americans buy raw materials (crude oil, metals, and coffee beans) and finished goods (such as cameras, DVD players, and automobiles) from other countries

US producers sell to other countries sophisticated products (computer hardware and software, aircraft and movies) and raw materials such as agricultural products

International Trade

Textbook page 69 for chart to explain and understand commodities

Group Work

Brainstorm to identify an item you own that is typically imported from another country. List and explain possible reasons why this product was not manufactured in the United States. How do your answers demonstrate the principle of comparative advantage?

Regulating the Private Sector

Learning Objectives Explain how government can improve the private sector Distinguish between regulations that promote competition

and those that could control natural monopolies Describe how fiscal policy and monetary policy try to

stabilize economics

Rules for a Market Economy

Establishing property rights Private property rights – legal claim that guarantees an

owner the right to use a resource or to charge others for its use

Intellectual property rights – inventors reap the rewards of their creations Innovation – a result of the limited life of patents

providing the stimulus to turn the invention into a marketable product

Copyright – assigns property rights to the original programmer (shark tank clip here)

Who owns the copyright to this song or this video?

Rules for Market Economy

Trademark – establishes property rights to unique commercial marks and symbols (insert logo)

Measurement and Safety – Market exchange is by weight (pounds of steak, chicken) or volume (gallon of gas, pint of milk)

US Bureau of Weights and Measures governs this Consumer Protection – FDA, Consumer Product Safety

Commission (Current Issue, another link) CPSC – federal agency that monitors safety of consumer

products

How can laws and regulations improve the operation of the private sector?

Market Competition and Natural Monopolies

The government regulates market competition and natural monopolies with the private sector Government promotes competition and reduces

anticompetitive behaviors

Think of examples of anticompetitive behaviors that companies engage in (in Ch 7 we will learn more)

Marketing Competition and Natural Monopolies

Promoting Market Competition Monopoly –a firm or group of firms working together for the most sales

in a market, and join together to fix prices that are higher than would result than with market competition

US Air/American APPLE/Google

Antitrust Laws – promote competition and reduce anticompetitive behavior laws enforced by individual firms bringing lawsuits against other firms for

violating these rules K-Cup

Why does the gov’t promote competition in some markets and control natural monopolies in others?

Marketing Competition and Natural Monopolies

Natural Monopoly – One firm can serve the entire market at a lower per-unit cost than two or more firms can

Growth & Stability of the US Economy

Economic fluctuation – the rise and fall of economic activity relative to the long-term growth trend of the economy Gov’t tries to reduce these fluctuations by making the

bad, not so bad, and the good, not so good Doing so is called fiscal policy - the federal government’s

use of taxing and public spending to influence the macroeconomy

If private sector activity slows down, the gov’t should offset this by cutting taxes to stimulate the spending

Growth & Stability of the US Economy

Inflation – an increase in the economy’s price level May happen if economy is growing too quickly If this is the case, the gov’t should increase taxes and

reduce its spending to cool down the economy Should keep inflation from getting too high

Growth & Stability of the US Economy

Monetary policy – The Federal Reserve System’s attempts to control the money supply to influence the macroeconomy. Supplies the appropriate amount of money to stabilizes the

economic fluctuations and promote healthy long-term economic growth

Increasing the money supply and lowering the interest rate tried to stabilize the economy in 2008 Interest rate – the cost of borrowing money and the reward for

lending it Fed wanted to encourage borrowing and spending

How do fiscal policy and monetary policy reduce economic fluctuations?

Source: Federal Reserve Bank of Richmond 2011 Annual Report (p.6) www.richmondfed.org/publications/research/annual_report/2011/ar2011.cfm

Monetary or Fiscal Policy Quotes

Determine if you think the quote relates to fiscal or monetary policy and why?

Public Goods

Private goods – goods with two features1. The amount consumed by one person is unavailable to

others

2. Nonpayers can easily excluded Both rival in consumption and exclusive For example, only paying customers get a pizza

Public Goods

Public goods – goods that, once produced, are available to all, but the producer cannot easily exclude nonpayers National defense CDC One persons benefit does not reduce the amount

available to others Such goods are available in equal amounts

Public Goods

Natural Monopoly Goods (tv signal) nonrival but exclusive

Open Access goods - goods that are rival in consumption but exclusion is costly Fish Wild geese

Table on p. 80

Name the four categories of goods, and provide an example of each

Externalities

Negative externalities – by products of production or consumption that impose costs on third parties third party – neither buyer nor seller

Gov’t restrictions try to reduce negative externalities

Positive externalities – by products of production or consumption that benefit third parties

In pairs, brainstorm a list of public goods that you and your families consume. Make sure each good you list is both nonrival and nonexclusive.