Chapter 3 Professor Yuna Chen 1 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Economic Decision Makers

2 3-1 The Household Demand goods and services –Determine what gets produced Supply resources –For firms to produce output Choices –What to buy –How much to save –Where to live –Where to work © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-1a The Evolution of the Household Farm household –Self-sufficient Better technology –Increased productivity Factories –Specialization; less self-sufficient Women in labor force –1950: 15% –Today: 70% 3 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-1b Households Maximize Utility Utility –Satisfaction received from consumption –Sense of well-being –Depends on each household’s subjective goals 4 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-1c Households as Resources Suppliers Resource suppliers –Labor, capital, natural resources, and entrepreneurial ability –To satisfy their unlimited wants –Labor – to earn income Households with few resources –Transfer payments - outright grants Cash transfers In-kind transfers 5 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-1d Households as Demanders of Goods and Services Demanders of goods and services –Durable goods Expected to last 3 or more years Can be reused –Nondurable goods Food, clothing, gasoline –Services Question: Lebron believes duct tape is an example of durable goods because it can last for a long time. Do you agree? 6 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Exhibit 1 7 Where U.S. Personal Income Comes From and Where It Goes © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-2 The Firm Firms –Economic units –Profit seeking entrepreneurs –Combine resources –Produce goods and services –Maximize profit 8 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-2a The Evolution of the Firm Specialization Comparative advantage Transaction costs Entrepreneur Cottage industry system Technological developments 9 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-2a The Evolution of Firm Large – scale factory production –Efficient division of labor –Direct supervision of production –Reduce transportation costs –Bigger machines Industrial Revolution Large-scale factory production Began in Great Britain around 1750 Spread to: Europe, North America, Australia 10 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-2b Types of Firms Sole proprietorship –Single owner Has the right to all profits Bears unlimited liability for the firm’s losses and debts Partnership –Two or more owners Share the profits Bear unlimited liability for the firm’s losses and debts 11 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-2b Types of Firms Corporation –Legal entity owned by stockholders –Whose liability is limited to the value of their stock ownership S corporation –Provides owners with limited liability –Profits are taxed only once A income on each shareholder’s personal income tax return 12 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Exhibit 2 13 Percent distribution by type of firm based on number of firms and firm sales © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-2c Cooperatives Cooperatives –People who pool their resources to buy and sell more efficiently than they could individually Consumer cooperatives –Retail business owned and operated by some or all of its customers –To reduce costs Producer cooperatives –Producers join forces to buy supplies and equipment and to market their output –To reduce costs and increase profits 14 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-2d Not-for-Profit Organizations Not-for-profit organizations –Do not pursue profit as a goal Charitable; Educational Humanitarian; Cultural Professional 15 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-2e Household Production Opportunity cost –Below market price No skills or special resources are required Avoid taxes Reduce transaction costs Technological advances increase productivity 16 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-3 The Government Role of government –to intervene in case of market failure Market failure –arises when the unregulated operation of markets –yields socially undesirable results 17 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-3a The Role of Government Establish & enforce rules of the game –Safeguard private property –Make sure that market participants abide by the rules of the game Promote competition –Antitrust laws that prohibit collusion (agreement among firms to divide the market and fix the price) 18 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-3a The Role of Government Regulate natural monopolies –Monopoly Sole supplier of a product with no close substitutes –Natural monopoly One firm that can supply the entire market at a lower per-unit cost than could two or more firms 19 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-3a The Role of Government Provide public goods –Private firms cannot sell them profitably Private goods –Rival in consumption (only for one to consume) –Exclusive (You get it only if you pay for it) Public goods –Nonrival in consumption (e.g. law enforcement) –Nonexclusive (benefit all, even the ones who don’t pay) 20 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-3a The Role of Government Externality –Cost or benefit on the third party rather than sellers and buyers Negative externalities: someone gets hurt w/o being paid (e.g. pollution) Should be discouraged Positive externalities: someone receives benefit w/o paying (e.g. education) Should be encouraged 21 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-3b Government’s Structure & Objectives Federal government –National security, economic stability, market competition State government –Public higher education, prisons, highways, welfare Local government –Primary and secondary education, police, fire protection 22 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-3b Government’s Structure & Objectives Difficulty –More than 89,500 jurisdictions 1 nation 50 states 3,033 counties 35,991 cities and towns 13,051 school districts 37,381 special districts –Not one single decision maker ‘Vote maximization’ 23 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-3b Government’s Structure & Objectives Market - voluntary exchange Government coercion –Enforced by the police Public goods –Zero price –Below the production cost 24 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-4 The Rest of the World Rest of the world –Foreign households, firms, governments 3-4a International trade –Occurs because of different opportunity costs (comparative advantage) Merchandise trade balance –Exports minus imports 25 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-4b Exchange Rates Exchange rates –Price of one currency in terms of another 3-4c Trade restrictions –Tariff Tax on imports –Quota Legal limit on the quantity of a particular product that can be imported or exported 26 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3-4c Trade Restrictions Trade restrictions –Benefit certain domestic producers –Raise price of imports –Hurt domestic consumers –Cause “trade war” –Hurt the overall economy 27 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.