Economic Decision Makers 3 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OUTCOMES 2 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 1Describe the major sources of income and expenditures for households 2Outline the evolution of production over the centuries from the household to the modern cooperation 3Summarize the seven roles of government in an economy 4Explain why countries trade with each other and why they sometimes act to restrict that trade

3 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Household Demands goods and services Determines what gets produced Supplies resources to produce output Makes choices What to buy How much to save Where to live Where to work

4 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Evolution of the Household Farm households Self-sufficient Better technology Increased productivity Factories: Led to specialization Made households less self-sufficient Percentage of women in the labor force increased over time

5 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Households Maximize Utility Satisfaction received from consumption Sense of well-being Utility maximization depends on each household’s subjective goals

6 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Households as Resource Suppliers Households with resources Supply: -Capital, natural resources, and entrepreneurial ability to satisfy their unlimited wants -Labor to earn income Households with few resources Receive transfer payments -Cash transfers -In-kind transfers

7 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Households as Demanders of Goods and Services Durable goods -Expected to last 3 or more years -Automobiles, refrigerators Nondurable goods -Food, clothing, gasoline Services -Haircuts

8 Exhibit Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 1Where U.S. Personal Income Comes From and Where It Goes

9 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Evolution of the Firm Specialization and comparative advantage: Increased transaction costs Created a need for entrepreneurs Emergence of entrepreneurs Led to the development of the cottage industry system and new technologies

10 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Evolution of the Firm (continued) Large-scale factories were formed 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

11 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Firm Is an economic unit Formed by profit seeking entrepreneurs Combines resources Produces goods and services Maximizes profit

12 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 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

13 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Types of Firms (continued 1) Corporation Legal entity owned by stockholders Liability is limited to the value of their stock ownership S corporation Provides owners with limited liability Profits are taxed only once as income on each shareholder’s personal income tax return

14 Exhibit Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 2 Percent Distribution by Type of Firm Based on Number of Firms and Firm Sales

15 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Types of Firms (continued 2) 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

16 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Types of Firms (continued 3) Producer cooperatives Producers join forces to buy supplies and equipment and to market their output to reduce costs and increase profits Not-for-profit organizations: Do not pursue profit as a goal Engage in charitable, educational, humanitarian, cultural, or professional activities

17 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Household Production Takes place if: Opportunity cost is below market price No skills or special resources are required are required for production Taxes can be avoided Transaction costs can be reduced Technological advances increase productivity

18 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Household Production (continued) Has become easier due to information revolution Information Revolution: Technological change spawned by the microchip and the Internet -Enhanced the acquisition, analysis, and transmission of information

19 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Government Role of government To intervene in case of market failure Market failure: Arises because of the unregulated operation of markets Yields socially undesirable results

20 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Role of Government Establishing and enforcing rules of the game Safeguard private property Make sure that market participants abide by the rules of the game Promoting competition Antitrust laws prohibit: -Collusion (agreement among firms to divide the market and fix the price) -Unfair business practices

21 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Role of Government (continued 1) To 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

22 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Role of Government (continued 2) Provision of public goods Funded with taxes Private firms cannot sell public goods profitably Public good Nonrival and nonexclusive Private good Rival and exclusive

23 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Role of Government (continued 3) Dealing with externalities Use taxes, subsidies, and regulations: -To discourage negative externalities -To encourage positive externalities Externality Cost or benefit that affects neither the buyer nor seller Affects people not involved in the market transaction

24 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Role of Government (continued 4) Ensuring a more equal distribution of income Transfer payments Fostering a healthy economy Full employment Price stability Economic growth

25 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Role of Government (continued 5) Framing the fiscal policy Use of government purchases, transfer payments, taxes, and borrowing to influence economy-wide variables Framing the monetary policy Regulation of the money supply to influence economy-wide variables

26 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Government’s Structure and Objectives National or government National security, economic stability, market competition State government Public higher education, prisons, highways, welfare Local government Primary and secondary education, police, fire protection

27 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Government’s Structure and Objectives (continued 1) Difficulty in defining objectives More than 89,150 jurisdictions -1 nation -50 states -3,000 counties -36,000 cities and towns -12,900 school districts -37,200 special districts Many decision makers ‘Vote maximization’ guides decisions

28 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Government’s Structure and Objectives (continued 2) Voluntary exchange vs. coercion Voluntary exchange -Some government coercion is involved Coercion -Public choices are enforced by the police No market prices for public output Public output provided at zero price or below the cost of production

29 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Size and Growth of Government Government outlays relative to GDP 1929: 10% of GDP -Mostly state and local 2013: 40% of GDP -Mostly federal Share of defense -Has decreased Share of redistribution -Has increased

30 Exhibit Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 3 Redistribution Has Grown and Defense Has Declined as Share of Federal Outlays: 1960–2016

31 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Sources of Government Revenue Taxes Federal government - Individual income tax State governments - Income tax, sales tax Local governments - Property tax User charges Borrowing Monopoly in certain markets

32 Exhibit Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 4 Composition of Federal Revenue Between 1960 and 2016

33 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Tax Principles and Tax Incidence Ability-to-pay tax principle Those with higher incomes or more property have a greater ability to pay and should pay more taxes Benefits-received tax principle Those who get more benefits from the government program should pay more taxes

34 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Tax Principles and Tax Incidence (continued 1) Tax incidence: who bears the burden of the tax Proportional taxation Progressive taxation Regressive taxation

35 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Tax Principles and Tax Incidence (continued 2) Proportional taxation Flat tax Tax as a percentage of income remains constant as income increases Marginal tax rate Percentage of each additional dollar of income that goes to taxes

36 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Tax Principles and Tax Incidence (continued 3) Progressive taxation Tax as a percentage of income increases as income increases Regressive taxation Tax as a percentage of income decreases as income increases

37 Exhibit Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 5Top Marginal Rate on Federal Personal Income Tax Since 1913

38 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Rest of the World Foreign households, firms, governments International trade Trade that occurs because of different opportunity costs Merchandise trade balance Value of a country’s exported goods minus the value of its imported goods during a given period

39 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Rest of the World (continued 1) Balance of payments Record of all economic transactions between residents of one country and residents of the rest of the world during a given period Foreign exchange Foreign money is needed to carry out international transactions

40 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Rest of the World (continued 2) Exchange rates Price of one currency in terms of another Determined in foreign exchange markets Trade restrictions Tariff -Tax on imports Quota -Legal limit on the quantity of a particular product that can be imported or exported

41 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 The Rest of the World (continued 3) Trade restrictions: Benefit certain domestic producers Lead to higher prices Hurt domestic consumers Interfere with the free flow of products across borders Hurt the overall economy

KEY TERMS 42 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Utility Transfer payments Industrial Revolution Firms Sole proprietorship Partnership Corporation Cooperative Not-for-profit organizations Information Revolution Market failure Antitrust laws Monopoly Natural monopoly Private good Public good Externality Fiscal policy Monetary policy Ability-to-pay tax principle Benefits-received tax principle Tax incidence

KEY TERMS 43 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Proportional taxation Progressive taxation Marginal tax rate Regressive taxation Merchandise trade balance Balance of payments Foreign exchange Tariff Quota

SUMMARY 44 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MICRO5 | CH3 Labor earnings account for the largest share of personal income in the U.S. and services account for the largest share of expenditure. Large-scale factory production started after the Industrial Revolution Government enforces rules, provides public goods, and frames fiscal and monetary policies International trade increases the welfare of all trading partners, while trade restrictions benefit producers that lobby governments

45 MICRO5 | CH3 Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.