The U.S. Private an Public Sectors

Households All who live under the same roof Evolution of the household In 1850 2/3 of labor force worked on farms Industrial revolution Two earner households Household Maximize Utility 116 million households Utility-their level of satisfaction, happiness, and sense of well being

Firms Economic unit former by profit seeking entrepreneur to produce goods and accepts risk of profit and loss Evolution of the Firm Firms higher specialists Cottage industry The Industrial Revolution Everything under one roof Increased productivity Large scale factory production Firms Maximize Profit Profit= revenue-cost of production

The rest of the world International Trade Trade in raw material Comparative advantage Countries specialize Trade has doubled sine 1970 6% to 12% Trade in raw material Production vs consumption

Rules for a market Economy Establishing Property Rights Private property rights- individuals right to use resources as they choose or charge others to use it Legal right to ownership Intellectual Property rights Rights to new ideas and inventions Patent Law Copyright-original expression and trademark- logo Measurement and Safety Government inspect weight devices Food and Drug (FDA)

Market Competition and Natural Monopolies Promoting Market Competition Antitrust Laws Regulating Natural Monopolies Subway Service Cheaper for one firm to serve market Government owned or regulated monopolies are called public utilities

Growth and Stability of the Us Economy Fiscal Policy Using taxing and public spending to influence macro economic variables Government stimulation of economy Monetary Policy Supply appropriate amount of money to stabilize fluctuations in economy Promote long term healthy growth Fed (federal reserve system) using interest rates

Public Goods Private goods characteristics Rivalry- a product bought and consumed is no longer available to another buyer Excludability- seller keeps people who don’t pay from obtaining the product or its benefits Public goods characteristics Nonrivalry-Everyone can simultaneously obtain the benefits of a public good Nonexcludability- no effective way of excluding individuals from the benefits of a good Free-rider problem Private firms don’t produce public goods Only government can finance through taxation

Private goods, Public goods, and in between Natural Monopoly Goods Nonrival and exclusive TV, Subways Open-Access Goods Rival but non exclusive Fish in the ocean Regulated to sustain resource

Externalities Externality- the costs or the benefits of a good or service are passed onto or “spill over to” someone other than the immediate buyer or seller Negative Externalities Cause supply-side market failures Ex. Polluted air, Airport noise, foul smelling gas Cost exceeds total benefit Marginal cost lower than company paying for such a cost

Externalities Positive Externalities Government Intervention Demand-side market failures Willingness to pay for third parties receiving the benefit Ex. vaccinations Government Intervention Government may step in if Externalities affect large numbers of people Pass legislation, ex. Clear Air Act of 1990 TaxesSubsidies to buyers Subsidies to producers Government provisions, Ex polio vacines

Safety Net Income and Poverty Why Household Income Differ Median income- middle income of all household incomes Education, ability, experience, # of earners Official Poverty Rate 2011, household of 4 $22,350 43.6 million people in poverty Poverty and Marital Status One way to measure poverty Female only, Male only, married couple Highest teen pregnancy rate in the world

Programs to help the poor Social Insurance programs Social security, Medicare, unemployment Income-assistance programs Cash transfer programs (supplement retirement, help those with children) In-kind transfer programs (Medicaid, vouchers) Earned-income tax credit Less or no taxes if below poverty line Welfare reform “welfare magnets” Has increased employment