ECONOMICS CHAPTER 3 U.S. PRIVATE AND PUBLIC SECTOR

HOUSEHOLDS Major player in markets Everyone under one roof The household’s demand for goods and services determines what gets produced In 1850 about 2/3 of American labor force worked on farms

HOUSEHOLDS cont. Specialization and comparative advantage help explain why households have become less self-sufficient. Industrial Revolution began in Great Britain around 1750

UTILITY MAXIMIZATION ECONOMISTS CONSIDER EACH HOUSEHOLD 1 DECISION MAKER HOUSEHOLDS ATTEMPT TO MAXIMIZE UTILITY: LEVEL OF SATISFACTION OR SENSE OF WELL-BEING

FIRMS ECONOMIC UNIT FORMED BY A PROFIT SEEKING ENTREPRENEUR WHY FIRMS: SPECIALIZATION AND COMPARATIVE ADVANTAGE

Transaction costs Cost of time and information required for exchange This is why entrepreneurs specialize.

PROFIT = REVENUE – COST OF PRODUCTION

The rest of the world affects what U. S. households consume and what U The rest of the world affects what U. S. households consume and what U. S. firms produce.

In the U. S., if production is greater than what is used the difference will be sold to other countries. If production is short, then the U. S. buys the difference from other countries

SEC 2

PRIVATE PROPERTY RIGHTS GUARANTEE INDIVIDUALS THE RIGHT TO USE THEIR RESOURCES AS THEY CHOOSE GOVERNMENTS ESTABLISH LEGAL RIGHTS OF OWNERSHIP TO SAFEGUARD PRIVATE PROPERTY

INTELLECTUAL PROPERTY RIGHTS PATENT LAWS INNOVATION: STIMULUS TO TURN INVENTIONS INTO MARKETABLE PRODUCTS COPYRIGHTS: PROPERTY RIGHTS FOR ORIGINAL EXPRESSIONS OF AN AUTHOR, ARTIST, COMPOSER, COMPUTER PROGRAMMER TRADEMARK: PROPERTY RIGHTS FOR UNIQUE COMMERCIAL MARKS AND SYMBOLS

ANTITRUST LAWS ATTEMPT TO PROMOTE COMPETITION AND REDUCE ANTICOMPETITIVE ACTIVITIES ENFORCED BY THE COURTS AND INDIVIDUAL FIRMS BRINGING LAWSUITS AGAINST OTHER FIRMS COMPETITION USUALLY HELPS KEEP PRODUCT PRICES LOW AND ENSURES THE MOST EFFICIENT USE OF RESOURCES

Companies would prefer monopolies because they can set higher prices and gain higher profits.

NATURAL MONOPOLY WHEN IT IS CHEAPER FOR ONE FIRM TO PROVIDE SERVICE MUST BE REGULATED BY THE GOVERNMENT TO ENSURE FAIRNESS

PUBLIC UTILITIES GOVERNMENT-OWNED AND GOVERNMENT-REGULATED MONOPOLIES

FISCAL POLICY GOVERNMENT USES TAXING AND SPENDING TO HELP INFLUENCE NATIONAL ECONOMIC VARIABLES ECONOMISTS STUDYING FISCAL POLICY FOCUS ON FEDERAL GOVERNMENT

INFLATION THE ECONOMY GROWS TOO FAST AVERAGE PRICE LEVEL INCREASES TAXES SHOULD GO UP AND GOVT SPENDING SHOULD GO DOWN TO OFFSET

RECESSION TOTAL PRODUCTION DECLINES LASTS AT LEAST TWO CONSECUTIVE QUARTERS (6 MONTHS)

MONETARY POLICY TRY TO SUPPLY THE RIGHT AMOUNT OF MONEY TO HELP STABILIZE THE BUSINESS CYCLE TO PROMOTE HEALTHY GROWTH

MONETARY POLICY IN U.S. RESPONSIBILITY BOARD OF GOVERNORS OF THE FEDERAL RESERVE CENTRAL BANK SYSTEM EST. 1913 TOO MUCH $ INFLATION TOO LITTLE MONEY MAKES EXCHANGE HARD

SEC 3

PRIVATE GOODS 2 FEATURES

1. RIVAL IN CONSUMPTION THE AMOUNT OF SOMETHING CONSUMED BY ONE PERSON IS NOT AVAILABLE FOR SOMEONE ELSE.

SUPPLIERS CAN EXCLUDE THOSE WHO DON’T PAY 2. EXCLUSION SUPPLIERS CAN EXCLUDE THOSE WHO DON’T PAY

NONRIVAL NONEXCLUSIVE PUBLIC GOODS AVAILABLE TO ALL ONCE THEY ARE PRODUCED NONPAYERS NOT EASILY EXCLUDED NOT PROVIDED THROUGH MARKET SYSTEM NONRIVAL NONEXCLUSIVE

QUASI-PUBLIC GOODS NONRIVAL EXCLUSIVE EX. TELEVISION SIGNALS, CELL PHONE SIGNALS

OPEN-ACCESS GOODS RIVAL NONEXCLUSIVE EX. WILD GAME, FISH CAN HAVE GOVT. RESTRICTIONS

EXTERNALITIES POSITIVE NEGATIVE

NEGATIVE EXTERNALITIES BY-PRODUCTS OF PRODUCTION OR CONSUMPTION HAVE A NEGATIVE EFFECT COST TO THIRD PARTY (NOT BUYERS OR SELLERS) EX AIR POLLUTION

POSITIVE EXTERNALITIES BY-PRODUCT HAS A POSITIVE EFFECT BENEFIT THIRD PARTY EX. VACCINATION (YOU DON’T GET SICK OTHERS DON’T GET SICK)

SEC 4

MEDIAN INCOME THE MIDDLE INCOME OF ALL HOUSEHOLDS WHEN INCOMES ARE RANKED

SOCIAL INSURANCE PROGRAMS TO HELP MAKE UP FOR LOST INCOME FOR THOSE WHO WORKED BUT NOW ARE UNABLE REDISTRIBUTE INCOME FROM RICH TO POOR RETIRED TEMPORARILY UNEMPLOYED BECAUSE OF DISABILITY

SOCIAL INSURANCE CONT. GOVT. FUNDED SOCIAL SECURITY: RETIRE FOR THOSE WITH WORK HISTORY MEDICARE: HEALTH INSURANCE FOR SHORT-TERM MEDICAL CARE, MOSTLY TO 65 AND OVER

INCOME-ASSISTANCE PROGRAMS (WELFARE) PROVIDE $ AND IN-KIND ASSISTANCE TO POOR IN-KIND ASSIST. : GOODS AND SERVICES DON’T REQUIRE WORK HISTORY MEANS TESTED: INCOME AND ASSETS ARE BELOW A CERTAIN LEVEL

EARNED INCOME TAX CREDIT SUPPLEMENTS WAGES TO THE WORKING POOR SEE P. 87