Moving on to Unit 2 Now that you have completed the first three chapters and understand supply and demand, we must move on with the course. This unit is only two chapters and will differentiate between the private sector and the public sector.

Unit 2 Objectives Distinguish between the three private sectors- - households, businesses, and international. Analyze the various forms of business ownership. Discuss how the three private sectors interact in the economy. Explain how the government interacts with the other sectors of the economy.

More Objectives for Unit 2 Compare and Contrast a planned economy and a free market economy. Answer the economic questions--How, What, and For Whom. Onward

Consumer Sovereignty The authority of consumers to determine what is produced through their purchases of goods and services.

Consumer Sovereignty Example A: Snackwell cookies produced by Nabisco, illustrates consumer sovereignty. They remain on the market because “We Want It!” Example B: Crystal Pepsi illustrates consumer sovereignty by what “We Don’t Want!” This product has been removed from the market.

Last thought on Consumer Sovereignty Some products seem to not really be wanted but they are still on the market. Plastic poop, plastic vomit, electric nose pickers, slime, and Chia Pets are all examples. The fact is that maybe you and/or I may not want the products, but someone does. Enough individuals want the products to keep them on the market which illustrates consumer sovereignty.

Determination of Income Consumers demand dictates The search for profits defines Who gets the goods and services What is produced How products are produced For Whom products are produced

Differentiate Private vs. Public Sectors Private sector: Households, businesses, and the international sector Public Sector: The government

Households Households: one or more persons who occupy a unit of housing. It does not matter if one person is living in a 15 room home or 15 people are living in a one room apartment, each constitutes a household. Consumption: Household spending. Consumers purchasing such things as transportation, food, entertainment, or anything for individual (household) use.

A Business Firm and Business Forms A business firm is a business organization controlled by a single management. Why does this definition not say operating for profit? Because their are not-for-profit businesses as well as for profit businesses. Business Forms: Sole proprietorship, Partnership, and Corporation.

Sole Proprietorship Owned by one person

Sole Proprietorship Advantages Receives all the profits Makes all the decisions Easy to start and dissolve Taxes are declared on the owners individual’s personal tax return

Sole Proprietorship Disadvantages Responsible for all the businesses debts Difficult to raise funds Unlimited liability Business ends when the owner dies.

Partnership Two or more individuals who own a business and share in the profits or losses. The partnership does not have to be equally split. The decision would be made when the partnership is formed.

Partnerships Advantages Disadvantages More individuals for better decision making. Additional resources to obtain capital. Easy to start and dissolve Business taxes are split between partners, and declared on their individual tax returns. Each partner is 100% liable for the firms debts. Unlimited liability Partners are responsible for each others actions under the company name. Business ends when at least one partner dies.

Corporations A legal entity owned by the shareholders. Must have a board of directors. Must hold at least one board meeting each year.

Corporations Advantages Disadvantages Limited liability Management and technical resources available have increased. Greater ability to raise capital. Unlimited life. Double taxation Most difficult and expensive to start and dissolve.

Other forms of Corporations S-Corp. LLC Subchapter S Corporation Operates as a corporation Taxed like a partnership Limited Liability Corporation Operates as a partnership Taxed like a partnership

Investment Investment spending in economics, is not the purchasing of stocks and/or bonds. Stock market

Investment in economics IS Spending on capital goods to be used in producing goods and services. Example A: The purchase of new equipment to be used in the production of a product. Example B: An accountant purchases a calculator to be used in the preperation of business documents for the accountants clients.

Two types of Countries Industrial countries: Economies are highly interdependent. Industrial countries are forced to pay close attention to each other’s economic policies. Examples: United States Japan, and Germany. Developing countries: Countries with relatively low per capita incomes. They are countries who tend to need financial assistance to build a strong infrastructure and educate its citizens. (Also referred to as less developed countries--LDCs). Examples: Brazil, Mexico, and India.

The World Bank An international organization that makes loans to developing countries.

Why is it important to distinguish between developing and industrial countries? One reason is because LDCs tend to borrow money from industrial countries to assist in their growth. For example, in 1989 Brazil owed foreign creditors $111.3 billion. A second reason is that it helps determine what products are needed in LDCs and also what resources they have which can be used by industrial countries to assist in the growth of all countries involved.

Exchanges between countries The United States tends to buy primary products such as agricultural produce and minerals from the developing countries. The United States also purchases electronic equipment from other industrial countries. The United States is said to be importing these products. Imports: products that a country buys from other countries.

Exchanges between countries The United States is the largest producer of grains. The United States sells quantities of the grain to other countries. These countries may or may not be LDCs. The Unites States is exporting grains. Exports: Products that a country sells to other countries.

International Sector The activity of various countries purchasing products from one another (imports and exports) make up the international sector of the economy. Each economy that engages in importing and exporting products will have a figure called net exports.

Net Exports Net Exports is the difference between the value of goods exported and the value of goods imported. Net Exports = Exports - Imports If exports equaled $300 million and imports equaled $200 million, the net exports would be $100 million.

Net Exports Continued If a country has more exports than imports (a positive net exports figure) the country is said to have a trade surplus. If a country has more imports than exports (a negative net exports figure) the country is said to have a trade deficit.

Financial Intermediaries These are institutions that accept deposits from savers and make loans to borrowers. Commercial banks, savings and loans,and credit unions are all examples of financial intermediaries. Financial intermediaries assist the economy by holding and moving currency.

A circular flow diagram of the private sector. Households Businesses Financial Intermediaries Foreign Countries Labor Wages Goods and Services Purhcases of Goods and Services Savings Investment Net Exports Payments for Net Exports

Circular Flow Households provides labor for business. In return, Businesses provides wages for Households. Businesses produce goods and services for Households to buy. Households use part of their wages to purchase goods and services. Households save part of their wages in financial institutions. Financial institutions loan part of their funds to businesses for investments.

Please open Unit 2 Chapter 5 Public Sector