U.S. Private and Public Sectors Chapter 3

Objectives Evolution of households Evolution of the firm International Trade

Households Households demand for goods and services determines what gets produced What to buy How much to save? Where to live? Where to work?

Evolution of households 1850s – 2/3 of America’s labor force worked on farms Farms became more productive Fewer farms were needed Urbanization!!!!! 2% of the U.S. Population works on a farms today.

Evolution of households 1950s – only about 15% of married women with children under 18 years old were in the labor force. Now! More than HALF Less production occurs in the home More goods and services are purchased

Households Maximize Utility Utility – the level of satisfaction from consumption or sense of well-being. Households are assumed to purse their rational self-interest. Self-interest – personal goals, standard of living and WANTS!

Households Maximize Utility Households try to act in their best interests by selecting products and services that are intended to make them better off.

Firms A business unit or enterprise formed by a profit-seeking entrepreneur who combines resources to produce goods and services. Transaction cost – the cost of time and information required for exchange Consumer just pays the entrepreneur. Cottage industry system ( 1 st Firm)

Firms Specialization and comparative advantage help explain why households are no longer efficient.

Industrial Revolution Technological Advances Water power Steam power Employment from rural farm to urban factory

Centrally Powered Factories More Organized 1.Promoted more efficient division of labor 2.Allowed for the direct supervision of production 3.Reduced transportation cost 4.Facilitated the use of specialized machines far larger than anything that had been used in the home.

Industrial Revolution 1750s – in Europe Then spread to North America and Australia

Entrepreneurs Entrepreneurs combine resources in firms such as factories, mills, offices, stores, and restaurants.

Entrepreneurs They accept the risk of profit and loss from the enterprise Profit is the entrepreneur’s reward for accepting the risks involved. Profit = Revenue – Cost of Production

The Rest of the World The rest of the world affects what U.S. households consume and what U.S. firms produce. Foreign decision makers have a significant effect on the U.S. economy– what they consume and what they produce.

International Trade and Trade in Raw Materials International Trade allows the countries involved to specialize in certain goods and thereby increases production. Trading Raw Materials: If the U.S. produces more than it consumes, we sell it to other countries.

International Trade and Trade in Raw Materials If we consume more than we produce, we buy the goods we need from other countries

[Insert Figure 3.2 U.S. Production as a Percentage of U.S. Consumption] U.S. Production as a Percentage of U.S. Consumption

Chap. 3.2: Rules for a Market Economy Establish property rights Intellectual property rights Measurement and safety

Private Property Rights Private property rights guarantee individuals the right to use their resources as they choose or to charge others for the use.

Intellectual Property Rights Patent Copyright Trademark

Measurement and Safety Consumers want to be confident that the products they buy are safe and fair. In our economy it is the gov’ts responsibility. U.S. Bureau of Weights and Measures

Measurement and Safety The U.S. Food and Drug Administration (FDA) The U.S. Department of Agriculture The Consumer Product Safety Commission

Market Competition and Natural Monopolies Promoting market competition  Antitrust laws attempt to promote competition and reduce anticompetitive behavior. Regulating natural monopolies  When it is cheaper for one firm to serve the market than for two or more firms to do so, that firm is called a natural monopoly.

Growth and Stability of the U.S. Economy Governments try to reduce fluctuations in the business cycle using two policies: fiscal and monetary. Reducing these fluctuations by gov’t taxing and spending is known as a fiscal policy. Reducing these fluctuations by gov’t regulation of the money supply to help stabilize the business cycle and promote healthy economic growth is known as a monetary policy.

Chap. 3.3 & 3.4 Notes U.S. Private Sector

3.3 Notes: Public Goods and Externalities 4 types of goods: Private Goods: the amount consumed by one person is unavailable to others (rival) and nonpayers can easily be excluded (pizza, etc..)

Goods Public Goods: goods that are available to all (they are both nonrival and nonexclusive, ex: national defense). Quasi-Public Goods: goods that are available to all but nonpayers are easily excluded (nonrival and exclusive, ex: tv’s)

Goods Open-access goods: goods that are rival in consumption, but nonexclusive (ex: fish in the ocean, migratory game)

Externalities Negative Externalities: by-products of production or consumption that impose costs on third parties (ex: pollution). Positive Externalities: by-products of production or consumption that benefit third parties (ex: education).

Chap. 3.4: Income and Poverty What kind of people receive the most income? Median Income: the “middle” income when a group of incomes is ranked from highest to lowest.

Poverty Who are the people with the lowest incomes? Why?

Programs to help the poor Programs to help the poor: Social Insurance: cash transfer programs for retirees, the unemployed, and others who contributed. Income-Assisted Programs: (welfare programs) Gov’t programs that provide money and assistance to the poor.

Programs to help the poor In-Kind Transfer Programs: this is gov’t help in the form of goods and services (food stamps, healthcare/Medicaid) Cash Transfer Programs: these programs provide cash to poor families with dependent children (TANF) and to the elderly poor, disabled, and people addicted to drugs and alcohol (SSI).

Earned Income Tax Credit Earned-Income Tax Credit: this is a program that exempts the poor from paying an income tax and it also increases their annual income (ex: pg 87).

3.3 Notes: Public Goods and Externalities 4 types of goods: Private Goods: the amount consumed by one person is unavailable to others (rival) and nonpayers can easily be excluded (exclusive) Ex: Pizza

Goods Public Goods: goods that are available to all (they are both nonrival and nonexclusive, ex: national defense). Quasi-Public Goods: goods that are available to all but nonpayers are easily excluded (nonrival and exclusive, ex: watching t.v.)

Goods Open-access goods: goods that are rival in consumption, but nonexclusive; meaning that it would be difficult and costly to block access to these goods (ex: fish in the ocean, migratory game)

Externalities Negative Externalities: by-products of production or consumption that impose costs on third parties (ex: pollution). Positive Externalities: by-products of production or consumption that benefit third parties (ex: education).

Chap. 3.4 Providing a Safety Net Operating on its own the private sector offers no guarantee that people will earn enough to survive. Society has mad the political choice that poor families should receive short-term public assistance, or welfare. This assistance reflects society’s attempt to provide a “social safety net.”