1. U.S. Private and Public Sectors
CHAPTER 3
U.S. Private and Public Sectors
3.1 The U.S. Private Sector
3.2 Regulating the Private Sector
3.3 Public Goods and Externalities
3.4 Providing a Safety Net

2. CONTEMPORARY ECONOMICS
5/18/2018
3.1 The U.S. Private Sector
Learning Objectives
LO1 Describe the evolution of households.
LO2 Explain the evolution of the firm.
LO3 Understand why international trade occurs.
CHAPTER 3
CHAPTER 3

3. CONTEMPORARY ECONOMICS
5/18/2018
Key Terms
household
utility
firm
Industrial Revolution
CHAPTER 3
CHAPTER 3

4. Households
All those who live under one roof are considered part of the same household.
Households make economic choices.
What to buy
How much to save
Where to live
Where to work
CHAPTER 3

5. Evolution of the Household
In 1850, the economy was primarily agricultural.
Now only about 2 percent of the U.S. labor force works on farms.
In 1950, only about 15 percent of married women with children under 18 years old were in the labor force.
Today more than half of married women with young children are in the labor force.
CHAPTER 3

6. Households Maximize Utility
Utility is a household’s level of satisfaction, happiness, or sense of well-being.
Households try to act in their best interests by selecting products and services that are intended to make them better off.
CHAPTER 3

7. Firms
A firm is a business unit or enterprise formed by a profit-seeking entrepreneur who combines resources to produce goods and services.
CHAPTER 3

8. Evolution of the Firm
Specialization and comparative advantage help explain why households are no longer self-sufficient.
Transaction costs could easily cancel out the efficiency gained from specialization.
The cottage industry system began when then entrepreneur hired households to turn raw material into finished products.
CHAPTER 3

9. The Industrial Revolution
Began in Great Britain around 1750
Development of large-scale factory production
CHAPTER 3

10. The Industrial Revolution
Organized work in centrally powered factories that
Promoted more efficient division of labor
Allowed for direct supervision of production
Reduced transportation costs
Facilitated the use of specialized machines
CHAPTER 3

11. CONTEMPORARY ECONOMICS
5/18/2018
Firms Maximize Profit
Profit is the entrepreneur’s reward for accepting the risks involved.
Profit equals revenue (the money received from selling goods and services) minus the cost of production.
Profit = Revenue − Cost of Production
CHAPTER 3
CHAPTER 3

12. The Rest of the World International trade Trade in raw materials
CHAPTER 3

13. U.S. Production as a Percent of U.S. Consumption
Figure 3.2
Source: Base on annual figures from The Economist Pocket World Figures: 2011 Edition (London: Profile Books, 2011.)
CHAPTER 3

14. 3.2 Regulating the Private Sector
CONTEMPORARY ECONOMICS
5/18/2018
3.2 Regulating the Private Sector
Learning Objectives
LO1 Explain how government can improve operation of the private sector.
LO2 Distinguish between regulations that promote competition and those that control natural monopolies.
LO3 Describe how fiscal policy and monetary policy try to stabilize economic fluctuations.
CHAPTER 3
CHAPTER 3

15. Key Terms private property rights antitrust laws natural monopoly
fiscal policy
monetary policy
CHAPTER 3

16. Rules for a Market Economy
CONTEMPORARY ECONOMICS
5/18/2018
Rules for a Market Economy
The effects of government regulation are all around you.
Examples
Clothing labels
Speed limits
CHAPTER 3
CHAPTER 3

17. Establishing Private Property Rights
Private property rights guarantee an owner the right to use a resource or to charge others for its use.
CHAPTER 3

18. Intellectual Property Rights
Patent
Copyright
Trademark
CHAPTER 3

19. Measurement and Safety
U.S. Bureau of Weights and Measures
The U.S. Food and Drug Administration (FDA)
The U.S. Department of Agriculture
The Consumer Product Safety Commission
CHAPTER 3

20. 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.
CHAPTER 3

21. Growth and Stability of the U.S. Economy
Fiscal policy uses taxing and public spending to influence the macroeconomy.
Monetary policy tries to supply the appropriate amount of money to help stabilize the business cycle and promote healthy economic growth.
CHAPTER 3

22. 3.3 Public Goods and Externalities
CONTEMPORARY ECONOMICS
5/18/2018
3.3 Public Goods and Externalities
Learning Objectives
LO1 Describe and provide examples of four types of goods.
LO2 Define negative externalities and positive externalities.
CHAPTER 3
CHAPTER 3

23. Key Terms private goods public goods open-access goods
negative externalities
positive externalities
CHAPTER 3

24. Private Goods Private goods have two important features:
1. The amount consumed by one person is unavailable to others
2. Nonpayers can easily be excluded
A private good is both rival and exclusive.
CHAPTER 3

25. Public Goods
Public goods are goods that, once produced, are available to all, but nonpayers are not easily excluded.
A public good is both nonrival and nonexclusive.
Once produced, public goods are available for all to consume, regardless of who pays and who doesn’t.
CHAPTER 3

26. Natural Monopoly Goods
Goods that are nonrival but exclusive result from natural monopolies.
CHAPTER 3

27. Open-Access Goods
Goods that are rival but nonexclusive are called open-access goods.
By imposing restrictions on open-access resource use, governments try to keep renewable resources from becoming depleted.
CHAPTER 3

28. Categories of Private and Public Goods
Figure 3.3
CHAPTER 3

29. Externalities
Externalities are by-products of production and consumption.
Some externalities are positive and others are negative.
CHAPTER 3

30. Negative Externalities
Negative externalities generally are by-products of production or consumption that impose costs on third parties.
Example—pollution
CHAPTER 3

31. Correcting for Negative Externalities
Government restrictions can improve the allocation of open-access resources.
Examples of government restrictions
Antipollution laws
Water quality restrictions
Noise restrictions
Local zoning laws
CHAPTER 3

32. Positive Externalities
Positive externalities occur when the by-products of consumption or production benefit third parties.
Example—education
CHAPTER 3

33. CONTEMPORARY ECONOMICS
5/18/2018
3.4 Providing a Safety Net
Learning Objectives
LO1 Determine why household incomes differ, and identify the main source of poverty in the United States.
LO2 Describe government programs that provide a safety net for poor people.
CHAPTER 3
CHAPTER 3

34. Key Terms median income social insurance income-assistance programs
CHAPTER 3

35. Income and Poverty
In a market economy, income depends primarily on earnings, which depend on the value of each person’s contribution to production.
CHAPTER 3

36. Why Household Incomes Differ
The median income of households is the middle income when incomes are ranked from lowest to highest.
The main reason household incomes differ is that the number of household members who are working differs.
Household income differs for all the reasons that labor earnings differ.
CHAPTER 3

37. Official Poverty Rate
The federal government determines the official poverty level and adjusts this benchmark over time to account for inflation.
The U.S. official property level of income is many times greater than the average income for most of the world’s population.
CHAPTER 3

38. Number and Percentage of U.S. Population in Poverty: 1959–2009
Figure 3.4
Source: U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2009, Current Population Reports, September 2010, Fig. 4, p. 14,
CHAPTER 3

39. Poverty and Marital Status
CONTEMPORARY ECONOMICS
5/18/2018
Poverty and Marital Status
Poverty rates among female-headed families are five to six times greater than rates among married couples.
Poverty rates among female-headed families are two to three times greater than those for male-headed families.
Poverty rates trended down for all types of families beginning in the mid-1990s, but began rising in 2000 and continued to increase during the recession of 2008–2009.
CHAPTER 3
CHAPTER 3

40. U.S. Poverty Rates and Types of Households
CONTEMPORARY ECONOMICS
5/18/2018
U.S. Poverty Rates and Types of Households
Figure 3.5
Source: Developed from U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2009, Current Population Reports, September 2010, Table B-3 at
CHAPTER 3
CHAPTER 3

41. Programs to Help the Poor
Social insurance programs
Income-assistance programs
Earned-income tax credit
Welfare reform
CHAPTER 3

42. Social Insurance
Social insurance programs are designed to help make up for the lost income of people who worked but are now
Retired
Temporarily unemployed
Unable to work because of disability or work-related injury
CHAPTER 3

43. Social Insurance Programs
Social Security
Medicare
Unemployment insurance
Worker’s compensation
CHAPTER 3

44. Income-Assistance Programs
Income-assistance programs provide money and in-kind assistance to poor people.
Cash transfer programs
In-kind transfer programs
CHAPTER 3

45. Earned-Income Tax Credit
Supplements wages of the working poor
Increases income and offers incentives for people to work
CHAPTER 3

46. Welfare Reform Temporary Assistance for Needy Families (TANF)
Welfare reform has reduced welfare rolls and increased employment.
CHAPTER 3

47. Income Redistribution as a Percentage of All Federal Outlays: 1960–2011
Figure 3.6
Source: Computed based on figures from the Economic Report of the President, February 2011, Table B-80
CHAPTER 3