1. McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

2. The U.S. Economy in Historical Perspective
The U.S. economy is a market economy which is an economic system based on private property and the markets in which, in principle, individuals decide how, what, and for whom to produce
Markets work through a system of rewards and payments
Individuals are free to do whatever they want as long as it is legal
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3. The U.S. Economy in Historical Perspective
Fluctuations in prices play a central role in coordinating individuals’ wants in a market economy
Most economists believe the market is a good way to coordinate economic activity
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4. Capitalism and Socialism
Capitalism is an economic system based on the market in which the ownership of the means of production resides with a small group of individuals (capitalists)
Socialism is an economic system based on individuals’ goodwill towards others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce
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5. Capitalism and Socialism
Is where all people contribute what they can and get what they need
Is based on government ownership of the means of production with economic activity governed by central planning
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6. Evolving Economic Systems
Feudalism is an economic system based on tradition and dominated the Western world from the 8th to the 15th century
Mercantilism is an economic system in which the government controls economic activity by doling out the rights to undertake economic activities and was dominant until the 18th century
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7. Evolving Economic Systems
During the Industrial Revolution, technology and machines rapidly modernized industrial production
Capitalism
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8. The U.S. Economy
The U.S. economy can be divided up into three sectors: businesses, households, and government
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9. The U.S. Economy
Households supply labor and other factors of production to businesses and are paid by businesses for it
The market where this interaction takes place is called a factor market
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10. The market where this interaction takes place is the goods market
The U.S. Economy
Businesses produce goods and services and sell them to households and the government
The market where this interaction takes place is the goods market
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11. The government taxes businesses and households
The U.S. Economy
The government taxes businesses and households
It buys goods and services from business and buys labor services from households
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12. The U.S. Economy: The Circular Flow Model
GOODS MARKET
INTERNATIONAL CONNECTION
INTERNATIONAL CONNECTION
GOVERNMENT
BUSINESS
(Production)
(Consumption)
HOUSEHOLDS
FACTORMMARKET
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13. Businesses are private producing units in our society
Businesses in the U.S. decide what to produce, how much to produce, and for whom to produce it
Businesses produce what they believe will sell and make a profit
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14. Business
By channeling the desire to make a profit for the general good of society, the U.S. economic system allows the invisible hand to work
Although businesses decide what to produce, they are guided by consumer sovereignty
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15. Business: Forms of Business
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16. Business: Forms of Business
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17. Business: Forms of Business
Advantages
Disadvantages
Proprietorship
Minimum bureaucratic hassle
Direct control by owner
Limited ability to get funds
Unlimited personal liability
Partnership
Ability to share work and risk
Relatively easy to form
Unlimited personal liability (even for a partner's blunder)
Corporation
No personal liability
Increasing ability to get funds
Ability to avoid personal income taxes
Legal hassle to organize
Possible double taxation of income
Monitoring problems
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18. Households
Households are groups of individuals living together making joint decisions
Households supply the labor with which businesses produce and government governs
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19. The largest source of household income is wages and salaries
Households
The largest source of household income is wages and salaries
In the economy, households vote with their dollars to determine what businesses produce
Besides being suppliers of labor, households make a significant number of the decisions in the economy
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20. The government plays two general roles in the economy:
An actor who collects money in taxes and spends that money on projects, such as defense and education
A referee who sets the rules that determine relations between businesses and households
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21. Government: Income of the Federal Government
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22. Government: Expenditures of the Federal Government
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23. Government as an Referee
Government sets the rules (laws) which regulate the interactions between households and businesses
Some examples of laws:
Businesses have to comply with equal opportunity and labor laws
Many working conditions are subject to government regulation, such as safety and overtime rules
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24. Government as an Referee
Businesses cannot meet with other businesses to agree on prices they will charge
In some businesses, workers have to join a union to work at certain jobs
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25. Six Roles of a Government in a Market
In its role as both an actor and a referee, government plays a variety of specific roles in the economy
These roles include:
Providing a stable set of institutions and rules
Promoting effective and workable competition
Correcting for externalities
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26. Six Roles of a Government in a Market
4. Ensuring economic stability and growth
5. Providing public goods
6. Adjusting for undesirable market results
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27. Externalities can be positive where society as a whole benefits
Externalities: the effect of a decision on a third party not taken into account by the decision-maker
Externalities can be positive where society as a whole benefits
They can also be negative where society is harmed
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28. Positive externality: public education Negative externality: pollution
Externalities
Examples:
Positive externality: public education
Negative externality: pollution
The government has the potential to adjust the market due to externalities
Usually this is through taxes and subsidies
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29. One role of the government is to provide public goods
A public good is a good that if supplied to one person must be supplied to everyone
The consumption of a public good by one person does not prevent other individuals from consuming it
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30. Examples: parks, playgrounds, roads, and national defense
Public Goods
Examples: parks, playgrounds, roads, and national defense
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31. Once I eat an apple that apple cannot be consumed by someone else
Private Goods
A private good is a good, that when consumed by an individual cannot be consumed by another individual
Once I eat an apple that apple cannot be consumed by someone else
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32. Free Rider
A free rider is someone who benefits from something but does not pay for the cost of this benefit
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33. Market Failures and Government Failures
Market failures are situations in which the market does not lead to a desired result (more in Chapter 21)
Government failures are situations in which the government intervenes and makes things worse
Policy makers must decide which failure is the least problematic, a market or government failure
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34. Global Institutions and Corporations
The U.S. economy makes up 20% of the world output and consumption, but only 6% of the world’s land mass and less than 5% of the world’s population
U.S. economic institutions are integrated with the world’s economy
Global corporations are corporations with substantial operations in both production and sales in more than one country
Global corporations create jobs, bring new technologies, and provide competition for domestic companies
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35. Coordinating Global Issues
There is no global government to regulate global corporations but governments have developed international institutions to promote negotiations and coordinate economic relations among countries
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36. Coordinating Global Issues
Some examples of international institutions:
The United Nations is an organization designed to achieve international cooperation but it has no ability to tax or enforce its policies on its members
The World Bank is a multinational, international financial institution that works to secure loans for developing countries
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37. Coordinating Global Issues
The International Monetary Fund (IMF) is a multinational, international financial institution concerned with monetary issues
The Group of Five (G5) meets to promote negotiations and coordinate economic relations among nations. These five countries include Japan, Germany, Great Britain, France, and the U.S.
The North American Free Trade Act (NAFTA) is an organization devoted to reducing trade barriers between the U.S., Mexico, and Canada
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38. Chapter Summary
The U.S. economy is a market economy (capitalistic) that gives property rights to individuals and relies on market forces to solve the what, how, and for whom problems
Socialism is based on government ownership of the means of production with economic activity governed by central planning
Economic systems are in a constant state of evolution
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39. Chapter Summary
The circular flow diagram on the U.S. market economy shows how the three sectors interact
Businesses decide what, how much, and for whom decisions in production
The three main forms of businesses are proprietorships, partnerships, and corporations
Households supply labor and influence business decisions through consumer sovereignty
Government serves as an actor and referee in the economy
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40. Chapter Summary The six roles for government include:
Providing a stable set of institutions and rules
Promoting effective and workable competition
Correcting for externalities
Ensuring economic stability and growth
Providing public goods
Adjusting for undesirable market results
Because there is no world government, governments enter voluntary organizations that regulate international markets
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