1. ECONOMICS CHAPTER 3 U.S. PRIVATE AND PUBLIC SECTOR

2. 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

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

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

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

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

7. PROFIT = REVENUE – COST OF PRODUCTION

8. 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.

9. 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

10. SEC 2

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

12. 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

13. 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

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

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

16. PUBLIC UTILITIES
GOVERNMENT-OWNED AND GOVERNMENT-REGULATED MONOPOLIES

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

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

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

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

21. 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

22. SEC 3

23. PRIVATE GOODS
2 FEATURES

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

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

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

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

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

29. EXTERNALITIES
POSITIVE
NEGATIVE

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

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

32. SEC 4

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

34. 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

35. 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

36. 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

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