1. U.S. Private and Public Sectors
Economics: Chapter 3
U.S. Private and Public Sectors

2. U.S. Private Sector Objectives Describe the evolution of households
Explain the evolution of the firm
Understand why international trade occurs
Video Clip

3. Households Household – all those who live together under one roof
makes all different economic choices
What to buy
How much to save
Where to live
Where to work
Have changed dramatically
1850 – worked on farms
1950 – married women didn’t work, they raised babies
Only 15% women in labor force
Reduced household production has led to increased availability of child-care services and a greater variety of restaurants

4. Households
Utility – household’s level of satisfaction, happiness and sense of well-being
Each household is a single decision maker
Maximizing utility depends on the personal goals of the household, not an objective standard
For example, some households maintain neat homes with well-groomed lawns, while other households pay little attention to their yard/home maintenance

5. Firm
Firm – economic unit formed by a profit (profit = revenue – cost of production) seeking entrepreneur who combines resources to produce goods and services
Evolution of factories, (helped the firm) they
Promoted a more efficient division of labor
Allowed for direct supervision of production
Reduced transportation costs
Facilitated the use of specialized machines far larger than anything that had been used in the homes

6. Firm Evolution of the firm
Specialization and comparative advantage help explain why households are no longer self-sufficient
But why is the firm a natural outgrowth?
Rather than make a wool sweater from scratch, couldn’t a consumer take advantage of specialization…
By hiring someone to produce the wool
Another person spins the wool into yarn
A third person to knit the sweater
Based on this, why is the firm necessary? Discuss

7. Firm Problems with previous model…
Transaction costs, the cost of time and information required for exchange, erase efficiency gained from specialization
Instead of dealing with each specialist to do this, the consumer can pay an entrepreneur to hire all the necessary resources to make the sweater

8. Firm
An entrepreneur, by hiring specialists to make many sweaters rather than just one, is able to reduce the transaction cost per sweater
Using raw materials and labor, entrepreneurs were able to make finished products
Led to….
Industrial Revolution – development of large-scale production during the 18th Century

9. Firm: In pairs - Rows A&B, C&D
Identify a local business you believe is particularly successful.
Does this firm offer goods or services that consumers could not produce as efficiently for themselves?
Where does the firm derive its revenue? What might add to the firm’s cost of production?
Which is more important to showing a profit: increasing revenue to cover costs of production or limiting cost of production?
Write a paragraph explaining the advantages the firm has in productive efficiency that consumers would not share.
Remember…Many Americans are physically able to care for their lawns but choose to hire others to perform this task for them. A truck pulls up to the house with workers and equipment. There is a whirlwind of activity for a period of time, then the job is done, and the workers leave for their next job.
Why do you think lawn-care firms can be more efficient than individuals in producing this service? What does this have to do with entrepreneurship?

10. The Rest of the World
Foreign decision makers have significant effect on the US economy
On what Americans consume and on what they produce
The rest of the world consists of the households, firms and governments in the more than 200 nations throughout the world.

11. International Trade
Gains from international trade occur because the opportunity cost of specific goods differ across countries
Trade allows the countries involved to specialize and thereby increase production
Americans buy raw materials (crude oil, metals, and coffee beans) and finished goods (such as cameras, DVD players, and automobiles) from other countries
US producers sell to other countries sophisticated products (computer hardware and software, aircraft and movies) and raw materials such as agricultural products

12. International Trade
Textbook page 69 for chart to explain and understand commodities

13. Group Work
Brainstorm to identify an item you own that is typically imported from another country. List and explain possible reasons why this product was not manufactured in the United States. How do your answers demonstrate the principle of comparative advantage?

14. Regulating the Private Sector
Learning Objectives
Explain how government can improve the private sector
Distinguish between regulations that promote competition and those that could control natural monopolies
Describe how fiscal policy and monetary policy try to stabilize economics

15. Rules for a Market Economy
Establishing property rights
Private property rights – legal claim that guarantees an owner the right to use a resource or to charge others for its use
Intellectual property rights – inventors reap the rewards of their creations
Innovation – a result of the limited life of patents providing the stimulus to turn the invention into a marketable product
Copyright – assigns property rights to the original programmer (shark tank clip here)
Who owns the copyright to this song or this video?

16. Rules for Market Economy
Trademark – establishes property rights to unique commercial marks and symbols (insert logo)
Measurement and Safety – Market exchange is by weight (pounds of steak, chicken) or volume (gallon of gas, pint of milk)
US Bureau of Weights and Measures governs this
Consumer Protection – FDA, Consumer Product Safety Commission (Current Issue, another link)
CPSC – federal agency that monitors safety of consumer products
How can laws and regulations improve the operation of the private sector?

17. Market Competition and Natural Monopolies
The government regulates market competition and natural monopolies with the private sector
Government promotes competition and reduces anticompetitive behaviors
Think of examples of anticompetitive behaviors that companies engage in (in Ch 7 we will learn more)

18. Marketing Competition and Natural Monopolies
Promoting Market Competition
Monopoly –a firm or group of firms working together for the most sales in a market, and join together to fix prices that are higher than would result than with market competition
US Air/American
APPLE/Google
Antitrust Laws – promote competition and reduce anticompetitive behavior
laws enforced by individual firms bringing lawsuits against other firms for violating these rules
K-Cup
Why does the gov’t promote competition in some markets and control natural monopolies in others?

19. Marketing Competition and Natural Monopolies
Natural Monopoly – One firm can serve the entire market at a lower per-unit cost than two or more firms can

20. Growth & Stability of the US Economy
Economic fluctuation – the rise and fall of economic activity relative to the long-term growth trend of the economy
Gov’t tries to reduce these fluctuations by making the bad, not so bad, and the good, not so good
Doing so is called fiscal policy - the federal government’s use of taxing and public spending to influence the macroeconomy
If private sector activity slows down, the gov’t should offset this by cutting taxes to stimulate the spending

21. Growth & Stability of the US Economy
Inflation – an increase in the economy’s price level
May happen if economy is growing too quickly
If this is the case, the gov’t should increase taxes and reduce its spending to cool down the economy
Should keep inflation from getting too high

22. Growth & Stability of the US Economy
Monetary policy – The Federal Reserve System’s attempts to control the money supply to influence the macroeconomy.
Supplies the appropriate amount of money to stabilizes the economic fluctuations and promote healthy long-term economic growth
Increasing the money supply and lowering the interest rate tried to stabilize the economy in 2008
Interest rate – the cost of borrowing money and the reward for lending it
Fed wanted to encourage borrowing and spending
How do fiscal policy and monetary policy reduce economic fluctuations?

23. Source: Federal Reserve Bank of Richmond 2011 Annual Report (p.6)

24. Monetary or Fiscal Policy Quotes
Determine if you think the quote relates to fiscal or monetary policy and why?

25. Public Goods Private goods – goods with two features
The amount consumed by one person is unavailable to others
Nonpayers can easily excluded
Both rival in consumption and exclusive
For example, only paying customers get a pizza

26. Public Goods
Public goods – goods that, once produced, are available to all, but the producer cannot easily exclude nonpayers
National defense
CDC
One persons benefit does not reduce the amount available to others
Such goods are available in equal amounts

27. Public Goods Natural Monopoly Goods
(tv signal) nonrival but exclusive
Open Access goods - goods that are rival in consumption but exclusion is costly
Fish
Wild geese
Table on p. 80
Name the four categories of goods, and provide an example of each

28. Externalities
Negative externalities – by products of production or consumption that impose costs on third parties
third party – neither buyer nor seller
Gov’t restrictions try to reduce negative externalities
Positive externalities – by products of production or consumption that benefit third parties
In pairs, brainstorm a list of public goods that you and your families consume. Make sure each good you list is both nonrival and nonexclusive.