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Economic Decision Makers. ECO 2013 Chapter 3. Households. Play a starring role in a market economy Determines what gets produced Supplies labor, capital, natural resources and entrepreneurial ability Maximize utility. Functional Distribution of Income.

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economic decision makers

Economic Decision Makers

ECO 2013

Chapter 3

households
Households

Play a starring role in a market economy

Determines what gets produced

Supplies labor, capital, natural resources and entrepreneurial ability

Maximize utility

functional distribution of income
Functional Distribution of Income
  • Indicates how the nation’s earned income is apportioned among
    • Wages labor
    • Rents  land
    • Interest owners of property resources
    • Profit  owners of businesses
personal distribution of income
Personal Distribution of Income
  • How the nation’s money income is divided among individual households.
  • Top 20% earn over 50% of the income
households6
Households
  • Income spent
    • Personal taxes – 12%
    • Personal savings – 0%
    • Personal consumption – 88%
households7
Households
  • Three categories of spending:
    • Durable goods
      • Goods expected to last three or more years
households8
Households
  • Nondurable goods
    • Goods such as food and gasoline
household
Household
  • Services
businesses
Businesses
  • Constitute the second major part of the private sector
  • Is a business organization that owns and operates plants.
types of firms
Types of Firms
  • Sole proprietorships
    • A firm with a single owner who has the right to all profits and who bears unlimited liability for the firm’s debts.
  • Partnerships
    • A firm with multiple owners who share the firm’s profits and who bears unlimited liability for the firm’s debts.
  • Corporations
    • A legal entity owned by stockholders whose liability is limited to the value of their stock.
    • Distinct and separate from the individual stockholders who own it.
government
Government
  • Extensive role of the public sector
  • Levels of Government
    • Federal
    • State
    • Local
role of government
Role of Government
  • Providing legal structure
  • Promoting competition
  • Regulating monopolies
  • Redistributing income
    • Transfer payments
    • Market invention
    • Taxation
  • Reallocating resources
    • Market failure
role of government14
Role of Government
  • Externalities
    • A cost or benefit that falls on a third party and is therefore ignored by the two parties to the market transaction
externalities
Externalities
  • An externality occurs when some of the costs or the benefits of a good are passed to or spill over to someone other than the immediate buyer or seller.
    • Negative externality
      • Production or consumption costs inflicted on a third party without compensation
      • Environmental pollution
    • Positive externalities
      • Benefits
      • education
role of government16
Role of government
  • Public good
    • A good that once produced is available for all to consume regardless of who pays
    • National defense
government structure
Government structure
  • Federal
    • National security
    • Economic stability
    • Market competition
  • State
    • Public higher education
    • Prisons
    • Transportation
  • Local
    • Education
    • protection
size of government
Size of Government
  • Government spending has increased over the years
  • Government is the green in the chart
  • 1930 – 10% of economy
  • 2004 – 36% of economy
government purchase and transfers
Government Purchase and Transfers
  • Government purchases
    • Exhaustive
      • Directly absorb resources and are part of the domestic output
  • Transfer payments
    • Non-exhaustive
federal expenditures
Federal Expenditures
  • Pension and income security
    • 35%
  • National defense
    • 20%
  • Health
    • 21%
  • Interest on debt
    • 7%
sources of government revenue
Sources of Government Revenue
  • Taxes
    • Bulk of government revenues at all levels
    • Tax principles
      • Ability to pay principle
      • Benefits received tax principle
    • Tax incidence
      • Distribution of tax burden among taxpayers
      • Proportional tax
      • Progressive
      • Regressive
      • Marginal tax rate
types of taxes
Types of taxes
  • Personal income tax
    • Tax on earnings of individuals
    • Progressive tax
    • All but six states have it
    • Single taxpayer
types of taxes23
Types of Taxes
  • Corporate income tax
    • Tax on earnings of corporations
    • Progressive tax
    • Federal and state
types of taxes24
Types of taxes
  • Sales tax
    • Tax on purchases of goods and services
    • Some services excluded
    • Some goods excluded
    • Flat rate
    • State and local government
types of taxes25
Types of taxes
  • Property taxes
    • Tax on the value of real property
    • Tax on the value of tangible property
    • Flat rate
    • Local governments
  • Excise taxes
    • Tax on consumption of specific goods
    • Alcohol, tobacco, and gasoline
    • Sin taxes
    • All levels of government