Chapter 3

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  • Chapter 3 Economic Decision Makers
  • Chapter 3 Economic Decision Makers
  • Chapter 3

    1. 1. Chapter 3Economic Decision Makers
    2. 2. The Household• They get the activities started• They are “the buyers” – They choose the goods and services to consume. – They supply the four factors of production.
    3. 3. The Evolution of the Household Farm household  Self-sufficient Better technology  Increased productivity Factories  Specialization; less self-sufficient  Manufacturing society Women in labor force  1950: 15%  2007: 70%  ttp://www.census.gov/newsroom/pdf/women_workforce_sl ides.pdf
    4. 4. The Household Maximize utility Supply resources  To satisfy unlimited wants  Earn income Demand goods and services  Durable goods  Nondurable goods  Services
    5. 5. The Evolution of the Firm Specialization Specialization  Comparative advantage  Comparative advantage  Transaction costs  Transaction costs  Entrepreneur  Entrepreneur  Cottage industry system  Cottage industry system  Technological developments  Technological developments
    6. 6. The Evolution of the Firm Factories  Efficient division of labor  Direct supervision of production  Reduce transportation costs  Bigger machines Industrial Revolution
    7. 7. The Firm• An economic unit formed by profit-seeking entrepreneurs who combine labor, capital, and natural resources to produce goods and services.
    8. 8. Types of Firms Sole proprietorship  Single owner Partnership  Two or more owners Corporation  Legal entity  Shares of stock S-corporation
    9. 9. Types of Firms Cooperatives  Consumer cooperatives  Producer cooperatives Not-for-profit organizations  Charitable  Educational  Humanitarian  Cultural  Professional http://www.marchofdimes.com/
    10. 10. Household Production Opportunity cost  Below market price No skills or special resources are required Avoid taxes Reduce transaction costs Technological advance
    11. 11. The Government Establish & enforce rules of the game Promote competition Regulate natural monopolies Provide public goods Deal with externalities More equal distribution of income Full employment Price stability Economic growth
    12. 12. Government’s Structure, Objectives National/federal government  National security, economic stability, market competition State government  Public higher education, prisons, highways, welfare Local government  Primary and secondary education, police, fire protection
    13. 13. Government’s Structure, Objectives Voluntary exchange vs. coercion  Some government coercion  Enforced by the police No market prices  Public output  Zero price  Below the production cost
    14. 14. The Size and Growth of Government Government outlays relative to GDP  1929: 10% of GDP  Mostly state and local  2007: 37% of GDP  Mostly federal  Defense  Decreased  Redistribution  Increased
    15. 15. Redistribution Has Grown and Defense HasDeclined as Share of Federal Outlays Since 1960
    16. 16. Size of Government ClipSize of Government Clip
    17. 17. Sources of Government Revenue Taxes  Individual income tax (federal)  Income tax; sales tax (state)  Property tax (local) User charges Borrowing Monopolize certain markets
    18. 18. Tax Principles and Tax Incidence• The Ability-to-Pay Principle – The concept that those who have higher incomes can afford to pay a greater proportion of their income in taxes, regardless of benefits received.
    19. 19. Tax Principles and Tax Incidence• The Benefits-Received Principle: – The concept that those who benefit from government expenditures should pay the taxes that finance their benefits – E.g.- Gasoline tax – Hard to apply principle because of the nature of public good- free rider problem
    20. 20. Tax Principles and Tax Incidence Tax incidence  Proportional taxation: Flat tax (as % of income)  Progressive taxation: marginal tax rate  Top 1% of tax filers – paid 39.4% of taxes  Top 10% of tax filers – paid 70.5% of taxes  Bottom 50% of tax fillers – paid 3.1% of taxes  Regressive taxation
    21. 21. A idea on Taxes: Flat Tax? Who knows?A idea on Taxes: Flat Tax? Who knows?
    22. 22. Top Marginal Rate on Federal Personal Income Tax Since 1913
    23. 23. The Rest of the World Foreign households, firms, governments International trade – different opportunity costs  Merchandise trade balance  Balance of payments Exchange rates  Foreign exchange markets Trade restrictions  Tariffs; quotas; others
    24. 24. Tax Burden in Other Countries• The U.S. is one of the lightly taxed people in the world.• Parts of Europe have 50% of their income that is taxed.
    25. 25. Government Expenditures in Other Countries, 2007 © 2010 South-Western, a part of 26 Cengage Learning

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