This document discusses the key economic decision makers - households, firms, and governments. It describes how households have evolved from self-sufficient farm households to today's model where most adults work outside the home. It also outlines the evolution of firms from small cottage industries to modern corporations. The role of government is summarized as establishing rules, providing public goods, and redistributing resources.
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. 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%
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4. The Household
Maximize utility
Supply resources
To satisfy unlimited wants
Earn income
Demand goods and services
Durable goods
Nondurable goods
Services
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. The Evolution of the Firm
Factories
Efficient division of labor
Direct supervision of production
Reduce transportation costs
Bigger machines
Industrial Revolution
7.
8. The Firm
• An economic unit formed by profit-seeking
entrepreneurs who combine labor, capital,
and natural resources to produce goods and
services.
9. Types of Firms
Sole proprietorship
Single owner
Partnership
Two or more owners
Corporation
Legal entity
Shares of stock
S-corporation
10. Types of Firms
Cooperatives
Consumer cooperatives
Producer cooperatives
Not-for-profit organizations
Charitable
Educational
Humanitarian
Cultural
Professional
http://www.marchofdimes.com/
11. Household Production
Opportunity cost
Below market price
No skills or special resources are required
Avoid taxes
Reduce transaction costs
Technological advance
12. 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
13. 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
14. 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
15. 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
18. Sources of
Government Revenue
Taxes
Individual income tax (federal)
Income tax; sales tax (state)
Property tax (local)
User charges
Borrowing
Monopolize certain markets
19. 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.
20. 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
21. 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
22. A idea on Taxes: Flat Tax? Who knows?
A idea on Taxes: Flat Tax? Who knows?
24. 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
25. 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.
