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
 Indicates how the nation’s earned income is apportioned among
 Wages  labor
 Rents  land
 Interest  owners of property resources
 Profit  owners of businesses

Functional Distribution of Income
Distribution of Personal Income
Rents
Interest
Profits
Self
Employment income
Wages
1 2 3 4 5

Personal Distribution of Income
 How the nation’s money income is divided among individual households.
 Top 20% earn over 50% of the income

Households
 Income spent
 Personal taxes – 12%
 Personal savings – 0%
 Personal consumption – 88%

Households
 Three categories of spending:
 Durable goods
 Goods expected to last three or more years

Households
 Nondurable goods
 Goods such as food and gasoline

Household
 Services

Businesses
 Constitute the second major part of the private sector
 Is a business organization that owns and operates plants.

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
 Extensive role of the public sector
 Levels of Government
 Federal
 State
 Local

Role of Government
 Providing legal structure
 Promoting competition
 Regulating monopolies
 Redistributing income
 Transfer payments
 Market invention
 Taxation
 Reallocating resources
 Market failure

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
 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 government
 Public good
 A good that once produced is available for all to consume regardless of who pays
 National defense

Government structure
 Federal
 National security
 Economic stability
 Market competition
 State
 Public higher education
 Prisons
 Transportation
 Local
 Education
 protection

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 purchases
 Exhaustive
 Directly absorb resources and are part of the domestic output
 Transfer payments
 Non-exhaustive

Federal Expenditures
 Pension and income security
 35%
 National defense
 20%
 Health
 21%
 Interest on debt
 7%

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
 Personal income tax
 Tax on earnings of individuals
 Progressive tax
 All but six states have it
 Single taxpayer
But not over--
If taxable income is over--
$0
$7,150
$29,050
$70,350
$146,750
$319,100
$7,150
$29,050
$70,350
$146,750
$319,100 no limit
The tax is:
10% of the amount over $0
$715.00 plus 15% of the amount over 7,150
$4,000.00 plus 25% of the amount over 29,050
$14,325.00 plus 28% of the amount over 70,350
$35,717.00 plus 33% of the amount over 146,750
$92,592.50 plus 35% of the amount over 319,100

Types of Taxes
 Corporate income tax
 Tax on earnings of corporations
 Progressive tax
 Federal and state
If taxable income (line 30, Form 1120, or line 26, Form 1120-A) on page
1 is:
Over
—
$0
But not over
—
$50,000
Tax is:
15%
Of the amount over —
$0
50,000 75,000 $ 7,500 + 25% 50,000
75,000
100,000
335,000
10,000,000
15,000,000
18,333,333
100,000
335,000
10,000,000
15,000,000
18,333,333
- - - - -
13,750 + 34%
22,250 + 39%
113,900 + 34%
3,400,000 +
35%
5,150,000 +
38%
35%
75,000
100,000
335,000
10,000,000
15,000,000
0

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 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

Level of Government
Federal
Services Provided
National defense
Transfer payments
Transfers to states
Taxes Imposed
Personal income tax
Corporate income tax
Excise taxes
State Public transportation
Welfare
Higher education
Personal income tax
Corporate income tax
Excise taxes
Sales taxes
Local Police and fire protection
Primary and Secondary education
Excise taxes
Property taxes