Chapter 3 Professor Yuna Chen Economic Decision Makers © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 3-1 The Household • Demand goods and services – Determine what gets produced • Supply resources – For firms to produce output • Choices – What to buy – How much to save – Where to live – Where to work © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 3-1a The Evolution of the Household • Farm household – Self-sufficient • Better technology – Increased productivity • Factories – Specialization; less self-sufficient • Women in labor force – 1950: 15% – Today: 70% © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 3-1b Households Maximize Utility • Utility – Satisfaction received from consumption – Sense of well-being – Depends on each household’s subjective goals © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 3-1c Households as Resources Suppliers • Resource suppliers – Labor, capital, natural resources, and entrepreneurial ability – To satisfy their unlimited wants – Labor – to earn income • Households with few resources – Transfer payments - outright grants • Cash transfers • In-kind transfers © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 5 3-1d Households as Demanders of Goods and Services • Demanders of goods and services – Durable goods • Expected to last 3 or more years • Can be reused – Nondurable goods • Food, clothing, gasoline – Services Question: Lebron believes duct tape is an example of durable goods because it can last for a long time. Do you agree? © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Exhibit 1 Where U.S. Personal Income Comes From and Where It Goes © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 3-2 The Firm • Firms – Economic units – Profit seeking entrepreneurs – Combine resources – Produce goods and services – Maximize profit © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 3-2a The Evolution of the Firm • • • • • • Specialization Comparative advantage Transaction costs Entrepreneur Cottage industry system Technological developments © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 3-2a The Evolution of Firm • Large – scale factory production – Efficient division of labor – Direct supervision of production – Reduce transportation costs – Bigger machines • Industrial Revolution • Large-scale factory production • Began in Great Britain around 1750 • Spread to: Europe, North America, Australia © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 3-2b Types of Firms • Sole proprietorship – Single owner • Has the right to all profits • Bears unlimited liability for the firm’s losses and debts • Partnership – Two or more owners • Share the profits • Bear unlimited liability for the firm’s losses and debts © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 3-2b Types of Firms • Corporation – Legal entity owned by stockholders – Whose liability is limited to the value of their stock ownership • S corporation – Provides owners with limited liability – Profits are taxed only once • A income on each shareholder’s personal income tax return © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Exhibit 2 Percent distribution by type of firm based on number of firms and firm sales © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 3-2c Cooperatives • Cooperatives – People who pool their resources to buy and sell more efficiently than they could individually • Consumer cooperatives – Retail business owned and operated by some or all of its customers – To reduce costs • Producer cooperatives – Producers join forces to buy supplies and equipment and to market their output – To reduce costs and increase profits © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 3-2d Not-for-Profit Organizations • Not-for-profit organizations – Do not pursue profit as a goal • Charitable; Educational • Humanitarian; Cultural • Professional © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 3-2e Household Production • Opportunity cost – Below market price • No skills or special resources are required • Avoid taxes • Reduce transaction costs • Technological advances increase productivity © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 3-3 The Government • Role of government – to intervene in case of market failure • Market failure – arises when the unregulated operation of markets – yields socially undesirable results © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 3-3a The Role of Government • Establish & enforce rules of the game – Safeguard private property – Make sure that market participants abide by the rules of the game • Promote competition – Antitrust laws that prohibit collusion (agreement among firms to divide the market and fix the price) © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 3-3a The Role of Government • Regulate natural monopolies – Monopoly • Sole supplier of a product with no close substitutes – Natural monopoly • One firm that can supply the entire market at a lower per-unit cost than could two or more firms © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 3-3a The Role of Government • Provide public goods – Private firms cannot sell them profitably • Private goods – Rival in consumption (only for one to consume) – Exclusive (You get it only if you pay for it) • Public goods – Nonrival in consumption (e.g. law enforcement) – Nonexclusive (benefit all, even the ones who don’t pay) © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 3-3a The Role of Government • Externality – Cost or benefit on the third party rather than sellers and buyers • Negative externalities: someone gets hurt w/o being paid (e.g. pollution) • Should be discouraged • Positive externalities: someone receives benefit w/o paying (e.g. education) • Should be encouraged © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 3-3b Government’s Structure & Objectives • 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 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 3-3b Government’s Structure & Objectives • Difficulty – More than 89,500 jurisdictions • • • • • • 1 nation 50 states 3,033 counties 35,991 cities and towns 13,051 school districts 37,381 special districts – Not one single decision maker • ‘Vote maximization’ © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 3-3b Government’s Structure & Objectives • Market - voluntary exchange • Government coercion – Enforced by the police • Public goods – Zero price – Below the production cost © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 3-4 The Rest of the World • Rest of the world – Foreign households, firms, governments 3-4a International trade – Occurs because of different opportunity costs (comparative advantage) • Merchandise trade balance – Exports minus imports © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 3-4b Exchange Rates • Exchange rates – Price of one currency in terms of another 3-4c Trade restrictions – Tariff • Tax on imports – Quota • Legal limit on the quantity of a particular product that can be imported or exported © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 3-4c Trade Restrictions • Trade restrictions – Benefit certain domestic producers – Raise price of imports – Hurt domestic consumers – Cause “trade war” – Hurt the overall economy © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27