Economics:
Chapter 3
U.S. Private and Public Sectors
U.S. Private Sector
 Objectives
 Describe the evolution of households
 Explain the evolution of the firm
 Understand why international trade occurs
Video Clip
Households
 Household – all those who live together under one roof
 makes all different economic choices
 What to buy
 How much to save
 Where to live
 Where to work
 Have changed dramatically
 1850 – worked on farms
 1950 – married women didn’t work, they raised babies
 Only 15% women in labor force
 Reduced household production has led to increased availability of
child-care services and a greater variety of restaurants
Households
 Utility – household’s level of satisfaction, happiness and
sense of well-being
 Each household is a single decision maker
 Maximizing utility depends on the personal goals of the
household, not an objective standard
 For example, some households maintain neat homes with
well-groomed lawns, while other households pay little
attention to their yard/home maintenance
Firm
 Firm – economic unit formed by a profit (profit = revenue
– cost of production) seeking entrepreneur who
combines resources to produce goods and services
 Evolution of factories, (helped the firm) they
 Promoted a more efficient division of labor
 Allowed for direct supervision of production
 Reduced transportation costs
 Facilitated the use of specialized machines far larger
than anything that had been used in the homes
Firm
Evolution of the firm
 Specialization and comparative advantage help explain
why households are no longer self-sufficient
 But why is the firm a natural outgrowth?
 Rather than make a wool sweater from scratch, couldn’t
a consumer take advantage of specialization…
 By hiring someone to produce the wool
 Another person spins the wool into yarn
 A third person to knit the sweater
 Based on this, why is the firm necessary? Discuss
Firm
 Problems with previous model…
 Transaction costs, the cost of time and information required
for exchange, erase efficiency gained from specialization
 Instead of dealing with each specialist to do this, the
consumer can pay an entrepreneur to hire all the necessary
resources to make the sweater
Firm
 An entrepreneur, by hiring specialists to make many
sweaters rather than just one, is able to reduce the
transaction cost per sweater
 Using raw materials and labor, entrepreneurs were able
to make finished products
 Led to….
 Industrial Revolution – development of large-scale
production during the 18th Century
Firm: In pairs - Rows A&B, C&D
 Identify a local business you believe is particularly successful.
 Does this firm offer goods or services that consumers could not produce as
efficiently for themselves?
 Where does the firm derive its revenue? What might add to the firm’s cost of
production?
 Which is more important to showing a profit: increasing revenue to cover costs
of production or limiting cost of production?
 Write a paragraph explaining the advantages the firm has in productive
efficiency that consumers would not share.
 Remember…Many Americans are physically able to care for their lawns
but choose to hire others to perform this task for them. A truck pulls up
to the house with workers and equipment. There is a whirlwind of
activity for a period of time, then the job is done, and the workers leave
for their next job.
 Why do you think lawn-care firms can be more efficient than individuals in
producing this service? What does this have to do with entrepreneurship?
The Rest of the World
 Foreign decision makers have significant effect on the US
economy
 On what Americans consume and on what they produce
 The rest of the world consists of the households, firms and
governments in the more than 200 nations throughout
the world.
International Trade
 Gains from international trade occur because the
opportunity cost of specific goods differ across countries
 Trade allows the countries involved to specialize and
thereby increase production
 Americans buy raw materials (crude oil, metals, and
coffee beans) and finished goods (such as cameras,
DVD players, and automobiles) from other countries
 US producers sell to other countries sophisticated
products (computer hardware and software, aircraft and
movies) and raw materials such as agricultural products
International Trade
 Textbook page 69 for chart to explain and understand
commodities
Group Work
 Brainstorm to identify an item you own that is typically
imported from another country. List and explain possible
reasons why this product was not manufactured in the
United States. How do your answers demonstrate the
principle of comparative advantage?
Regulating the Private Sector
 Learning Objectives
 Explain how government can improve the private sector
 Distinguish between regulations that promote competition
and those that could control natural monopolies
 Describe how fiscal policy and monetary policy try to
stabilize economics
Rules for a Market Economy
 Establishing property rights
 Private property rights – legal claim that guarantees an
owner the right to use a resource or to charge others for its
use
 Intellectual property rights – inventors reap the rewards of
their creations
 Innovation – a result of the limited life of patents providing
the stimulus to turn the invention into a marketable
product
 Copyright – assigns property rights to the original
programmer (shark tank clip here)
 Who owns the copyright to this song or this video?
Rules for Market Economy
 Trademark – establishes property rights to unique
commercial marks and symbols (insert logo)
 Measurement and Safety – Market exchange is by weight
(pounds of steak, chicken) or volume (gallon of gas, pint of
milk)
 US Bureau of Weights and Measures governs this
 Consumer Protection – FDA, Consumer Product Safety
Commission (Current Issue, another link)
 CPSC – federal agency that monitors safety of consumer
products
 How can laws and regulations improve the operation of
the private sector?
Market Competition and
Natural Monopolies
 The government regulates market competition and
natural monopolies with the private sector
 Government promotes competition and reduces
anticompetitive behaviors
 Think of examples of anticompetitive behaviors that
companies engage in (in Ch 7 we will learn more)
Marketing Competition and
Natural Monopolies
 Promoting Market Competition
 Monopoly –a firm or group of firms working together for the most sales in
a market, and join together to fix prices that are higher than would result
than with market competition
 US Air/American
 APPLE/Google
 Antitrust Laws – promote competition and reduce anticompetitive
behavior
 laws enforced by individual firms bringing lawsuits against other firms for
violating these rules
 K-Cup
 Why does the gov’t promote competition in some markets and
control natural monopolies in others?
Marketing Competition and
Natural Monopolies
 Natural Monopoly – One firm can serve the entire market
at a lower per-unit cost than two or more firms can
Growth & Stability of the US Economy
 Economic fluctuation – the rise and fall of economic
activity relative to the long-term growth trend of the
economy
 Gov’t tries to reduce these fluctuations by making the bad,
not so bad, and the good, not so good
 Doing so is called fiscal policy - the federal government’s
use of taxing and public spending to influence the
macroeconomy
 If private sector activity slows down, the gov’t should
offset this by cutting taxes to stimulate the spending
Growth & Stability of the US Economy
 Inflation – an increase in the economy’s price level
 May happen if economy is growing too quickly
 If this is the case, the gov’t should increase taxes and
reduce its spending to cool down the economy
 Should keep inflation from getting too high
Growth & Stability of the US Economy
 Monetary policy – The Federal Reserve System’s attempts to
control the money supply to influence the macroeconomy.
 Supplies the appropriate amount of money to stabilizes the
economic fluctuations and promote healthy long-term
economic growth
 Increasing the money supply and lowering the interest rate
tried to stabilize the economy in 2008
 Interest rate – the cost of borrowing money and the reward for
lending it
 Fed wanted to encourage borrowing and spending
 How do fiscal policy and monetary policy reduce economic
fluctuations?
Source: Federal Reserve Bank of Richmond 2011 Annual Report (p.6)
www.richmondfed.org/publications/research/annual_report/2011/ar2011.cfm
Monetary or Fiscal Policy Quotes
 Determine if you think the quote relates to fiscal or
monetary policy and why?
Public Goods
 Private goods – goods with two features
1. The amount consumed by one person is unavailable to
others
2. Nonpayers can easily excluded
 Both rival in consumption and exclusive
 For example, only paying customers get a pizza
Public Goods
 Public goods – goods that, once produced, are
available to all, but the producer cannot easily exclude
nonpayers
 National defense
 CDC
 One persons benefit does not reduce the amount available
to others
 Such goods are available in equal amounts
Public Goods
 Natural Monopoly Goods
 (tv signal) nonrival but exclusive
 Open Access goods - goods that are rival in consumption
but exclusion is costly
 Fish
 Wild geese
 Table on p. 80
 Name the four categories of goods, and provide an
example of each
Externalities
 Negative externalities – by products of production or
consumption that impose costs on third parties
 third party – neither buyer nor seller
 Gov’t restrictions try to reduce negative externalities
 Positive externalities – by products of production or
consumption that benefit third parties
 In pairs, brainstorm a list of public goods that you and
your families consume. Make sure each good you list is
both nonrival and nonexclusive.