Chapter 4: Public & Private Sectors

Functional distribution of income

How total income is divided among factors of production

Personal distribution of income

How income is divided among individuals or households

Durable goods

Goods that last a long time

cars, appliances

Nondurable goods

Goods consumed quickly

food, paper

Services

nonphysical products

haircuts, teaching

Plant

A single production facility

factory, office, store

Firm

An organization that produces goods or services

Industry

all firms producing the same product

Sole Proprietorship

One Owner, unlimited liability, keeps all profits

Partnership

Two or more owners, shared profits and liability

Corporation

Legally separate entity, limited liability

Stock

Ownership share in corporation

Bond

Debt instrument, company borrows money from investors and pays interest

Limited Liability

Owners are not personally responsible for business debts

Principal-agent problem

When one person (the agent) is hired to act on behalf of another (the principal), but the agent’s self-interest doesn’t always align with the principal’s best interest.

The principal = the person who owns or delegates.

The agent = the person who is supposed to act for them.

Problem: The agent may pursue their own goals instead of the principal’s.

Monopoly

Market with on seller dominating the industry

Externality

Costs or benefits of an economic activity that affect people who are not directly involved in the transaction.

Negative Externalities

Harmful side effects

Pollution

Positive externalities

Beneficial side effects

Education

Public goods

Non-excludable and non rivalrous

National defense

Free-rder problems

People benefit from public goods without paying

Quasi-public goods

Goods with some excludability or rivalry

Private education

Government purchase

Spending on goods/services by the government

Transfer Payments

Payment to individuals with exchange of goods/services

Social Security

Personal income tax

tac on individual earnings

Marginal tax rate

Tac rate on the next dollar earned

Average tax rate

Total taxes paid/ total income

Payroll tax

taxes for social security and medicare

Corporate income tax

Tax on corporate profits

Sales and excise taxes

taxes on goods/services

Property tax

taxes on land, building, or other property