Chapter 4: The US Economy: Private and Public Sectors

Functional distribution of income

Illustrates how the nation’s income is distributed among wages, rents, interest, and profits

Personal distribution of income

How the nation’s total income is divided among individual households

Durable goods

Products with expected lives of 3 years or more

Non-durable goods

Products with expected lives of less than 3 years

Services

Work done for consumers by lawyers, barbers, doctors, etc.

Plant

Physical establishment that helps with manufacturing and distributing goods and services

Firm

Organization that uses resources to produce goods and services for profit

Industry

Group of firms that produces same, or similar, products

Sole proprietorship

Business owned + operated by 1 person

Partnership

Business owned + operated by 2+ people; share risks, profits, and losses

Corporation

Distinct/separate from individual stockholders that own it; run by hired managers

Stock

Share in the ownership of a corporation

Bond

Lends money to corporation; no corporate ownership for purchaser

Limited liability

Stockholders risk only what they paid for their stock; personal assets not at stake

Principal-agent problem

Interests of people managing the corporation (agents) and of the owners (principals) don’t always coincide

Monopoly

Single seller controls an industry

Externality

Some of the costs or benefits of a good “spill over” to 3rd parties that aren’t the buyer or seller

Negative externalities

Production or consumption costs that affect 3rd parties without compensation

Private goods

________- Produced through competitive market system; rivalry + excludability.

Positive externalities

Production or consumption benefits that are enjoyed by 3rd parties

Public goods

Everyone can simultaneously obtain benefits; one person’s benefit does not reduce benefits available to others

Free-rider problem

People can receive benefits from a public good w/o paying for it

Quasi-public goods

Government provides public goods and services that could include exclusion (could be provided by private firms)

Government purchases

Products purchased directly absorb resources + are part of domestic output

Transfer payments

Don’t directly absorb resources or create output; recipients don’t contribute to domestic

Personal income tax

Levied on taxable income

Marginal tax rate

Rate at which the tax is paid on each additional unit of taxable income

Average tax rate

Total tax paid divided by total taxable income

Payroll taxes

Taxes based on wages + salaries used to finance compulsory federal programs

Corporate income tax

Levied on a corporation’s profit

Sales and excise taxes

Taxes on commodities or purchases

Property taxes

Make up 72% of local governments’ tax revenue