Economic_Actors__1_

Economic Decision Makers

Key Questions Addressed

The exploration of specialization and household production reveals the reasons behind personal task management despite specialization. Additionally, user-driven value creation is significant in platforms like Facebook. The role of government in efficient markets is highlighted, particularly through the concept of the "invisible hand."

Simple Model of the Circular Flow of Income

In the simple model, consumer spending for goods and services reflects demand in the product market. The factor market involves labor, land, capital, and enterprise, which leads to the generation of wages, rent, interest, and profit.

More Refined Model of the Circular Flow of Income

A more refined model incorporates broader elements such as foreign spending, government purchases, business investment, and savings. It also shows interactions among various market players, including consumers, businesses, and the government.

The Household

Households play a central role in the market economy by influencing production through their demand for goods and services. They provide labor, capital, natural resources, and entrepreneurship necessary for output. Households are critical in making economic decisions regarding purchases, saving strategies, living arrangements, and employment choices.

The Evolution of the Household

There has been a significant evolution from farm households, which were self-sufficient, to urban factory-based setups driven by technology and specialization. The increased demand for factory labor has decreased self-sufficiency, notably rising the participation of women in the workforce from 15% of married women with children in 1950 to 70% today. This growth in two-earner households demands more from market production.

Households Maximize Utility

Utility represents the satisfaction derived from consumption and drives household choices. Households serve as resource suppliers by providing essential resources such as labor and capital to meet unlimited wants. In 2011, total personal income reached $13 trillion, primarily sourced from labor earnings, which constituted two-thirds of this income. Breakdown of income sources in 2011 shows that 59% came from wages/salaries, 17% from transfer payments, and 8% from proprietors’ income.

Households as Demanders of Goods and Services

Personal consumption is a major avenue of household income spending, with 8% allocated for durable goods, 18% for nondurable goods, and 51% for services.

The Firm

Firms enhance efficiency through comparative advantage, leading to the specialization of resource suppliers. They naturally arise as extensions of specialization in production.

The Evolution of the Firm

Historically, the transition from cottage industries to organized factory production occurred, with the Industrial Revolution marking a shift towards large-scale, efficient factory production.

Types of Firms

• Sole Proprietorship: Single ownership that implies full profits and liability.

• Partnership: Involves multiple owners who share profits and liabilities.

• Corporation: An entity owned by shareholders, offering limited liability.

• S-Corporation: Provides limited liability with single-level taxation on income.

• Not-for-Profit Organizations: Engage in various activities without a profit motive, funded through contributions and service charges, and often exempt from taxes.

Reasons for Household Production

Households may choose to engage in production when opportunity costs are lower than market prices. Key motivations include: possessing skills or special resources that can be utilized, avoidance of taxes, minimized transaction costs, and enhanced productivity due to technological advances such as the Information Revolution.

Role of Financial Institutions

Financial institutions provide secure storage for savings and facilitate business funding through efficient capital allocation.

The Government

The government intervenes primarily in cases of market failure, safeguarding property and promoting fair competition. Public goods funded by taxes are available for all consumers without competition. Various levels of government have distinct responsibilities affecting national security and public welfare, although challenges arise in defining objectives due to multiple jurisdictions.

The Size and Growth of Government

The size of government has grown, shown by an increase in government spending relative to GDP, which rose from 10% in 1929 to 41% in 2012. There has been a notable shift in spending focus from defense to welfare programs.

Sources of Government Revenue

Government revenue primarily comes from various taxes (income, sales, property) and user charges.

Tax Principles and Tax Incidence

Understanding tax principles, such as the ability-to-pay principle (higher earners contribute more) and benefits-received principle (taxpayers should pay in accordance with benefits received), is crucial. Tax incidence refers to how the tax burden is distributed among taxpayers, with an examination of proportional, progressive, and regressive taxation revealing impacts on income.

International Trade

International trade is driven by differing opportunity costs; the U.S. imports raw materials and finished goods while exporting sophisticated products and agricultural goods. The merchandise trade balance has reflected deficits affecting overall economic standings.

Exchange Rates and Trade Restrictions

Exchange rates facilitate international transactions; tariffs and quotas regulate import/export levels. Countries often impose trade restrictions to support domestic producers, sometimes at the expense of consumers.