HOUSEHOLDS AS INCOME RECEIVERS
- Functional Distribution of Income – indicates how the nation’s earned income is apportioned among wages, rents, interest and profits, that is, according to the function performed by the income received.
- Personal Distribution of Income – indicates how the nation’s money income is divided among individual households.
HOUSEHOLDS AS SPENDERS
- Personal Taxes
- Personal Saving
- Personal Consumption Expenditures
THE BUSINESS POPULATION
- Plant – a physical establishment that performs one or more functions in fabricating and distributing goods and services,
- Firm – is a business organization that owns and operates plants.
- Industry – is a group of firms that produce the same, or similar products.
LEGAL FORMS OF BUSINESSES
- Sole Proprietorship – is a business owned and operated by one person.
- Partnership – form of business organization which is natural outgrowth of the sole proprietorship.
- Corporation – is a legal creation that can acquire resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and perform the functions of any other type of enterprise.
The Principal-Agent Problem – is the conflict of interest that may occur when agents pursue their own objectives to the detriment of the principal’s goals.
THE PUBLIC SECTOR: THE GOVERNMENT’S ROLE
- Providing Legal Structure
Government provides the legal framework and the services needed for a market economy to operate effectively.
- Maintaining Competition
Competition is the force that subjects producers and resource suppliers to the dictates of consumer sovereignty.
- Redistributing Income
The society chooses to redistribute a part of total income through a variety of government policies and programs. They are:
· Transfer payments
· Market intervention
· Taxation
- Reallocating Resources
Market failures occur when the competitive market system (1) produces the “wrong” amounts of goods and services or (2) fails to allocate any resources whatsoever to the production of certain goods and services whose output is economically justified.
2 Types of Failures
· Spillovers or Externalities – cause the equilibrium output of certain goods to vary from socially efficient output.
-Spillover costs – result in an over allocation of resources, which can be corrected by legislation or by specific taxes.
-Spillover benefits – are accompanied by an under allocation of resources, which can be corrected by government subsidies to consumers or producers.
· Public Goods – can be consumed by all simultaneously (nonrivalry) and entail benefits from which nonpaying consumers (free riders) cannot be excluded (nonexcludability).
-Quasi-public goods – have some of the characteristics of public goods and some of the characteristics of private goods; government provides them because the private sector would under allocate resources to their production.
- Promoting Stability
Government provides stability by addressing these two problems:
· Unemployment
· Inflation
GOVERNMENT FINANCE
- Government Purchases and Transfers
· Government purchases – are exhaustive; the products purchased directly absorb resources and are part of the domestic output.
· Transfer payments – are nonexhaustive; they do not directly absorb resources or create output.
FEDERAL FINANCE
- Federal Expenditures
1. Pensions and income security
2. National defense
3. Health
4. Interest on the public debt
- Personal Tax Revenues
1. Personal Income Tax – is the kingpin of the Federal Tax System and merits special comment.
2. Payroll Taxes – taxes based on wages and salaries used to finance two compulsory Federal programs for retired workers: Social Security and Medicare.
3. Corporate Income Tax – is levied on a corporation’s profit – the difference between its total revenue and its total expenses.
4. Excise Taxes – Sales taxes fall on a wide range of products, whereas excises are levied individually on a small, select list of commodities.
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