Bah - MacroPrinciples 04 the Market System and the Private Sector

8/13/2019 Bah - MacroPrinciples 04 the Market System and the Private Sector

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The Market SystemThe Market Systemand the Private Sector and the Private Sector

Chapter 4Chapter 4


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Private vs. Public SectorsPrivate vs. Public Sectors

The private sector is made up ofhouseholds, businesses, and theinternational sector.

The public sector refers to activity by thevarious levels of government.Productive activity occurs in both sectors.

A basic problem is determining whichsector can best produce a given good orservice.


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The Market SystemThe Market System

In the market system of the private sector,the consumer is supreme. Consumer Sovereignty : consumers determine

what is produced through their purchases ofgoods and services.

The agents of the market include: Households Business Firms The international sector


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Profit and the Allocation ofProfit and the Allocation ofResourcesResources

The profit motive drives firms: to allocate their resources toward theproduction of the products the consumerswant (demand), hence consumer sovereignty .

to produce as efficiently as possible, thereforeat the lowest cost.

Competitive markets drive prices down to

economic costs, therefore providingproducts to consumers at the lowestpossible prices. Cet. par., this improvesthe average standard of living .


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A Demand Change in theA Demand Change in theMarket for InMarket for In --Restaurant Food Restaurant Food


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A Demand Change in theA Demand Change in theMarket for Delivered Food Market for Delivered Food


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Resources in ProductionResources in Production

Producersof Goods

ResourceSuppliers

land

labor

capital

rent

wages

interest


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Income Distribution DecisionsIncome Distribution Decisions

Ownership of resources determines who getswhat goods and services in a market system.Firms pay the factors of production according totheir marginal product (according to what theycontribute to production). Workers receive wages equal to the marginal product of

labor. Contributors of capital receive interest equal to the

marginal product of capital. Owners of land receive rents equal to the marginal

product of land.


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HouseholdsHouseholds

A household is a group of people living inthe same unit of housing. Thehouseholder is the person in whose name

the housing is owned or rented.Households consume housing,transportation, food, entertainment etc..

Household spending is called consumerspending or consumption .


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There are over 104 million households in the U.S.There are over 104 million households in the U.S.The largest group is : 35The largest group is : 35 --44 age bracket44 age bracketMedian income: $58,217Median income: $58,217


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Size Distribution of HouseholdsSize Distribution of Householdsin the United Statesin the United States


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Household Spending and IncomeHousehold Spending and Income


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Business FirmsBusiness Firms

A Firm is a business organizationcontrolled by a single management. It mayoperate in more than one location. It isalso referred to as a company , anenterprise , or a business .Firm spending on capital goods used inproducing other goods is called

investment .In 2005: investment = $2,100 billion = ofconsumption


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U.S. Investment SpendingU.S. Investment Spending


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Forms of Business OrganizationsForms of Business Organizations

Sole Proprietorship : a business owned by a single person,who receives all the profits and is

responsible for all its debts.Partnership : A business owned by two or more

partners, who share the profits andshare the responsibility for debts orlosses.


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Forms of Business OrganizationsForms of Business Organizations

Corporation : A legal fictitious person. The law sees the

corporation as a distinct person from its owners.

The owners are shareholders who share the profitsbut are not held liable beyond their investment(stock). They enjoy limited liability. (Hence ltd.)

A multinational business is one that operates in

several countries.There are far more sole proprietorships andpartnerships in the U.S. than there are corporations .


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The World's Ten LargestThe World's Ten LargestPublic companiesPublic companies


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The international sector The international sector

Both consumers and firms in the U.S buyand sell goods and services to or fromconsumers and firms in other countries.Products that US agents buy from the restof the world are called imports .Products that US agents sell to the rest ofthe world are called exports .Net Exports is the difference between thevalue of exports and imports.Trade surplus if exports exceeds imports.The opposite is trade deficit.


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Type of countriesType of countries

Grouping by per capita incomeLow-income: = $9,266Industrial countries: 23 industrial marketeconomies- interdependent countriesDeveloping countries: Different issues Debt and trade


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US Net ExportsUS Net Exports


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The Circular Flow: Households and FirmsThe Circular Flow: Households and Firms


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MoreMoreCircularCircularFlowFlow


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Test questionsTest questions

In a market economy who decideswhat will be produced?Which one is greater in the U.S:consumption or investment ?

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Bah - MacroPrinciples 04 the Market System and the Private Sector