Chapter 5 Flashcards
Four sectors of the economy
Households, Businesses, International, and Government
Functional Distribution of Income
Indicates how society’s money income is divided among wages, rents, interest, and profits.
Personal Distribution of Income
How total income is distributed among households.
Three ways households spend income
1) Pay taxes
2) Save
3) Spend
Two reasons for saving
1) Security-provide a nest for retirement
2) Speculation-purchase securities speculating they will increase in value (stocks, gold, bonds, ect.)
Three types of personal consumption expenditures
1) Expenditures on durables: Items which last more than three years
ex: autos, wash machines, furniture
2) Expenditures on non-durables: Items which last less than three years.
ex: most clothing, pens, food
3) Expenditures on services: Work done by Accountants, Lawyers, Financial Advisors, Teachers
Plant vs firm vs industry
Plant: Is a physical establishment, which helps in making and/or Distributing of G/S
Business firm: Is an organization which owns and operates these plants business (Business is any entity which sells G/S)
Industry: Is a group of firms producing the same or similar products
ex: Steel Industry
USX steel, Republic, Bethlehem
Vertical, horizontal, and conglomerate combination of plants
Vertical-firms own plants at various stages of production
ex: Exxon
Horizontal-means each plant is at the same stage of production
ex: JC Penny
Conglomerate- There are plants which operate across many different markets and industries
ex: ATT
Three ways the government redistributes income
Transfer Payments: Taking money from one group and giving it to another
ex: Welfare checks, food stamps, unemployment compensation.
Market Intervention: The government modifies market prices
ex: minimum wage
Taxation: Take a larger proportion of income tax the more money you make
Ex: 2023 tax brackets 10%, 12%, 22%, 24%, 32%, 35%, and 37%
Externalities/Spillover effects
When a transaction takes place and it effects someone not involved in the transaction
ex: paint producer/building contractor/o-zone layer (you get sunburn)
Free Rider
Someone who receives the benefit of a G/S without contributing to its cost
Two ways government corrects spillover effects
Legislation: Specific laws designed to make firms responsible
ex: for polluters, make firms install special equipment to stop pollution for example smoke stock fillers.
Specific Taxes: Let the firm pollute; however, make them pay a heavy tax. The government takes the money and cleans up the pollution.
Positive Externalities
When a transaction takes place and it positively effects someone not involved in the transaction
ex: Education benefits society, Measles vaccines
Public Goods
Are G/S provided by the government
Three reasons why the government must provide G/S
1) Some goods are too expensive
ex: Patriot Missiles, Highways
2) Exclusion Principle: No effective way of excluding individuals from the benefits once those goods come to existence
ex: lighthouse. no practical way to exclude certain ships from the benefits.
3) Market System Fails-No demand for Street lights, yet they are needed, so the government must provide them.
