Economic Decision Makers

Economic Decision Makers - Economic Decision Makers The...

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Economic Decision Makers The principle decision makers in the economy are households, firms, government, and the rest of the world. Households Households provide resources that the economy uses to produce goods and services that households eventually demand. They are rational optimizers as are all economic agents. Households maximize utility. Utility is the word economists use as a catch-all for the satisfaction derived from economic activity. It encompasses consumption, charity, love, and overall well-being that people try to attain. Income Wages and Salaries 61% Transfer Payments 14% Personal Interest 9% Proprietors Income 9% Dividends 6% Rental Income 1% Expenditures Services 50% Non-Durable Goods 25% Durable Goods 10% Taxes 10% Other 5% The above table shows the distribution of resources in the household in terms of income and expenditures. Durable goods are goods that are expected to last three or more years. Proprietor’s income is income to the self-employed. Transfer payments are payments made by the government to households that are income to the household. The Firm Firms are the second class of economic agents. Firms are economic units formed by profit seeking entrepreneurs who employ resources to produce goods and services for sale. Firms are rational economic agents in that they generally maximize profits for owners. The firm is the result of specialization and comparative advantage. It became costly for households to produce all of the resources they consumed. As more products developed, the resources that went into those products became more specialized. If households were to organize the production of all of the goods they consumed, it would require a very large amount of time and resources to organize, much less produce those goods. Firms developed to reduce the transactions cost associated with producing goods and services. The firm can internalize much of the contracting necessary to produce specialize goods and services and turn those goods out much more efficiently.
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Transactions cost refers to the costs associated with conducting transactions in pursuit of trade. Types of Firms Sole Proprietorships A firm with a single owner, who receives all the profits, but bears all of the liability (losses and debt) associated with running the firm. These are the most common form of firm organization, making up 72% of all firms, but only4% of all business in the US. Partnerships A firm with multiple owners who share the profits and bear full liability for losses and debt. They make up 10% of all firms and 12% of all business. Corporations A corporation is a legal entity owned by stockholders whose liability is limited by the stock ownership. Stockholders have limited control over the day to day operation of the corporation. Corporations make up 18% of all firms, but 84% of all business.
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This note was uploaded on 09/01/2009 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Economic Decision Makers - Economic Decision Makers The...

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