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Chapter 4 Handout

Principles of Microeconomics + DiscoverEcon code card

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Chapter 4 US Economy: Private and Public Sectors I. Households as Income Receivers A. Functional distribution of 1. Wages and salaries are 72 percent of the total. 2. Proprietors’ income (income to self-employed business owners, doctors, lawyers, etc.) is under 10 percent of the total. 3. Capitalist income—corporation profits, rent, interest—is less than one-fifth of the total. B. Personal distribution of income is a. Lowest 20 3.4% 3.4 b. 20-40 8.7 12.1 c. 40-60 14.7 26.8 d. 60-80 23.2 50.0 e. 80-100 50.1 100 % II. Households As Spenders B. How do households dispose of their income? 1. Personal taxes - 12% in 2005. 2. Saving around 0% in 2005. 3. Most of household income goes to consumer spending – 88 % a. Durable goods are those with a life of three or more years. b. Nondurable goods include things such as food and clothing. c. Services are today more than one-half of all consumer spending, which demonstrates that ours is a service-oriented economy. IV. The Business Population A. Related definitions 1. Plant : physical establishment where production or distribution takes place (factory, farm, store). 2. Firm: business organization that owns and operates the plants. (The legal entity.) 3. Industry : a group of related firms, producing the same or similar products. 4. Types of multiplant firms a. Horizontally integrated: a multiplant firm with plants in the same stage, like a retail chain store such as J. C. Penney or Safeway. b. Vertically integrated: a multiplant firm in which the company owns plants at different production stages. Example: A steel company may own ore and coal mines as well as plants in different stages of the manufacturing process. c. Conglomerate : a firm that owns plants in different industries or markets. B. Legal forms of businesses 1. Sole proprietorship a. Advantages: easy to set up; proprietor is his or her own boss; because profit is proprietor’s income, there is an incentive to operate the business efficiently. 1
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Chapter 4 US Economy: Private and Public Sectors b. Disadvantages: financial resources are limited and may be insufficient; the proprietor is responsible for all of management functions; the proprietor is subject to unlimited liability. 2. Partnership a. Advantages: easy to organize; greater specialization; better access to financial resources than proprietorships. b. Disadvantages: some of the same shortcomings of the proprietorship; possible difficulties in sharing management responsibilities; still limited financial resources; problems if one of the partners leaves; still unlimited liabilities. 3. Corporations a. Advantages: improved ability to raise financial capital (money); defining and comparing stocks and bonds; limited liabilities; corporations have a permanence that is conducive to long-run planning and growth. b. Disadvantages: red tape and expense in obtaining a corporate charter; unscrupulous business owners sometimes avoid responsibility for questionable business activities; double taxation of corporate income; possible inconsistency between owner objectives and manager objectives (principal-agent problem).
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Chapter 4 Handout - Chapter 4 US Economy Private and Public...

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