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MICRO CHAPTER 3 THE HOUSEHOLD 09 20 2012 As demanders of goods and services and suppliers of resources households make all kinds of choices such as what to buy how much to save where to live and where to work Before the growth of urban factories and the demand for labor in big cities households used to produce what they consumed and consume what they produced The rise of two earner households has affected the family as an Utility the satisfaction received from consumption sense of well economic unit being o Households try to act in their best interest and do not deliberately try to make themselves less happy Households are resource suppliers The most valuable resource sold by most households is that of labor Proprietors are people who work for themselves rather than for employers farmers plumbers doctors are all self employed Proprietors income should also be considered a form of labor income Over two thirds of personal income in the United States comes from labor earnings rather than form the ownership of other resources such as capital or natural resources Transfer payments cash or in kind benefits given to individuals as outright grants from the gov t o Cash transfers are monetary payments such as welfare benefits social security unemployment compensation and disability benefits o In kind transfer provide for specific goods and services such as food health care and housing Households are demanders of goods and services Once in a household personal income goes to personal consumption which is split up into 3categories o Durable goods goods expected to last three or more years o Nondurable goods such as food clothing and gasoline o Services such as haircuts air travel and medical care THE FIRM Specialization and comparative o Explain why households are no longer self sufficient Instead of producing everything themselves it is now easier to purchase it from somewhere who thus purchases it form someone somewhere else In the British economy for example entrepreneurs began organizing the stages of production under one roof factories The reasons for this is o 1 promotes a more efficient division labor o 2 allowed for the direct supervision of production o 3 reduced transportation costs o 4 facilitated the use of machines far bigger than anything used in the home Industrial revolution development of large scale factory production that began in Great Britain around 1750 and spread to the rest of Europe North America and Australia Today entrpreneurs combine resources in firms such as factories mills offices stores and restaurants Firm economic units formed by prodit seeking entrepreneurs who combine labor capital and natural resources to produce goods and services o Try to maximize profit o Profit the entrepreneurs rewards equals sales revenue minus the cost of production including the opportunity cost of the entrepreneurs time There are three types of firms o Sole Proprietorships A single owner firm The owner is in complete control but faces unlimited liability and could lose everything Because they have no partners or investors raising enough money to get the business up and running and keep it going can be a challenge The most common type of business Involves two or more individuals who agree to combine their funds and efforts in return for a share of any profit Each partner faces unlimited liability for any debts or claims against the partnership so one partner could lose everything because of another s mistake The lease common form of U S business o Partnerships or loss o Corporations By far the most influential form of business there is A legal entity established through articles of incorporations Owned by stockholders whose liability is limited to the value of their stock ownership Stockholders liability for any loss is limited to the value of their stock meaning stockholders enjoy limited liability Corporate form has some disadvantages as well The typical stockholder of a large corporation owns only a tiny fraction of the shares and thus has little say Realized capital gain an increase in the market price of a share that occurs between the time the share is purchased and he it is sold S corporation provides owners with limited liability but profits are taxed only once as income on each shareholder s personal income tax return o The sole proprietorship is the most important in sheer numbers but the corporation is the most important in total Cooperative an organization consisting of people who pool their resources to buy and sell more efficiently than they could sales individually o Cooperatives try to minimize costs and operate with limited There are two types of cooperatives consumer cooperatives and liability of members producer cooperatives o Consumer cooperatives A retail business owned and operated by some or all of its customers in order to reduce costs o Producer cooperatives Producers join forces to buy supplies and equipment and to market their output Each producer s objective is to reduce costs and increase profits Not for profit organizations groups that do not pursue profit as a goal they engage in charitable educational humanitarian cultural professional or other activities often with a social purpose o Evolved to help people accomplish their goals THE GOVERNMENT Market failure a condition that arises when the unregulated operation of markets yields socially undesirable results the market system would break down if one could not safeguard his private property of if one could not enforce contracts Some firms try to avoid competition through collusion which is an agreement among firms to divide the market and fix the price Some individual firms may try to eliminate the competition by using unfair business practices Monopoly a sole supplier of a prodict with no close substitutes o A monopoly can sell and produce the product for less than could competing firms Natural monopoly when it is cheaper for one firm to serve the market than for two or more firms to do so A firm that can supply the entire market at a lower per unit cost than could two or more firms o The gov t usually regulates a natural monopoly forcing it to lower its price and increase output Private goods such as pizza are both rival in consumption and exclusive Public goods are nonrival in consumption A good that once produced is available for all to consume regardless of who pays and who doesn t such a good is nonrival and nonexclusive such as a safer community o b c public goods are nonrival and


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NU ECON 1116 - Chapter 3

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