The Basic Institutional Structure of the U'S' Economy: The Private, Public

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CHAPTER 3

• The Basic Institutional Structure of the U.S.
  Economy The Private, Public International
  Sectors

2
The Private Sector

• Most production is undertaken by private
  individuals and organizations.

3
The Private Sector

• The private sector is made up of independently
  owned firms that exist to make a profit,
  nonprofit organizations, and households.

4
The Private Sector

• The businesses set up to make profits may be
  organized in one of three basic legal forms
• Proprietorship (70 of all businesses with 5.8
  sales).
• Partnership (7 of all firms with 4.8 total
  sales).
• Corporation (20 of all firms with 90 of all
  sales).

5
Group Discussion

• Identify specific companies that you know about
  as belonging to one of the three basic legal
  forms of private sectors.

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The Organization of Industries

• An industry is a group of firms that produce
  similar products.

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The Organization of Industries

• The organization refers to how the industry is
  structured.
• How many firms there are.
• Whether the product is the same or
  differentiated.
• Whether or not firms can control prices or wages.
• Whether firms can enter or leave, or so forth.

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The Organization of Industries

• Four categories are generally used to describe
  the structures in the U.S.

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Perfect Competition

• An industry in which many small firms produce
  nearly identical (homogeneous) products.

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Perfect Competition

• No single firm has control over prices and can
  decide only how much output to produce and how to
  produce it.
• No barriers exist to block the entry of new firms
  in search of profits, and exit is also easy.

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MONOPOPY

• An industry in which only one firm produces a
  product for which there are no close substitutes.

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MONOPOPY

• The firm sets the price, but can only sell
  whatever quantity the market will buy at that
  price.
• To remain a monopoly the firm must keep others
  out by using barriers to entry
• For example exclusive license from the government.

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Monopolistic Competition

• A hybrid organization.
• There are many small firms (like perfect
  competition) but each produces a slightly
  different product.

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Monopolistic Competition

• If the firm can differentiate its product enough
  to establish a brand loyalty, it can enjoy some
  of the benefits of monopoly.
• Firms can compete by both price and quality, and
  entry and exit are relatively easy.

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Oligopoly

• An industry in which there are a few firms.
• In some cases one large firm dominates.

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Oligopoly

• In other cases a few large firms have roughly
  equal power.
• Firms must consider the reactions of the other
  firms when considering strategy.
• Entry is difficult because of the large initial
  investment is required to break into the industry.

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THE PUBLIC SECTOR Taxes Government Spending

• The public sector plays a major role in
  determining the allocation of resources, the mix
  of outputs, and the distribution of rewards.

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THE PUBLIC SECTOR Taxes Government Spending

• The size of the public sector can be measured as
  a percentage of the nations total annual output
  (GDP).
• In total the public sector has almost doubled in
  about the last 50 years, with the fed portion
  increasing more rapidly than the state and local.

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Government Spending

• Government spending can be broken into three
  major categories
• 1. Purchase of goods and services
• This includes wages salaries of govt. Employees
• 2. Transfer payments
• Cash payments made directly to households e.G
  social security benefits
• 3. Interest payments
• Paid to those who own government bonds

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Government Spending Continued

• Government expenditures include spending on
  national defense, health care, education, etc.

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Government Spending Continued

• The social security payments and pensions for
  government employees (including military) are
  included in the transfer payment category.
• Federal government interest payments on its debt
  to individual bondholders counts as a service
  payment, not as a transfer payment.

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Sources Of Government Revenue

• The largest single source of government revenue
  is individual income tax. Other sources include
• 1. Social insurance taxes or payroll taxes.
• These pay for social security, disability, and
  unemployment compensation.

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Sources Of Government Revenue

• 2. Corporate income taxes.
• 3. Excise taxes.
• Taxes on specific commodities such as cigarettes,
  alcoholic beverages, gasoline, etc.

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Field Project Assignment

• Investigate how much of the price of a pack of
  cigarettes is actually tax.
• How does this vary by state?
• Do likewise with alcohol gasoline.

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The International Sector

• In a closed economy there would be no
  transactions with the rest of the world .
• The U.S. Economy is by no means closed There are
  thousands of transactions every day.

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The International Sector

• The volume of trade increased significantly since
  1970.
• The composition of trade is tremendously
  diversified.