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	Economics 14/e McConnell
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Chapter 5 - The Mixed Economy: Private And Public Sectors

Chapter 5 Outline McConnell and Brue 14th Edition

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1.	Households play a dual role in the economy. They supply the economy with resources and they purchase the greatest share of the goods and services produced by the economy. They obtain their personal incomes in exchange for the resources they furnish the economy and from the transfer payments they receive from government. The functional distribution of income indicates the way in which total personal income is divided among the five sources of earned income (wages and salaries proprietors’ income corporate profits interest and rents) and transfer payments. The personal distribution of income indicates the way in which total personal income is divided among households in different income classes.
2.	Households use their incomes to purchase consumer goods to pay taxes and to accumulate savings. Personal taxes constitute a deduction from a household’s personal income; what remains after taxes can be either saved or spent. Saving is what a household does not spend of its after-tax income. Households spend for durable goods nondurable goods and services.
3.	The business population of the U.S. economy consists of three major types of entities. A plant is a physical structure that produces a product. A business firm is an organization which owns and operates plants. (Multiplant firms may own horizontal vertical or conglomerate combinations of plants.) An industry is a group of firms producing the same or similar goods or services.
4.	The three principal legal forms of business firms are the proprietorship partnership and corporation. Each has special characteristics and advantages and disadvantages. The proprietorship is easy to form lets the owner be boss and allows great freedom. Disadvantages are lack of access to large amounts of financial capital difficulty of managerial specialization and the owner’s unlimited liability. The partnership is also easy to form and allows for more access to financial capital and permits more managerial specialization. Potential disadvantages are that partners may disagree there are still limits to financial capital or managerial specialization continuity of the firm over time is a problem and partners face unlimited liability. The corporation can raise financial capital through the sale of stocks and bonds has limited liability for owners can become large in size and has an independent life. Chief disadvantages are the double taxation of some corporate income potential for abuse of this legal entity and legal or regulatory expenses. There can also be a principal-agent problem with the separation of ownership and control of the firm. Large corporations are a major characteristic of the U.S. economy; they dominate most industries and produce most of the nation’s output.
5.	The U.S. economy is “mixed ” with government and markets directing economic activity. Government performs five economic functions. The first two (6 and 7 following) are designed to make the market systems operate more effectively; the other three (8 9 and 10) are used to eliminate the shortcomings of a purely market-type economy.
6.	The first of these functions is to provide the legal and social framework that makes the effective operation of the market system possible.
7.	The second function is the maintenance of competition and the regulation of monopoly.
8.	Government performs its third function when it redistributes income to reduce income inequality.
9.	When government reallocates resources it performs its fourth function: It reallocates resources to take account of spillover costs and benefits. It also reallocates resources to provide society with public (social) goods and services. It levies taxes and uses the tax revenues to purchase or produce the public goods.
10.	Its fifth function is stabilization of the price level and maintenance of full employment.
11.	A circular flow diagram that includes the public sector as well as business firms and households in the private sector of the economy reveals that government purchases public goods from private businesses collects taxes from and makes transfer payments to these firms purchases labor services from households collects taxes from and makes transfer payments to these households and can alter the distribution of income reallocate resources and change the level of economic activity by affecting the real and monetary flows in the diagram.
12.	Government spending consists of purchases of goods and services and transfer payments but they have different effects on the economy. Purchases are exhaustive because they directly use the economy’s resources while transfers are nonexhaustive. Government spending is equal to about one-third of domestic output.
13.	At the Federal level of government most spending goes for pensions and income security national defense health care or interest on the public debt. the major sources of revenue are personal income taxes payroll taxes and corporate income taxes.
14.	At the other government levels state governments depend largely on sales excise and personal income taxes and they spend their revenues on public welfare education health care and highways. local governments rely heavily on property taxes; they spend much of the revenue on education. state and local governments often receive transfers and grants from the Federal government in a process called fiscal federalism; they sometimes use lotteries to supplement tax revenues.

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