11

Private Sector Circular FlowPrivate Sector Circular Flow

22

Private and Public SectorsPrivate and Public SectorsPrivate sector:Private sector: households, households, businesses, & the international sector.businesses, & the international sector.

Household spending Household spending “consumption”.“consumption”.Business spending on Business spending on capital goods capital goods and inventoriesand inventories “investment”.“investment”. Sales of goods and services to Sales of goods and services to foreigners foreigners “exports.”“exports.”

Purchases from foreigners Purchases from foreigners “imports.”“imports.”Private sector responds to consumerPrivate sector responds to consumer

Consumer sovereigntyConsumer sovereignty

Public sector:Public sector: government activities. government activities.

33

A Change in Demand for Restaurant Food:A Change in Demand for Restaurant Food:Price Guides ActionPrice Guides Action

44

Wisdom of Adam Smith:Wisdom of Adam Smith:The The Invisible HandInvisible Hand at Work at Work

It is not from the benevolence of It is not from the benevolence of the butcher, the brewer, or the the butcher, the brewer, or the baker that we seek our dinner, but baker that we seek our dinner, but from their regard to from their regard to their own their own interest.interest.

55

Income Distribution in Market EconomyIncome Distribution in Market EconomyWhat you own What you own What you get What you get

Firms pay the Firms pay the factors of productionfactors of production according to their according to their marginal productsmarginal products– WorkersWorkers get get wageswages equal to the marginal equal to the marginal

product of product of laborlabor..– CapitalistsCapitalists get get interestinterest equal to the equal to the

marginal product of marginal product of capitalcapital..– LandlordsLandlords getget rentsrents equal to the marginal equal to the marginal

product of product of landland..– EntrepreneursEntrepreneurs get get profitsprofits equal to the equal to the

excess of revenues over costs (payments excess of revenues over costs (payments to other factors).to other factors).

66

Consumption is a Household DecisionConsumption is a Household DecisionThere are over 104 million households in the U.S.There are over 104 million households in the U.S.

77

Household Household Spending Spending

and and IncomeIncome

88

Forms of Business OrganizationForms of Business Organization

Sole Proprietorship Sole Proprietorship

PartnershipPartnership

CorporationCorporation– Owners are Owners are shareholdersshareholders who share the who share the

profitsprofits but enjoy but enjoy limited liabilitylimited liability. .

– A A multinational businessmultinational business operates in operates in several countries.several countries.

There are far more sole proprietorships and There are far more sole proprietorships and partnerships in the U.S. than corporations.partnerships in the U.S. than corporations.

– But corporations are generally But corporations are generally biggerbigger..

99

The World’s Ten Largest CorporationsThe World’s Ten Largest Corporations

1010

U.S. U.S. Investment Investment SpendingSpending

by by BusinessesBusinesses(includes (includes allall

new new residential residential structures)structures)

1111

World Economic DevelopmentWorld Economic Development

1212

1313

Income in Industrial Market Economies, 2001Income in Industrial Market Economies, 2001

1414

Direction of U.S. TradeDirection of U.S. Trade

1515

U.S. Net ExportsU.S. Net Exports

1616

Private Sector Circular FlowPrivate Sector Circular Flow

1717