Chapter 10 – Households & Businesses

ECONOMICSTHEORY AND PRACTICE

Seventh Edition

Copyright © 2004 John Wiley & Sons, Inc. All rights reserved.

Patrick J. WelchSt. Louis University

Gerry F. WelchSt. Louis Community

Collegeat Meramec

&

PowerPoint Presentation by:

Dr. Ray EverettPima Community College

Households & Businesses: An Overview

Contents

Microeconomy Overview

Overview of Households

Overview of Business

Decision Making & Economic Systems

Chapter Objectives• To provide an overview of households and businesses.

• To introduce the sources and sizes of household income and types of household expenditures.

• To define the basic objective of economic decision making by individuals.

• To introduce the balancing process involved in an individual’s spending and earning decisions.

• To identify the legal forms of business, and to discuss business ownership of other businesses.

• To discuss the goal of profit maximization or loss minimization in business decision making, and to explore some questions about this goal.

• Microeconomy Study of individual decision-making units and markets

within the economy. Focuses on:

• Decision making and how it influences the behavior of individuals in households and businesses.

Microeconomy Overview 10-1

• Household Income & Expenditures Household

• Person living alone or a group of related or unrelated persons who occupy a house, an apartment, or other housing unit.

Personal Income• Household gross, or pretax, income.

Transfer Payment• Money from government for which no direct work is

performed in return. Durable Good

• Good that has a useful lifetime of more than one year. Nondurable Good

• Good that has a short, useful lifetime.

Overview of Households 10-2a

• Household Income & Expenditures (cont.)

Overview of Households 10-2b

TABLE 10-1Sources of Personal Income (Percentage Distribution for Selected Years)

• Household Income & Expenditures (cont.)

Overview of Households 10-2c

TABLE 10-2 Average Money Income of Householdsa

• Goals & Decisions of Individuals Maximizing Economic Well-Being

• Obtaining the greatest possible satisfaction, or return, from an economic decision.

Utility• Satisfaction realized from consuming a good or service.

Total Utility• Total satisfaction from consuming a particular combination

of goods and services. The utility-price rule states that in order to maximize total

utility from spending a given income, a buyer must weigh the utility received from each good against the money spent on that good.

• A similar rule applies to earning income by means of working.

Overview of Households 10-2d

• Business Organization established to produce and sell goods and

services.

Overview of Business 10-3a

TABLE 10-3The Ten Largest U.S. Corporate Employers: 2001

• Legal Forms of Business Proprietorship

• One-owner business.– Relatively easy to start.

– Independence in decision making.

– Difficulty in raising money.

– Unlimited liability.

• Unlimited Liability– Business owner’s personal assets are subject to use as

payment for business debts.

Overview of Business 10-3b

• Legal Forms of Business (cont.) Partnership

• Legal organization of a business that is similar to a proprietorship but has two or more owners.

– Allows the pooling of money, experience, and talent.

– General partner has the burden of unlimited liability.

• General Partner– Owner in a partnership who is subject to unlimited

liability.

Overview of Business 10-3c

• Legal Forms of Business (cont.) Corporation

• Legal entity, owned by stockholders.• Can carry on in its own name business functions normally

performed by individuals.• Preferred Stock

– Pays a stated dividend to its holder before dividends are issued to common stockholders.

Overview of Business 10-3d

FIGURE 10-1Structure of a Corporation

• Common Stock– Pays a dividend dependent on the

profit of a firm after all other financial obligations have been met.

• Corporate Board of Directors– Governing body of a corporation.

• Bond– Financial instrument through which a

corporation can borrow long-term funds.

• Numbers & Sizes of Businesses

Overview of Business 10-3e

TABLE 10-4Number and Receipts of Proprietorships, Partnerships, and Corporations: 1998

• Numbers & Sizes of Businesses (cont.)

Overview of Business 10-3f

TABLE 10-5Percentage Distribution of Businesses and Business Receipts

Classified by Size of Receipts: 1998

• Business Ownership of Business Merger

• Also called an acquisition.• Acquiring of one company by another.

Conglomerate Merger• Corporation acquires another corporation that produces

unrelated goods and services. Vertical Merger

• Corporation acquires another corporation that supplies its inputs or distributes its products.

Horizontal Merger• Corporation acquires another corporation that competes in

the same market. Holding Company

• Corporation formed for the purpose of owning or holding stock in other corporations.

Overview of Business 10-3g

• Business Ownership of Business (cont.)

Overview of Business 10-3g

FIGURE 10-2The Alltown Bank Holding Company

• Goals & Decisions of Business Firms Profit maximization or loss minimization

• Profit or loss = revenue – costs• Revenue

– Money or income that a company receives from selling its product.

ECONOMICSTHEORY AND PRACTICE

Seventh Edition

Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the expressed written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Chapter 10 – Households & Businesses

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