Chapter 3:Chapter 3:

1.1. PublicPublic andand PrivatePrivate Goods Goods

2.2. The The Business Cycle Business Cycle (a little (a little about unemployment too)about unemployment too)

3.3. Positive and Negative Positive and Negative ExternalitiesExternalities

PrivatePrivate and and PublicPublic Goods: Goods: What is the difference?What is the difference?

A Private Good:A Private Good:

An example of the An example of the Private GoodPrivate Good is bread is bread (or any food): (or any food):

• there is a finite (there is a finite (limitedlimited) amount of it, ) amount of it, and bread eaten by a given person and bread eaten by a given person cannot be consumed by another.cannot be consumed by another.

1.1. ExcludabilityExcludability to one individual ( to one individual (in in other words it can only be consumed other words it can only be consumed by one personby one person) )

2.2. DepletabilityDepletability ( (it is has an end, it can it is has an end, it can be used upbe used up))

twotwo main features are... main features are...

How about money?How about money? YES, it is PrivateYES, it is Private

A Public Good:A Public Good:

Some examples of the Some examples of the public goodpublic goods are:s are:

1.1. It It does NOT have an enddoes NOT have an end ( (in other words, once it in other words, once it has been produced, everyone can benefit from it without has been produced, everyone can benefit from it without diminishing other's enjoymentdiminishing other's enjoyment))

2.2. Non-ExcludableNon-Excludable once it has been created, it is very once it has been created, it is very difficult (difficult (almost impossiblealmost impossible) to prevent access to the ) to prevent access to the good. good. EVERYONE HAS ACCESS TO THE GOODEVERYONE HAS ACCESS TO THE GOOD..

twotwo main features are: main features are:

national defensenational defense our system of property rightsour system of property rights public fireworkspublic fireworks lighthouseslighthouses

QUESTION: It is important to note that without _____________ there would be NO private or public goods supplied. To an economist the HOUSEHOLD is the _____ important Decision Maker in an economy.

HOUSEHOLDSHOUSEHOLDS

PrivatePrivate and and PublicPublic Goods: Goods: What is the difference?What is the difference?

Earned Income Tax CreditEarned Income Tax Credit (reduction in taxes to the (reduction in taxes to the working poor, so they pay less)working poor, so they pay less)

MOST

Before we begin the Business Cycle: Before we begin the Business Cycle: What is the unemployment rate?What is the unemployment rate?

Unemployment rateUnemployment rateSimply means the percentage of people that are NOTNOT employed. So…To have a To have a highhigh unemployment rate unemployment rate MUSTMUST mean the economy is doing mean the economy is doing poorlypoorly(means there are many people (means there are many people unemployed)unemployed)

To have a To have a lowlow unemployment rate unemployment rate MUSTMUST mean the economy is doing mean the economy is doing wellwell (means there are few people (means there are few people unemployed)unemployed)

US Unemployment History

Unemployment for LouisianaUnemployment for Louisiana

WHY?WHY?

1.1. Simply, due to Simply, due to scarcity, there are scarcity, there are NOT enough jobsNOT enough jobs for for ALL the people in the ALL the people in the USA. USA.

2.2. Also, some people Also, some people are just not are just not motivatedmotivated to work. to work.

Economists consider between ___ and ___ unemployment to be a healthy rate.

This is a high unemployment rate

The Business Cycle

0% unemployment can 0% unemployment can never be achieved.never be achieved.

4% 5%

Unemployment and Poverty are not the same thingUnemployment and Poverty are not the same thing

Just because the unemployment rate is high one year Just because the unemployment rate is high one year does notdoes not mean that the number of poor will increase.mean that the number of poor will increase.

The unemployment rate includes a lot of unemployed people The unemployment rate includes a lot of unemployed people that are that are NOTNOT poor. Such as: poor. Such as:

Individuals who have simply switched careers and are returning to school.

College students who receive money from scholarships and parents

Individuals who quit working due to a large financial gain (a investment that went well or won a lottery)

However, if the unemployment rate does remain HIGH for a long period of time, then it is possible to see an INCREASE in the poverty rate.

FYI QUESTION:FYI QUESTION: According to the latest Census Report, the leading cause of all poverty in the United States is:

BIRTHS TO SINGLE MOTHERS

Correction to the book’s information about poverty rates and unemployment.

BUSINESS CYCLEBUSINESS CYCLE       The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time.

The five stagesfive stages of the business cycle are:1.1. GrowthGrowth ( (expansionexpansion))

2.2. Peak Peak ((highest point of cycle, means that the unemployment highest point of cycle, means that the unemployment rate is at its LOWEST levelrate is at its LOWEST level) -- Think of the “Roaring 20’s”) -- Think of the “Roaring 20’s”

3.3. RecessionRecession ( (contraction - or slow down of the economycontraction - or slow down of the economy) )

4.4. TroughTrough ( (lowest point of cycle, means that the unemployment lowest point of cycle, means that the unemployment rate is at its HIGHEST levelrate is at its HIGHEST level) – Think of the “Great ) – Think of the “Great Depression”Depression”

5.5. RecoveryRecovery ( (productivity increases and the total products productivity increases and the total products produced in a nation increaseproduced in a nation increase))

Business Cycle

Business Cycle

How does this cycle relate to unemployment rates? A peak means that the economy is doing very well and the unemployment rate is at its LOWEST level A trough means that the economy is doing poorly and the unemployment rate is at its HIGHEST level

Remember the stages of the business cycle:

Growth, Peak, Recession, Trough, Recovery, Growth

RECESSION:RECESSION: Defined:Defined: A significant decline in economic A significant decline in economic

activity spread across the economyactivity spread across the economy The technical indicator of a recession is The technical indicator of a recession is twotwo

consecutive quartersconsecutive quarters of of NEGATIVENEGATIVE economic economic growthgrowth (or decline) as measured by a country's (or decline) as measured by a country's output of goods. output of goods.

It effects industrial production, employment, It effects industrial production, employment, income, and wholesale-retail trade.income, and wholesale-retail trade.

RecessionRecession is a normal ( is a normal (yet unpleasantyet unpleasant) part of ) part of the business cycle.the business cycle.

A A recessionrecession generally lasts from six to generally lasts from six to eighteen months. eighteen months.

Business Cycle: What is a What is a Recession?Recession?

The Business Cycle & The Business Cycle & UnemploymentUnemployment

QUESTION:QUESTION: During what year did a recession During what year did a recession occur?occur?

1992 was the worse recessionary year since the 1980s

WhyWhy and and HowHow do we stabilize this do we stabilize thisbusiness cycle?business cycle?

Why?Why? We need to stabilize this We need to stabilize this cycle because …cycle because …

1.1. The economy cannot take care of itself The economy cannot take care of itself (regardless of what Adam Smith said)(regardless of what Adam Smith said)

2.2. A recession A recession (if it lasts for a long period of time)(if it lasts for a long period of time) can can cause high unemployment and business cause high unemployment and business failure.failure.

3.3. It is possible for an economy to do It is possible for an economy to do TOOTOO WELLWELL normally prices increase during an economic boom, normally prices increase during an economic boom,

which is not good for people on fixed income, such retire which is not good for people on fixed income, such retire folksfolks

How?How? Through the use of Through the use of monetarymonetary and and fiscalfiscal policy policy

How to Stabilize the Business Cycle using: Fiscal Fiscal PolicyPolicyJohn Maynard KeynesJohn Maynard Keynes

Did not believe in Did not believe in ““laissez faire” economicslaissez faire” economics (laissez (laissez faire: no government regulation of the economy)faire: no government regulation of the economy)

Instead, Keynes stated that the government should use Instead, Keynes stated that the government should use spendingspending and and taxationtaxation to stabilize the market. to stabilize the market.

He believed thatHe believed that “ “aggregate demandaggregate demand was the was the driving force in an economy and that driving force in an economy and that governmentgovernment has a responsibility to fight economic slowdowns”.has a responsibility to fight economic slowdowns”. Basically, he believed that demand for products and Basically, he believed that demand for products and

services was the services was the onlyonly factor keeping the economy factor keeping the economy together.together.

So if there was a recession and many people were out of So if there was a recession and many people were out of a job, then the economy would fail. Therefore, it is the a job, then the economy would fail. Therefore, it is the government’s job to help fuel the economy.government’s job to help fuel the economy.

Fiscal Policy:Fiscal Policy: government’s use of government’s use of taxationtaxation and and spendingspending to regulate the to regulate the economy throughout the business cycleeconomy throughout the business cycle..

Believed in the use ofBelieved in the use of FISCAL POLICYFISCAL POLICY

How to Stabilize the Business Cycle using Fiscal Policy

An Example of Fiscal PolicyAn Example of Fiscal Policy

During an economic slowdown (trough) the

government will DECREASE taxes and INCREASE

spending

During an economic boom (peak) the government will

INCREASE taxes and DECREASE spending

How to Stabilize the Business Cycle using:

Monetary Policy:Monetary Policy: government’s use of government’s use of money supplymoney supply and and interest ratesinterest rates to regulate the economy throughout to regulate the economy throughout the business cyclethe business cycle..

Monetary PolicyMonetary Policy

Interest Rates usually fall in recessionary times to stimulate the economy by offering cheap rates at

which to borrow money.

Money Supply usually increases in recessionary times to stimulate the economy by supplying money

to businesses and people.

So, our government uses both fiscal and monetary policy to

regulate the economy throughout the business cycle.

EXTERNALITIES OF PRODUCTION

What are externalities?What are externalities?

An externality occurs in economics when a An externality occurs in economics when a decision (or product) causes decision (or product) causes costscosts or or benefitsbenefits to to any person any person OTHEROTHER than the person making the than the person making the decision or buying the good. decision or buying the good.

In other words, the decision-maker (In other words, the decision-maker (buyerbuyer) does ) does not bear all of the costs or reap all of the gains not bear all of the costs or reap all of the gains from his action. from his action. OTHERS are effected tooOTHERS are effected too..

These externalities cause either POSITIVE or NEGATIVE results

EXTERNALITIES OF PRODUCTION

What are externalities?What are externalities?Examples of Examples of negativenegative externalities include:externalities include:

Pollution by a firm in the course of its production Pollution by a firm in the course of its production which causes nuisance or harm to others. which causes nuisance or harm to others. (chicken (chicken house, pulp wood mill)house, pulp wood mill)

Toxic chemicals contained within TVs Toxic chemicals contained within TVs ((if the TV is if the TV is

not properly disposed of it will pollute the environmentnot properly disposed of it will pollute the environment))

These decisions have a certain These decisions have a certain social costsocial cost. . (society must bear these costs)(society must bear these costs)

QUESTION: What are two negative externalities of providing healthcare to the nation?

doctor’s insurance premiums are raised due to patient’s winning law suitsdoctor’s insurance premiums are raised due to patient’s winning law suits hospital costs increase as a result of litigation and falsehospital costs increase as a result of litigation and false insurance claimsinsurance claims

EXTERNALITIES OF PRODUCTION

What are externalities?What are externalities?

Examples of Examples of positivepositive externalities include:externalities include:

An individual planting an attractive garden in An individual planting an attractive garden in front of his house may benefit others living in the front of his house may benefit others living in the area. area.

My decision to come to school today and My decision to come to school today and teach you teach you ((I see it as positive, you might see it as I see it as positive, you might see it as

negativenegative))

These decisions have a certainThese decisions have a certain social benefitssocial benefits..

Thinking CriticallyThinking Critically

Although automobiles powered by Although automobiles powered by natural gas are expensive, they create natural gas are expensive, they create little pollution.little pollution.

Why does the gov’t give tax deductions Why does the gov’t give tax deductions to businesses that use these trucks?to businesses that use these trucks?

Use this “tax money” to expand their business and also TO REDUCE A NEGATIVE EXTERNALITY