2011 Cengage Learning Chapter 3 GOVERNMENTS ROLE IN THE ECONOMY 2011 Cengage Learning Imperfect Markets When a group of buyers or sellers are able to directly influence prices! An exclusive patent Ownership (a scarce commodity) Control (a transportation route)
2011 Cengage Learning Government Intervention in the Economy To help balance inequities created by imperfect markets : 1890 - Sherman Antitrust Act - forbade combinations that restricted competition. 1897 - Interstate Commerce Commission - regulated monopolistic sellers of interstate products. 1890-1970s - general increase in regulations. 2011 Cengage Learning
Regulation Effects Business prices & volume flexibility Ease of new business start up 2011 Cengage Learning Deregulation Moves Airlines Trucking Banking 2011 Cengage Learning
Summary of Government activities in regulating the economy and private business Changes in spending on the federal, state and local level. Regulatory agencies at the federal, state and local level. Welfare programs Wetland protection Endangered species Planning/Zoning 2011 Cengage Learning
Private Goals Public Goals The Search for Balance 2011 Cengage Learning Reasons for those who favor regulations: Capitalism tends to create imperfect markets. Need for protection and national defense require the consumption of resources.
Social goals require government programs. Segments in the population desire government to provide service that are offered by private enterprise. Reasons for those who favor less regulation: Private enterprise is more efficient at allocating resources. Government creates unnecessary cost. 2011 Cengage Learning Land, labor, and capital Resource Market Demand
Factors of Production Supply The Circular Flow of Economy goods and services Individuals and Households Product Market Supply
Goods and Services 2011 Cengage Learning Demand Receive goods and services Sell goods and services Business $$ Expenses
Demand Resource Market Factors of Production The Circular Flow of Economy Dollars $$ Income Supply
(rent, wages, interest) (rent, wages, interest) Individuals and Households Business Revenue $$ Goods and Services 2011 Cengage Learning
Demand $$ Spend Income $$ Expenditures Supply Product Market Land, labor, and capital $$ Expenses
Demand $$ Income Resource Market Factors of Production Supply The Circular Flow of Economy- Revisited Individuals and Households
Supply Revenue $$ Goods and Services 2011 Cengage Learning Demand $$ Spend Income $$ Expenditures
Product Market Receive goods and services Business Sell goods and services (rent, wages, interest) (rent, wages, interest) Flow of the Economy People and companies pay taxes to or buy
services from governments. The money is used to buy goods & services from the public. 2011 Cengage Learning Local real estate markets are heavily influenced by changes in the local and national economy Measuring the Economy GDP- gross domestic product the total market value of all goods and
services produced domestically in US The national economy is growing if the GDP is increasing 2011 Cengage Learning GDP is acquired by consumers, business, government, and foreign markets Customers: personal consumption expenditures Business: gross private domestic
investment Government: includes federal, state, and local agencies Exports: trade 2011 Cengage Learning GDP and Inflation Inflation distorts comparison of GDP from different time periods. GDP adjusted for inflation is called real GDP.
2011 Cengage Learning Economic Indicators Personal income: individual income before taxes. Disposable personal income: take-home pay measures consumer purchasing power. Discretionary income: money remaining after paying necessities. 2011 Cengage Learning Changes in Economic Activity Seasonal Fluctuations
Business Cycles- typically 3 to 6 years Long-term Secular Trends - occurs over an extended period of time (examples include: family size, shorter work week, increases in per capita income, and changes in life span) 2011 Cengage Learning The Four stages of the business cycle: 1. Prosperity 2. Recession 3. Depression
4. Recovery 2011 Cengage Learning Business Cycle Causes War, natural disasters and international conflicts. The introduction of innovations including the development of cereal, automobile, steam engine, & use of steel in buildings. Erratic spending patterns of consumers, business, and government. Changes in the amount of money and credit in
circulation. The psychological frame of mind of businesspeople and consumers. 2011 Cengage Learning Forecasting Changes in Economic Activity Economic forecasting is one way of reducing uncertainty (reducing risk). Investors should define the investment requirements and expectations. Forecasting the amount of money received each year and the reversion during the holding
period is considered a cash flow analysis. Economic forecasting is an art, not a science. 2011 Cengage Learning Long-run trends in real estate economics appear to be influenced by gradual changes in population, age distribution, marriage rates, income levels, construction costs, taxes, and transportation patterns. Short-run trends are heavily influenced by the availability and cost of mortgage money and the current state of the national and local economy. (On average long real estate cycles are approximately 18 years of prosperity, recession, depression, and
recovery.) 2011 Cengage Learning Fiscal and monetary policies are used to fight inflation, unemployment, and recession Government Tools to Fight Economic Problems Fiscal policy includes taxing and spending power. Monetary policy is changes in the supply of money to encourage or discourage consumer spending and business investments.
2011 Cengage Learning Fiscal and monetary policies are tools the government uses to fight inflation, unemployment, and recession. 2011 Cengage Learning Special Interest Topics GNP Stagflation Measurement Problems
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