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26 Cards in this Set

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  • Back
The manner in which national income is divided among the functions performed to earn it (or the kinds of resources provided to earn it); the division of national income into wages and salaries, proprietors' income, corporate profits, interest, and rent.
Functional distribution of income
The manner in which the economy's personal or disposable income is divided among different income classes or different households or families.
Personal distribution of income
Break down the functional distribution of U.S. income in 2002.
1. Wages and salaries (72%)
2. Proprietors' income (9%)
3. Corporate profits (9%)
4. Interest (8%)
5. Rents (2%)
Break down the personal distribution of U.S. income in 2002.
1. Highest (50.2)
2. Fourth (23.0)
3. Middle (14.6)
4. Second (8.7)
5. Lowest (3.5)
Break down the business population percentage of firms.
1. Sole proprietorships (72%)
2. Corporations (20%)
3. Partnerships (8%)
Break down the business population percentage of sales.
1. Corporations (87%)
2. Partnerships (9%)
3. Sole proprietorships (4%)
An unincorporated firm owned and operated by one person.
Sole proprietorship
An unincorporated firm owned and operated by two or more persons.
A legal entity ("person" chartered by a state of the Federal government that is distinct and separate from the individuals who own it.
What are the advantages and disadvantages of sole proprietorships?
-Easy to set up and organize
-No complex paper work or legal expense
-One's own boss
-Strong incentive to manage the business efficiently

-Hard to grow into a large enterprise
-Finances usually limited to what's in the bank
-Commerical banks not eager to extend them credit
-Benefits of specialization in business management not availalbe
-Subject to unlimited liability (risk their own assets as well as companys)
What are the advantages and disadvantages of partnerships?
-Easy to organize
-Not much paper work or legal expense
-Greater specialization in management
-Greater financial resources than sole proprietorship

-Partner disagreements
-May not be enough still for a enterprise
-Continuity precarious (one dies)
-Unlimited liability
What are the advantages and disadvantages of corporations?
-Large in size and in scale of operations
-Most effective form of business organization
-Unique methods of finance (stocks/bonds)
-Limmited liability- owners risk only what they paid for their stock
-Expansion easier
-Life independent of its owners and its officers

-Double taxation
A conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals' (stockholders') goals.
Principal-agent problem
Market failure occurs when the competitive market system does the two following things:
(1) produces the "wrong" amounts of certain goods and services or
(2) fails to allocate any resources whatsoever to the production of certain goods and services whose output is economically justified.
A cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: A manufacturer dumps toxic chemicals into a river, killing the fish sought by sport fishers.
Spillover cost
A benefit obtained without compensation by third parties from the production or consumption of sellers or buyers. Example: A beekeeper benefits when a neighboring farmer plants clover.
Spillover benefit
What two things does the government do to correct spillover costs?
1) Legislation; force potential offenders, under the threat of legal action, to bear all the costs associated with production.
2. Specific taxes; amount of this tax would equal estimated amount of the spillover cost arising from the production of each unit of output.
What three things does the government do to correct spillover benefits?
1. Subsidize consumers; provides low-interest loans to students so that they can afford more education.
2. Subsidize suppliers; higher education from government, hospitals, medical research.
3. Provide goods via government; when spillover benefits are large, government may finance or own (ex USPS).
A good or service that is characterized by nonrivalry and nonexcludability; a good or service with these characteristics provided by government.
Public good
A good or service to which excludability could apply but that has such a large spillover benefit that government sponsors its production to prevent an underallocation of resources.
Quasi-public good
What does "rivalry" mean?
"Rivalry" means that when one person buys and consumes a product, it is not availble for purchase and consumption by another person.
What does "excludability" mean?
Excludability means that buyers who are willing and able to pay the market price for the product obtain its benefits, but those unable or unwilling to pay that price do not.
The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability.
Free-rider problem
What are the main categories of Federal spending?
Income security and national defense
What are the primary sources of Federal revenue?
Personal income, payroll, and corporate income taxes
States reply on ____ ___ _____ ___ for revenue; their spending is largely for education and public welfare.
Sales and excise taxes