Chapter 3

Economic Decision Makers

The Household

 Demand goods and services

 What gets produced
 Supply resources
 Produce output
 Choices (e.g.: what to buy, how much to
save, etc)

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 The Evolution of the
Household
 Farm household
 Self-sufficient 自给自足
 Better technology
 Increased productivity (less workers needed)
 Workers Move to Factories
 Specialization; workers less self-sufficient
 Women in labor force
 1950: 15%
 2007: 70% (Malaysia: 46%)

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The Household
 Maximize utility
 Supply resources
 To satisfy unlimited wants
 Earn income
 Demand goods and services
 Durable goods 耐久品 (goods expected to last three
or more years)
 Nondurable goods 易腐货物
 Services

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 Exhibit 1
Where U.S. personal income comes from and where it goes
(a) Over two-thirds of personal income (b) Half of U.S. personal income
in 2006 was from wages, salaries, and in 2006 was spent on services
proprietors income

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The Evolution 进展 of the Firm
 Specialization and Comparative advantage
explain why households no longer self sufficient
 Transaction costs 交易费 if consumer
negotiates with each specialist
 Consumer buys from entrepreneurs who hire
the resources to produce the goods
 Started with the cottage industry system 家庭手
工业
 Technological developments

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The Evolution of Firm

 Factories
 Efficient division of labor 劳动力的分工
 Direct supervision of production
 Reduce transportation costs 运输费
 Bigger machines
 Industrial Revolution (development of large-
scale factory production) began in Great
Britain around year 1750

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The Firm

 Firms
 Economic units formed by entrepreneurs
 Combine resources to produce goods and
services
 Maximize profit

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Types of Firms
 Sole proprietorship
 Single owner (face unlimited liability) 无限责任
 Partnership
 Two or more owners (face unlimited liability)
 Corporation
 Legal entity 法人实体
 Shares of stock 股份
 Limited liability to value of stock 有限责任

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Types of Firms
 S corporation
 do not pay any income taxes 所得税
 corporation's income are divided among and passed
through to its shareholders who must then report the
income on their own individual income tax returns
 Limited liability
 Maximum: 100 stockholders

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Types of Firms in Malaysia
 Sole proprietorship
 Single owner
 Partnership
 Two or more owners (maximum: 20)
 Corporations
 Public Limited Companies
 Shares of stock
 Private Limited Companies
 Limited to 50 members
 Cannot sell shares to the public

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Exhibit 2
Number and sales of each type of firm (U.S.)

(a) Most firms are sole (b) Corporations account for most sales
proprietorships

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Types of Firms
 Cooperatives
 A group of people who cooperate by pooling
resources to buy and sell more efficiently
 Consumer cooperatives
 Producer cooperatives
 Not-for-profit organizations
 Charitable
 Educational
 Humanitarian
 Cultural
 Professional
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 User generated products
• Computer programming: open source
• Linux; Apache; MySQL; Firefox; OpenOffice
• Wikipedia;
• MySpace;
• Facebook;
• YouTube
• Radio call-in shows
• Internet increases opportunities to create
new products and improve existing
products
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Household Production
 Opportunity cost
 Below market price
 No skills or special resources are required
 Avoid taxes
 Reduce transaction costs
 Technological advance

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 The Electronic Cottage
• Information revolution
– Telecommute
• Doubled in the last decade
– Videoconference
– Online database
– Virtual offices
• Cell phones; Blackberries

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The Government
 Establish & enforce 强迫 rules of the game
 Promote competition, prohibiting collusion 禁
止勾结
 Regulate natural monopolies ( P; Q)
 Provide public goods (nonrival, nonexclusive)
 Deal with externalities (taxes, subsidies, 津贴
regulations to discourage negative
externalities and encourage positive
externalities) 外在

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The Government
 More equal distribution of income (transfer
payments)
 Attempts to promote
 Full employment
 Price stability
 Economic growth

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Government’s Structure, Objectives
(U.S.)

 National/federal government 联邦政府

 National security, economic stability, market
competition
 State government 州政府
 Public higher education, prisons, highways,
welfare
 Local government 地方政府
 Primary and secondary education, police, fire
protection
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Government’s Structure, Objectives
U.S.
 Difficulty
 87,600 jurisdictions
 1 nation
 50 states
 3,034 counties
 35,933 cities and towns
 13,506 school districts
 35,052 special districts
 Not a single decision maker
 ‘Vote maximization’
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 Government’s Structure,
Objectives
 Voluntary exchange vs. coercion 自愿交换，强
迫
 Market transactions 市场交易 : voluntary exchange
 Some government coercion used to ensure
compliance 顺从 of law
 Enforced by the police (e.g. if refuse to pay tax,
could go to jail)
 No market prices
 Public output (e.g. in-state tuition)
 Zero price or below the production cost

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Government’s Structure, Malaysia
 Federal Parliamentary Monarchy 联邦议会郡主制
 Federal Government
 Senate (Dewan Negara) 参议院
 House of Representatives (Dewan Rakyat) 众议院
 Federalism is highly centralised
 State government
 excluded from the revenues of income tax, export,
import and excise duties 消费税
 depends on revenue from forests, lands, mines,
petroleum, 石油 the entertainment industry, and
transfer payments 转拨项款 from the central
government.
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The Size and Growth of Government
(U.S)
 Government outlays 费用 relative to GDP
 1929 (Great Depression): 10% of GDP
 Mostly state and local
 2007: 37% of GDP
 Mostly federal
 Defense spending since 1960
 Decreased
 Redistribution expenses- social security,
medicare, welfare programs etc since 1960
 Increased

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Exhibit 3
Redistribution has grown and defense has declined
as share of federal outlays since 1960

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Government Expenditure in Malaysia

 Percent of GDP
 2006: 24% ; 2007: 25%; 2008 (est): 24.2%
 Development Expenditure 2008 (est): RM 40
billion
 Economic services 44.7%
 Transport 16.9%
 Social Services 33.7%
 Education 18.4%
 Security 15.2%
 General Administration 6.3%
 Operating Expenditure 2008 (est): RM 129 billion
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 Sources of Government
Revenue
 Taxes
 Individual income tax (federal)
 Income tax; sales tax (state)
 Property tax (local) 财产不动产税
 User charges (eg tolls: payments for the cost of
collective services; primarily used as a
financing device by local authorities) 由地方政
府筹集资金
 Borrowing
 Monopolize certain markets e.g lottery tickets
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Exhibit 4
Payroll taxes have grown as a share of federal
revenue since 1960

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Government Revenue in Malaysia

 2008: RM 147 billion (21.6% of GDP)

 Tax Revenue: RM 102 billion (69.3%)
 Direct Tax: Companies: 23.7%, Petroleum Income
Tax: 15.1%, individuals: 9.1%
 Indirect Tax (excise duties, sales tax): 18.4%
 Non Tax Revenue (e.g. licences, permits): 30.7%

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 Tax Principles and Tax
Incidence
 Ability-to-pay tax principle
 Benefits-received tax principle
 Tax incidence 租税归宿
 Proportional taxation 比例税制 : Flat tax (as % of
income)
 Progressive taxation 累计税制 : marginal tax rate
 Top 1% of tax filers – paid 36.9% of taxes
 Top 10% of tax filers – paid 68.2% of taxes
 Bottom 50% of tax fillers – paid 3% of taxes
 Regressive taxation 递减税

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Exhibit 5
Top marginal rate on federal personal income tax since 1913

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Marginal Tax Rate on Income in Malaysia

 Top marginal tax rate: 28%

 11 categories ranging from 0% to 28%

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The Rest of the World
 Foreign households, firms, governments
 International trade - different opportunity costs
across countries
 Merchandise trade balance 商品贸易
 Balance of payments (record of all economic transactions
between nation’s residents 居民 with residents of the rest
of the world
 Exchange rates
 Foreign exchange markets
 Trade restrictions 贸易约束
 Although gains from trade, nations restrict trade to some
extent
 Tariffs; quotas; other trade restrictions
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