Households and Firms: Economic Decision Making and Specialization

1. Chapter 3 section 1 • Household-the most important economic decision maker, consisting of all those who live under one roof. • Demand goods and services, sellers of resources (ex. Resources). • Choices include what to buy, how much to save where to live,and where to work.

2. Households • Farmers-grow and kill their food. Sew clothing. Farms –fertilizer are need to grown enough food. • Move away from agriculture to factory work. • Require growing large amounts of food for the public, or making large amount clothing and other tools for the households. • Households-now provide labor to make goods and services. • Before it was a one person income per household. • At least today, two incomes per household.

3. Households • Less production occurs at home • More goods and services are purchased in markets. • Reduced household production has led to increase in need/use of child services. • Rise in two-earner families has reduced the significance of specialization within the household.

4. House holds maximizes utility • Households- are assumed to pursue their rational self-interest. (they try to act in their best interest by selecting products and services that are intended to make them better off.) • Households try to maximize their utility. • Utility- their level of satisfaction or sense of well-being. • Depends personal goals, not some objective standard.

5. Firms • A firms is an economic unit formed by a profit-seeking entrepreneur who combines resources to produce goods and services and accepts the risk of profit and loss. • Evolution of the Firm. • Specialization and comparative advantages (household that are no longer self sufficient)

6. continued • Wool sweaters. Sheer sheep (cut the wool of the sheep). Clean and twist the wool into yarn. Yarn is knitted into a sweater. • Suppose you went to different people for each transaction. • Transaction cost-the cost of time and information required for exchange-could cancel out the efficiency gained from specialization. • Sale of the sweater.

7. continued • An entrepreneur by hiring specialist to make many sweater rather than just one, is able to reduce the transaction cost per sweater. • 17th and 18th century, homemade factories creating wool or cotton products were known as Cottage industries.

8. The Industrial Revolution • Technological developments, water power & steam power. • Shift in employment form rural farm to urban factory • Large organized factories • 1.) promote more efficient division of labor • 2.) allowed for the direct supervision of production • 3.) reduced transportation cost

9. continued • 4.) facilitated the use of specialized machines far larger than anything that had been used in the home. • Industrial Revolution, Great Britain 1750 • Profit = Revenue – Cost of Production.