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ABILITY-TO-PAY PRINCIPLE: A principle of taxation in which taxes are based on the income or resource-ownership ability of people to pay the tax. The income tax collected by our friends at the Internal Revenue Service is one of the most common taxes that seeks to abide by the ability-to-pay principle. In theory, the income tax system is set up such that people with greater incomes pay more taxes. Proportional and progressive taxes follow this ability-to-pay principle, while regressive taxes, such as sales taxes and Social Security taxes, don't.

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Lesson 22: Factor Supply | Unit 1: Background Page: 5 of 25

Topic: Circular Flow <=PAGE BACK | PAGE NEXT=>

  • Factor markets are only part of the economic picture.

  • This diagram depicts the basic circular flow of the economy.

  • The circular flow is the continuous production and consumption interaction among the household and business sectors that takes place through the product and resource markets.
  • Examining the circular flow more closely.

  • Two Sectors:

    • Household
    • Business

  • The household and business sectors interact through Two Markets:

    • Product Markets
    • Resource Markets

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ABSTRACTION

Simplifying the complexities of the real world by ignoring (hopefully) unimportant details while doing economic analysis. Abstraction is an essential feature of the scientific method. Hypothesis verification, model construction, and comparative static analysis are not possible without abstraction.

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Today, you are likely to spend a great deal of time at the confiscated property police auction seeking to buy either a birthday gift for your mother or a weathervane with a horse on top. Be on the lookout for cardboard boxes.
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A scripophilist is one who collects rare stock and bond certificates, usually from extinct companies.
"Defeat is simply a signal to press onward. "

-- Helen Keller, author, lecturer

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American Bankers Association, Associate in Business Administration
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