More EOC ReviewECONOMICS

Becky Griffith

Economics

• Economics is

the study of how we use our limited natural resources to produce the goods and services that will satisfy our unlimited needs and wants.

4 Factors of Production

• Land– Natural Resources

• Labor– Physical and Mental

• Capital– Capital Goods

• Management– Entrepreneurship

Major Economic Problem

•SCARCITY–There is not enough!

Fundamental Economic Questions

• What are we going to produce?

• How are we going to produce it?

• Who are we going to produce it for?

• How much are we going to produce today versus tomorrow?

Productivity

• The efficiency with which resources are used in production.

Contributions to Productivity

• Innovation• Technology /

Computerization• Education• New Skills• Lower Taxes / Higher Wages

Law of Diminishing Returns

• A principle of economics that describes a condition that exists when adding more of one factor of production to fixed amounts of other factors of production yields a lesser increase than the previous addition yielded.

Opportunity Cost

• Goods, services, or time given up, because one choice is made rather than another.

• It is a term used to describe the value of a second choice that you give up when you take your first choice.

Trade-offs

• Choices between alternatives with the understanding that using resources for one purpose must be at the expense of another purpose.

• You choose to give up one thing so that you can have something else instead.

Division of Labor• Dividing

production up into specific tasks in order to increase efficiency and to lower costs.

Specialization

• Concentrating a person’s labor (or other function of production) on a single task in order to increase efficiency.

Command Economy• An economics

system in which decisions on the questions of what, how, for whom, and how much are made by the government.

Traditional Economy• An economics

system in which the basic questions of what, how, for whom, and how much are decided by custom.

• Things are done the way they have always been done in the past.

Market Economy• An economics

system in which supply, demand, and the price system help people made decisions and allocate resources.

Adam Smith

• Wealth of Nations

• Capitalism• Invisible Hand• “laissez-faire” • Competition• Free Market

Mixed Economy• An economics

system in which there exists elements of government regulation or ownership and elements of the market system.

Price Competition• A means of competing for greater

shares of the market.

• Pure price competition occurs in those market structures where products are homogeneous and can not compete by product differentiation.

• A homogeneous product is a product that is identical in all firms in the industry that sell it. (i.e. Nails)

Price Competition

• All products of purely competitive markets are homogeneous.

• In purely competitive markets, price competition is the only means of competition available.

• Price competition is

sometimes found

among gasoline companies.

Non-Price Competition

• Form of competition involving the advertising of a product’s appearance, quality, and design, rather than its price.

• A means of attracting a larger part of the market for a product without changing price.

• The main form of non-price competition is called “product differentiation.”

Goods and Services

Factors of Production

Purchases

Rents, Wages, Interest, Profit

Circular Flow of the Economy

Demand

• The willingness on the part of people to buy certain quantities of a product at different price levels.

Quantity

Pri

ce

Supply• The quantity

of goods and services that sellers will offer at various prices during a given time and place.

Pri

ce

Quantity

Point of Equilibrium

• The intersection of the demand and supply curves, indicating the price and quantity at which the product will be sold in the market.

Quantity

Pri

ceSurplus

Shortage

Price Elastic Demand

• A change in price causes a change in the quantity sold.

• Demand for luxuries is elastic.

Price Inelastic Demand

• People want the same amount no matter what the price.

• Demand for necessities is inelastic.

Profits• The basic

incentive for operating a business in capitalism, consisting of the amount of money left over after all costs are paid.

7 Economic / Social Goals

• 1. Economic Freedom– People are free to make economic

decisions. They can choose their occupation and how to spend their money, for example.

• 2. Economic Efficiency– The wise use of scarce resources.

Efficient decision making.

7 Economic / Social Goals

• 3. Economic Equity– Justice, fairness, and impartiality on

the job, in pricing, and concerning advertising, for example.

• 4. Economic Security– Job protection and Social Security.

• 5. Full Employment– Available jobs for all those who want

them.

7 Economic / Social Goals

• 6. Price Stability– Protection from

inflation.

• 7. Economic

Growth– A sure supply of

goods and services to meet future needs and improve the standard of living.

Businesses• Single

Proprietorship– Form of business

organization that places full responsibility on a single owner.

• Partnership– Form of business

organization with two or more owners, having limited life and unlimited liability.

Businesses• Corporation

– Form of business organization requiring a government charter granting the company specific powers separate from those of the individuals who own the firm. These include the right to sue, to be sued, and to issue stock.

Businesses• Cooperative

– Businesses owned and operated by its members for some other reason than profit; cooperatives may buy and sell goods, manufacture and market products, offer services, or supply housing to members only.

Multinational

• A company that does business in more than one nation.

Privatization

• A program to return government-owned and government-operated companies to private ownership.

Labor Union

• An organization of workers formed to give them greater bargaining power.

• They attempt to improve their wages and working conditions through collective action.

Collective Bargaining

• Method of reaching an agreement on wages, working hours, and conditions of work when representatives of business (employers) discuss changes for all with the representatives of the workers.

Mediation

• A method for settling a labor dispute in which a third party helps union and management arrive at an acceptable compromise.

Arbitration

• A manner of settling a labor-management dispute by submitting disagreements to a third party for a decision.

• If a labor contract or law requires all disagreements to be settled this way and both parties must accept the decision, it is compulsory arbitration; otherwise, it is voluntary arbitration.

Tactics

• Strike– Workers withhold their services in

order to pressure management to yield to the workers’ demands.

• Boycott– A group decision designed to put

pressure on another group. Usually a union urging its members and others not to buy from an employer in order to make the employer come to terms.

Money…Physical Characteristics

• Portable

• Durable

• Divisible

• Recognizable

• Acceptable (legal tender)

• Scarce (stable in value)

• Difficult to counterfeit

Trade• Imports

– Goods brought from another country for domestic use. (Taxed)

• Exports– Goods sold to

another country. (Not taxed)

FDIC

• Federal Deposit

Insurance

Corporation is a government agency that insures deposits up to a certain amount in a bank that is covered if that bank should fail.

Federal Reserve System• An agency

created in 1913 to oversee banking and influence the economy through monetary policy.

Monopoly and Oligopoly

• Monopoly is a single seller of a good or service. In general terms, a seller of a good or service who has considerable control over prices and output is said to have some degree of monopoly power.

• Oligopoly is an imperfect market in which a few firms dominate.

GNP• Gross National Product is the

total dollar value of all final goods and services produced by a nation during a given period.

• GNP measures the value of goods and services produced by resources owned by the United States citizens, regardless of where the resources are located.

GDP• Gross Domestic

Product measures the value of goods and services produced by resources within the boundaries of the United States regardless of who owns the resources.

Business Cycle

• The expansion and contraction of business activity in four fairly regular periods…expansion, peak, contraction, trough.

Peak

Expansion

Trough

Contraction

Recession

• The contracting portion of a business cycle, when output declines and unemployment increases.

• The opposite of recovery.

Recovery

• The expanding portion of a business cycle, when output is increasing and unemployment is decreasing.

Inflation• A general

increase in the price level resulting from a decline in the value of money.

• “Too many dollars chasing too few goods”

Consumer Price Index

• The most widely reported measurement of inflation is the consumer price index (CPI).

• The CPI measures the cost of a fixed basket of goods relative to the cost of that same basket of goods in a base (or previous) year.

• Changes in the price of this basket of goods approximate changes in the overall level of prices paid by consumers.

Producer Price Index

• This index measures prices at the wholesale or producer level.

• It can act as a leading indicator of inflation.

• If the prices producers are charging are increasing, it is likely that consumers will eventually be faced with higher prices for good they buy at retail stores.

Stagflation

• Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.

• It is an inflationary period accompanied by rising unemployment and lack of growth in consumer demand and business activity.

Depression• Major slowdown

of economic activity during which millions are out of work, many businesses fail, and the economy operates at far below capacity.

Normal Equilibrium

Inflation

Depression

Recession

Monetary Policy

• Actions to control the money supply by the Federal Reserve System to achieve the 7 economic and social goals.

Monetary Policy

• LOOSE Monetary Policy– Policy designed to stimulate the

economy by making credit inexpensive and abundant.

– Lower interest rates– Lower reserve requirements

Monetary Policy

• TIGHT Monetary Policy– Policy designed to slow the economy

by making credit expensive and in short supply.

– Raise interest rates– Raise reserve requirement

Normal Equilibrium

Tight Monetary Policy

Raise Interest Rates

Raise Reserve Requirements

Loose Monetary Policy

Lower Interest Rates

Lower Reserve Requirements

John Maynard Keynes• Keynesian Economics• Deficit Spending• Advocated for

interventionist government policy, by which the government would use fiscal and monetary measures to mitigate the adverse effects of economic recessions, depressions and booms

• One of the fathers of modern theoretical macroeconomics

Normal Equilibrium

Fiscal PolicyReduce Government SpendingIncrease Taxes

Fiscal PolicyIncrease Government SpendingReduce Taxes

Leading Economic Indicators

• A group of economic variables used to predict the business cycle during the next several months.

Leading Economic Indicators

• ARE THEY UP OR DOWN?

• Number of business failures

• Length of average work-week

• New orders for durable goods• Building contracts (housing starts)

• Index of stock prices

• Change in credit (borrowing)

Taxes…What are they?

• Charges made by the government on individuals and businesses, usually for the purpose of shifting resources from the private to the public sector.

Taxes• Voluntary

Compliance• A system of

taxation that relies on individual citizens to report their income freely and voluntarily, calculate their tax liability correctly, and file a tax return on time.

Taxes• Sales Tax

– Tax on retail products made at the time of purchase

• Income Tax– Tax based on

the amount of taxable income that people receive annually

Progressive Tax

• Tax that takes a larger percentage of income from high income groups than from low income groups

• Income Tax• Brackets

Regressive Tax

• Tax that takes a larger percentage of income from low income groups than from high income groups.

• Sales Tax

Taxes

• Excise Tax– Tax on the sale or use

of specific products or transactions

• Luxury Tax– Excise tax on goods or services

considered to be luxuries rather than necessities. The reason for luxury tax is revenue productivity. (jewelry, yachts, perfumes)

More Taxes• Property Taxes

– Local Tax– Used to fund public

schools– Taxes on the value of

real property (real estate…land, homes) and some personal property (cars, recreational vehicles, boats)

• Use Taxes– Tax on the use of an

item…toll roads

Vocabulary

• Complements / Complimentary Goods– Product often used with another

product

• Substitutes / Substitute Goods– A competing product that

consumers can use in place of another

Vocabulary

• Conglomerates– A corporation made up

of a number of different companies that operate in diversified fields.

• Barter– To trade goods or

services without the exchange of money.

Vocabulary

• Collateral– Property or valuable item serving

as security for a loan

• Mutual Funds– Pools of money from many people

who are invested in a selection of individual stocks and bonds chosen by financial experts

Vocabulary

• Dividend– Payment of a portion

of a company’s earnings

• Open Market Operations– Purchase or sale of

United States government bonds and Treasury bills

Vocabulary• Copyrights

– The owner’s exclusive right to control, publish, and sell an original work

• Patents– A grant made by a

government that confers upon the creator of an invention the sole right to make, use, and sell that invention for a set period of time.

Vocabulary

• White Collar Workers– Refers to employees who

perform knowledge work, such as those in professional, managerial or administrative positions.

• Blue Collar Workers– Refers to employees who

perform manual labor, such as in a factory.

Vocabulary• Bull Market

– A prolonged period in which investment prices rise faster than their historical average

• Bear Market– A prolonged period in

which investment prices fall, accompanied by widespread pessimism.