Unit one: Chapters 1-6 o Because we have scarce resources, we must make wise economic decisions.

o What to produce o How to produce o For whom to produce o Opportunity cost is the cost of the next best alternative use of money, time, or resources when one choice is made rather than another o Ex. If you buy a CD, the opportunity cost is the book you could have bought with that money instead o A production possibilities frontier is a diagram representing various combinations of goods and/or services an economy can produce when all productive resources are fully employed (23) o It shows possible alternatives, like how much butter v guns to produce o It shows the opportunity cost of producing more butter o It shows the cost of idle resources, like a strike or unused land o It shows how economic growth, like a larger population, increases productivity and allows the possibilities frontier to expand o Command economy o Government makes the what, how, and for whom decisions o Advantages Can change direction drastically in a short time Health and public services are available to everyone, regardless of income o Disadvantages Not designed to meet the need of the consumers Does not give people an incentive to work hard Requires a large decision making bureaucracy Does not have the flexibility to deal with minor problems and discourages even the smallest adjustments o Market Economy o People and firms act in their best interest to answer what, how, and for whom o Advantages Can adjust to change Has a high degree of individual freedom Little gov interference Decision making is decentralized, not concentrated in the hands of the few

 Large variety of goods and services available High degree of consumer satisfaction o Disadvantages Does not Provide basic needs to everyone Doesnt provide enough of the services that people value highly Ex. Education Uncertainty for workers and owners Must guard against market failures o Law of Demand (98) o The quantity demanded of a good or service varies inversely with its price o So, when the price goes up, quantity demanded goes down o Change in demand is caused by a change in Income Tastes Price of related goods Expectations Number of consumers o Change in substitutes effects demand Substitutes are products that can be used in place of one another, like butter and margarine If the price of butter rises, the demand for margarine increases o Change in complements effects demand Complements are related goods and the use of one increases the use of another, like computers and software If the price for computers rises, less consumers will buy computers and software o Law of Supply (115) o More will be offered for sale at high prices and less at lower prices o The market supply curve shows the quantities offered at various prices by all firms that offer the product for sale o As price goes up, the amount a producer supplies will also go up o Change in supply is caused by Cost of inputs (labor, packaging, ect.) Productivity Technology Taxes and subsidies Expectations

 Gov regulations Number of Sellers o The supply graph can shift as inputs, productivity, ect. change o Elasticity o The measure of responsiveness that shows how a dependent variable such as quantity responds to an independent variable such as price o Demand elasticity The extent that change in price effects quantity demanded Demand is elastic when a given change in price causes a relatively larger change in quantity demanded Ex. Prices for fresh fruit are lower in the summer so the demand significantly increases Inelastic demand is when a given change in price cause a relatively smaller change in quantity demanded Ex. If salt prices are cut in half, the demand wouldnt increase very much Unit elastic demand is when a given change in price causes a proportional change in quantity demanded Ex. A 5% price drop would cause a 5% increase in demand Elasticity is estimated using the total expenditure test Total expenditure is found by multiplying the price of the product by the quantity demanded, representing a point along a curve (103) Determinants of demand elasticity (106) Can the purchase be delayed? Are adequate substitutes available? Does purchase use a large potion of income? More no= inelastic, more yes= elastic o Supply elasticity The measure of how quantity supplied responds to change in price Supply is elastic when a small increase in price leads to a relatively larger increase in output Supply is inelastic when the quantity supplied changes very little in response to a change in price

 o Price o o o

Supply elasticity is determined on the nature of the products production. If a firm can adjust quickly to a price change than supply is likely to be elastic

(146) When prices are too high, surpluses force them down When prices are too low, shortages for them up Prices serve as the link between producers and consumers Allocate scarce goods and services Favor neither producer or consumer Flexible and allow buyers and sellers to change their production and consumption accordingly Accommodate to change o Equilibrium price is when there is no surplus or shortages, where the supply and demand curves intersect

Unit two: Chapter 12 o Basic investment Considerations o Analyze risk-return relationship o Consider your reason for investing and investment objectives o Stay with what is simple and you are comfortable with o Invest consistently over long periods of time o Think about 401(k) plans A tax-deferred investment and savings plan for employees o Bonds o When gov or firms need to borrow funds for long periods, they issue bonds o Bonds are long-term obligations that pay a standard rate of interest for a specified number of years o Coupon is the stated interest on the debt o Maturity is the life of the bond o Par value is the total amount initially borrowed that must be repaid to the lender at maturity o Credit o Market Efficiency o Portfolio diversification is the practice of holding a large number of different stocks so that increases in some can offset unexpected declines in others o Measures of stock Performance o Dow-Jones Industrial Average (DJIA) The most popular and publicized measure of stock market performance on the NYSE

The New York Stock Exchange is the oldest, largest, and most prestigious of organized stock exchanges located on Wall St. It publishes the average closing price for 30 stocks o Standard and Poors 500 Uses the price changes of 500 representative stocks as an indicator of overall market performance It reports of the NYSE, AMEX, and OTC o Rule of 72 Simplified way to determine how long an investment will take to double, given a fixed annual rate of interest Just divide 72 by the % of return Ex. $1 invested at 10% would take 7.2 years (72/10 = 7.2) to turn into $2. In reality, a 10% investment will take 7.3 years to double (1.10^7.3 = 2) Unit three: Chapters 9 & 10 o Incidence of tax (225) The incidence of tax is the final burden of the tax Ex. A utility company that is taxed will raise rates, shifting the burden of the tax to the consumers It can bed predicted using a supply and demand analysis If there is an elastic demand, it is hard for the producers to shift the burden to the consumers, so they absorb most of the cost If the demand is inelastic, it is easier for the producers to raise prices and not loose consumers, so consumers will pay for most of the tax To shift the tax from the supplier to consumer, it must be an inelastic product o FICA Second most important federal tax The Federal Insurance Contributions Act levied on both employees and employers to pay for social security and Medicare Medicare is a federal heath-care program available to all senior citizens 65 and older regardless of income

o o

Social Security is a federal program of disability and retirement benefits that cover most working people Employers and employees share equally in paying for SS and Medicare taxes These taxes are called payroll taxes because they are deducted from your paycheck Corporate Income Tax The tax a corporation pays on its profits Mandatory Spending Spending authorized by law that continue without the need for annual approvals of Congress Includes interest payments on borrowed money, Social Security, and Medicare An estimated 2/3 of the federal budget consists of mandatory spending Discretionary spending Programs that must receive annual authorization Includes how much to spend on programs like the military, Coast Guard, and welfare Deficits, Surplus, and the National Debt The federal deficit is an excess of expenditures over revenues The federal debt is the total amount borrowed from investors to finance the governments deficit spending The federal debt is about 15.9 trillion When the federal gov runs a deficit, it finances the shortage by borrowing The Department of Treasury sells bonds, totally up to the federal debt

Unit three: Chapters 9 & 10 o Gross Domestic Product o The dollar value of all final goods and services, and structures produced within a country in a year o GDP is computed by multiplying all final goods and services by their prices, then add them up to get the total value of production o GDP is described with the output-expenditure model o GDP = C + I + G + (X-M) C is the consumer sector Ex. Groceries, books, cars I is the investment of business sector

Ex. Offices, equipment, paper G is the government sector Education, health care, military X is the foreign sector This is calculated using the net exports of goods and services This is the difference between the USs imports and exports Economic Sectors and Circular Flow (347) o The largest sector in macro economy is the consumer of private sector Its basic unit is the household Consumer Price Index o Reports of price changes for 80,000 items in 364 categories o Prices for the goods and services sampled are taken from 85 areas around the country and compared to their 198284 base year price Phases of the Business Cycle o Study graph on 376 and know all the terms o Recession is a period where real GDP declines for at least two quarters o Peak is the point where real GDP stops going up o Trough is when the GDP stops going down o Expansion is a period of recovery from recession o Trend line is the line of best fit and the economy returns to it as it passes from recession to expansion o Depression is a severe recession where there are large numbers unemployed Kinds of Unemployment o Frictional unemployment Unemployment caused by workers who are between jobs Can be caused by new people moving into the labor force Will always exist because workers will always be in between jobs o Structural unemployment Occurs when a fundamental change in operations of the economy reduces the demand for workers and their skills Caused when demand shifts, like from buggies to cars o Cyclical Unemployment

 Unemployment related to swings in business cycle Often caused by lay-offs during a recession o Seasonal Unemployment Resulting from changes in weather or seasons o Technological unemployment Caused when workers with less skills are replaced by machines This is when workers face the threat of automation o Inflation and Stagflation o Inflation is a rise in the level of prices o Causes According to the demand-pull theory, people try to buy more goods then available, and shortages cause prices to go up Another possible cause is the federal gov deficit spending Another possibility is that the rising cost of labor drives up the cost of products Some say this is a natural cycle as workers ask for high wages, then prices do up The most popular explanation is the monetary growth When the Federal Reserve system issues more money, prices go up o Lorenz Curve (395) o Shows how the actual distribution of incomes varies from equal distribution o If all households received the same income, the curve would be a straight line o From 1980 to present, the curve has become even more drastic, showing that the majority of the money is in the hands of the few o Federal Reserve o The federal reserve was the nations first central bank