Economics Final Review

Do Now:
Take out your review sheet. Circle those terms that you are unsure of.

Chapters covered
1 What is Economics? 2 (section 1) Economic Systems 4 Demand 5 Supply 6 (section 2) The Price System at work 9 Sources of Government Revenue 10 Government Spending 13 Economic Performance 14 Economic Instability 15 The Fed and Monetary Policy 16 Achieving Economic Stability 17 (sections 1 & 2) International Trade

What is Economics?

the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the use of scarce resources
Needs vs. Wants Need - Required for survival - water, food, shelter Want - a way of expressing a need - food is a need and Taco Bell is a want.

Microeconomics is the study of how

Individuals Households Businesses Industries

Make economic decisions

Microeconomics revolves around two very important concepts:

Demand Supply

MACROECONOMICS

Part of economic theory that deals with the economy as a whole and decision making by large units such as the United States government

The Fundamental Economic Problem is

Scarcity a lack of resources

You may desire to purchase a but the ability may not be there due to a scarcity of

There is no such thing as a free lunch

What does this mean??? Everything has a cost time and/or money

Scarcity

Choices

Opportunity Costs

Opportunity costs =
the value of the next best choice that one gives up when making a decision... Can be money, time, or resources

Tradeoff choosing between two things Opportunity Cost the thing given up in order to attain the other thing

OR

Wealth = accumulation of products that are tangible, scarce, useful, and transferable from one person to another

Why are some things more valuable than others?

Value- worth of a good or service based on dollars and cents Good- item that is economically useful or satisfies a want 1- Consumer good- intended for purchase by individuals examples- store bought items 2- Capital good- goods that are used to produce consumer goods
example- machines in factories

Service- work or labor performed for someone

Why are some things more valuable than others?

Paradox of Value- Contradiction between the high value of nonessentials and low value of essentials
Essential with little value

Water vs. diamonds

Non- Essential with high value

Utility- capacity to be useful and provide satisfaction Scarcity + Utility = Value

Practice
Economics may best be defined as a(n) A. scientific study of supply and demand. B. study of efforts to satisfy seemingly unlimited wants with scarce resources. C. limited description of economic activities. D. extended application of cost-benefit analysis.

Practice
What is the fundamental problem of economics? A. scarcity B. capital C. the factors of production D. labor

Practice
What are the fundamental questions of economics? Land, labor, capital, and entrepreneurs are the A. results of supply and demand. B. result of production. C. basis of employment. D. factors of production

Practice
Which of the following would most likely be studied in a microeconomics course? A) the cycling trends of unemployment and inflation B) the size of the federal budget deficit C) the interaction between labor and production D) the history of world trade and globalization

Practice
For something to have value it must A. cost a lot of money. B. have utility. C. be on sale. D. never go out of style

Practice
Which of the following is NOT a capital good? A. a bulldozer at a construction site B. a cash register at a clothing store C. an oven at a bakery D. a television set for sale at an appliance store

Practice
The accumulation of economic products that are tangible, scarce, useful, and transferable is A. wealth. B. profit. C. value. D. scarcity.

Practice
The opportunity cost of becoming an entrepreneur is the A) income one could be making in another field B) the value of collateral one puts up for entrepreneurial loans C) the operating costs of the business D) business taxes one pays to the govt

Do Now:
Describe the circular flow of economic activity.

The Circular Flow Model shows how capitalistic societies are economically interdependent.
Economic Interdependence - economic activities in one part of the country or world affect what happens elsewhere

Markets A market is location that allows buyers and sellers to exchange economic products
Examples- supermarket, mall, internet

Two types of markets

Factor Market -where productive resources are bought and sold. Entrepreneurs hire: land in return for rent labor in return for wages and salaries capital in return for interest

Two types of markets

Product Market - where producers sell their goods and services to consumers. Households spend their money on goods and services and businesses get revenue

Productivity
The amount of goods and services produced per unit of input Productivity has an impact on what producers can supply at various prices

Specialization
Leads to greater productivity Workers/business/countries focus on production of one good. Same as division of labor

The PPF helps to answer the economic questions What to Produce? and How to produce it?
Production Possibilities Frontiergraph that shows the various possible combinations of output that can be produced when all resources are fully employed. It is used to show the opportunity costs associated in the production of two items.

All points on the curve represent the use of fully employed resources
What to do with resources available? Point A Country can produce 70 guns and 300 butter Point B 40 Guns and 400 butter

Because of Scarcity point D is impossible for this country to reach at this point

Inefficiency- when resources are not being fully employed

Point e shows the inefficient use of resources

Opportunity Cost
Point A Country can produce 70 guns and 300 butter The opportunity cost of increasing production of butter by 100 units is 30 guns which must be given up

Law of increasing opportunity cost: opportunity cost increases as more of a good is produced. As production of guns increases so the does the amount of butter that must be given up.

Expansion in the production curve

How can the curve move to the right? New Technology Better use of or increases in resources Improvements in labor

Outward movement of curve= economic growth Inward movement= shrinking of the economy

1- What is the opportunity cost of moving from D to E? 3 units of grain

c
d e f

2- What is the opportunity cost of moving from E to C? 7 units of wine 3- Which point on the graph represents resources that are not being fully employed? point a 4- What is one way that point b could be reached? (answers on previous slide)

Demand
The desire and ability to purchase a good or a service Demand represents the consumers point of view

Law of Demand
As the price of an item goes down, demand goes up; as the price of an item goes up, demand goes down.
EXAMPLE: If the price of flip flops is $5 per pair, 50 people may go to buy them. If the price went up to $50 per pair, there may only be five people who would buy them.

Demand Curves & Schedules

Price
$50 Price $25 $5 5 25 Quantity Curve 50 D

Quantity Demanded 50

$5

$25

25

$50

Schedule

Factors which affect demand

Substitutes: can be used in place of other products
ex: butter and margarine

Complements: the use of one increases the use of the other

ex: computers and software

ELASTICITY of DEMAND
Demand Elasticity: the extent to which a change in price causes a change in the quantity demanded Elastic: when a given change in price causes a relatively larger change in the quantity demanded. Inelastic: the given change in price causes a relatively small change in the quantity demanded.

DETERMINING ELASTICITY
1) Can a purchase be delayed? INELASTIC If a consumers need is urgent and can not be put off demand tends to be inelastic. (Diabetes Insulin, Tobacco addictive) 2) Are adequate substitutes available? ELASTIC If they are people can switch back and forth between them. (Gasoline from a particular station. However, gas as a whole is inelastic) 3) Does the purchase use a large portion of income? If yes then demand tends to be elastic, if no demand tends to be inelastic.

Supply
The desire and ability to sell a good or service to people Supply represents the producers point of view

Law of Supply
As the price of an item goes up, supply goes up; as the price of an item goes down, supply goes down.

EXAMPLE: If the price of flip flops is $5 per pair, 50 people may go to buy them; however, the store might only stock 5 pairs. If the price went up to $50 per pair, there may only be five people who would buy them; however, the store would want to make a lot of money so they would make sure they had 50 pairs on the shelves.

Supply Curves and Schedules

S

50 25 5 $5 $25

Price $5 $25

Quantity Supplied 5 25 50

Quantity

$50

Price

Curve

$50

Schedule

Demand and Supply Curves and Schedules

$50 D Surplus S

Quantity Demanded 50

Price $5 $25 $50

Quantity Supplied 5 25 50

Price

$25

Equilibrium

25
$5 5 Shortage

5
25
Quantity

50

Curve

Schedule

Government Regulations and the Price System

Price Ceiling maximum legal price that can be charged for a product (ex: rent control) Price Floor lowest legal price that can be charged for a product (ex: minimum wage)
Price

$50

D Surplus

S Price Floor

$25

Equilibrium

Price Shortage $5 5 25
Quantity

Ceiling

50

Practice
Draw a market equilibrium graph for a milk. Identify the equilibrium price. Identify the equilibrium quantity. Illustrate what happens when demand for milk decreases. What happens to equilibrium price/quantity? If the price of cookies goes up, what will happen to equilibrium price for milk?

Do Now:
Identify and explain the 3 basic types of economic systems.

Economic Systems
All Societies have something in common - what is it? An Economy 3 types of Economies:
Traditional: allocation of scarce resources and nearly all other economic activity stems from rituals, habitat, or custom. Roles are defined by the customs of the elders. Ex: African tribes, Australian Aborigines, Inuits Command: a central authority makes most of the WHAT, HOW, and FOR WHOM decisions. Ex: North Korea and Cuba Market: People and firms act in their own best interest to answer the WHAT, HOW, and FOR WHOM questions. Ex: United States

Practice
How does the demand curve respond to an increase in demand? A) the curve shifts left B) the curve shifts right C) movement along the curve D) no change

Practice
All of the following are examples of complements EXCEPT A) butter and margarine B) flashlights and batteries C) peanut butter and jelly D) cameras and film

Practice
A company decreases the price of milk by 10% and the companys total revenues fall significantly. What term best describes the demand for milk? A) elastic B) inelastic C) unit elastic D) demand elastic

Practice
Price floors that are artificially high are likely to cause A) a price ceiling B) a surplus C) an equilibrium D) a shortage

Practice
Which of the following is NOT a strength of a market economy? A) it can adjust to change over time B) it gives producers and consumers freedom C) it has decentralized decision making D) it supports all of its people

Economic Indicators
GDP- Gross Domestic Product- Includes everything that is produced within a countrys borders GNP- Gross National Product- Anything that is produced by a company headquartered in a specific country or produced by a countrys citizens EX: TOYOTA (Japanese Company) If produced in the US, would count for US GDP If produced in the US, would count for Japans GNP APPLE (American Company) If produced in China, would count for Chinas GDP If produced in China, would count for USs GNP

What is NOT included in GDP?

underground economy, resale items, intermediate products, services and goods bought and sold off the books

Other Economic Indicators

Unemployment rate - The percentage of the work force that are willing and able to work but do not have jobs.
Frictional Structural Cyclical -- Seasonal -- Technological

Full Employment lowest possible unemployment rate considered to be below 4.5%

Who does the labor force consist of?

Other Economic Indicators

Inflation- The general rise in prices. Inflation is measured by a Price Index Demand-Pull too much money chasing too few goods aggregate demand outpaces aggregate supply - Cost-Push - caused by large increases in the cost of important goods or services where no suitable alternative is available
Who is hurt the most by inflation? Lenders, those on a fixed income

Other Economic Indicators

CPI- Consumer Price Index looks at a market basket of goods and services to calculate the rate of inflation - Prices are compared to prices during the base year in order to determine the rate of inflation

Draw the Business Cycle

Recession:

GDP falls for 2 consecutive quarters (6 months)

Do Now:
What are the three types of taxes? How is each one applied?

Government Spending
The federal budget is presented by the President of the U.S. and approved by Congress Federal, State and Local governments raise money through taxation.

Three Types of Taxation

Progressive Tax people with more income pay a higher percentage of that income in taxes than do those with less income. Ex income tax PROGRESSIVE TAX
Income Family A Family B Family C $10,000 $50,000 $100,000 % income paid in tax 10% 20% 30% Amount of tax $1,000 $10,000 $30,000

Three Types of Taxation

Regressive Tax everyone pays the same amount, regardless of income; therefore, the percentage of income paid in tax is greater for lower-income people

REGRESSIVE TAX
Income Family A Family B Family C $10,000 $50,000 $100,000 % income paid in tax 20% 4% 2% Amount of tax $2,000 $2,000 $2,000

Three Types of Taxation

Proportional Tax
takes the same percentage of income from all income groups

PROPORTIONAL TAX
Income Family A Family B Family C $10,000 $50,000 $100,000 % income paid in tax 20% 20% 20% Amount of tax $2,000 $10,000 $20,000

Assessing Fairness in Taxation

Benefits Received Principle A concept of tax fairness that states that people should pay taxes in proportion to the benefits they receive from government goods and services Ex: people who use a toll road should pay the toll; people who use a park should pay the park fees.

Assessing Fairness in Taxation

Ability to Pay Principle A concept of tax fairness that states that people with different amounts of wealth or different amounts of income should pay at different tax rates. Ex: Progressive income tax

Government Spending
Federal Budget has two categories of spending
Discretionary Mandatory (Only Social Security, Medicare and Interest Payments on National Debt)

Government Spending
Budget Surplus - revenues exceed expenditures Budget Deficit - expenditures exceed revenues National Debt - amount of money borrowed to cover our deficit

Practice
All of the following are included in GDP EXCEPT A) B) C) D) The income from a garage sale The value of a new car The value of a new house The sale of an ice cream cone

Practice
All of the following are basic sectors of the United States economy EXCEPT A) B) C) D) Income sector Consumer sector Government sector Investment sector

Practice
An assembly line worker in an automobile plant is laid off during a recession. She is A) B) C) D) Seasonally unemployed Frictionally unemployed Cyclically unemployed Technologically unemployed

Practice
What are two phases of the business cycle? A) B) C) D) Peak and trough Depression and recession Depression and expansion Recession and expansion

Practice
Paying $1,000 tax on $10,000 of taxable income, $4,000 on $20,000 of taxable income, and $20,000 on $60,000 of taxable income is an example of a tax system that is A) proportional B) regressive C) progressive D) average

Practice
The ability to pay principle of taxation states that A) only people who have the ability to pay should be taxed B) those who benefit from government services should pay for them C) people should be taxed according to their ability to pay D) the govt should assess taxes only if it is clear that citizens will have the ability to pay

Functions of Money $$$

Medium of exchange: It can be used to purchase goods and services. Unit of account: It can be used to compare the value of different goods and services. Store of value: It can be held to buy something in the future.

Monetary Policy
Determined by the Federal Reserve, or the Fed Concerned with LONG TERM economic health ex: inflation, money supply

Tools of Monetary Policy

Open Market Operations buying and selling government securities Adjusting the discount rate the interest rate charged on short-term loans to banks by the Federal Reserve Adjusting reserve requirements the percentage of deposits that banks must keep on reserve in their vaults or on deposit with the Fed

Tight (Contractionary) Monetary Policy

Recommended when the economy is in danger of creating inflation
raise reserve requirement raise discount rate sell bonds
all of these decrease the money supply

Loose (Expansionary) Monetary Policy

Recommended when the economy is showing signs of low economic and employment growth
lower reserve requirement lower discount rate buy bonds
all of these increase the money supply

Fiscal Policy
Determined by the President and Congress Concerned with SHORT TERM economic health ex: unemployment Stabilize the economy through taxing and spending

Demand-Side Policies
Designed to increase or decrease total demand in the economy Keynes only the government is big enough to step in and offset changes in investment sector spending
Expansionary increase government spending, lower taxes Contractionary decrease government spending, raise taxes

Supply-Side Policies
Designed to stimulate output and lower unemployment by increasing production rather than demand
Smaller role for government DEREGULATION Lower federal taxes