EOCT Study Guide
Project
Hunter Corbett
Fundamental
Economic Concepts
Scarcity
Scarcity: A fundamental economic problem
facing all societies that result from a
combination of scarce resources and
people’s virtually unlimited wants
Trade Offs and Opportunity Costs
Trade Offs: Alternatives that must be given
up when one is chosen rather than another
Opportunity Cost: Cost of the next
best alternative use of money, time, or
resources when one choice is made
rather than another
Production Possibilities Graph
This shows the possible
combinations of goods or services
produced. The further away from
the start point the more effectively
the resources are being used. The
closer to the start, it shows that the
good or service production is not
doing well. This graph also shows
what can be gained or lost at
certain points.
Economic Systems
Traditional
Basic Questions answered by:
Custom and Habit
Advantages: Stable and
predictable economy, Everyone
knows their role
Disadvantages:
Lower standard of living, Don’t
accept new ideas
Examples: Rainforest Tribes
Aborigines, Mbuti
Command
Basic Questions answered by:
Government or Central Agency
Advantages: Change direction
quickly, Many public services
offered for a low cost
Disadvantages: Consumer
wants and needs are not met, No
incentive to work hard
Examples: North Korea, Soviet
Union
Economic Systems
Market
Basic Questions answered by:
Consumers and Producers
Advantages: Adjust to change
quickly, Individual freedom
Disadvantages: Only reward
those who are productive, Public
goods lacking
Examples: USA, France, UK,
Canada, Japan
Mixed
Basic Questions answered by:
Consumers, Producers and
Government
Advantages: Lack of
government interference, Large
variety of goods and services
Disadvantages: Guard against
market failures, Lacking public
goods
Examples: UK, Japan, Germany,
Canada, France
Traditional
Market
Command
Mixe
d
Economic and Social Goals
1. Economic Freedom - people being able to make their
own economic decisions
2. Economic Efficiency - make economic decisions so
that the benefits gained are greater than the cost, it
involves careful use of resources to decrease the
amount of resources that are wasted
3. Economic Equity - people should be paid the same for
the same kind of work, no false advertising, “Lemon
Laws” limited days to return product, include warranties
Economic and Social Goals
4. Economic Security - protection from adverse
economic events= layoff/ illnesses, social security
supports the ill, disabled, elderly, unemployed
5. Full Employment - provide as many jobs as possible if
you want to work you should be able to find a job 5% or
less unemployment rate
6. Price Stability - prices shouldn’t increase too much so
that people can have more goods and services or
freedom from inflation
7. Economic Growth - allows consumers to have more
goods and services to chose from as population grows
Circular Flow Diagram
Revenue
Consumer
Spending
Product
Market
Goods and
Services
Goods
and
Services
Households
Labor and
Resources
Wages
Businesses
Resources
Factor
Market
Pay for
Resources
Microeconomics
Demand
Demand: Represents all the different
amounts of goods and services people will
buy at different prices
Slope - On a demand curve, the slope is
downward
Law of Demand
According to the Law of Demand, when price
goes up
quantity demanded goes down
When price goes down
quantity
demanded goes up
Relation to Price - There is an inverse
relationship between price and demand
Demand Curve and Schedule
Demand Curve: Graph showing
the quantity demanded at
each and every possible price
Price
Quantity
Demanded
$3.00
1
$2.50
1
Demand
Schedule:
Listing
$1.50
2
showing the quantity demanded at all possible prices
$1.00
2
$0.50
3
Factors that Affect Shifting
Moving along the demand curve: changes in quantity
Consumer Income: more income = consumers buy more and shift right
less income = buy less and shift left
Number of Consumers: population increases = more demand and shift right
population decrease = less demand and shift left
Substitutes: goods that can be used in place of other goods, product price
increase = demand for substitute increase and shift right
demand for product decrease = shift left
Change in Expectations: the way people think/feel about future market
demand for new product = shift left
Complements: products that are used with each other, if demand for product
decreases, then demand for complement product decreases and shifts left
Consumer Taste: what is in style and popular, increase in popularity = demand
increase and shift right
decrease in popularity = demand decrease and shift left
Examples of Factors
Increase money
Growing population
Butter and Margarine
New technology
Hot dogs and hot dog buns
New fashion
Supply
Supply: The amount of a product, output,
that producers are willing to bring to the
market at each price
Slope - The slope of a supply curve is
positive
Law of Supply
According to the Law of Supply, when price
goes up
the quantity supplied goes up
When the price goes down
down
supply goes
Relation to price - There is a direct
relationship between price and supply
Supply Curve and Schedule
Supply Curve: a graph of
the information in a
supply schedule
Price
Quantity
Supplied
$1
0
$2
10
$3
20
$4
30
Supply Schedule: a listing
of various quantities of a particular
product supplied at all possible prices
Factors that Affect Shifting
Number of Suppliers: number of people providing a good or service, increase in
suppliers = increase in supply and shift right
decrease in suppliers = decrease in supply and shift left
Technology: items in process used to make products, new technology = increase
in supply and old technology or breakdown = decrease in supply
Government Regulations: mandates from government that businesses must
follow, more regulations = increase in cost and decrease in production and shift
left, less regulations = decrease in cost and increase in production and shift right
Cost of Inputs: land, labor, capital goods used to make products, cost of inputs
increase = decrease in production and shift left, cost of inputs decrease = increase
in production and shift right
Productivity: making of goods and services to connect employee morale,
increase in productivity = increase in supply and shift right, increase in productivity
= supply increase and shift left
More Factors that Affect Shifting
Expectations: beliefs about future prices, belief prices will increase = decrease in
supply and shift left, belief prices will decrease = increase in supply and shift right
Subsidies and Taxes: payment to encourage economic activities, increase
subsidies = increase in supply and shift right decrease in subsidies = decrease in
supply and shift left, taxes are fees paid to the government, increase in taxes =
decrease in supply and shift right and decrease in taxes = increase in supply and
shift left
Prices
Price: The value of a product in money
determined by supply and demand
Price Ceilings and Floors
Price Ceiling: highest legal price that can be charged
Price Floor: lowest legal price that can be charged
Price Shifts
Supply constant
and demand
increase - shift
right
Demand
constant and
supply increase shift right
Supply constant
and demand
decrease - shift
left
Demand
constant and
supply decrease
- shift left
Business Organization - Sole Proprietorship
❏
❏
❏
❏
Number of Owners: one
Management of Business: owner
Receives Profits: owner
Liability: unlimited liability - owner pays all
debts
❏ Life of Business: limited life - business ends
when owner dies
❏ Tax Payments: single Taxation - profit taxed
individuals income
Business Organization - Partnership
❏
❏
❏
❏
Number of Owners: two or more
Management of Business: owners
Receives Profits: owners divide profits
Liability: unlimited liability - owners share
debts
❏ Life of Business: limited life - business ends
when owner dies
❏ Tax Payments: single taxation - profits are
treated like income for owners
Business Organization - Corporation
❏
❏
❏
❏
Number of Owners: any number
Management of Business: board of directors
Receives Profits: divided by shareholders
Liability: limited liability - if business fails then
only investment is lost
❏ Life of Business: unlimited life - continues after
death of stockholder
❏ Tax Payments: double taxation - taxed on
profits and shareholders taxed on dividends
Market Structures
Perfect Competition
Many firms
Identical Products
Easy Entry into Market
Price Taker setting power
Extreme Competition
Example: Agriculture
Monopolistic
Many firms
Similar Products
Easy Entry into Market
Some Price setting power
High Competition
Example: Fast Food
Market Structures
Oligopoly
Firms dominated by Few
Similar Products
Hard Entry into Market
Limited Price setting power
Some Competition
Examples: Cars and Sodas
Monopoly
One firm
No substituted Products
Impossible Entry
Price Maker power
No Competition
Examples: Natural,
Geographic,
Technological,
Pricing of Market Structures
Highest : Lowest Pricing
Monopoly Oligopoly Monopolistic Perfect Competition
Macroeconomics
Gross Domestic Product
GDP: The best measure of US economic
health and shows overall growth that
consists of the total amount dollars of final
goods and services produced within the US
in a year
Formula: c + i + g + (x-m) = GDP
Excluded Products
Intermediate Goods - make final products
already in GDP
Secondhand Sales - Sale of used goods
Nonmarket Transaction - services not paid
for
Underground Economy - unreported or
illegal activities
Examples of Excluded Products
Intermediate Goods
Secondhand Sales
Nonmarket Transactions
Underground Economy
Business Cycle
Monetary Policy
Monetary Policy: Policy used by the Federal
Reserves to expand or shrink the money
supply in order to affect cost and availability
of credit
Monetary Policy during Phases
Expansion Phase
Recession Phase
Fed sells bonds/ Securities
Uses Open Market
Operations
Reserve Regulations increase
Interest Rates Increase
Discount Rates Increase
Shrinks Money Supply
Uses Tight Money Policy
Fed buys bonds/ Securities
Uses Open Market Operator
Reserve Requirements
Decrease
Interest Rates Decrease
Discount Rates Decrease
Expands Money Supply
Uses Easy Money Policy
Fiscal Policy
Fiscal Policy: Policy used by the
Government Revenue Collection, such as
taxes, and expenditure spending to
influence the economy
Fiscal Policy during Phases
Expansion Phase
Taxes Increase
Government Spending
Decreases
“Stepping on the Brake.”
Recession Phase
Taxes Decrease
Government Spending
Increases
“Stepping on the Gas
Pedal.”
Unemployment
Unemployment: People available for work
who have made effort to find a job and
worked for a profit
Formula: Unemployment Rate = % of
unemployed people divided by the total
number of the civilian work force
Types of Unemployment
Frictional -
workers that are between jobs
Example: Working at Burger King then going to McDonald’s
Structural - change in the economy reduces demand for
workers and their skills or employees lack skills
Example: Blacksmith
Types of Unemployment
Technological - results from technology
improvements
that make some jobs obsolete
Example: Robots doing human job
Cyclical - related to changes in business cycle
Example: Layoffs do to cut in production
Seasonal - changes in weather or demand
for products
International
Economics
Absolute and Comparative Advantage
Absolute Advantage: Ability to make more of
something than another nation can
Comparative Advantage: Ability to make
something at a lower opportunity cost than
another nation can
Trade Barriers Types
Tariff - Tax on imports, known as a duty
Quota - Limits placed on the amount of a
good that can be imported
Embargo - Government ordered ban on
trade
Free Trade VS Protectionists
Free Trade
Against trade barriers because:
● They work only if other countries don’t do the same
● have nearly halted trade in past
Free Trade is good because:
● exposes the population to new products
● Makes specialization possible
Free Trade VS Protectionists
Protectionists
● Practice of limiting foreign trade
● National Security - trading makes nation dependent on
imports
● Infant Industries - new industries develop
● Domestic Jobs - barriers can help protect american
workers by making imports cost more than domestic
goods
● Flow of Money - limiting imports helps keep dollars in the
US
● Dumping - practice of exporting goods at a price that is
below the exporting country’s price
Trading Blocks
EU (European Union) - trade zone of 27 european nations
Nations: Belgium, Italy, Netherlands
NAFTA (North American Free Trade Agreement) - no trade
barriers between Canada, USA and Mexico
Nations: Canada, USA, Mexico
ASEAN (Association of SouthEast Asian Nations) - trade
association of 10 southeast nations
Nations: Cambodia, Laos, Malaysia
Exchange Rates
Foreign Exchange Rates: Prices that
currencies are bought and sold
Fixed: The value of a country’s currency if set
at an unchanging rate compared to another
country
Flexible: Supply and demand determine that
value of one’s currency compared to another
US Dollar compared to other Currencies
1 US dollar = .80 Euro
1 US dollar = 8.51 Argentine Peso
1 US dollar = 5.94 Danish Krone
1 US dollar = 1 Bermudan Dollar
1 US dollar = 7.99 Macanese Pataca
1 US dollar = 13.57 Mexican Peso
1 US dollar = 1.26 New Zealand Dollar
EOCT Date: December 9 and 10,
2014