EOCT REVIEW
The major concepts
Fundamental Economics
BRIGHT IDEAS
MARKET ECONOMY

1. The U.S. has a market economy which features
private ownership of businesses and very little
government interference. Voluntary Exchange is
also a BIG component of a market economy. This
means that buyers and sellers come together to
exchange goods/services. One other important
feature of a market economy is the price system.
This means if you’ve got the $, someone has the
good/service! The price system is based on income.
BRIGHT IDEAS
TRANSFER PAYMENTS

2. Payments given by the government to an
individual with no service required in return. A
good example of transfer payments are: Welfare,
WIC, Social Security, disability benefits, TANF,
Medicare, Medicaid
BRIGHT IDEAS
CAPITAL
Human Capital

This involves investing
in a PERSON. This
could be training for
an employee, college
or school to make the
employee more
productive.
Physical Capital

This is an investment in
technology, equipment,
machinery to improve
PRODUCTION.
BIG IDEAS
PPC
A
5000
B
C
Illustrates Scarcity, Choice,
and Trade-off’s
D
4000
H
E
Points A-G = Maximum Output
Point I = Lagging Production
Point H = Impossible
Military Goods
3000
I
2000
F
1000
G
0
1000
2000
3000
4000
5000
6000
Consumer Goods
Microeconomics
Supply and Demand, Decisions by Individuals or
a Business
Circular Flow
Product Market
Businesses
Households
Factor Market
Supply and Demand
Surplus
30
25
Price Floor
Ex. Minimum wage
Price
20
Equilibrium Price
15
10
5
Price Ceiling
Ex. Apartment Rent
Controls
Shortage
0
5
10
15
20
25
30
35
40
45
50
55
60
Quantity
Business Organizations
What is it?
One person
SoleProprietorship
2 or more owners
Partnership
Corporation
•Apply for legal
charter,
• gov’t views as
separate entity
•sell shares of
company as stock
Advantages
Disadvantages
Total profit, total
control
Responsible for all
the debt – unlimited
liability
Share profit,
responsible for all
debt– unlimited
liability
Specialization,
share responsibility
Easy to raise
money –
stockholders earn
profit on stocks
Investors have
limited liability –
not responsible
for company debt
Complex
organization,
difficult decision
making process
Market Structures
Characteristics
Example
Locally grown vegetables
Perfect (Pure)
Competition
Large number of buyers and sellers
nearly identical products
Price takers – can’t control market
Monopolistic
Competition
Many competing producers
Product differentiation
Advertising is essential
Under Armour
The North Face
McDonalds
a few large firms control the market
Pricing decisions depend on
behavior of other firms
Soft Drinks – (Coke/Pepsi)
Car Manufacturers
one corporation has total control of
the market
ex. Technological (patent)
or natural monopoly
(utilities)
Oligopoly
Monopoly
Macroeconomics
Use of resources in the entire nation – GDP,
Unemployment, Inflation, Monetary Policy, Fiscal
Policy
Economic Indicators



Why are they important? Economic Indicators tell us
how the economy is performing. Is the economy in a
recession, expansion, sick or healthy?
SICK = Stagflation means the economy is NOT
growing (stagnant) and has high inflation. A.K.A.
RECESSION or DEPRESSION
HEALTHY = low unemployment, low inflation, high
GDP.
A.K.A. EXPANSION
Economic Indicators



3 types Unemployment
Structural (skills don’t match the job)
Frictional ( looking for a better job)
Cyclical (based on the business cycle)
CPI (Consumer Price Index) measures the rate of inflation
which compares the price of goods/services each year
GDP measures economic growth
Debt vs. Surplus
DEBT


Deficit means spending
more money than you
have
National Debt is all
the years of
government deficit
added together
SURPLUS


Surplus means taking
in more than you
spend
Budget Surplus is
based on the year-toyear (fiscal year)
Congressional budget
Monetary vs. Fiscal Policy
MONETARY POLICY


THE FED
The Federal Reserve either
increases or decreases the
amount of money available to
the public

Reserve requirement

Discount rate

Open Market Operations (buy or
sell)
FISCAL POLICY

CONGRESS
 TAXES
 SPENDING
International Economics
International Economics studies countries and
their involvement with other countries with trade,
imports and exports, and currencies.
Comparative vs. Absolute Advantage
Comparative Advantage


ability to produce a good
or service at a lower
opportunity cost than
another nation can
Individuals and businesses
are using comparative
advantage when they
SPECIALIZE in producing
what they are best at and
trading for the rest
Absolute Advantage

ability to produce
more of a good or
service than another
nation can.
Free Trade
Arguments FOR Free Trade


If all countries produced what
they were best at –
comparative advantage- and
traded for the rest, everyone
would benefit.
Production and GDP would
increase for all countries. This
would deliver the greatest
goods to the greatest number
of people.
Arguments AGAINST Free Trade




Protection of national
security
Protection of infant
industries
Protection of jobs
PROTECTIONISM
Trading Blocs/Trade Barriers
What do they do? Eliminates trade barriers with
neighboring countries which leads to increases in GDP and
productivity.
 EXAMPLES: NAFTA, EU, ASEAN
Trade Barriers
 Advantages: protect domestic industries – reduces foreign
competition – protects jobs, Increase government revenue –
can reduce budget deficit
 Disadvantages: Fewer Choices and higher prices for
consumers, encourages other nations to impose trade
barriers against the U.S., hurting American exporters
 EXAMPLES: NAFTA, EU, ASEAN

Exchange Rates




Price of one nation’s currency in terms of another nation’s currency.
Changes based on world demand for each country’s exports worldwide
When the dollar is WEAK (DEPRECIATION):
U.S. exports increase and the price of exports go up
Travel abroad is more expensive for American tourists
U.S. imports decline and the price of imports increases
Foreign investment in U.S. businesses increases.
When the dollar is STRONG (APPRECIATION):
Imports increase and are cheaper for consumers to buy
Travel abroad is cheaper for American tourists
U.S. exports decline
The U.S. trade deficit increases.
Personal Finance
Taxes

3 Types of Taxes
 Proportional
– everyone pays the same portion or
percentage – flat tax – ex. Social Security 6.2%
 Progressive – the more you make, the higher
percentage you pay in taxes – ex. Income tax
 Regressive - people with lower incomes pay a higher
tax percentage than those with higher incomes – ex.
Sales Tax.
Insurance




People buy insurance to protect themselves
financially for unexpected events that could be very
expensive
Examples – health, property, car, life, disability, life,
accidental
Pay a PREMIUM (amount per month, quarter) to
guarantee coverage
The insurance company takes the money people pay
in premiums to pay claims.
Budgeting



Fixed expenses – those that do not change from
month to month – house payment, car payment
Variable expenses – exact dollar amount changes
from month to month – power bill, water bill
Disposable income – amount a person has leftover
after all bills and necessities have been paid
Credit and Interest

Credit Worthiness – to borrow money you must have good credit
(good credit score)

Depends on your:




Credit History – how well you have managed your bills and credit in the past
(Credit Score)
Collateral - property you have that the bank could take from you if you do
not pay the loan
Creditworthy – are you able to pay the money back given your income and
current expenses
Interest – money charged for borrowing money
Interest paid – you can get paid interest for investments
 Interest charged – you will be charged interest if you borrow money
APR – Annual Percentage Rate – interest rate on a credit card
