Document 15555254

1. Define economics- The study of how people seek
to satisfy their needs and wants by making choices
2. Explain how scarcity relates to economicsscarcity is that there are limited quantities of resources
to meet unlimited wants
3. Differentiate between
opportunity costs – is the most desirable alternative
given up as the result of a decision
trade offs- is an alternative that is sacrificed when a
decision is made
4. Define factors of production- resources that are
used to make all goods and services
5. List and explain the three factors of
1. land- is the natural resources that are put into production
or used to make goods and services
2. labor- is the human effort of man power used in the
production process
3. capital- is any man made resource, such as equipment or
tools, that is used to create other goods and services
6. Use a PPC to demonstrate the concepts of: p. 12-14
Marginal Opportunity Cost The production possibilities
curve also reflects opportunity costs, since to get more of
one good we have to sacrifice some of the other. The
marginal opportunity cost measures the amount of a
good that has to be sacrificed for each additional unit of
the other good.
When everyone is working on houses we can produce 20
houses annually. If we wanted 2 computer programs we
would have to sacrifice two houses. Thus the marginal
opportunity cost would be 1 house for each additional
computer program. Who would be the individuals we
would want to move from construction to
programming? Likely those individuals who are good at
programming and not very good at building houses.
Economic Growth
Recall the PPC is based on a fixed set of resources and technology. As new
resources are discovered, such as new oil deposits in Wyoming, we are able to produce more as a
society. If the quality of the resources improves, we are able to shift the PPC outward. A workforce with
a bachelors degree would be more productive than one with only an elementary education. As a society
grows, including immigration, there are more workers that are able to produce more goods and services.
Technology also plays a key role in the growth of an economy. As new technologies are developed,
resources are freed up to produce other goods and services. A society that produces capital goods (e.g.,
machinery) today foregoes the benefit of the consumer goods that could have been produced, but is then
able to increase the production of goods and services in the future due to the machinery and other
improvements that have been made. In 1950, one farmer in the U.S. fed 15 other people. By 1995, that
number had increased to 128 and continues to rise. As technology advances and farmers use more and
more capital, not as many people are required to be in agriculture and are able to go produce cars, TVs,
and other goods and services that we enjoy.
7. Draw and label a circular flow diagram.
b. How does the above represent consumers and
businesses in the market?
In the circular flow model, the inter-dependent entities of
producer and consumer are referred to as "firms" and
"households" respectively and provide each other with factors in
order to facilitate the flow of income. Firms provide consumers
with goods and services in exchange for consumer expenditure
and "factors of production" from households.
Government taxes businesses and households to pay for the
productive resources it uses to provide certain kinds of goods
and services to households and businesses.
8. Define consumer sovereignty- is the power of consumers
to decide what gets produced
9. List and describe five features of a market economy. (capitalism)
1. Self interest- means that buyers and sellers are focused on personal gain
2. competition- is the struggle among producers for the dollars of
3. incentive- for consumers is the hope of reward or the fear of punishment
that encourages people to behave in a certain way; Incentives for business is
selling more goods for more profit
4. laissez faire- is the doctrine that states that government generally should
not intervene in the marketplace
5. consumer sovereignty- is that consumers decide what gets produced
because businesses want to meet the consumers desires.
10. Compare and contrast the major types of economics. List 3 benefits and 3
costs of a market economy
1. market economy- decisions on production and consumption of goods and services
are based on voluntary exchange
2. mixed economy- combines the free market with limited government
3. command economy- the central government makes all decisions on the production
and consumption of goods and services
incentives to produce, more
variety of products,
more varied income, more income
greater efficiency, personal
satisfaction, economic freedom
unemployment/shifts in factors,
negative externalities
private ownership, higher standard of
living, encourages innovation and
poverty/homelessness, wealth gap,
less economic security
11. Describe the works/theories of:
1. Adam Smith- (Father of modern economics)
believed that in each transaction, the buyer and seller
consider their self interest or personal gain
2. Karl Marx- believed that human labor was the source of
all added value but keeps it as profit or exploiting the
3. John Maynard Keynes- believed that government
intervention may be needed in crisis situations to pull
the economy out of depression (pump money into the
12. List and describe the three basic types of business organizations.
Discuss the advantages and disadvantages of each business type
1. sole proprietorship- a business owned and managed by a single
2 advantages- easy to form; flexibility in decision making, no corporation
taxes; personal satisfaction; no sharing of profits; fewer government
 2 disadvantages- limited life; limited capital$; unlimited liability; limited
size; less specialization
2. partnership- owned by two or more persons who agree on specific
2 advantages- easy to for; flexibility in decision making; no corporation
taxes; personal satisfaction; fewer government regulations; more capital$
 2 disadvantages- management disagreements; limited life; unlimited
3. corporation- owned by individual stockholders and run by a board of
2 advantages- more capital$; specialization;, unlimited life; greater
efficiency; limited liability
 2 disadvantages- double taxes; government regulations; and organizing
capital, expenses and charter; less flexibility in decision making
a. What is the role of stockholders in financing
corporations? stockholders must invest money to buy shares to
finance and to part of the corporation * (they are considered the
b. What is the role of government in regulating
corporations? to make sure the corporations follow the
regulations they set such as filing quarterly and annual reports
to the SEC and taxation
a. Define the law of demand. consumers buy more of
a good when its price decreases and less when increases
b. Define the law of supply.
is the tendency of suppliers to offer more of a good at a
higher price
15. Draw and label a supply and demand graph. Illustrate changes in
demand and supply. p. 126
Supply and Demand Curve
16. List and describe the four market structures.
1. perfect competition- is when a large number of
firms all produce the same product
2. monopoly- a system that is dominated by a single
3. monopolistic competition- when many companies
sell products that are similar but not identical
4. oligopoly- is when a few large firms dominate a
17. Define elasticity of demand. is a measure of how
consumers react to a change in price
18. Define and give an example of each.
1. elastic demand- is a very sensitive change in price
example: the demand for a particular brand
2. inelastic demand- is not sensitive to a change in
example: goods with no substitutes
water, gas,
3. unitary (unit elastic) demand- is a demand
whose elasticity is equal to 1
example: equilibrium
19. Define a price floor and a price ceiling and provide a graph that shows
what a price floor and ceiling cause. p. 129
1. price floor- a government- or group-imposed limit on how low a price can
be charged for a product. For a price floor to be effective, it must be greater
than the equilibrium price. Causes a surplus
2.price ceiling- A price ceiling is a government-imposed limit on the price
charged for a product.
A price ceiling set below the free-market price has several effects. Suppliers
find they can't charge what they had been. As a result, some suppliers drop
out of the market. This reduces supply and creates a shortage.
Summary of Microeconomics
Create questions and answers for the following
vocabulary, topics, or ideas
marginal cost
elasticity of demand
law of demand
inelastic demand
to create a surplus or shortage
variable costs
demand curve shift
major types of market structures
20. Define and provide examples of the following costs to a firm.
1. total cost- fixed costs plus variable costs
Example: materials and labor
2. fixed cost- is a cost that does not change
Example: rent mortgage
3. variable cost- may rise of fall depending on the quantity produced
Example: raw materials
4. marginal cost- is the cost of producing one more unit of a good
Example: hiring a new worker
21. What is the golden rule of profit maximization? occurs at a point
where marginal cost equals marginal revenue. Thus, the optimal level of
production occurs where marginal revenue equals marginal cost, the point of
maximum profit as dictated by the golden rule.
IV. Measurement and Fiscal Policy
22. Draw and label a business cycle.
a. What is fiscal policy? the use of government
spending and revenue collection (taxes) to influence the
economy (expand or contract)
b. Describe the government’s two fiscal policy tools.
1. taxes
2. spending
24. How would the fiscal policy tools be used to
expand or contract the present economy recession?
The government would increase spending and cut taxes
25. What are the three major types of taxes? Give one
example of each.
1. proportional or flat tax
a tax imposed so that the tax rate is fixed. The amount of the
tax is in proportion to the amount subject to taxation.
"Proportional" describes a distribution effect on income or
expenditure, referring to the way the rate remains consistent
(does not progress from "low to high" or "high to low" as
income or consumption changes), where the marginal tax rate is
equal to the average tax rate.
Example: same percent taken from everyone regardless of income
With a proportional or flat tax, each individual or household
pays a fixed rate. For example, low-income taxpayers would
pay 10 percent, middle-income taxpayers would pay 10
percent, and high-income taxpayers would pay 10 percent. The
sales tax is an example of a proportional tax because all
consumers, regardless of income, pay the same fixed rate.
2. progressive tax
is a tax by which the tax rate increases as the
taxable base amount increases. "Progressive"
describes a distribution effect on income or
expenditure, referring to the way the rate
progresses from low to high, where the average
tax rate is less than the marginal tax rate.
Example: the more a person makes the higher the
percentage that is taken out takes more from the
wealthier people
3. regressive tax
is a tax imposed in such a manner that the tax rate
decreases as the amount subject to taxation increases.
"Regressive" describes a distribution effect on income or
expenditure, referring to the way the rate progresses from
high to low, where the average tax rate exceeds the
marginal tax rate. In terms of individual income and
wealth, a regressive tax imposes a greater burden (relative
to resources) on the poor than on the rich — there is an
inverse relationship between the tax rate and the
taxpayer's ability to pay as measured by assets,
consumption, or income
Example: sales tax -takes a larger amount from low
income people
26. Discuss major macroeconomic measurements:
1. GDP- total value of all goods and services produced in a year
2. unemployment- people not in the labor force 16 and over, not retired, and are
looking for a job
3. CPI- (Consumer Price Index) a price index determined by “market basket”
4. inflation- a general increase in prices
5. national debt- all the money the federal government owes to bond holders
6. budget deficit- is when a government spends more money than it takes in
7. budget surplus- is when the government takes in more than it spends
V. Money, Banking and Monetary Policy
27. What are the three functions (uses) of money?
1. medium of exchange
2. unit of account
3. store of value
28. List four characteristics of money.
1. durability
2. portability
3. divisibility
4. uniformity
5. scarcity
6. acceptability
29. Differentiate fiat vs. representative money.
fiat money has value because the government says it is an
acceptable way to pay debts
 representative money are objects that have value because
can exchange them for something else of value
30. Provide a short response about the FED.
a. history: after several banking crisis’s, Congress passed the Federal
Reserve Act
b. purpose: to have a more centralized power to deal with a crisis,
stabilizes the banking system. Overseen by the 7 member Board of
Governors, chosen by the president with the advice and consent of the
c. structure: there are 12 Federal Reserve districts
31. What are the three tools of the Federal Reserve? How
does each tool work to expand or contract the economy?
1. Open-Market Operations –
The Fed constantly buys and sells U.S. government securities in the
financial markets, which in turn influences the level of reserves in the
banking system. These decisions also affect the volume and the price
of credit (interest rates). The term open market means that the Fed
doesn't independently decide which securities dealers it will do
business with on a particular day. Rather, the choice emerges from an
open market where the various primary securities dealers compete.
Open market operations are the most frequently employed tool of
monetary policy.
Expand: the Federal Reserve Bank buys government securities on
the open market
Contract: the Federal Reserve Bank sells bonds to bond dealers
which takes the money out of circulation
2. Setting the Discount Rate –
This is the interest rate that banks pay on short-term
loans from a Federal Reserve Bank. The discount rate is
usually lower than the federal funds rate, although they
are closely related. The discount rate is important
because it is a visible announcement of change in the
Fed's monetary policy and it gives the rest of the market
insight into the Fed's plans.
 Expand: decrease the *discount rate
 Contract: increase the *discount rate
discount rate- is the rate the Federal Reserve
charges for loans to commercial banks
3. Setting Reserve Requirements –
This is the amount of physical funds that depository
institutions are required to hold in reserve against
deposits in bank accounts.
Expand: reducing would allow banks to make more
loans which would increase the money supply
Contract: increasing even a small amount would force
banks to hold more money in reserves which would
cause the money supply to shrink or contract.
1. T- F One function of money is that it is a medium of exchange
2. T-F Durability, portability, uniformity , acceptability,
scarcity, and invisibility are all characteristics of money.
3. T-F Money is scarce because it is unlimited.
4. T- F Fiat money has value because the government says it is an
acceptable way to pay debts.
5. T-F The purpose of the government is to stabilize the banking
6. T-F The 3 tools that the FED uses to regulate the money supply
are open-market operations, setting the discount rate and
reserve requirements .
7. T-F The rate the Federal Reserve charges for loans to commercial
banks is called the fed rate.
8. T-F When the FED uses expansionary measures, it only expands
money supply?
VI. Personal Finance and Decision Making
Types of Financial Institutions
1. Commercial banks
2. Credit unions
3. Savings and loans
Functions of a bank
1. keeping deposits and
2. making loans
32. Compare the different types of profits for investors:
1. interest- is the price for the use of borrowed money or money earned from
deposited funds
2. dividends- is the portion of corporate profits paid out to stockholders
3. capital gains- is the difference between a higher selling price and lower
purchase price, resulting in a financial gain for the seller
33. Define the following key consumer terms:
1. mortgage- is a loan used to buy real estate
2. credit rating- is an evaluation made by credit bureaus of a
borrower’s overall credit history
3. collateral- is property used to secure a loan
4. budget- is a plan for saving and spending
34. Compare investment options:
1. savings- is depositing money that may be needed within a
short period of time (low interest)
2. bonds- is a formal contract to repay borrowed money with
interest at fixed rates
3. stocks- is a certificate of ownership in a corporation
4. mutual funds- pools the savings of many individuals and
invests this money in a variety of stocks, bonds and other
financial assets
35. Describe the corporate structure from stockholders to workers.
a. Board of Directors and Officers' Role in a Corporation
The primary responsibility of the board of directors is to protect the
shareholders' investment. They are elected by the shareholders for
this reason. The board of directors reports on the business’s success
and progress to the shareholders, normally via an annual or quarterly
report. While not involved in the daily operations of the business,
they set its mission and structure. The board of directors is
responsible for drafting and amending the company by-laws and
appointing committees as necessary. They, along with officers, are
protected from the company’s liabilities.
The board appoints the officers. The officers are the president or CEO
(chief executive officer), the vice president, treasurer and secretary of
the corporation. These people are appointed by and report to the
board of directors. They are responsible for business operations. Their
main responsibility is to act in the best interests of the corporation.
This may or may not always align with the board of director’s wishes.
b. The Employee's Role in a Corporation
Employees are those who make the business run. They carry out the
various tasks associated with the company's mission. Employees
report to the officers of the company.
c. Shareholders or Owners' Role in a Corporation
The shareholders own the corporation. That ownership may be 100
percent in the hands of one individual, divided within a family or a
few individuals, or spread among tens of thousands or millions.
Though shareholders may not participate in day-to-day management
or have a direct say in decision-making, major shareholders
nonetheless carry great weight in influencing corporate decisions.
This group routinely votes on election and removal of directors,
amending by-laws, major corporate changes (mergers, sales,
dissolution), disposition of corporate assets, and amendment of the
Articles of Incorporation. Other shareholders may participate in these
activities, but to a lesser extent. The level of shareholder influence on
the board of directors is one of many things to consider when forming
a new corporation.