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 production. 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 consumers 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 involvement 3. command economy- the central government makes all decisions on the production and consumption of goods and services Benefits Costs incentives to produce, more production, variety of products, more varied income, more income inequality greater efficiency, personal satisfaction, economic freedom unemployment/shifts in factors, negative externalities private ownership, higher standard of living, encourages innovation and technology 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 workers 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 economy) 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 individual 2 advantages- easy to form; flexibility in decision making, no corporation taxes; personal satisfaction; no sharing of profits; fewer government regulations 2 disadvantages- limited life; limited capital$; unlimited liability; limited size; less specialization 2. partnership- owned by two or more persons who agree on specific responsibilities 2 advantages- easy to for; flexibility in decision making; no corporation taxes; personal satisfaction; fewer government regulations; more capital$ 2 disadvantages- management disagreements; limited life; unlimited liability 3. corporation- owned by individual stockholders and run by a board of directors 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 13. 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 owners) 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 14. 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 Price Supply and Demand Curve Demand Supply Equilibrium Equilibrium Quantity 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 seller 3. monopolistic competition- when many companies sell products that are similar but not identical 4. oligopoly- is when a few large firms dominate a market 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 price example: goods with no substitutes water, gas, utilities 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 partnership corporation elasticity of demand law of demand inelastic demand to create a surplus or shortage variable costs demand curve shift major types of market structures monoploly stockholder SEC 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. 23. 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” measuring 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 Senate 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. Questions 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 system 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 ADD TO NOTES 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.