SS 57 -- Principles and Practices of Economics

Name _______________________________________ per. ______ date ___________
SS 57 -- Principles and Practices of Economics
District Test Review Guide
1. Foundations
1. Define economics- The study of how people seek to satisfy their needs and wants by making choices
Explain how scarcity relates to economics- scarcity is that there are limited quantities of resources
to meet unlimited wants
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
Define factors of production- resources that are used to make all goods and services
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
Use a PPC to demonstrate the concepts of: p. 12-14
 opportunity costs
 standard of living
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.
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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.
Market Economy
Mixed Economy
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.
Define consumer sovereignty- is the power of consumers to decide what gets produced
II. Economic Systems
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
SS 57 District Test Review Guide
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
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
Market economy
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
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)
III. Microeconomics
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
SS 57 District Test Review Guide
 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
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
Place the following on your graph: price, quantity, equilibrium, demand, supply and title
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
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18. Define and give an example of each.
1. elastic demand- is very sensitive eto 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.
An effective price floor,
causing a surplus (supply
exceeds demand).
An effective price floor,
causing a surplus (supply
exceeds demand).
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. Meanwhile, consumers find they can now buy the
product for less, so quantity demanded increases. These two actions cause quantity demanded to exceed quantity supplied,
which causes a shortage—unless rationing or other consumption controls are enforced. It can also lead to various forms of
non-price competition so supply can meet demand.
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. Meanwhile, consumers find they can
now buy the product for less, so quantity demanded
increases. These two actions cause quantity demanded to
exceed quantity supplied, which causes a shortage—unless
rationing or other consumption controls are enforced. It
can also lead to various forms of non-price competition so
supply can meet demand.
SS 57 District Test Review Guide
20. Define and provide examples of the following costs to a firm.
1. total cost- _____________________________________________________________________________
Example: materials and labor
2. fixed cost- _____________________________________________________________________________
Example: rent mortgage
3. variable cost- __________________________________________________________________________
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.
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23. a. What is fiscal policy? ______________________________________________________________________
b. Describe the government’s two fiscal policy tools.
1. ____________________________
2. ____________________________
24. How would the fiscal policy tools be used to expand or contract the present economy recession? ________
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 taxis 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
In the United States, there are five "tax brackets." ranging from 10% to 35%. used to calculate the percentage of taxable income (of
If taxable income falls within a particular tax bracket, the individual pays the listed percentage of income on each dollar that falls within that
monetary range. For example, a person in the U.S. who earned $10,000 US of taxable income (income after adjustments, deductions, and
exemptions) would be liable for 10% of each dollar earned from the 1st dollar to the 7,550th dollar, and then for 15% of each dollar earned
from the 7,551st dollar to the 10,000th dollar, for a total of $1,122.50. This ensures that every rise in a person's salary results in an increase of
after-tax salary.
3. regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.[1][2][3][4][5]
"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
A poll tax (a discriminatory tax that was a pre-condition of the exercise of the ability to vote) is a fixed tax for each person. Since each
person pays the same amount of money, it is a lower proportion for people with higher incomes.
A tax with a cap, above which no taxes are paid. The United States payroll tax is an example of this.
The so called sin taxes are also criticized for being regressive, as it is assumed that they are often consumed more (or at least at a greater
proportion) by the lower classes. For example, "people in the bottom income quintile spend a 78% larger share of their income on alcohol
taxes than people in the top quintile." Tobacco in particular is highly regressive, with the bottom quintile of income paying an effective rate
583% higher than that of the top quintile.
26. Discuss major macroeconomic measurements:
1. GDP- _________________________________________________________________________________________________
2. unemployment- ________________________________________________________________________________________
3. CPI- (Consumer Price Index) _____________________________________________________________________________
4. inflation- _____________________________________________________________________________________________
5. national debt- _________________________________________________________________________________________
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6. budget deficit- ________________________________________________________________________________________
7. budget surplus- _______________________________________________________________________________________
V. Money, Banking and Monetary Policy
27. What are the three functions (uses) of money?
1. ____________________________________________
2. ____________________________________________
3. _____________________________________________
28. List six characteristics of money.
1. _____________________
2. __________________
3. ______________________
4. _____________________
6. ______________________
29. Differentiate fiat vs. representative money. fiat money has value because the government says it is an acceptable way to pay
debts and 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: ________________________________________________________________________________________
c. structure: _____________________________________________________________________________________
31. ( see pages 420-429) 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
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. It determines how much money banks can create through loans and investments. Set by
the Board of Governors, the reserve requirement is usually around 10%. This means that although a bank might hold $10 billion
in deposits for all of its customers, the bank lends most of this money out and, therefore, doesn't have that $10 billion on hand.
Furthermore, it would be too costly to hold $10 billion in coin and bills within the bank. Excess reserves are, therefore, held either
as vault cash or in accounts with the district Federal Reserve Bank Therefore, the reserve requirements ensure that depository
institutions maintain a minimum amount of physical funds in their reserves.
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.
* discount rate- is the rate the Federal Reserve charges for loans to commercial banks
SS 57 District Test Review Guide
VI. Personal Finance and Decision Making
32. Compare the different types of profits for investors:
1. interest____________________________________________________________________________________________
2. dividends- _________________________________________________________________________________________
3. capital gains- ______________________________________________________________________________________
33. Define the following key consumer terms:
1. mortgage- ___________________________________________________________________________________________
2. credit rating- ________________________________________________________________________________________
3. collateral- ___________________________________________________________________________________________
4. budget- _____________________________________________________________________________________________
34. Compare investment options:
1. savings- ____________________________________________________________________________________________
2. bonds- _____________________________________________________________________________________________
3. stocks- ____________________________________________________________________________________________
4. mutual funds- ________________________________________________________________________________________
35. Describe the corporate structure from stockholders to workers.
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.
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.
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-today 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.
SS 57 District Test Review Guide
VII. International Trade
36. a. Define export. _____________________________________________________________
b. Define import. ____________________________________________________________
c. How do exports and imports combine to create a nation’s trade balance?
The balance of trade surplus - is the difference between the amount of produced and exported production, and the amount
of imported production. Simply speaking the balance of trade surplus can be calculated according to this formula: Trade
balance = Export – Import
When the balance of trade surplus turns out to be positive, it means that the country’s economy develops in a good way
and the trade balance is in the state of surplus. If the process is opposite and the trade balance is in shortcoming, then there
will surely be some deficit and of course it will have a bad influence on the economical state, national currency and
confidence in country’s lending activity. The trade balance is measured in the currency that the indicator was calculated
from. Consequently, the German trade balance is measured in Euro. It is monthly published and exerts insignificant
influence on the market.
37. a. List and define and give two examples of trade barriers.
1. import quota- ____________________________________________________________________
2. tariff- a tax on imported goods ______________________________________________________
b. How do trade barriers affect trade between countries? limits supply , some negative and positive
effects are increases prices for foreign goods for example imported cars U.S. can compete but Americans
have to pay a higher price: they create trade wars that decreases trade for both countries
38. a. Identify two free trade agreements.
1. NAFTA- is an agreement between the United States, Canada and Mexico that will eliminate all tariffs, and other trade
barriers over time. tariffs on all farm products and other goods 15years,automobiles 10 years, free access to trucks throughout
the three countries; special judges to have authority to resolve trade disputes
2. European Union- (EU)a regional trade organization made up of 27 European countries has its own
currency which is shared by sixteen of its members usually in top 5 in currencies
b. Why do countries develop free trade agreements to reduce protectionism? __________________________________
39. Identify the following issues related to globalization:
1. cultural imperialism- __________________________________________________________________
2. outsourcing- _________________________________________________________________________
3. developing nations- a country with a low level of resources and technology has low standard of living, and life
expectancy, and high infant mortality rate also called low developing countries (LDC)
SS 57 District Test Review Guide