Fundamental Economic Concepts
1. Explain why limited productive resources and unlimited wants result in scarcity,
opportunity costs and trade offs for individuals, businesses and governments.
a. Wants are unlimited, the total resources of a society including natural
resources, human resources, capital goods and entrepreneurship are
limited resulting in scarcity. All wants cannot be filled, trade-offs are
inevitable when deciding what to produce.
2. Define scarcity as a basic condition which exists when unlimited wants exceed
limited productive resources
a. Scarcity exists because human wants exceed the capacity of available
resources. This basic problem of scarcity is faced by all individuals,
organizations, businesses and governments.
3. Define and give examples of productive resources (Factors of Production) as land
(natural), labor (human), capital (capital goods), entrepreneurship
a. Land = natural resources;
b. Labor = people with their education, skills and abilities;
c. Capital = the goods and services used to make other consumer goods
and services;
d. Entrepreneurs = individuals who take the risk and combine the
productive resources (factors of production) to produce goods and
services and profit by selling these to consumers.
4. Identify strategies for allocating scarce resources
a. See Chart. The different strategies include, price, contests, force,
sharing, lottery, command, 1st come 1st served, personal characteristics.
5. Define opportunity cost as the next best alternative given up when individuals,
businesses and governments confront scarcity by making choices.
a. Opportunity cost is what you give up to obtain something else, one good
or service for another. Governments often have to decide on one good
or service at the expense of another. Trade-off is giving up one benefit
or advantage in order to gain another one that may be better.
6. Provide examples of how rational decision making entails comparing the marginal
benefits and the marginal costs of an action.
a. We make choices to satisfy needs or to seek happiness! We look at the
options, compare costs, benefits, and the trade-offs involved with each
choice and reach a decision.
b. Marginal Cost = the additional cost of producing one more unit.
c. Marginal Benefit = the additional satisfaction or utility of consuming
one more unit.
7. Illustrate by means of a production possibilities curve the trade-offs between two
options
a. Production Possibilities Curve
A table or graph that shows the full employment capacity of an
economy in the form of possible combinations of two goods, or two
bundles of goods, that could be produced with a given amount of
productive resources and level of technology.
a. Moving from point B to C indicates that this society now prefers to build more
consumer goods and less capital goods. This is the trade-off when choosing a
different combination of goods
8. Explain that rational decisions occur when the marginal benefits of an action
equal or exceed the marginal costs.
a. Economic decisions are made on the basis of comparing marginal costs and
marginal benefits. There are not many all or none decisions. Almost all
decisions are marginal, we don’t typically make a decision between studying all
day or watching TV all day, we choose between studying a little more and
watching a little less TV or vice versa.
9. Explain how specialization and voluntary exchange between buyers and sellers
increase the satisfaction of both parties. Provide examples of how individuals and
businesses specialize
a. Division of Labor refers to the practice of dividing the work to make
something into separate tasks. Workers become specialized in different
tasks. We earn a living by doing tasks, taking our wages to purchase
goods and services from other workers. Division of Labor and
Specialization is the basis for an economy to exist. 3 benefits are doing
it better, no time required to switch tasks, create more effective ways to
do the task.
10. Explain that both parties gain as a result of voluntary, non-fraudulent exchange.
a. We don’t make all of our electronic devices, countries do not make all of
the goods and services they need. Specialization is the basis of trade and
interdependence among individuals, businesses, cities, regions and
countries. Wisconsin = dairy Florida = oranges.
11. Compare and contrast different economic systems, and explain how they answer
the three basic economic questions of what to produce, how to produce and for
whom to produce.
a. Every society must contend with the problem of scarcity. Every society,
regardless of its political structure, must develop an economic system to
determine how to use its limited productive resources to answer the three
basic economic questions.
What goods and services will be produced?
How will goods and services be produced?
Who will consume the goods and services?
The way a society answers these questions determines its economic system.
a. Three types of economic systems exist to answer these questions.
Traditional – In a traditional economy, economic decisions are based on
custom and historical precedent.
Command – In a centralized command economy, government planning
groups make the basic economic decisions. They determine such things as
which goods and services to produce, their prices, and wage rates.
Market – In a decentralized market economy, economic decisions are
guided by the changes in prices that occur as individual buyers and sellers
interact in the market place (which it is also referred to as a price system).
Other names for market systems are free enterprise, capitalism, and
laissez-faire.
12. Compare command, market, and mixed economic systems with regard to private
ownership, profit motive, consumer sovereignty, competition, government
regulation
13. Economic systems are characterized by how they answer the three basic economic
questions
i. Command (centralized) Economy - the issues of production and
distribution are resolved through central planning and control
ii. Market (decentralized) Economy - market prices are determined
by consumers and producers, all pursuing their own self-interest.
iii. Mixed Economy - there are no pure market or command
economies, most economies today contain both command and
market characteristics
iv. Profit Motive - the desire to make money causes people to work
hard to produce goods and services.
v. Consumer Sovereignty - people are free to choose without
government interference or regulation
vi. Competition - consumers compete with other consumers for
goods and services, producers compete with other producers for
consumers.
vii. Governmental Regulation - the government intervention in the
decisions of consumer and producers in the market.
14. Evaluate how well each type of system answers the three economic questions and
meets the broad social and economic goals of freedom, security, equity, growth,
efficiency and stability
a. Economic Freedom - freedom of choice by consumers and producers.
b. Economic Security - protection against some risks as consumers and
producers
c. Economic Equity - Fairness? Right or wrong? Equal opportunity?
Equal distribution of wealth and income?
d. Economic Growth - an increase in the production of goods and services
over time, measured by real GDP, 3 to 4 % is a reasonable and
sustainable yearly growth rate.
e. Economic Efficiency - allocation of resources so that no one is hurt at
the expense of someone else gaining, lower costs to produce.
f. Economic Stability - maintain stable prices, full employment and
economic growth
15. Describe the roles of government in a market economy.
a. Government establishes the rules of the game, gov’t involved in the
market, public goods, gov’t as a business (national defense),
environmental concerns, monetary system.
16. Explain why government provides public goods and services, redistributes
income, protects property rights and resolves market failures.
a. Public Goods and Services - Those goods and services that cannot be
easily be restricted to those who pay for them. Shared consumption and
non-exclusion determine what a public good is.
b. Income Redistribution – The re-allocation of wealth and income, 3/4ths
of national income is wages.
c. Property Rights – legal ownership of resources, government’s role is to
protect property rights.
d. Market Failures – private police or military, imperfect information in the
market, pollution costs.
17. Provide examples of government regulation and deregulation and their effects on
consumers and producers.
a. Comparing the expected costs of a new policy or a change in an existing
policy to the expected benefits.
18. Explain how productivity, economic growth and future standards of living are
influenced by investment in factories, machinery, new technology and the health,
education and training of people.
19. Define productivity as the relationship of inputs to outputs
a. The quantity of output per unit of input, an increase in productivity can
be more goods and services created with the same amount of resources
or the same amount of goods and services with less resources. More
productive workers lead to a higher standard of living.
20. Provide illustrations of investment in equipment and technology and explain their
relationship to economic growth
a. Improvements in education, experience, skill level of the workforce
(human capital), greater amounts of physical capital, improved
technology.
21. Provide examples of how investment in education can lead to a higher standard of
living
a. High investments in education, physical and human capital equals
higher productivity, low inflation, political stability and free trade.
Microeconomic Concepts
22. Describe how households, businesses, and governments are interdependent
and interact through flows of goods, services, and money.
a. Illustrate by means of a circular flow diagram, the Product market; the
Resource (factor) market; the real flow of goods and services between and
among businesses, households, and government; and the flow of money.
b. Explain the role of money as a medium of exchange and how it facilitates exchange.
Money – anything used to buy and sell goods and services. 3 functions of money:
Medium of exchange – generally accepted as a form of payment.
Store of value – retains value over time.
Unit of account – value is measured in units of money.
23. Explain how the Law of Demand, the Law of Supply, prices, and profits work to
determine production and distribution in a market economy.
a. Define the Law of Supply and the Law of Demand.
i. Law of Supply – all other factors being equal, as the price of a
good or service increases, the quantity of goods and services
offered by suppliers increases and vice versa.
ii. Law of Demand – all other factors being equal, as the price of a
good or service increases the quantities consumers demand for
the good or service will decrease and vice versa.
b.
Describe the role of buyers and sellers in determining market clearing
price.
i. The market clearing price (equilibrium) results in neither
shortages or surpluses. Transactions in a market economy are
voluntary so they must benefit both buyers and sellers.
c. Illustrate on a graph how supply and demand determine equilibrium price and quantity.
Market Equilibrium
d. Explain how prices serve as incentives in a market economy.
a. The price and quantity exchanged are determined by supply and demand,
prices provide incentives for both buyers and sellers. Prices provide
information to consumers and producers about market conditions on supply
and demand.
24. Explain how markets, prices, and competition influence economic behavior.
25. Identify and illustrate on a graph factors that cause changes in market supply and
demand.
a. Factors that cause changes in market supply – explain how they affect
supply
1. Cost of inputs
2. Productivity
3. Technology
4. Taxes and Subsidies
5. Expectations
6. Government regulations
7. Change in the number of sellers
8. Weather/natural disasters
Price
Price
Increase in Supply
Decrease in Supply
b. Factors that cause changes in market demand – explain how they affect
demand
1. Consumer income/wealth
2. Consumer tastes and preferences (advertising)
3. Change in the price of substitute goods
4. Change in the price of complementary goods
5. Change in expectations
6. Change in number of consumers
Price
Increase in Demand
Price
Decrease in Demand
b. Explain and illustrate on a graph how price floors create surpluses and price ceilings
create shortages.
Price floor - a legally established minimum priced – examples are farm products
and minimum wage laws. Too much milk produced, too many workers seeking a
higher minimum wage. Designed to help suppliers, some will not be able to sell
their goods because of lack of demand.
Price ceiling – legally established
maximum price, an example
would be rent control. Too many renters, not enough apartments. Designed to
help consumers, the quantity demanded tends to exceed the quantity supplied.
c. Define price elasticity of demand and supply.
Price elasticity of demand – a way of measuring how much quantity demanded
will change in response to a change in price.
Price elasticity of supply – a way of measuring how much quantity supplied will
change in response to change in price.
26. Explain the organization and role of business and analyze the four types of market
structures in the U.S. economy.
a.
Compare and contrast three forms of business organization—sole
proprietorship, partnership, and corporation.
i. Sole proprietorship – a business owned by one person.
A. Advantages- ease of start-up, ease of management, owner
gets all profits, full control, easy to stop, business itself is
exempt from tax on income.
B. Disadvantages- unlimited liability, difficulty in raising
financial capital, amount of work, limited life.
ii. Partnership – a business jointly owned by two or more people.
A. Advantages- ease of start-up, each partner brings a skill,
larger pool of capital, lack of special taxes on partnerships.
B. Disadvantages- each partner is responsible for the business,
unlimited liability (unless LLP or limited liability
partnership), limited life, potential for conflict.
iii. Corporation – a business organization that is owned by stock
holders and recognized by law as a separate legal entity having
all the rights of an individual.
A. Advantages- ease of raising financial capital thru the sale of
stock or bonds, limited liability of owners, unlimited life, ease
of transferring ownership.
B. Disadvantages- difficult to start, owners/shareholders often
have little or no power to run the corporation, more legal
requirements, double taxation.
b. Explain the role of profit as an incentive for entrepreneurs.
Entrepreneurs are willing to risk their resources in order to sell them for financial gain
or profit, and are successful when providing goods and services valued by consumers.
Successful entrepreneurs are willing to assume risk, have unique skills, discipline to
work long and hard to earn income, learn skills valued by others.
27. Identify the basic characteristics of monopoly, oligopoly, monopolistic
competition, and pure competition.
a. Monopoly – a market structure in which there is a single supplier of a
good or service that there is no close substitute for. Example – public
water.
b. Oligopoly – a market structure in which a few, relatively large firms
account for all or most of the production or sale of a good or service in a
market, barriers to new producers are high. Examples are cars, airlines,
and movie studios.
c. Monopolistic competition – a market structure where slightly different
products are sold by a large number of relatively small producers,
barriers to new firms are low. An example would be jeans and gas
stations.
d. Pure competition – a market structure theory in which a large number of
relatively small firms produce and sell identical products, there are no
barriers to enter the market and it is easy to exit from the market, the
best example would be agricultural products like wheat.
Macroeconomic Concepts
Illustrate the means by which economic activity is measured.
28. Explain that overall levels of income, employment, and prices are determined by
the spending and production decisions of households, businesses, government,
and net exports.
Define
Gross
29. Domestic Product (GDP), economic growth, unemployment, Consumer Price Index
(CPI), inflation, stagflation, and aggregate supply and aggregate demand.
a. Gross Domestic Product (GDP) – the market value of all goods and services
produced in a calendar year.
b. Economic Growth – an increase in real output as measured by real GDP or per
capita real GDP
c. Unemployment – the number of people in the civilian workforce over the age of
16 without jobs who are actively seeking work.
d. Consumer Price Index (CPI) – a price index that measures the cost of a fixed
basket of consumer goods and services, compares the costs from other time
periods and is used to measure inflation.
e. Inflation – a rise in the general or average price level of all goods and services
in an economy, (caused by demand-pull or cost-push)
f. Stagflation - a decline in real GDP combined with a rise in the average price
level
g. Aggregate Supply (AS) – the value of output (real GDP) that would be produced
at different price levels in a nation’s economy.
-3-
h. Aggregate Demand (AD) - the value of output (real GDP) that would be
demanded at different price levels in a nation’s economy.
30. Explain how economic growth, inflation, and unemployment are calculated.
a. Economic growth is measured by GDP, Inflation is measured by CPI, the
polling of 50,000 households to create an unemployment rate (total unemployed
divided by the total workforce)
31. Bureau of Economic Analysis- www.bea.gov (economic growth)
Bureau of Labor Statistics- www.bls.gov (inflation, unemployment)
32. Identify structural, cyclical, and frictional unemployment.
a. Structural Unemployment – skills of workers do not match up with the skills
required by employers.
b. Cyclical Unemployment – caused by the fluctuations in the overall rate of
economic activity or a phase in the business cycle.
c. Frictional Unemployment – some are always unemployed, often it is the
choice of the worker for a variety of reasons.
33. Define the stages of the business cycle, include peak, contraction, trough,
recovery, expansion as well as recession and depression.
a. Business cycle – changes in the overall rate of national economic activity
with alternating periods of expansion and contraction, varying in duration
and severity and measured by real GDP
b. Peak – the height of economic expansion, real GDP stops rising.
c. Contraction – a period of economic Decline Marked by falling GDP.
d. Trough – the lowest point in an
Economic contraction, real GDP
stops falling.
e. Recovery – the period following a
recession during which real
GDP rises.
f. Expansion – a period of economic growth
as measured by a rise in real GDP.
g. Recession – a decline in national economic activity, measured by a decline
in real GDP for at least two consecutive quarters (6 months).
h. Depression – a severe and prolonged economic contraction.
34. Describe the difference between the national debt and government deficits.
a. National Debt – the public debt, all of the annual budgets deficits added
together.
b. Government Deficits – the government spends more money (expenditures) in
a fiscal year than it takes in (revenue) during that time.
35. Explain the role and functions of the Federal Reserve System.
a.
Describe the organization of the Federal Reserve System.
Chairman, Board of governors, FOMC, 12 district banks.
b.
Define monetary policy.
Monetary Policy – changes in the money supply, availability and cost of
credit set by the Fed to promote economic growth, price stability and full
employment.
c. Describe how the Federal Reserve uses the tools of monetary policy to
promote price stability, full employment, and economic growth.
a. Open Market Operations – the buying and selling of government
securities (T-bonds, T-notes- T-bills) by the Fed, to increase money
supply – buy back bonds, to decrease money supply – sell bonds.
b. Discount Rate – the interest rate the Fed charges banks that borrow
money from the Fed.
c. Federal Funds Rate – the overnight lending interest rate between
banks utilizing federal funds (funds on reserve in a bank).
d. Reserve Requirements – the fraction of bank deposits required by the
Fed to be kept on hand. Banks must have this money (federal funds)
available in their vault.
36. Explain how the government uses fiscal policy to promote price stability, full
employment, and economic growth.
a.
Define fiscal policy.
i. Fiscal Policy – the spending (expenditures) and tax collection
(revenue) of the government to influence economic activity.
b.
Explain the government’s taxing and spending decisions.
ii. Government taxation – revenue raised through taxes to pay
for expenditures.
iii. Government expenditures – goods and services purchased by
the government with tax revenues or borrowed money.
INTERNATIONAL ECONOMICS
Fundamental Economic Concepts
37. Explain how specialization and voluntary exchange between buyers and sellers
increase the satisfaction of both parties.
38. *Provide examples of how individuals and businesses specialize
a. Division of Labor refers to the practice of dividing the work to make
something into separate tasks. Workers become specialized in different
tasks. We earn a living by doing tasks, taking our wages to purchase goods
and services from other workers. Division of Labor and Specialization is
the basis for an economy to exist. 3 benefits are doing it better, no time
required to switch tasks, create more effective ways to do the task.
39. Explain that both parties gain as a result of voluntary, non-fraudulent exchange.
a. We don’t make all of our electronic devices, countries do not make all of the
goods and services they need. Specialization is the basis of trade and
interdependence among individuals, businesses, cities, regions and
countries. Wisconsin = dairy Florida = oranges.
INTERNATIONAL ECONOMICS
40. Explain why individuals, businesses and governments trade goods and services.
41. Define and distinguish between absolute advantage and comparative
advantage
a. Comparative Advantage – the ability to produce a good or service at a lower
opportunity cost than some other producer (the economic basis for
specialization and trade)
b. Absolute Advantage –. the ability to produce more units of a good or service
than some other producer, using the same quantity of resources.
42. Explain that most trade takes place because of comparative advantage in the
production of a good or service
a. COMPARATIVE ADVANTAGE – every country should produce and trade
the good in which it has a comparative advantage. The good or service in
which the opportunity cost is lowest. Staying with comparative advantage
yields the biggest gains in trade
b.
BENEFITS OF TRADE – international trade equals increased competition,
increased variety of goods available to consumers, spreads new technology
and production methods, helps low-income countries.
43. Explain the difference between balance of trade and balance of payments
a. Balance of Trade – a comparison of imports and exports of goods and
services.
b. Balance of Payments – the record of all transactions in trading good and
services between countries and is expressed in monetary terms (dollars)
44. Explain why countries sometimes erect trade barriers and sometimes advocate
free trade
a.
define trade barriers as tariffs, quotas, embargoes, standards and
subsidies
i. Tariff – a tax on imported goods and services.
ii. Quotas – a limit on the quantity of a product that may be
imported or exported.
iii. Embargoes – to impose certain conditions before granting
consent to import a good or service.
iv. Standards – expectations of minimal levels of quality that
must be met or extra safety standards.
v. Subsidies – financial assistance from government to an
enterprise or business, often considered to be beneficial to the
public.
45. Identify costs and benefits of trade barriers over time
a. Designed to prevent imports and protect domestic industries and producers,
protectionism is an attempt to protect a nation’s economy, trade barriers
may save jobs in one area and at the same time destroy jobs in another area.
46. List specific examples of trade barriers
a. Tariffs, import quotas, non-tariff barriers like additional administrative
requirements, regulations or unnecessary procedures.
47. List specific examples of trading blocks such as the EU, NAFTA, ASEAN
EU – European Union
NAFTA – North American Free Trade Agreement [US/Canada/Mexico
ASEAN – Association of Southeast Nations
MERCOSUR – Common Market of the South [Latin America]
Other players on the world stage:
BRIC – Brazil, Russia, India, China
GATT – General Agreement of Tariffs and Trade
WTO – World Trade Organization
IMF – International Monetary Fund
World Bank
48. Evaluate arguments for and against free trade.
a. The arguments most often heard AGAINST free trade…
Keep jobs in America, keep our money in our country, national security,
other nations treat their workers unfairly, other nations dump cheap stuff
in our country, other countries keep our products from being sold in their
country.
b. The argument FOR free trade….
Lower prices for goods, more variety in goods and services, higher
standard of living because of increased income as a result of lower prices.
49. Explain how changes in exchange rates can impact the purchasing power of
individuals in the United States and in other countries.
Exchange rate is the amount of one country’s currency that is equal to one
unit of another country’s currency (Dollar vs. yen). Exchange rates are
determined by supply and demand. All countries typically want to be paid
in their country’s currency.
50. Define exchange rate as the price of one nation’s currency in terms of
another nation’s currency
Exchange Rate – the price of one nation’s currency in terms of another
nation’s currency.
51. Locate information on exchange rates – process skill
Rate at which one currency may be converted into another. The exchange rate is used
when simply converting one currency to another (such as for the purposes of travel to
another country), or for engaging in speculation or trading in the foreign exchange
market. There are a wide variety of factors which influence the exchange rate, such as
interest rates, inflation, and the state of politics and the economy in each country - also
called rate of exchange or foreign exchange rate or currency exchange rate.
52. Interpret exchange rate tables – process skill
1 to 1
GBP
CAD
EUR
AUD
MXN
1
0.62116
0.99310
0.76360
0.95497
12.94772
1.60988
1
1.59878
1.22931
1.53739
20.845083
1.00695
0.62548
1
0.76891
0.96160
13.037616
1.30958
0.81346
1.30055
1
1.25061
16.954413
1.04716
0.65045
1.03993
0.79961
1
13.554086
0.07723
0.05897
0.07669
0.05898
0.07376
1
USD
USD
GBP
CAD
EUR
AUD
MXN
53. Explain why, when exchange rates change, some groups benefit and others
lose.
When demand for a country’s currency rises faster than the supply of its
currency, the value of the currency will rise
Personal Finance Concepts
54. Apply rational decision making to personal spending and savings choices.
Decision making – rational consumers seeking their own happiness or utility
will make choices, everyday consumers consider their options and trade-offs
and try to make the choice that brings them the greatest satisfaction.
55. Explain that people respond to positive and negative incentives in predictable
ways
Incentives are costs and benefits that motivate a decision or action by
consumers, workers or firms in an economy. Incentives matter in each and
every decision. Concerns like higher and lower prices, wages and interest
rates.
56. Use a rational decision making model to select one option over another
P – What is the PROBLEM?
 What decision are you trying to make?
 What is the issue at hand?
A – What are the ALTERNATIVES?
 What actions are you considering?
 What options are available to you in this decision?
C – What are the CRITERIA important to the decision?
 What goals do you hope to accomplish in making your
decision?
 What characteristics are you looking for in your result?
 Which criteria are more important than others? How do
you rank them?
E – EVALUATE each alternative.
 Evaluate each alternative on the basis of each criterion.
 Give each alternative a plus (+) or a minus (-) according
to how well it meets each criterion.
D – Make a DECISION.
 Calculate the net value of each alternative; which alternative
best meets your highest-ranking criteria?
 What do you gain with each alternative?
 What do you give up with each alternative?
57. Decision-Making Grid
A graph-like form into which people may enter notations about the costs and
benefits of various alternatives; used for assistance in making decisions.
58. Using the decision grid below, evaluate each option and then decide which choice
you would have made.
Evaluate each
alternative as:
+ = Greater benefit
than cost
? = Equal or
questionable benefit
and cost
- = Greater cost than
benefit
Criteria
Alternative
Option #1
Option #2
Option #3
Criterion A
Criterion B
Criterion C
Criterion D
Ranking ___
Ranking ___
Ranking ___
Ranking ___
Using the decision grid, rank the candidates in order of preference
1________________
2________________
3________________
Create a savings or financial investment plan for a future goal.
Spend or Save? Saving and investing go together, postponing current consumption or
rewards for greater future benefits. Real investment is critical to economic growth in a
society or country.
59. Explain that banks and other financial institutions are businesses which
channel funds from savers to investors.
a.
compare services offered by different financial institutions –
ATM’s , interest rates, checking and saving accounts loans, credit and debit
cards.
b.
explain reasons for the spread between interest charged and interest earned
The difference between interest charged to borrowers and the interest paid to
depositors is profit.
c.
give examples of the direct relationship between risk and return
Risk = good or bad outcomes. The greater the risk usually requires a
promise of a greater return to get investors. If it is too good to be true, it
probably is.
60. Evaluate a variety of savings and investment options, including stocks, bonds
and mutual funds.
a. Stock – an ownership share or shares of ownership in a corporation.
b. Bond – a certificate of indebtedness issued by a government or publicly
owned corporation, promising to repay borrowed money to the lender at
a fixed rate of interest and at a specified time.
c. Mutual Fund – a pool of money used by a company to produce a variety
of stocks, bonds or money market instruments. Provides diversification
and professional management of their investment for investors.
61. Explain how changes in monetary and fiscal policy can impact an individual’s
spending and savings choices.
62. Provide examples of who benefits and who loses from inflation
Inflation or an increase in prices across the economy benefit borrowers, and
hurts those who loan money. Inflation hurts those who are on fixed incomes
(retirees) and negatively impacts savings accounts.
63. Define progressive, regressive and proportional taxes
Progressive Tax – a tax that takes a larger percentage of income from
people in higher-income groups than from people in lower-income groups.
An example is the federal income tax.
Regressive Tax – a tax that takes a larger percentage of income from
people in lower-income groups than higher-income groups. An example
would be sales tax or gas tax.
Proportional Tax – a tax that takes the same percentage of income from
people in all income groups. An example would be social security which
takes 6.2 % from everyone up to 106,800 in 2009.
64. explain how an increase in sales tax affects different income groups.
Sales Tax – a regressive tax that requires lower-income groups to pay a
higher percentage of their income than higher income groups.
65. Evaluate the costs and benefits of using credit
a. List factors that affect credit worthiness
Are you suitable to receive credit? A person must show the ability and
willingness to carry the cost of borrowing and be able to pay back the loan
to the lender.
b. Compare interest rates on loans and credit cards from different institutions
Financial institutions attempt to earn a profit, people should shop
around for the best interest rates on credit cards and loans.
A bank offers 3% interest on savings accounts, and 9% interest on car
loans, the bank makes a profit on the 6% difference in interest rates.
66. Explain the difference between simple and compound interest rates.
Simple Interest – Year 1 - $100 at 10% interest = $10 in interest earned.
Year 2 - $100 at 10% interest = $10 in interest earned.
Year 3 - $100 at 10% interest = $10 in interest
earned.
Compound
Interest
earned.
– Year 1 - $100 at 10% interest = $10 in interest earned.
Year 2 - $110 at 10% interest = $11 in interest
Year 3 - $121 at 10% interest = $12 in interest
earned.
67. Describe how insurance and other risk-management strategies protect against
financial loss.
a. List various types of insurance such as automobile, health, life, disability and
property
Individuals pay premiums into a pool of money collected by insurance
companies, allowing individuals and companies to spread the risk, in
reality only a few actually experience a loss.
Type of
Insurance
Automobile
Purpose
Examples of Coverage
Provides financial protection
from losses due to an auto
accident or other damage to a
car.
Health
Provides payment for certain
health-care costs.
Renter’s
Provides financial protection
in case of loss of personal
possessions in a rental unit.
Collision: provides for the repair or replacement of the
policy owner’s car damaged in an accident
Liability: covers the cost of property damage or injuries to
others caused by the policy owner
Comprehensive: covers the cost of damage to an auto as a
result of fire, theft, or storms
Basic Health: covers office visits, laboratory, hospital
costs and routine care
Major Medical: protects against large bills from
catastrophic illness or injury
Dental and Vision: covers some cost of routine exams and
specific services
Reimburses policy owner for loss of possessions in a
rental unit due to fire, theft, water damage, etc.
Homeowner
s
Protects against financial loss
from damage to your home or
its contents, as well as injury
to others on the property.
Disability
Provides income over a
specified period when a
person is ill or unable to work
Life
Provides financial protection
to dependents of policy owner
when policy owner dies.
Physical Damage: reimburses for fir or water damage to
house or other structures on the property
Loss or Theft: reimburses for personal property damaged
or stolen
Liability: Protects against loss from a lawsuit for injuries
to invited or uninvited guests
Policy owner selects a replacement income for lost wages
if an illness or accident presents the person from working.
Disability income is paid for a specified time after a
waiting period.
Term Life: Offers protection for a specified period of time
Whole Life: Offer protection that remains in effect during
the lifetime of the insured and acquires cash value
68. Explain the costs and benefits associated with different types of insurance
Insurance is something you purchase and hope to never collect on.
69. Describe how the earnings of workers are determined in the marketplace
Supply and demand
70. Identify skills which are required to be successful in the workplace
Competent workers in the high-performance workplace need:
Basic Skills like reading, writing, arithmetic, speaking and listening skills.
Thinking Skills like the ability to learn, to reason, to think creatively, make
decisions and solve problems.
Personal Qualities like responsibility, self-esteem, self-management,
sociability, integrity and character.
71. Explain the significance of investment in education, training and skill
development.
a. - Human capital – a person’s knowledge, education and experience.
You learn during the process of getting the degree. Investing in self by
studying, practice and self-discipline.