+Econ EOCT
Study Guide
Fundamental Concepts
What are Productive Resources or Factors of Production?
Natural resources used to produce goods and services
List the three types of factors of production.
a. land
ex. Water, forests, coal, dirt
b. labor
ex. people
c.Capital
ex. Buildings, trucks, machines
Scarcity limited resources vs. unlimited wants
Opportunity Cost the next best choice given up
Trade Offs alternatives sacrificed when making a decision
Marginal Benefits what is gained from a choice. What is gained from one more unit
produced.
Marginal Costs What is given up from a choice. What is lost from producing one more
unit.
Productive Possibility Curve A graph that shows alternative ways to use resources.
Specialization doing one specific job to increase production.
Voluntary Exchange willing exchange of payment for product
Utilization working at maximum production levels for resources available
Economic Systems > List the Four econ systems and give a brief description of each.
a. Traditional > using culture, religion, past generations to answer 3 econ
questions
b. Market > individual buyers & sellers answ. 3 Econ quest.
c. Command > Gov’t makes all econ decisions
d. Mixed > market based with some gov’t regs
Economic Questions > List the three economic questions.
a. What to Produce?
b. How to produce?
c. Who gets it?
Private Property Rights: Freedom to use your property as you see fit. (legally)
Profit motive: the force that encourages indiv. To improve material wellbeing
Consumer Sovereignty: the power of individual’s money to encourage production of
more goods and services.
Competition: Rivalry among sellers to attract customers
What is the role of Government Regulations? To protect property rights, contracts,
and other business activities in our free enterprise system
List 3 examples of Gov’t regulations.
1. FDA > safe food and drugs
2. OSHA > safety at work place
3. USDA > set standards for ag
List 2 examples of Gov’t deregulations.
1. airlines
2. electricity
What are the effects of regulations and deregulations on the producers and
consumers?
Regulations effects
Deregulations effects
Producers
Creates competition
Lowers barriers to entry
Regulates industry
sets price controls
Consumers
Lower prices
Quality control
Regulates price levels
More choice and variety
What are the 6 Economic Goals most economic systems try to address? Give a brief
description of each.
1. economic efficiency > max production
2. economic freedom > choices
3. economic security > gov’t protection
4. economic equity > = pay for = work
5. economic growth & innovation > improved standard of living
6. additional goals > environmental protection, national healthcare
Role of the Gov’t in a Market Economy
1. What are Public Goods & Services? Give some examples of each.
Gov’t provided G&S > items that are too expensive to buy indiv. if
provided by the private sector
Roads, national parks, national defense, education
2. How does the Gov’t redistribute income in the US?
Welfare, social security, TANF, unemployment comp
3. How does the Gov’t protect Private Property Rights in the US?
5th and 14th amendment > eminent domain
Court system
4. How does the Gov’t resolve market failures?
Fiscal policy> increase spending or tax cuts
Define Productivity as the relationship of inputs to outputs.
The more resources used to produce one product the fewer resources can be used to
produce another.
What is Capital Investment?
Reinvesting profits to improve production
What three areas do firms usually apply capital investment to?
1. human
2. technology
3. physical
When firms apply capital investment to these areas, what is the effect on the US?
It raises the standard of living
Microeconomics Concepts
Draw and label the Circular Flow Model.
What is the role of Money in the economy?
It is used as a means of exchange, unit of account, store of value
What is the Law of Demand?
As price increases demand decreases, as price decreases demand increases
What is the Law of Supply?
As price increases amount supplied increases, as price decreases the amount
supplied decreases
What is the role of Price in the Free Market?
It sets a standard of value
It helps move land, labor, and capital into the hands of producers, and finished
goods into the hands of buyers.
Explain how prices serve as incentives in a market economy.
Higher prices encourage production by suppliers and attract new firms to the
market
What is the Equilibrium price?
The point where supply and demand meet.
Graph the following information and determine the equilibrium price.
Price of a slice of pizza
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity Demanded
300
250
200
150
100
50
Quantity Supplied
100
150
200
250
300
350
What are Price Ceilings?
The max price that can be legally charged for a good or service
What do price ceilings lead to?
Shortages
What are Price Floors?
A minimum price for a good or service
What do price floors lead to?
Surplus
What factors lead to changes in Supply?
a. future expectations
b. number of suppliers
c. technology
d. cost of production
e. subsidies
f. taxes
g. regulations
What factors lead to changes in Demand?
a. income
b. consumer expectations
c. tastes and advertising
d. population
What is Elasticity of Supply?
The measure of how a change in price affects quantity supplied
What is Elasticity of Demand?
The measure of how consumers react to a change in price.
List and describe the four types of market structures and their characteristics.
Types of Market
Structures
Description
Characteristics
Pure
Competition
Large number of firms
all produce the same
product
Monopoly
Dominated by a single
seller
Monopolistic
Competition
Many companies sell
products that are
similar but not identical
Many buyers and sellers
Identical product
Well informed buyers & sellers
Easy entry and exit for firms
One firm
No variety of products
Complete barrier to entry
Complete control of price
Many firms
Few barriers to entry
Slight control of price
Differentiated products
Oligopoly
A few large firms
dominate a market
Few large firms
Some variety of goods
High barriers to entry
Some control of price
List and describe the three types of Business Structures. Give two advantages and
disadvantages of each type.
Type of
Business
Structure
Sole
proprietorship
Partnership
Corporation
Description
Advantages
Disadvantages
One owner
1., make all rules
1. Take all risk
2. get all profits
2. limited life
1. share risk
1. potential for conflict
2. join resources
2. share profit
1. unlimited life
1. difficult to start up
2. shared risk
2. double taxation
Two or more owners
Owned by stockholders
What is the role of Profits for an Entrepreneur?
An incentive to invest in a new idea or business to make money
Macroeconomics
How is economic activity measured?
GDP the total value of all final goods and services produced in the US
GDP = C + I + G + (X-M)
Vocab:
Gross Domestic Product (GDP)
the total value of all final goods and services produced in the US
Economic Growth
Growth allows successive generations to have more and better goods and services
than their parents. An increase in standard of living
Unemployment
The percentage of the nation’s labor force that is out of work
Consumer Price Index (CPI)
A price index determined by measuring the price of a standard group of goods
meant to represent the “market basket” of a typical urban consumer
Inflation
The general rise in price levels
Stagflation
A decline in real GDP combined with a rise in the price level
Aggregate Supply
The total amount of goods and services in the economy available at all possible price
levels
Aggregate Demand
The total amount of goods and services in the economy that will be purchased at all
price levels.
Identify the 4 types of unemployment.
Types of Unemployment
Frictional
Seasonal
Structural
Cyclical
Describe
Occurs when people take time out to find a job
Occurs when industries slow or shut down for a season or make
seasonal shifts in their schedule
Occurs when workers’ skills do not match the jobs available
Rises during econ downturns and falls when econ improves
Label the 4 phases of a business cycle.
c
a
a = expansion
b = trough
c = peak
d = contraction
d
b
What is the difference between a recession and a depression?
Recession is a prolonged econ contraction lasting 2 quarters
Depression is a recession that is especially long and severe
What is the difference between national debt and government deficits?
National debt is all the money the gov’t owes to bondholders
Gov’t deficits is when the gov’t spends more than it raises in revenues
What is role and function of the Federal Reserve?
It acts as the gov’ts bank, it sells bonds, issues currency, it serves banks for check
clearing, supervises lending practices, and is the lender of last resort.
It regulates the bank system and the money supply.
What is Monetary Policy?
The actions the Fed takes to influence the level of real GDP and the rate of inflation
in the economy. (control interest rates)
What is Fiscal Policy?
The use of gov’t spending and revenue collection to influence the economy
How are fiscal and monetary policies similar? How do they differ?(434)
Both fiscal and monetary policies affect the nation’s economy. However, fiscal
policy is created by Congress while monetary policy is created by the FED.
Fiscal and Monetary Policy Tools (434)
Fiscal Policy Tools
Monetary Policy Tools
Expansionary Tools
1.Increase gov’t spending 1.open market opers:
Bond purchases
2.cutting taxes
2.decrease the discount
rate- rate the FED charges
for loans to commercial
banks
3.decrease reserve
requirements- cash that
banks have on hand in
vaults or on deposit with
the federal reserve- check
clearing by depositor of
different bank
Contractionary Tools
1.decreasing gov’t
1.open market opers:
spending
bond sales
2.increase discount rate
2.raising taxes
3.increase reserve
requirements
International Economics
What is absolute advantage in regards to trade?
The ability to produce more of a given product using a given amount of resources
(not best guide for deciding who should do what; comparative advantage is better.)
What is comparative advantage in regards to trade?
The ability to produce a product most efficiently given all the other products that
could be produced- law of comparative state that the worker, firm, region, or
country with the lowest opportunity cost of producing an output should specialize in
that output
Why does most production of goods and services use a comparative advantage?
Each nation can use the money it earns selling those goods to buy other goods it
cannot produce efficiently. (more efficient and productive due to specialization)
What is the difference between a balance of trade and a balance of payments?
Balance of trade is the relationship between a nation’s imports and its exports
The balance of payments (BOP) is the method countries use to monitor all
international monetary transactions at a specific period of time. Theoretically, the
BOP should be zero, meaning that assets (credits) and liabilities (debits) should
balance. But in practice this is rarely the case and, thus, the BOP can tell the
observer if a country has a deficit or a surplus and from which part of the economy
the discrepancies are stemming.
Define the following trade barriers.
Tariffs (ex. custom duty)
A Tax on imported goods
Quotas
A limit on the number of any product entering the country
Embargos
an embargo is the prohibition of commerce and trade with a certain country.
Standards
something set up and established by authority as a rule for the measure of quantity,
weight, extent, value, or quality
Subsidies
a gov’t payment that supports a business or market
Identify the cost/benefits of trade barriers over time.
Costs >increased prices on foreign goods, trade wars, slows introduction of new
goods and better technologies
Benefits > job protection, protect infant industries, safeguard national security
What are trading blocks?
Free trade agreements between regions and countries
Describe the following Examples of trading blocks.
EU = European Union is a regional trade org made up of European nations
NAFTA= North American Free Trade Agreement eliminates all tariffs and
other trade barriers between Canada, Mexico, and the US
ASEAN= The Association of Southeast Asian Nations or ASEAN. The aims
and purposes of the Association are to accelerate the economic growth, social
progress and cultural development in the region
Free trade Pros
Free trade cons
Lowers price of all goods
Less Job protection
Improves economic efficiency and
consumers of all nations a wide
variety of goods
Inability to Protect infant industries
introduction of new goods and better Less Safeguard for national security
technologies
Define exchange rates
The value of a foreign country’s currency in terms of home country’s currency
What is the impact of exchange rates on purchasing power?
Depending on the rate of exchange purchasing power can be increased or decreased
depending on the other country’s economy
Personal Finance Economics
Decision making model Alternative
Alternative
Choice 1- Sleep late
Choice 2 –wake up
early to study
Benefits
Enjoy more sleep
Have more energy
during the day
Decision
Sleep late
Better grade on test
Teacher and parental
approval
Personal satisfaction
wake up early to study
Opportunity Cost
Extra study time
Extra sleep time
Benefits Forgone
Better grade on test
Teacher and parental
approval
Personal satisfaction
Enjoy more sleep
Have more energy
during the day
Financial Institutions and Services (510-511)
Types
Description
Commercial banks
For indiv. And business
Savings & Loan
Intended for home
owners- long term
financing
Deposits and low risk
investments
Savings Banks
Credit Unions
Non profit owned by their
members
Services
Checking, savings, money
market, CD, loans
Mortgages, savings
Gov’t bonds, and some
offer services like
commercial banks
Checking, savings, low
rate loans
Saving & Investing (506-509)
Options
Savings
Bonds
Common stock
Preferred stock
Mutual funds
Income generated
Steady
Very steady
Variable
Less variable than
common stock
Variable
Growth potential
Little or none
Little or none
Good
Good
Risk level
Low
Low risk
High risk
Moderate risk
Good
moderate
Taxes
Type of tax
Progressive
Regressive
proportional
Describe
Increase with income
Goes down with income
Constant % at all income
levels
example
Income tax
Sales tax
Flat tax
What factors affect credit worthiness?
Capacity > ability to repay debt
Capital > income plus savings available
Character > willingness to repay debt
Collateral > property used to secure loan
What are the types of interest on credit accounts and give a description.
a. fixed >stays the same
b. Variable > the rate will rise or fall as the prime rate or other econ
indicators change
What is the purpose of insurance?
To help defray the cost in the event of any personal loss
List 3 types of insurance.
a. Auto
b. health
c. property
What are the costs and benefits of insurance?
Costs > premiums, deductibles- an amount of expenses that you must pay before the
insurer will cover any expenses
Benefits > company promises to pay compensation in the event of an accident
What is the importance of investment in education, training, and skill development in
the workforce?
To help maximize skills in order to perform a job more effectively