Economics
Sager
Midterm (1-54) &
Final Exam Review
What is scarcity?
Scarcity is the idea that there
are a limited amount of
resources to meet unlimited
wants and needs. If you have
a limited supply of workers
and cannot finish a job, that
is an example of scarcity.
Why is scarcity a basic
problem of
economics?
The definition of
economics is the study
of efforts to satisfy
seemingly unlimited
wants with scarce
Why is choice a basic problem of
economics?
The whole point of economics is
trying to understand why people
make the choices they make. If
you make a choice, there are
costs. Economists want to know
what costs people are willing to
sacrifice in order to chose the
alternative.
What does a production
possibility curve tell you?
The opportunity cost of a
decision
Guns
Butter
What is opportunity
cost?
The most desirable
alternative given up for
the decision
What is a traditional
system?
A system where the
economy is based on
customs, habit, and
ritual
Give an example of a
traditional system.
A tribal community in
Africa
What is a command system?
A system where the
government controls the
economy and makes all
economic decisions. There is
not a lot of uncertainty
because everything is
government controlled.
Give an example of a
command system.
Former Soviet Union,
North Korea
What is a market system?
A system where the economy has
little or no government control. The
market is regulated by competition
and motivated by self-interest. It
does not provide for everyone’s
basic needs. It does provide
individual freedom for producers
and consumers. Consumers play a
key role in WHAT is produced.
Give an example of a
market system.
The US
(with some
government
intervention)
How does the U.S. system
compare with Russia? France?
China? Mexico?
Russia is in transition to a
market system. France has a
similar market system. China is
in transition – moving away
from a command system to a
market based system. Mexico
has a similar market system.
What does a circular flow model tell
you?
The flow of resources between households and
firms. Product market is where money flows from
households to firms in exchange for goods from the
firms. The factor market is where the money flows
from firms in the form of income to households in
exchange for their factors of production
(land, labor and capital).
Factors of Production
Income
Households
Factor Market
Firms
Payment
Goods and Services
Product
Market
Use an example to explain the
circular flow model.
You go to work for ABC inc. in
exchange for a paycheck. Then
you purchase a shirt from ABC
inc. in exchange for payment.
The government may take taxes
from your paycheck and charge
taxes on the sale of the goods.
How does government
action affect the
circular flow model?
Regulations over
production, labor laws,
taxes, etc.
Who is Adam Smith
and why is he
important?
He was a free market
philosopher and a
classical economist.
What societal values
influence traditional
economies?
Custom, ritual, habit,
family
What societal values
influence command
economies?
Government control,
order, total equity
What societal values
influence market
economies?
Freedom, choice, selfinterest, competition
What are the economic rights
of individuals as consumers?
They determine the products
that a free enterprise
economy provides. Choose
who to purchase from.
Choose what products to
purchase. Choose what price
willing to pay.
What are the economic
responsibilities of
individuals as consumers?
They must let producers
know what they want by
making purchasing
decisions.
What are the consequences
of economic decisions made
by individual consumers?
If they purchase a product,
that lets the producer know
that there is demand for that
product
What are the economic rights
of businesses?
They have the right to start
any legal business. They can
produce whatever will earn
them a profit. If they are not
making money, they have the
right to leave the market.
What are the economic
responsibilities of
businesses?
Disclose required
information to make buyers
more knowledgeable and
safer.
What are the consequences of
economic decisions made by
businesses?
Positive externalities – an
economic side effect that
generates unexpected benefits
Negative externalities –
economic side effect that
generates unexpected cost
What is profit motive?
One of the basic
principles of free
enterprise. Businesses
are driven by the desire
to make money.
What ordinances and
regulations must be
followed if someone
wants to start a business?
Not all businesses are
required to have licenses.
What is voluntary
exchange?
One of the basic
principles of free
enterprise. Consumers
and producers choose
who to buy and sell from.
What are private property
rights?
One of the basic principles
of free enterprise. Individuals
have the right to own
property and land. They can
use it as they wish and
transfer it if they want to.
What is competition?
One of the basic
principles of free
enterprise. Businesses
can adjust their prices
and products to attract
consumers.
What are the benefits of
individual freedom to
consumers in the U.S.
free market system?
Choice of what to buy,
rights, protection from
products and businesses
What are the benefits of
individual freedom to
producers in the U.S. free
market system?
Choice of what to sell,
rights, protection from
consumers
What is the role of the
government in the US
free enterprise system?
Regulation (laws,
taxes), protection,
assistance (subsidies)
Why does the government
make rules and regulations in
the US free enterprise system?
Protect consumers through
disclosure law (forcing
companies to give consumers
information about their
products and services) and
producers through
How does technology
affect productivity?
Improvements in
technology allow an
economy to produce
more output from the
same or a smaller
quantity of inputs.
Analyze the ethical
policy of Union Pacific
Corp (pg. 74-75)
The issue at the center
of the debate was toxic
waste clean-up
What causes changes in
demand?
According to the law of
demand…price. If price
goes up, demand goes
down. If price goes
down, demand goes up.
Who is Mary Kay Ash and
why is she important?
She started Mary Kay
cosmetics. She is one of
the most successful
female entrepreneurs
ever.
What causes changes
in supply?
According to the law
of supply…price. If
price goes up, supply
goes up. If price goes
down, supply goes
down.
Why is it beneficial to
have a variety of goods
available?
More competition,
lower prices, more
choices for consumers
What causes changes
in price?
When supply
increases, prices fall
and quantity
demanded increases to
reach new equilibrium
What does a supply
and demand graph tell
you?
Supply
Price
Equilibrium
Demand
Quantity
How do you use a supply
and demand schedule to
interpret a supply and
demand graph?
Use the numbers to draw
the graph. You cannot use
a graph to make a
schedule!
What are responsive
prices and why are they
generally a good thing?
They can change easily
when there are shifts in
supply or demand. You do
not end up with shortages
or surpluses.
What is pure competition?
A market structure where
many buyers and sellers
participate, both are well
informed about products,
sellers are able to enter and
exit the market freely, no
seller sells a product above
the prevailing market price.
Name an example of a
pure competition.
Tomatoes or any
agricultural market
What is a monopolistic
competition?
A market structure
where many
companies sell similar
but not identical
products
Name an example of a
monopolistic
competition.
Denim Jeans, soft
drinks
What is an oligopoly?
A market structure
where few large firms
dominate the market
Name an example of
an oligopoly.
Airlines – Also cartels
which only work if the
members keep to their
agreed output.
What is a monopoly?
A market structure
dominated by a single
seller
Name an example of a
monopoly?
AT&T, Standard Oil
Trust, The Public
Water Company
Who is Bill Gates and why is
he important?
CEO and Chairman of
Microsoft. He dropped out
of Harvard to form his
computer software company
and become one of the
richest, most influential
entrepreneurs ever.
End of Midterm
Material!
What are the characteristics
of sole proprietorships?
Least regulated form of
business, zoning laws often
keep them from doing
business from home,
unlimited personal liability
What are the characteristics
of partnerships?
General partnership- partners
share liability.
Limited Liability Partnership
(LLP) – all partners are
limited from personal liability
in certain situations.
What are the
characteristics of
corporations?
A corporation has a
separate entity apart
from that of the
owners and workers
What are the advantages
and disadvantages of sole
proprietorships?
Adv – least regulated
Dis – zoning laws,
unlimited personal
liability
What are the advantages
and disadvantages of
partnerships?
Adv – in a limited
partnership you only lose
your initial investment
Dis – Tied to partner’s
actions
What are the advantages
and disadvantages of
corporations?
Adv- corporation has a
separate entity apart from
owners and workers
Dis – no one person in
control
What are the major events in
the history of the labor
movement in the US?
The Industrial Revolution
and manufacturing initiated
the labor movement in the
early 1800s which changed
the face of the US labor
force
Who is Karl Marx and
why is he important?
He wrote the Communist
Manifesto and Das
Kapital
He was the father of
communism/socialism
How do people use
credit to get more
stuff ?
People use their credit
cards at stores and the
credit card issuer pays
the store.
What role does interest
play in the use of credit?
Interest is the money
paid for the use of credit.
It is essentially the “cost”
of credit. Interest from
loans is the largest source
of income for banks.
What do financial
institutions do?
Bring together funds
that savers provide and
then lend those funds
to others which leads
to economic expansion
How has the role of financial
institutions changed over
time?
Expanded investment
opportunities, provided
additional services for more
people than ever before
How do financial
institutions affect
households?
Investment
opportunities, loans
How do financial
institutions affect
businesses?
Investment
opportunities, loans to
grow
What is insurance and why
do people insure their stuff ?
Insurance is money paid to
an insurer to be used in the
event of an emergency. If
nothing happens, the money
is usually not paid back to
the consumer.
What is the economic
impact of investing in
the stock market?
Gives companies the
funds to grow and
expand their
businesses
What is the economic
impact of investing in the
bond market?
Money is used by
company/government to
expand and grow. It does
not just sit unused until it
reaches maturity.
What are the benefits
savings accounts?
Safe, guaranteed
interest, extremely
liquid
What are the risks of
savings accounts?
Virtually none, low
return
What are the benefits
of mutual funds?
Intermediaries buy
short term financial
assets and investors
receive higher interest,
diversified investment
What are the risks of
mutual funds?
Not insured by the
FDIC
What are the benefits
of pension funds?
Often tax-deferred
What are the risks of
pension funds?
Depends on the type
but usually fairly low
risk, funds restricted
until retirement
What are the benefits
of insurance?
Provides funds in the
event of an emergency
(home, life, health)
What are the risks of
insurance?
Money is not usually
paid back if there is no
emergency
What are the benefits
of CDs?
No fees, Insured by
FDIC, higher interest
than a savings account,
safe
What are the risks of
CDs?
Minimum deposits,
restrictions on access
to money,
What are the benefits
of bonds?
Safe, high interest,
bondholders have first
claim to assets if a
company goes
bankrupt
What are the risks of
bonds?
No access to money until
bond matures, Junk
bonds are very high risk
but have a potentially
higher return.
What are the benefits
of stocks?
Potentially high return,
Easily liquidated
What are the risks of
stocks?
Very risky, losses can
be large, requires
understanding of the
stock market
What is the impact of
business cycles on US
history?
During the 90s, there was a
recession, and although
inflation remained at less
than 3 percent,
unemployment fell to very
low levels.
How is economic
growth measured?
Real GDP per capita
because prices and
population change over
time
How is economic
stability measured?
By looking at general
price levels
Who is Andrew
Carnegie and why is he
important?
He was a entrepreneur
in the steel industry
What are the economic effects of
the development of communication
and transportation systems in the
US?
Provide easier methods of
communicating information and
exchanging goods and services. For
example, the internet has made a
huge impact on the economy.
When new technologies emerge,
what economic effect do they
have on the “old way of doing
things”?
An example…a country’s
production possibilities increase
because the workers become
more skilled at using a
computer. This is an example
of growth caused by
How do technological
innovations change the way
goods are manufactured,
marketed and distributed?
They generally make
manufacturing, marketing
and distribution easier and
less expensive.
Give some examples of
types of economic
information available as a
result of technological
innovations?
Stock prices on the internet,
economic news in the
newspaper, Fed
announcements on CNN
How do scientific discoveries
and technological innovations
create the need for rules and
regulations to protect
individuals and businesses?
The growth of the internet has
made it necessary for the
government to make
regulations regarding the
security of information online
What are the effects of
unequal distribution of
economic factors of
production?
Unequal distribution of the
4 factors (land, labor, human
capital, physical capital)
inhibits economic growth
How is full employment
measured?
When there is no cyclical
unemployment (does not
take into account
dropouts)
What kinds of taxes are
paid at the local level and
what are they used for?
Most of the tax money
goes to elementary and
secondary education
What kinds of taxes are
paid at the state level and
what are they used for?
Sales and income taxes
provide the most revenue
in most states
What kinds of taxes
are paid at the national
level and what are they
used for?
Most money comes
from income taxes.
What are the different
categories of revenues
in the US federal
budget?
Taxes and non-tax
revenue
What are the different
categories of
expenditures in the US
federal budget?
Fastest growing category
of expenditures in recent
years has been
entitlement programs
What is taxation and why
are taxes included in the
Constitution?
To provide for common
defense and general
welfare (they must be the
same in every state)
How have taxes impacted
contemporary issues and
policies?
One of the major
challenges facing the
federal government is the
rapid growth of
entitlements
What are the major
goals of US economic
policy?
Growth, stability,
balanced budget,
reduced debt,
employment
What impact do fiscal policy
decisions have on the
economy?
Fiscal policy is the use of
taxing and spending to
influence economic activity.
Policies can either cause the
economy to expand or
contract
Who is John Maynard
Keynes and why is he
important?
He developed Keynesian
economics which takes a
broader view of the
economy than classical
economics
What is the Fed and why is the
Federal Reserve System set up the
way it is?
12 districts, to make sure every state
has access to the Fed. It was
created to provide consumers
w/access to funds for business
expansion. The Fed coordinates
regulatory activities and examines
banks
What are the 3 basic tools
used to implement US
monetary policy?
The buying and selling of
government securities,
reserve requirements,
discount rate
Why are economic policies used
and what effect do they have?
Monetary policies are use to
control the money supply. They
are used to lessen the effect of
natural business cycles.
Expansionary policies are used
to increase output and create
jobs in the short term
Where is oil an
abundant resource?
The middle east
Why is this an issue for
the US?
We use a lot of oil. It is
the largest category of
nonrenewable energy
in use in the US
What is absolute
advantage?
A term related to nations
engaged in trade. When a
nation can make the most
of something given all of
the resources available
What is comparative
advantage?
A term related to nations
engaged in trade. When a
nation can make the most
of something with the
least opportunity cost
involved.
How does comparative
advantage affect how and
why countries trade?
Sometimes countries will
import a good they are
able to produce because
their trade partner has the
comparative advantage.
What is the impact of US
imports on the US and its
trading partners?
If a country reduces their
imports into our country, the
demand for comparable
domestic goods will most
likely increase.
What is the impact of US exports
on the US and its trading partners?
If we reduce our exports, the
demand for those goods MAY OR
MAY NOT change. There is no
way to tell for sure. Some goods
may increase in demand while
others will decrease because
people will find alternatives
Why do exchange rates
fluctuate?
They are influenced by
supply and demand in
a flexible rate system.
How changes in exchange rates
of world currencies affect the
balance of trade?
If the currency depreciates, the
country’s products will become
cheaper to other nations. If the
currency appreciates, the
country’s products will become
more expensive in other
nations.
How does free trade
affect economic activity?
Free trade makes it easier
for importers and
exporters to do their
business
How do trade barriers affect economic
activity?
They restrict the growth of export
industries in developing countries. If
trade barriers are used to make
domestic goods cheaper, domestic
manufacturers may lose the economic
incentive to become more efficient.
Tariffs also help shield infant industries
from competition
What are some benefits to
participating in a free
trade agreement?
Trade barriers and tariffs
are reduced or
eliminated, trade
significantly increases
What are the costs of
participating in a free trade
agreement?
Jobs can be eliminated in
one or both countries
(although with NAFTA an
equal number of jobs were
created and eliminated)
Describe the level of development in the US,
Mexico, Iraq, China, India, Russia, Germany,
Afghanistan, Brazil, and Indonesia.
US – developed
Mexico- developed
Iraq – underdeveloped
China – developing
India- developing
Russia- developing
Germany- developed
Afghanistan- underdeveloped
Brazil – developing
Indonesia – underdeveloped
How do societal values affect the
economic development of nations?
Societies who value tradition, habit,
ritual and custom develop much
slower than those who value selfinterest, competition, and freedom.
Things like $ from weapons,
corrupt leaders and colonialism all
prevent development
What are property rights?
A set of laws that protect
people’s claim to land
and other property. If
property rights are
certain, entrepreneurs are
more likely to make large
investments.
Trace Transition of USSR
 Lenin
comes to power
 The govt. organizes land into state
farms
 Gorbachev implements glasnost
and perestroika
 Yeltsin is elected in the 1st
democratic election
 Gorbachev resigns; end of USSR
Trace Transition of China
 Mao
Zedung comes to power
 The Great Leap Forward
 The Cultural Revolution
 Deng Xiaoping comes to power
 People’s communes are replaced
with contract responsibility
What is interest?
 The
money you pay to borrow
money
 The percentage of principle paid to
investors as an incentive to invest
money.
 It is the “cost” of credit
 It is the primary source of income
for banks
How do you eliminate Credit Card
Debt?
Stop charging/using the credit cards
 Pay off the cards with the highest
interest rates first
 Pay more than the minimum payment
even if it is just a few dollars
 Be very careful about companies who
claim they will help you eliminate debt
and fix your credit!

What are you rights when buying a
home?
You can hire a realtor
 You can tour the property
 You can have a pre-sale inspection
done
 You have a certain amount of time to
change your mind once you sign the
contracts

What are your responsibilities when
buying a home?
You must secure financing…qualify for
a mortgage
 You must be present at the closing

How can you prepare to make the
change from renting to buying?
Save a down-payment
 Do your research
 Save a “rainy day” fund in case of
emergency
 Pay down any debt you might have

What are the steps to starting up a
small business?
Research/Design/Education
 In some cases, licenses/certifications
 Production
 Marketing
 Sales
 Accounting

How and why should someone invest
in the Stock Market?

How?
 Meet
with a stock broker/financial
advisor
 Research companies

Why?
 Potentially
large returns
How do you plan for retirement?
401K
 IRA/Roth IRA
 Pension/Company Retirement
 Mutual Fund
 Do not rely on Social Security!!!!

How should you start saving money?
Pay yourself first…direct deposit
money into a savings account straight
out of your paycheck so you never miss
it.
 Cut expenses that are not necessary
(Starbucks, fast food, etc.) and put that
money into savings.

What are the different types of bank
accounts?
Savings
 Checking

 Interest
bearing
 General Use
Money Market
 Certificate of Deposit

How do you balance a checkbook?
Get balance from bank statement
 Add any outstanding deposits
 Subtract any outstanding
checks/debits
 Compare the balance to your account
register

How and why should you take out a
loan?

How?
 From
a bank or credit union
 Not a pawn shop or check cashing outlet!

Why?
 Car
Loan
 Home Loan
 Student Loan
 NOT spending money, big screen TV, etc
Who needs to be insured and how do
you get insurance

Who?
 Life:
young families with children
 Car: everyone…it’s the law!
 Health: everyone!!
 Homeowners/Renters: everyone!!

How?
 Contact
an insurance company to apply
 Sign up through work
How and why should you give to
charity?

How?
 Research…BBB

online, Atty. Gen office
Why?
 Others
needier than yourself
 Tables could be turned
 Good karma!
What scams are out there and how
do you avoid them?



Many scams are out there to prey on people
who do not know any better or are desperate
for $$.
If it sounds too good to be true, it probably
is
Research: BBB online, Atty. Gen Office, ask
a friend who invested…google is probably
the LEAST reliable way to research a scam