ECONOMICS SEOCT
REVIEW
Scarcity and its effects
• All resources are scarce
• Productive resources (factors of production)
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–
–
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Land
Labor
Capital
entrepreneurship
• Scarcity leads to 3 questions:
– What to produce
– How to produce
– For whom to produce
Scarcity and its Effects Cont’d
• Different economic systems answer the three
basic economic questions differently
– Command Economy – government makes all
decisions (North Korea)
– Free-Market Economy – producers and consumers
make the decisions (no true free market systems in
existence)
– Mixed-Market Economy – producers and consumers
make the decision with guidance (regulation) from the
government (United States)
Role of Government in a Market
(U.S.) Economy
• Provide public goods and services
• Redistribute income to meet needs of poor
– (collect money through taxes and redistribute through
welfare programs)
• Resolve market failures
– Use of Fiscal Policy (taxes and spending)
– Use of Monetary Policy (actions by the Federal
Reserve)
– Regulations to protect property rights of citizens
– Deregulation – allow businesses to operate in free
market
Fundamental Concepts Cont’d
• Scarcity forces us to make choices
– Results in opportunity costs, trade-offs or engaging in
voluntary trade
• used when parties feel that will benefit (gain) from the trade
• Basis of U.S. economy
• Rational Decision Making Model
– Define the problem
– List the alternatives
– Evaluate the alternatives (compare opportunity costs
and benefits)
– Make a rational decision
Production Possibility Curve (Production
Frontier)
– shows production efficiency (b,c,d) underutilization (a)
and impossibilities (x)
Fundamental Concepts
• Specialization, division of labor, increased
labor force and investment in education,
training, technology, and resources
increases productivity and improves
efficiency
– All of these lead to economic growth and
improved standards of living
Fundamental Concepts Review
Questions
•
trees, minerals and the real estate on which a company builds its main
manufacturing center are all __________.
•
Following a massive storm, people buy up all the flashlights and bottled
water in the area faster than the producers can resupply them. The people
in the area now face _________ regarding the flashlights and bottled water?
•
Paying for an employee’s health insurance is a way of investing in
_________ __________ to increase production possibilities.
•
Using a production possibility curve, a company can determine the
______________ _________ of increasing production of one product over
another
MICROECONOMIC CONCEPTS
Circular Flow Model
• Three economic actors: households (individuals),
businesses (firms) and government
• Individuals provide labor and other factors of production
to businesses in exchange for money (wages/income)
• Businesses provide goods and services to households in
exchange for money (revenue)
• Government uses taxes from households and
businesses to provide services and money (transfer
payments/subsidies) to households and businesses
DEMAND
Resource Market
Individuals
Businesses
SUPPLY
SUPPLY
Product Market
DEMAND11
MICROECONOMIC
CONCEPTS
• Product Market where consumers
purchase final goods/products
• Factor Market where businesses hire
their labor and buy the goods needed to
produce their products
Microeconomic Concepts
Cont’d
• Fiat Money – represents value – has value
because the government says it does
• The Role of Money
– Medium of exchange
– Standard of value
– Includes paper and coins
– Includes transactions such as online
transactions, debit card transactions, online
stock trades
Microeconomic Concepts
Market Influences
Supply
• Supply – willingness and ability of a producer to provide
goods/services to consumers (aggregate supply)
• Law of Supply – As price increases, quantity supplied
increases
• Represented by an outward and upward shaped curve
on a graph
Supply
• Shift in supply refers to the change in total
supply, not the quantity supplied
Shifters of Supply
•
•
•
•
•
•
Availability of resources
Number of sellers
Technology
Government action (excise tax/subsidy)
Opportunity cost of alternate product
Expectations for future products
Demand
• Consumers willingness and ability to purchase a product
(aggregate demand)
• Law of Demand: as price decreases, quantity demanded
will increase
• Represented by a downward and outward sloping curve
Shifters of Demand
• Shift in demand refers to a total change in
demand, not just quantity demanded
Shifters of Demand
• Number of Consumers
• Tastes and Preferences
• Price of Related Goods
(substitutes/complements)
• Income (normal & inferior goods)
• Future Expectations
• Changes in PRICE don’t shift the curve. It
only causes movement along the curve
Supply and Demand
Price
• Equilibrium Price
– Quantity demanded equals quantity supplied
– Also known as Market Clearing Price
– Prices below equilibrium will result in a shortage
– Prices above equilibrium will result in a surplus
• Price Elasticity
– Sensitivity to price
– Price elastic – demand changes as price changes
– Price inelastic – demand does not change
significantly as price changes (steep almost vertical
demand curve)
Inflation and Interest Rates
• Inflation – general rise in prices throughout the economy
– Increased productions costs
– Increased prices
– Decreased demand
– Decreased supply
• Interest Rates
– Amount paid to borrow money
– High interest rates
• Fewer loans
• Decreased demand
Government Action
Wage and Price Controls
• Wage Controls
– Minimum wage – lowest wage employers can pay
their employees
• Pros and Cons
• Price Controls
– Price Ceiling – highest price producers can charge
• Set below equilibrium
• Causes shortages
– Price Floor – lowest price producers can charge
• Set above equilibrium
• Causes surpluses
Microeconomic Concepts
Competition
Market Competition
• Spectrum of competition – one end has no
competition and the other is VERY
competitive
Competition in a Free Market
Perfect
Monopolistic
Competition
Competition
Perfect
Oligopoly
Monopoly
Pure Competition
•
•
•
•
Large number of sellers
Identical products
No barriers to entering market
Free exchange of price information/but
market controls price
Monopolistic Competition
•
•
•
•
many sellers
Similar but differentiated products
Producers have more control over price
Examples: fast food chains
Oligopolies
• Only a few producers
• More control over prices than monopolistic
competition – conspire with competitors to
control prices
• Example: breakfast cereals, auto
manufacturers
Monopolies
•
•
•
•
One producer
No adequate substitutes
High barriers to entry
Produce less and charge higher prices
Business Organizations
• Sole Proprietorship
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–
–
–
–
Individual owner
Most common type of business
Accounts for small percentage of revenue in economy
Owner has unlimited liability
Business has limited life
• Partnership
– Two or more owners
– Share liability
– Pool resources
Business Organizations
• Corporation
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–
–
–
Owned by shareholders (stockholders)
Limited liability for shareholders
Unlimited life
Profits are taxed twice
• Franchise
– Sole proprietors purchase local rights to trademark
corporation
– Pays a licensing fee
– Lack flexibility
Macroeconomic Concepts
Measuring Economic Activity
• Gross domestic product (GDP)
– Total value of all goods and services
– High GDP = healthy economy (usually)
• Per capital GDP – value per household
– Better indication of standard of living
• Consumer Price Index - monthly changes in
costs of goods and services
– Rise in prices = inflation
– Drop in prices = deflation (can lead to increased
unemployment)
– Rise in prices and rise in unemployment = stagflation
Measuring Economic Activity
Cont’d
• National Debt – money owed by the federal
government
• National Deficit – the amount of money “over
budget” in a given year
– Government spends more than it collects in taxes in a
given year
• Economic Growth – GDP grows, CPI remains
at levels that increase profits w/o causing
inflation, national debt shrinks (or at least stays
level)
Measuring Economic Activity
Cont’d
• Net Exports – Total exports minus total imports
– The more exports the more money that flows into the
economy
– Positive net exports = growing economy
• Unemployment Rate – percentage of total labor
force that is not working
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–
–
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Cyclical unemployment
Structural unemployment
Frictional unemployment
Seasonal unemployment
Measuring Economic Activity
Cont’d
• Fiscal Policy – governments decisions to tax and
spend (made by Congress)
– Taxes
• Income tax
• Capital gains tax
• Property tax
– Spending
• Domestic programs (education, healthcare)
• Welfare programs (income redistribution)
• National Defense programs
– Increased spending leads to increased taxes, leaving
citizens with less disposable income
Measuring Economic Activity
Cont’d
• Monetary Policy –Federal Reserve
controls the flow of money in the economy
– Easy-money policy
– Tight-money policy
– Required reserve ratio (RRR) – Discount Rate –
– Open Market Operations
• Controls the sell/purchase of U.S. Treasury Bonds
– Sell bonds to decrease money supply
– Buy bonds to increase money supply
Measuring Economic Activity
Cont’d
• Federal Reserve (organization)
– Board of Governors
• Appointed by U.S. President
• Sets monetary policy
• Federal Reserve Chairman – Ben Bernanke
– Federal open Market Committee
– 12 Regional Federal Reserve Banks
– Numerous Private Member Banks
Measuring Economic Activity
Cont’d
• The Business Cycle
INTERNATIONAL ECONOMY
INTERNATIONAL ECONOMY
• International Economics – how economies in
different countries impact one another
• International Trade – buying an selling goods
across international borders
• Exports – goods sold to another nation
• Imports – goods bought from another country
• Market Advantage –
– Absolute advantage – one country can produce a product using
less resources than another country
– Comparative advantage – one country can produce a product at
a lower opportunity cost than another country
International Economy
International Economy
• Trade Restrictions and Barriers
– Used to protect domestic industries or for national
security
– Quota – limitation on the number of imports
– Tariffs – taxes on imports
– Embargo – refusing to trade with another country
(often used to punish)
– Standards – specific guidelines on imports to make
them meet high standards established by FDA, EPA,
– Subsidies to domestic industries to help them
compete
International Economy
• Trade Organizations
– World Trade Organization (WTO)
– European Union (EU)
– Association of Southeast Asian Nations
(ASEAN)
– United Nations (UN)
– North American Free Trade Agreement
(NAFTA)
Trade Organizations
• World Trade Organization (WTO)
– Establishes rules fr international trade
– Helps resolve disputes between member
nations
• European Union (EU)
– Trading union consisting of 25 European
nations
– Facilitates trade and commerce
– Seeks to create a unified regional economy
International Trade Organizations
• Association of Southeast Asian Nations
(ASEAN)
– Aims to accelerate economic growth, social
progress and cultural development among its
members
• United Nations (UN)
– Seeks effective solutions to economic matters
through diplomacy
– Helps determine how worldwide economy
responds to international circumstances
International Trade Organizations
• North American Free Trade Agreement
(NAFTA)
– Lowered trade barriers between U.S., Canada
and Mexico
– Allows U.S. businesses greater access to
foreign markets (positive)
– Possible loss of U.S. jobs (negative)
International Economy
• Balance of Trade – rate at which a nation
trades with other nations
• Favorable balance of trade – country exports more
than it imports
• Unfavorable balance of trade- country imports
more than it exports
• Balance of Payments – value of money
coming into a country due to exports
minus imports
International Economy
• Exchange Rates – worth of one nation’s
currency in any other nation
– Fixed exchange rate – price that is tied to a
stable currency of a developed nation
– Floating exchange rate – determined by
supply and demand
• Currency Appreciation – benefits domestic
consumer
• Currency Depreciation – benefits foreign
buyers
Foreign Exchange Cross Rates
•Majors
•Americas
USD
•Europe, Middle East & Africa
EUR
JPY
GBP
CHF
CAD
AUD
USD
–
EUR
0.7435 –
JPY
90.490 121.69 –
GBP
0.6370 0.8568 0.0070 –
CHF
0.9261 1.2457 0.0102 1.4539 –
CAD
1.0059 1.3531 0.0111
AUD
0.9585 1.2892 0.0106 1.5045 1.0350 0.9527 –
HKD
7.7575 10.433 0.0857 12.177 8.3760 7.7113
•Asia-Pacific
1.3450 0.0111
HKD
1.5698 1.0798 0.9940 1.0433 0.1289
0.0082 1.1672 0.8028 0.7391 0.7757 0.0958
142.03 97.708 89.938 94.393 11.663
0.6878 0.6332 0.6646 0.0821
0.9206 0.9662 0.1194
1.5792 1.0862 –
1.0495 0.1297
0.1236
8.0936 –
International Economy
• Factors affecting exchange rates
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–
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Interest rates
Productivity
Consumer taste
Economic stability
• Purchasing Power – actual amount that can be
bought with a given unit of money
• Purchasing Power Parity – same product sells for
same amount of currency in different countries
PERSONAL FINANCE
Personal Decision Making
• Use Rational Decision Making Model
• Respond to Incentives
– Positive incentives –Engage in activities that
benefit me economically (increased income,
profit, revenue)
– Negative incentives – avoid activities that
could harm me economically (decrease
income, profit, revenue)
Worker’s Earnings
• Worker’s earnings: pay received from an
employer– determines how much I have to spend, save
or invest
• Earning potential: how much a person is
likely to receive in pay
– Influenced by skills, education, training,
– Highly successful people investment as much
time/money on education and training as possible
TAXES
• Progressive tax – increases as income
increases
– Tax Bracket Married (FJ)
Single
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$0 – $8,700
$8,700 - 35,350
$35,350 – $85,650
$85,650 – $178,650
$178,650 – $388,350
Over $388,350
10% Bracket
16% Bracket
25% Bracket
28% Bracket
33% Bracket
35% Bracket
$0 – $17,400
$17,400 – $70,700
$70,700 – $142,700
$142,700 – $217,450
$217,450 – $388,350
Over $388,350
TAXES CONT’D
• Regressive Tax
– Percentage paid in tax increases as income
decreases (sales tax)
• Proportional Tax – everyone pays the
same amount proportional to their
income (also known as flat tax)
FINANCIAL INSTITUTIONS
• Commercial Banks – receive deposits of
money, extend credit and provide loans
• Credit Unions – similar to banks, but serve
only members of CU
• Savings and Loans Associations –
originally established to make home
mortgage loans (aka thrift institutions)
INVESTING: Why? To Have a
good retirement!!!
• Looking for a RETURN (eventual payoff) on my
investment
• RISK (chance of loosing investment) in hope for
the payoff
• KEY: MAKE SURE I WILL STILL BE OK IF I
LOOSE THE MONEY
– STOCKS – shares in a company
– MUTUAL FUNDS – pool of money from many
investors that are used to buy a range of stocks
– BONDS – loans to a company or the government
CREDIT
• GOOD
– Allows me to have goods or services now and pay
later (Student loans, House, Furniture, Car)
• Bad
– Interest charged makes me pay more in the long run
• Credit Worthiness – based on credit score
– Can affect interest rates you pay on all loans
– Can affect insurance rates
– Can affect employment opportunities
INTEREST RATES
• Simple interest – applied only to the value
of the principle
• Compound Interest – applied to principle
and the accrued interest
INSURANCE
• Life – provides money upon one’s death
• Health/medical – covers medical expenses
• Disability – provides income (usually 60% of
normal wages) when a person is unable to work
• Liability – pays when a person is held financially
responsible for an accident
• Homeowners – covers damage to policy holders’
home (limited liability for accidents on property)
• Comprehensive – usually held by businesses to
cover actions of employees
Online practice test
www.quia.com/quiz/678432.html