Page 1

Review for Midterm th

Date of exam: January 14 , 2009 Chapters covered: 1,2,3,4,5,7,9,10,11,13,14 Chapter 1: What is Economics? - Economics o Is business of everyday life o Social science that studies how society uses scarce resources to satisfy wants o Involves study of people o Uses many tools of analysis - Factors that affect production- land, labor, capital, entrepreneurship o Land- Natural resources o Labor- physical and mental efforts of people o Capital- buildings, tools, machines o Entrepreneurship- imagination, innovative thinking, management skills needed to start a business  Entrepreneurs are willing to take risks for profit - Scarcity o Inequality exists between wants and resources available to satisfy them o Resource not available at precise time and place when needed o Must have demand for resource to be scarce - Opportunity costs and Trade offs o Highest valued alternative given up as a result of choice o Ex: working in bookstore, opp. cost is participating in school debate team - Incentives and Disincentives o Incentives  Positive rewards for making choice or behaving in a certain way  May be higher wages, praise, good grades, etc. o Disincentives  Negative or withdrawn reward  Fines, punishment - Marginal o Extra or additional costs or benefits of a decision - 3 questions that every economy must ask- what, how, and for whom o What goods and services to produce? o How should goods and services be produced? o For whom will goods and services be produced? - Microeconomics and Macroeconomics o Macroeconomics- “big picture”  Nationwide, statewide level thinking  Affects large group o Microeconomics- “small picture”  Individuals, families, businesses Chapter 2: Free Enterprise in the United States - Free Enterprise o People in their economic roles are free to make choices - Pillars of Free Enterprise o Private property  Resources products owned by individuals IAHelp.tk

1

Credits to Ying Wang and Anthony


-

-

 Important part of American economic system  Gives reason to use property as efficiently as possible o Specialization  Focusing on producing one or few parts of a product  Allows business to increase amount it produces and sells o Voluntary Exchange  Buying and selling products  Depends on other people to work effectively o The Price System  Monetary prices as a message to allow exchanges between sellers and buyers  Acts as messengers  How willing buyers are to buy  Which resources are least expensive to use in producing  Price is dominant in messaging in market economy  Provide strong incentives for consumers and producers  Higher prices encourages businesses to produce  Lower prices encourages consumers to buy  Profit; prices affect profit o Market Competition  Competition in Resource Markets  Market for producers  Drives price down  Competition in Product Markets  Market for consumers  Drives price up o Entrepreneurship  Motivation that drives business to react to the market  Encouraged by free enterprise Economic Systems o Command economy  Government controls most assets  Centrally based  Orders people to produce o Traditional economy  Relies on traditions to make decisions o Mixed economy  Blend of voluntary exchange, government control, and traditional elements Circular flow of money, resources, and products o See pg. 23 of textbook Goals of the U.S. economic systems o Full employment  Almost all that are , ready, willing and able can find work o Economic growth  Increase in output of production of goods and services during a year o Price stability  Prices do not fluctuate severely  Would cause hardship for businesses and people if happened o Economic freedom

IAHelp.tk

2

Credits to Ying Wang and Anthony


 High degree of freedom in what to do and what to buy o Economic security  Basic needs of everyone should be met o Economic equity  Fairness and impartiality  Equal economic opportunities o Efficiency  Maximum output of goods from available resources Chapter 3: Demand - Demand o Quantities of a good/service that consumers are willing and able to buy at different prices at a particular time - Law of Demand o Buyers will buy more at lower prices than high o Inverse relationship between quantity demanded and price - Changes in Qd vs. changes in Demand* o Only price can affect Qd o Many thing can affect change in Demand; see “Factors that affect Demand” - Market Demand vs. individual demand o Market demand- sum of all individual demands o Individual demand- demand of an individual - Factors that affect demand o Population  More population  more people to buy stuff  more demand o Income  More income  more money to spend  more demand o Tastes and Preferences  Ex: If [paper] was cool  more buyers  more demand o Future price expectations  If price was predicted to fall  more demand o Change in weather or season  Products that are affected by this, say bottled water, road salt, etc.  If weather/ season change  more demand o Price of complements and substitutes  Price of complements rise  more demand  Price of substitutes rise  less demand for product - Income effect and substitution effect o Income effect- what income does to demand o Substitution effect- what substitutes does to demand (of a certain product) - Price Elasticity of Demand o Measure of the impact of the price effect on demand o When change in demand is large, price is elastic o And vice versa o What affects price elasticity of demand?  Availability of substitutes  More substitutes  more elastic, and vice versa  Percentage of budget for an item  Percentage is greater  more elastic, and vice versa  Time IAHelp.tk

3

Credits to Ying Wang and Anthony


More time  more elastic, and vice versa

Chapter 4: Supply - Supply o Quantity of a good or service producers are willing and able to sell at a particular time. - Law of Supply o Producers make more as price of a product rises - Changes in Qs vs. changes in supply* o Only price can change Qs o Many things affect changes in supply; see “Factors that affect Supply”. - Factors that affect Supply o Price of Inputs  Price of Inputs rise  supply drops o Future price expectations  Future price rises  supply increases o Number of suppliers  Number of suppliers increases  supply increases o Government (not like the other ones…)*  - Price elasticity of Supply o Responsiveness of business is key  Responsiveness is slow  supply inelastic o Time is also key  More time  supply elastic Chapter 5: Market-Clearing Price - Market o Where people trade goods and services for labour, money, etc. (you can define this too ) - Market-Clearing Price o Amount supplied = Amount demanded o Nothing left over o “clears” market - Shortage and Surplus o Surplus: when the price is above the market clearing price; leads to extra inventory o Shortage: when demand is greater than supply; the price is below market clearing; more people are unsatisfied o Surplus of scarce products? Not possible. If the product is scarce, then there is demand for the product making it scarce. That means there cannot be a surplus. - Functions of prices o Messenger  Tells when sellers should sell and buyers should buy o Ration products  Distributing products by price  If you want a Lamborghini that bad, spend less on other products and by the end, you get the money   Auctions are “excellent example of demand affecting price” o Motivator  Provides incentives for people to produce goods and services  Ex: profit incentive: prices can yield profits  profits mean more money to spend  more luxuries - Shifts in demand and supply altogether IAHelp.tk

4

Credits to Ying Wang and Anthony


o Market- clearing price varies o Incentives also change  products and demands change  Ex: environmentally-unfriendly product’s demand lowers, opp. products demand increases Chapter 7: Business of Free Enterprise - Industry o A group of one or more firms that produce a similar or identical product - Advantages and Disadvantages of small businesses o Advantages  Flexibility  Can be profitable in small markets  “down the street” appeal  Specialize more quickly and effectively o Disadvantages  Higher failure rate than larger businesses  Inexperience  Monetary problems  Hiring and retraining workers - Sole Proprietorship o Definition  Business owned by one person o Advantages  Organization  Easy to start, easy to run  Free to make own decisions  Profits  Gain all profits of business  Taxes  Few legal restrictions  Flexibility  React quickly to problems  Personal Achievement  Success and recognition through individual efforts o Disadvantages  Unlimited Liability  All debts are on bosses head, not businesses (two different things)  Limited funds  Limited money to expand  Limited potential  Lack of opportunities for employees  Limited size and growth  Lack of resources  Fragile existence  Competitor can take large part of business  Market can decline  If owner dies, company ends - Partnership o Definition IAHelp.tk

5

Credits to Ying Wang and Anthony


-

-

 Business organized by two or more people o Advantages  Organization  Easy to form, easy to run  Potential growth  Bring more money into business  Abilities  Fresh ideas from each other o Disadvantages  Unlimited Liability  All individually responsible  If one partner commits crime, all partners are held liable  Limited Life  If a partner dies or leaves, partnership is terminated  Limited funds  Determined on wealth and ability to borrow  Organization  Conflicts may arise form different ideas. Corporation o Definition  Company managed on behalf of owners o Advantages  Limited Liability  Owners held responsible only for debts for investment  Makes possible to raise large amounts of capital  Ease of transfer  Owners can leave or join at will by trading stock  Unlimited life  Corporations can live forever  Ability to raise funds  Sell stock, issue bonds o Disadvantages  Expense  More complicated and costly  Taxation  Taxes earning twice, from profits and dividends  Regulations  Many legal laws to regulate corporations and provide transparency Limited Liability companies o Definition  Combines advantages of corporations and partnerships o Advantages  Benefit of mass Internet use  Limited liability  Function in its own name o Disadvantages  More complicated than partnerships  Taxed as partnerships are taxed

IAHelp.tk

6

Credits to Ying Wang and Anthony


-

Non-profit organizations o Do not try to earn a profit o Serve specific purposes o Not subject to income taxes o Income must cover expense o Employ volunteers and paid staff - Cooperatives o Associations of individuals or companies that perform functions for members o Housing co-ops o Consumer co-ops o Producer co-ops - Franchises o License that entitles holder to operate as if a part of a larger chain. o Holder gains popularity and good/bad name of the chain. o Revenue from selling franchises enables company to expand at minimum cost o More capital saved o Franchisers benefit as franchisees try to be successful o Franchisers retain control o A mistake from one franchisee can being a blow to the entire franchise Chapter 9: Production and Productivity - GDP – Gross Domestic Product o Definition  Final value of goods and services produced within a given country within a year o Components  Consumption +Investment + Government Spending + [Exports + Imports] (last two are called Net Exports) - Real GDP vs. Nominal GDP o Real GDP is deflated to a given year’s dollars o Nominal GDP is measured in the dollars of the year when the GDP was announced - Shortcomings of GDP o Does not measure goods and services that are produced but not sold i.e. charity work o Does not measure goods and services produced and consumed by oneself o Does not measure value of leisure time o Does not measure value of illegal activities - Productivity vs. Labor Productivity o Productivity is output of goods and services measured per unit of input of resources o Labor Productivity is amount of goods and services the work force can produce in a given time period. - The relationship between technology and GDP o More technology more productivity  more GDP (like robots on an assembly line) - Fixed cost, variable costs and total costs o Fixed cost  Costs that remain the same regardless of how much the firm produced (i.e. rent of a factory, provided it didn’t expand or anything or a machine – buy it once and it keeps producing; no need to buy a new one for every product) o Variable costs  Costs that change with changing amounts of production  i.e. cost of raw materials; more goods produced  more raw materials needed  higher costs IAHelp.tk

7

Credits to Ying Wang and Anthony


o Total costs  Sum of fixed and variable costs - Law of diminishing returns o As more and more variable resources are added to fixed resources, the marginal amount produced decreases each time. - Total revenue vs. profit o Total revenue  P x Qs (Price multiplied by quantity sold) o Profit  TR- TC = TP (total revenue subtract total cost = total profit) - Economies of scale o Reductions in cost resulting in mass production Chapter 10: The U.S. Labor Force - Labor force o Employed  Works at least one hour a day with pay  Works 15+ hours without pay in a family business  Holds a job but did not go due to illness, vacation, labor disputes, or bad weather o Unemployed  Temporarily laid off  Reporting to new jobs in 30 days  Not working but looking for a job in the past four weeks - Labor force trends o Agricultural  Declines as country modernizes o Manufacturing  Declines as country modernizes even more o Service  Increases as country modernizes even more. - Human capital o What humans can do to benefit the company - Contingent employment o Definition  Employment of temporary workers o Benefits to the employer  Cheaper labor  Can lay off workers more easily o Drawbacks  More cost to teaching/training new employees - Labor demand, labor supply, equilibrium wage o Like demand, supply, market-clearing price… o Labor demand  Labor demanded from business, producers o Labor supply  Labor supplied from the workforce o Equilibrium wage  Wage at which both supplier and demanders of labor are satisfied - Unskilled, skilled, and professional labor o Skilled IAHelp.tk

8

Credits to Ying Wang and Anthony


 Engineer  Architect o Unskilled  Builder  Cement Layer  Paper Watcher (inspecting paper) o Professional  Lawyer  Doctor  Executives  Government Officials - Labor unions o Definition  Association of workers that seeks to improve standard of living for workers o Trends  Downward o Reasons for decline  Conflicting objectives  Lessening of demand for unionized workers  Appearance of non-unionized workers  Increasing percentage of labor (college-educated employees, women, service providers) have been reluctant to join unions - Specialization and division of labor o Relation to productivity  Allows people to concentrate on tasks at which they are most productive  More productivity as a result - Minimum wage o Lowest legal wage an employer can pay o $5.15/hr for persons above 20 o $4.25/hr for persons under 20 o Fair Labor Standards Act of 1938 Chapter 11: Competition among Businesses - Market Structure o Set of conditions that describes the characteristics of a market under which a business competes - Perfect Competition o Many businesses o Market determines price o Identical products o Easy to start business - Monopoly o True Monopoly  Controls entire market o Real Monopoly  Dominates industry o Single large business o Determines market price o One product o Difficult to start a business - Monopolistic competition IAHelp.tk

9

Credits to Ying Wang and Anthony


o Many businesses o Limited ability to set prices o Similar products o Relatively easy to start business - Oligopoly o Few large businesses o Considerable ability to set price o Many forms of product differentiation o Usually in either raw materials or highly technologically advanced sectors of the economy i.e. nickel mining, oil, airplane manufacturing, etc. - Collusion o Formal gathering of company leaders o Restrict production to raise demand and more profits o Illegal in the U.S. o Severe market restrictions against colluding - Mergers o Horizontal  Two or more companies involved in making the same product o Vertical  Two businesses involved in the same business o Conglomerate  Two or more unrelated companies Chapter 13: Money and Financial Institutions - Functions and Characteristics of Money o Stability  Value should be stable, so that it could be used as a form of transfer o Portability  Small and light enough to take with anywhere o Durability  Tough; no-disintegrating-in-the-washer toughness. o Uniformity  The equal denominations of money should be equal o Divisibility  Easy to split up into parts of relative value o Recognizability  Hard to copy, easy to recognize - Money supply o M1  Currency  Traveler’s Checks  Demand Deposits  Other checkable Accounts o M2  M1  Small Savings deposits  Passbook and money Markey savings accounts  Mutual fund money market accounts o M3  M2 IAHelp.tk

10

Credits to Ying Wang and Anthony


 Institutional money market accounts  Large savings deposits  Eurodollars  Other (files that are worth a lot, essentially) - Development of banking o Middle Ages  Stored money for safekeeping  Bartered gold with receipts; early form of money  Goldsmiths were first bankers o Modern Era  Government regulates and supervises banking  Banks are defined as financial institutions that accept demand deposits and makes commercial loans. - Fractional reserves system o Banks hold a fraction of depositor’s money. - Federal reserve system o Nation’s central bank o The “Fed” o 12 central banks, 25 branches o Board of Governors o Fed open Market Committee o Advisory committees - Monetary policy o Government policy that affects interest rates and quantity of money supplied to the economy o Purpose is to reduce the effects of recession or too-rapid expansion Chapter 14: Economic Stability - Business cycle o Expansion  Also called recovery  Output and employment expand o Peak  Temporary maximum of output and employment o Contraction  Also called recession, depression  Total GNP output declines o Trough  Output and employment at minimum - GNP, NI, PI, DI o GNP  Gross National Product  Total market value of all final goods and services produced by American citizens, whether they are in the U.S. or overseas. o NI  National Income  Value of Goods and Services of a given nation in one year o PI  Per Capita Income  The value of goods and services produced by a single person in a given nation in one year. o DI IAHelp.tk

11

Credits to Ying Wang and Anthony


-

-

-

-

-

-

 Disposable Income  Income received from households, subtract personal taxes. Economic Indicators o Durable Goods orders  Durable goods include items used for three years or more, such as airplanes, cook pots, cars, etc.  A backlog of orders means that the economy is relatively healthy and growing o Housing starts  If economy is strong and growing, then there would be more housing starts. o Jobless claims  If jobless claims are declining, then that means the economy is strong, and there is low unemployment. Recession, Depression, Economic Growth o Recession  See “contraction” for definition  Taxes allow families to be taxed at a lower rate than in boom years, and so provide a tax cut for those families that are affected.  Technically, a recession is a decrease in GDP lasting 2 quarters o Depression  A really bad recession o Economic Growth  When the economy is healthy and growing; unemployment is low, output of goods and services increases. Unemployment o Definition  Rate is number of people looking for a job divided by the number of people in the workforce. o Types  Frictional  Temporary, unavoidable unemployment, i.e. between jobs.  Structural  When the “structure” of the economy changes, i.e. moving from farming to manufacturing, farmers are then unemployed.  Seasonal  Spending part of the year in temporary unemployment, as such as ski resort teachers are unemployed in the summertime  Cyclical  Downturn in the economy, i.e. as in a recession, when people are laid off Full employment o When actual rate of unemployment is equal to natural rate of unemployment, the country is said to be at full employment. Frictional and structural unemployment are still expected. Discouraged workers o Workers who have been without work for so long that they stop looking for work. o Not included in the unemployment rate Inflation, price level, CPI o Inflation  A general rise in overall prices. o Price level

IAHelp.tk

12

Credits to Ying Wang and Anthony


 o CPI 

-

-

-

-

-

Measure of overall prices.

Separate index that measures the prices of a “market basket” of 300 typical goods that consumers buy.  Good measure of inflation since it is tied to common, everyday products Purchasing power o The value of money in purchasing goods and services o Decreased by inflation; money is worth less, so it buys less. Theories of inflation o Quantity  Keeping prices constant but letting quantity of goods vary. o Cost-push  Rising prices from increases in the cost of production o Demand-pull  Too much money to chase too few goods Fiscal policy o Definition  Usage of government spending and taxation to stabilize the economy o Tools  Government spending  Spending on infrastructure  Subsidies for business  Taxation  Income taxes  Sales taxes o Expansionary/Contractionary  Expansionary  Raise taxes, and decrease government spending to control inflation  Contractionary  Lower taxes, and increase government spending to boost the economy and prevent it from going into a downspin o Limitations  If government reduces taxes, revenues decrease, creating a deficit.  Can crowd out private borrowers, increasing the interest rate, making it harder to borrow money  Government prints money to pay off debt, causing inflation  Increasing taxes is unpopular with the public Classical vs. Keynesian economics o Classical  Government keeps its hands off the economy  As long as economy is without interference from the government, supply and demand can balance. o Keynesian  Supports government intervention for economic stabilization through fiscal and monetary policy  Government spends money  more money for the regular people  more spending and increase in productivity. Multiplier effect

IAHelp.tk

13

Credits to Ying Wang and Anthony


o Banks lend money  people have money  save in another bank  lends money  people have money… Miscellaneous - Absolute and Comparative Advantages o Absolute Advantage  Being able to produce something more efficiently than another person/nation/etc.  Can we produce more? o Comparative Advantage  Being able to produce a good or service at a lower opportunity cost than another person/nation/etc.  Should we produce more? - Exchange Rates o The value of one country’s currency stated in terms of another country’s currency.

GOOD LUCK

IAHelp.tk

14

Credits to Ying Wang and Anthony

Review for Economics Final  

Credits to Ying Wang and Anthony

Read more
Read more
Similar to
Popular now
Just for you