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Economics Final Review
Do Now:
• Take out your review sheet. Circle those terms that you are unsure of.
Chapters covered
• 1 – What is Economics?• 2 – (section 1) Economic Systems• 4 – Demand• 5 – Supply• 6 – (section 2) The Price System at work• 9 – Sources of Government Revenue• 10 – Government Spending• 13 – Economic Performance• 14 – Economic Instability• 15 – The Fed and Monetary Policy• 16 – Achieving Economic Stability• 17 – (sections 1 & 2) International Trade
Needs vs. WantsNeed - Required for survival - water, food,
shelter Want - a way of expressing a need - food is
a need and Taco Bell is a want.
the study of how people try to satisfy what appears to be
seemingly unlimited and competing wants through the use of scarce
resources
What is Economics?
Microeconomics is the study of how…
• Individuals• Households• Businesses• Industries
Make economic decisions
Microeconomics revolves around two very important concepts:
•Demand
•Supply
MACROECONOMICS
Part of economic theory that deals with the
economy as a whole and decision making by large units such as the United
States government
Scarcity – a lack of resources
• You may desire to purchase a …
• … but the ability may not be there due to a scarcity of…
The Fundamental Economic Problem is…
“There is no such thing as a free lunch”
Everything has a cost – time and/or money
What does this mean???
Scarcity Choices Opportunity Costs
the value of the next best choice that one gives up when making a decision...
Can be money, time, or resources
Opportunity costs =
OR
Tradeoff –
Opportunity Cost –
choosing between two things
the thing given up in order to attain the other thing
accumulation of products that are tangible, scarce, useful, and transferable from one person to another
Wealth =
Why are some things more valuable than others?
Value- worth of a good or service based on dollars and cents
Good- item that is economically useful or satisfies a want1- Consumer good- intended for purchase by individuals examples- store bought items
2- Capital good- goods that are used to produce consumer goods
example- machines in factories
Service- work or labor performed for someone
Why are some things more valuable than others?
Paradox of Value- Contradiction between the high value of nonessentials and low value of
essentials
Water vs. diamonds
Utility- capacity to be useful and provide satisfaction
Scarcity + Utility = Value
Essential with littlevalue
Non- Essential with high value
Practice
Economics may best be defined as a(n)
A. scientific study of supply and demand.
B. study of efforts to satisfy seemingly unlimited wants with scarce resources.
C. limited description of economic activities.
D. extended application of cost-benefit analysis.
Practice
What is the fundamental problem of economics?
A. scarcity
B. capital
C. the factors of production
D. labor
Practice
What are the fundamental questions of economics?
Land, labor, capital, and entrepreneurs are the
A. results of supply and demand.
B. result of production.
C. basis of employment.
D. factors of production
Practice
Which of the following would most likely be studied in a microeconomics course? A) the cycling trends of unemployment and inflationB) the size of the federal budget deficitC) the interaction between labor and productionD) the history of world trade and globalization
Practice
For something to have value it must
A. cost a lot of money.
B. have utility.
C. be on sale.
D. never go out of style
Practice
Which of the following is NOT a capital good?
A. a bulldozer at a construction site
B. a cash register at a clothing store
C. an oven at a bakery
D. a television set for sale at an appliance store
Practice
The accumulation of economic products that are tangible, scarce, useful, and transferable is
A. wealth.
B. profit.
C. value.
D. scarcity.
Practice
The opportunity cost of becoming an entrepreneur is the
A) income one could be making in another field
B) the value of collateral one puts up for entrepreneurial loans
C) the operating costs of the business
D) business taxes one pays to the gov’t
Do Now:
• Describe the circular flow of economic activity.
The Circular Flow Model shows how capitalistic societies are economically
interdependent.
Markets• A market is location that allows buyers and
sellers to exchange economic products• Examples- supermarket, mall, internet
Economic Interdependence - economic activities in one part of the country or world affect what happens elsewhere
Two types of markets
• Factor Market
-where productive resources are bought and sold.
Entrepreneurs hire:land in return for rentlabor in return for wages
and salariescapital in return for interest
Two types of markets
• Product Market
- where producers sell their goods and services to consumers.
Households spend their money on goods and services and businesses get revenue
Productivity
• The amount of goods and services produced per unit of input
• Productivity has an impact on what producers can supply at various prices
Specialization
• Leads to greater productivity
• Workers/business/countries focus on production of one good.
• Same as division of labor
The PPF helps to answer the economic questions “What to Produce?” and “How
to produce it?”
Production Possibilities Frontier- graph that shows the various possible combinations of output that can be produced when all resources are fully employed. It is used to show the opportunity costs associated in the production of two items.
All points on the curve represent the use of fully employed resources
What to do with resources available?
Point A
Country can produce70 guns and 300 butter
Point B
40 Guns and 400 butter
Because of Scarcity point D is impossible for this country to reach at this point
Inefficiency- when resources are not being fully employed
Point e shows the inefficient use of resources
Opportunity Cost Point A
Country can produce70 guns and 300 butter
The opportunity cost of increasing production of butter by 100 units is 30 guns which must be given up
Law of increasing opportunity cost: opportunity cost increases as more of a good is produced. As production of guns increases so the does the amount of butter that must be given up.
Expansion in the production curve
•How can the curve move to the right?
•New Technology
•Better use of or increases in resources
• Improvements in labor
Outward movement of curve= economic growthInward movement= shrinking of the economy
1- What is the opportunity cost of moving from D to E? 3 units of grain
2- What is the opportunity cost of moving from E to C? 7 units of wine
3- Which point on the graph represents resources that are not being fully employed? point a
4- What is one way that point b could be reached? (answers on previous slide)
cd
e
f
Demand
• The desire and ability to purchase a good or a service
• Demand represents the consumer’s point of view
Law of Demand
As the price of an item goes down, demand goes up; as the price of an item goes up, demand goes down.
EXAMPLE:
If the price of flip flops is $5 per pair, 50 people may go to buy them. If the price went up to $50 per pair, there may only be five people who would buy them.
Demand Curves & Schedules
D$50
$5
5 50
Price
Quantity5$50
25$25
50$5
Quantity
Demanded
Price
$25
25
Curve
Schedule
Factors which affect demand
can be used in place of other products– ex: butter and margarine
the use of one increases the use of the other– ex: computers and software
Substitutes:
Complements:
ELASTICITY of DEMAND
• Demand Elasticity: the extent to which a change in price causes a change in the quantity demanded
• Elastic: when a given change in price causes a relatively larger change in the quantity demanded.
• Inelastic: the given change in price causes a relatively small change in the quantity demanded.
DETERMINING ELASTICITY
1) Can a purchase be delayed? INELASTIC If a consumer’s need is urgent and can not be put off
demand tends to be inelastic. (Diabetes Insulin, Tobacco addictive)
2) Are adequate substitutes available? ELASTIC If they are people can switch back and forth between
them. (Gasoline from a particular station. However, gas as a
whole is inelastic)
3) Does the purchase use a large portion of income? If yes then demand tends to be elastic, if no demand
tends to be inelastic.
Supply
• The desire and ability to sell a good or service to people
• Supply represents the producer’s point of view
Law of Supply
As the price of an item goes up, supply goes up; as the price of an item goes down, supply goes down.
EXAMPLE:If the price of flip flops is $5 per pair, 50 people may go to buy them; however, the store might only stock 5 pairs.
If the price went up to $50 per pair, there may only be five people who would buy them; however, the store would want to make a lot of money so they would make sure they had 50 pairs on the shelves.
Supply Curves and Schedules
50
25
5
$5 $25 $50
Quantity
Price
S
50$50
25$25
5$5
Quantity
Supplied
Price
Schedule
Curve
Demand and Supply Curves and Schedules
$50
$25
$5
5 25 50
Surplus
Shortage
50$505
25$2525
5$550
Quantity
Supplied
PriceQuantity
DemandedD S
Curve Schedule
Pri
ce
Quantity
Equilibrium
Government Regulations
and the Price System
• Price Ceiling – maximum legal price that can be charged for a product (ex: rent control)
D S
Equilibrium
Shortage
Surplus
Price
Ceiling
Price
Floor
$50
$25
$5P
rice
5 25 50
Quantity
• Price Floor – lowest legal price that can be charged for a product (ex: minimum wage)
Practice• Draw a market equilibrium graph for a
milk. • Identify the equilibrium price.• Identify the equilibrium quantity.• Illustrate what happens when demand for
milk decreases.• What happens to equilibrium
price/quantity?• If the price of cookies goes up, what will
happen to equilibrium price for milk?
Do Now:
• Identify and explain the 3 basic types of economic systems.
Economic Systems• All Societies have something in common - what is it? An Economy
3 types of Economies:• Traditional: allocation of scarce resources and nearly all other
economic activity stems from rituals, habitat, or custom. Roles are defined by the customs of the elders.Ex: African tribes, Australian Aborigines, Inuits
• Command: a central authority makes most of the WHAT, HOW, and FOR WHOM decisions.Ex: North Korea and Cuba
• Market: People and firms act in their own best interest to answer the WHAT, HOW, and FOR WHOM questions. Ex: United States
Practice
How does the demand curve respond to an increase in demand?
A) the curve shifts left
B) the curve shifts right
C) movement along the curve
D) no change
Practice
All of the following are examples of complements EXCEPT
A) butter and margarine
B) flashlights and batteries
C) peanut butter and jelly
D) cameras and film
Practice
A company decreases the price of milk by 10% and the company’s total revenues fall significantly. What term best describes the demand for milk?
A) elastic
B) inelastic
C) unit elastic
D) demand elastic
Practice
Price floors that are artificially high are likely to cause
A) a price ceiling
B) a surplus
C) an equilibrium
D) a shortage
Practice
Which of the following is NOT a strength of a market economy?
A) it can adjust to change over time
B) it gives producers and consumers freedom
C) it has decentralized decision making
D) it supports all of its people
Economic Indicators• GDP- Gross Domestic Product- Includes everything that is produced
within a country’s borders
• GNP- Gross National Product- Anything that is produced by a company headquartered in a specific country or produced by a country’s citizens
EX:
TOYOTA (Japanese Company)
• If produced in the US, would count for US GDP
• If produced in the US, would count for Japan’s GNP
APPLE (American Company)
• If produced in China, would count for China’s GDP
• If produced in China, would count for US’s GNP
What is NOT included in GDP? underground economy, resale items, intermediate products, services and goods bought and sold off the books
Other Economic Indicators
• Unemployment rate - The percentage of the work force that are willing and able to work but do not have jobs.– Frictional -- Seasonal– Structural -- Technological– Cyclical
• Full Employment – lowest possible unemployment rate – considered to be below 4.5%
Who does the labor force consist of?
Other Economic Indicators
• Inflation- The general rise in prices. Inflation is measured by a Price Index
Who is hurt the most by inflation?
Lenders, those on a fixed income
–Demand-Pull – “too much money chasing too few goods” – aggregate demand outpaces aggregate supply
- Cost-Push - caused by large increases in the cost of important goods or services where no suitable alternative is available
Other Economic Indicators
• CPI- Consumer Price Index -
looks at a market basket of goods and services to calculate the rate of inflation
- Prices are compared to prices during the base year in order to determine the rate of inflation
Draw the Business Cycle
Recession: GDP falls for 2 consecutive quarters (6 months)
Do Now:
• What are the three types of taxes?
• How is each one applied?
Government Spending• The federal budget is presented by the
President of the U.S. and approved by Congress
• Federal, State and Local governments raise money through taxation.
Three Types of Taxation• Progressive Tax –
Income % income paid in tax
Amount of tax
Family A $10,000 10% $1,000
Family B $50,000 20% $10,000
Family C $100,000 30% $30,000
PROGRESSIVE TAX
people with more income pay a higher percentage of that income in taxes than do those with less income. Ex – income tax
Three Types of Taxation• Regressive Tax –
Income % income paid in tax
Amount of tax
Family A $10,000 20% $2,000
Family B $50,000 4% $2,000
Family C $100,000 2% $2,000
REGRESSIVE TAX
everyone pays the same amount, regardless of income; therefore, the percentage of income paid in tax is greater for lower-income people
Three Types of Taxation• Proportional Tax –
Income % income paid in tax
Amount of tax
Family A $10,000 20% $2,000
Family B $50,000 20% $10,000
Family C $100,000 20% $20,000
PROPORTIONAL TAX
takes the same percentage of income from all income groups
Assessing Fairness in Taxation
• Benefits Received Principle – A concept of tax fairness that states that people should pay taxes in proportion to the benefits they receive from government goods and services
Ex: people who use a toll road
should pay the toll; people who
use a park should pay the park
fees.
Assessing Fairness in Taxation
• Ability to Pay Principle – A concept of tax fairness that states that people with different amounts of wealth or different amounts of income should pay at different tax rates.
Ex: Progressive income tax
Government Spending
• Federal Budget has two categories of spending– Discretionary– Mandatory (Only
Social Security, Medicare and Interest Payments on National Debt)
Government Spending
• Budget Surplus - revenues exceed expenditures
• Budget Deficit - expenditures exceed revenues
• National Debt - amount of money borrowed to cover our deficit
Practice
All of the following are included in GDP EXCEPT
A) The income from a garage sale
B) The value of a new car
C) The value of a new house
D) The sale of an ice cream cone
Practice
All of the following are basic sectors of the United States economy EXCEPT
A) Income sector
B) Consumer sector
C) Government sector
D) Investment sector
Practice
An assembly line worker in an automobile plant is laid off during a recession. She is
A) Seasonally unemployed
B) Frictionally unemployed
C) Cyclically unemployed
D) Technologically unemployed
Practice
What are two phases of the business cycle?
A) Peak and trough
B) Depression and recession
C) Depression and expansion
D) Recession and expansion
Practice
Paying $1,000 tax on $10,000 of taxable income, $4,000 on $20,000 of taxable income, and $20,000 on $60,000 of taxable income is an example of a tax system that is
A) proportional
B) regressive
C) progressive
D) average
Practice
The ability to pay principle of taxation states that
A) only people who have the ability to pay should be taxed
B) those who benefit from government services should pay for them
C) people should be taxed according to their ability to pay
D) the gov’t should assess taxes only if it is clear that citizens will have the ability to pay
Functions of Money $$$
• Medium of exchange: It can be used to purchase goods and services.
• Unit of account: It can be used to compare the value of different goods and services.
• Store of value: It can be held to buy something in the future.
Monetary Policy
• Determined by the Federal Reserve, or the Fed
• Concerned with LONG TERM economic health – ex: inflation, money supply
Tools of Monetary Policy
• Open Market Operations – buying and selling government securities
• Adjusting the discount rate – the interest rate charged on short-term loans to banks by the Federal Reserve
• Adjusting reserve requirements – the percentage of deposits that banks must keep on reserve in their vaults or on deposit with the Fed
Tight (Contractionary) Monetary Policy
• Recommended when the economy is in danger of creating inflation– raise reserve requirement– raise discount rate – sell bonds
• all of these decrease the money supply
Loose (Expansionary) Monetary Policy
• Recommended when the economy is showing signs of low economic and employment growth– lower reserve requirement– lower discount rate – buy bonds
• all of these increase the money supply
Fiscal Policy
• Determined by the President and Congress
• Concerned with SHORT TERM economic health – ex: unemploymentStabilize the economythrough taxing andspending
Demand-Side Policies
• Designed to increase or decrease total demand in the economy
• Keynes – only the government is big enough to step in and offset changes in investment sector spending– Expansionary – increase government
spending, lower taxes– Contractionary – decrease government
spending, raise taxes
Supply-Side Policies
• Designed to stimulate output and lower unemployment by increasing production rather than demand– Smaller role for government -
DEREGULATION– Lower federal taxes