EOCT REVIEW
The major concepts
Fundamental Economics
BRIGHT IDEASMARKET ECONOMY
1. The U.S. has a market economy which features private ownership of businesses and very little government interference. Voluntary Exchange is also a BIG component of a market economy. This means that buyers and sellers come together to exchange goods/services. One other important feature of a market economy is the price system. This means if you’ve got the $, someone has the good/service! The price system is based on income.
BRIGHT IDEASTRANSFER PAYMENTS
2. Payments given by the government to an individual with no service required in return. A good example of transfer payments are: Welfare, WIC, Social Security, disability benefits, TANF, Medicare, Medicaid
BRIGHT IDEASCAPITAL
This involves investing in a PERSON. This could be training for an employee, college or school to make the employee more productive.
This is an investment in technology, equipment, machinery to improve PRODUCTION.
Human Capital Physical Capital
BIG IDEASPPC
Milit
ary
Good
s
Consumer Goods
4000
5000
C
H
3000
30002000
2000
0
E
D
1000
1000
5000
4000 6000
F
B
G
I
AIllustrates Scarcity, Choice, and Trade-off’s
Points A-G = Maximum OutputPoint I = Lagging ProductionPoint H = Impossible
Supply and Demand, Decisions by Individuals or a Business
Microeconomics
Circular FlowProduct Market
BusinessesHouseholds
Factor Market
Spend Money
Profit - Revenue
Resource
Payments
– Make
More StuffIncome
Goods
and
Ser
vice
s
Goods and
Services
Fact
ors o
f Pro
duction
( Reso
urces)
Factors of Production
( Resources)
Supply and Demand
Quantity
Pri
ce
Equilibrium Price
SupplyDem
and
Surplus
Shortage
30
15
25
20
10
0
5
5 10
15
60
30
25
20
50
45
40
35
55
Price Floor Ex. Minimum wage
Price Ceiling Ex. Apartment Rent Controls
Business Organizations
What is it? Advantages Disadvantages
Sole-Proprietorship
One person Total profit, total control
Responsible for all the debt – unlimited liability
Partnership 2 or more owners Specialization, share responsibility
Share profit, responsible for all debt– unlimited liability
Corporation •Apply for legal charter,• gov’t views as separate entity•sell shares of company as stock
Easy to raise money – stockholders earn profit on stocksInvestors have limited liability – not responsible for company debt
Complex organization, difficult decision making process
Market Structures
Characteristics Example
Perfect (Pure) Competition
Large number of buyers and sellers nearly identical productsPrice takers – can’t control market
Locally grown vegetables
Monopolistic Competition
Many competing producers Product differentiation Advertising is essential
Under ArmourThe North FaceMcDonalds
Oligopolya few large firms control the marketPricing decisions depend on behavior of other firms
Soft Drinks – (Coke/Pepsi)Car Manufacturers
Monopolyone corporation has total control of the market
ex. Technological (patent) or natural monopoly (utilities)
Use of resources in the entire nation – GDP, Unemployment, Inflation, Monetary Policy, Fiscal Policy
Macroeconomics
Economic Indicators
Why are they important? Economic Indicators tell us how the economy is performing. Is the economy in a recession, expansion, sick or healthy?
SICK = Stagflation means the economy is NOT growing (stagnant) and has high inflation. A.K.A. RECESSION or DEPRESSION
HEALTHY = low unemployment, low inflation, high GDP.
A.K.A. EXPANSION
Economic Indicators
3 types UnemploymentStructural (skills don’t match the job)Frictional ( looking for a better job)Cyclical (based on the business cycle)
CPI (Consumer Price Index) measures the rate of inflation which compares the price of goods/services each year
GDP measures economic growth
Debt vs. Surplus
Deficit means spending more money than you have
National Debt is all the years of government deficit added together
Surplus means taking in more than you spend
Budget Surplus is based on the year-to-year (fiscal year) Congressional budget
DEBT SURPLUS
Monetary vs. Fiscal Policy
THE FED The Federal Reserve either
increases or decreases the amount of money available to the public Reserve requirement
Discount rate
Open Market Operations (buy or sell)
CONGRESS TAXES
SPENDING
MONETARY POLICY FISCAL POLICY
International Economics studies countries and their involvement with other countries with trade, imports and exports, and currencies.
International Economics
Comparative vs. Absolute Advantage
ability to produce a good or service at a lower opportunity cost than another nation can
Individuals and businesses are using comparative advantage when they SPECIALIZE in producing what they are best at and trading for the rest
ability to produce more of a good or service than another nation can.
Comparative Advantage Absolute Advantage
Free Trade
If all countries produced what they were best at – comparative advantage- and traded for the rest, everyone would benefit.
Production and GDP would increase for all countries. This would deliver the greatest goods to the greatest number of people.
Protection of national security
Protection of infant industries
Protection of jobs PROTECTIONISM
Arguments FOR Free Trade
Arguments AGAINST Free Trade
Trading Blocs/Trade Barriers
What do they do? Eliminates trade barriers with neighboring countries which leads to increases in GDP and productivity.
EXAMPLES: NAFTA, EU, ASEANTrade Barriers Advantages: protect domestic industries – reduces
foreign competition – protects jobs, Increase government revenue – can reduce budget deficit
Disadvantages: Fewer Choices and higher prices for consumers, encourages other nations to impose trade barriers against the U.S., hurting American exporters
EXAMPLES: NAFTA, EU, ASEAN
Exchange Rates
Price of one nation’s currency in terms of another nation’s currency.
Changes based on world demand for each country’s exports worldwide
When the dollar is WEAK (DEPRECIATION):U.S. exports increase and the price of exports go upTravel abroad is more expensive for American touristsU.S. imports decline and the price of imports increasesForeign investment in U.S. businesses increases.
When the dollar is STRONG (APPRECIATION):Imports increase and are cheaper for consumers to buyTravel abroad is cheaper for American touristsU.S. exports declineThe U.S. trade deficit increases.
Personal Finance
Taxes
3 Types of Taxes Proportional – everyone pays the same
portion or percentage – flat tax – ex. Social Security 6.2%
Progressive – the more you make, the higher percentage you pay in taxes – ex. Income tax
Regressive - people with lower incomes pay a higher tax percentage than those with higher incomes – ex. Sales Tax.
Insurance
People buy insurance to protect themselves financially for unexpected events that could be very expensive
Examples – health, property, car, life, disability, life, accidental
Pay a PREMIUM (amount per month, quarter) to guarantee coverage
The insurance company takes the money people pay in premiums to pay claims.
Budgeting
Fixed expenses – those that do not change from month to month – house payment, car payment
Variable expenses – exact dollar amount changes from month to month – power bill, water bill
Disposable income – amount a person has leftover after all bills and necessities have been paid
Credit and Interest
Credit Worthiness – to borrow money you must have good credit (good credit score) Depends on your:
Credit History – how well you have managed your bills and credit in the past (Credit Score)
Collateral - property you have that the bank could take from you if you do not pay the loan
Creditworthy – are you able to pay the money back given your income and current expenses
Interest – money charged for borrowing money Interest paid – you can get paid interest for investments Interest charged – you will be charged interest if you borrow
moneyAPR – Annual Percentage Rate – interest rate on a credit card