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