EOCT – What I know, you need to know!

Pay Attention!

Scarcity • Productive resources: land, labor &

capital • Factors of Production are limited• Needs & wants are unlimited • Result is Scarcity

Trade offs & Opportunity Cost • Rational Decisions are made by

considering the Costs & Benefits of the decision.

• Decision have trade-offs. • The BEST alternative given up

when you make a decision is the opportunity cost.

Specialization & Division of Labor • Individuals, Businesses & Societies cannot

satisfy all their needs & wants. • Result is specialization: to maximize

productive resources• Specialization creates interdependence & the

need to trade & exchange.

• Focus on what you do best & trade for what someone else does well: Both sides benefit!!

Production Possibilities • We can analyze the opportunity cost of

decisions by using a PPC – two products X & Y – can be produce in varying amounts.

• More of x = less of y, more of y = less of x

Economic Systems• Systems have developed to answer economic

questions: what to produce, how to produce, & allocating what is produced.

• Command systems (Socialism, Communism) – govt. officials plan all economic activities.

• Market systems (Capitalism, Free Enterprise) – individuals (producers & consumers) make decisions free* of govt. interference.

Microeconomics – study of individual markets. • Circular flow illustrates our economy; the flow of money,

products & resources.

• Demand – the desire to own & pay for a good. • Law of Demand – as price goes up, the quantity of the

product demanded by consumers goes down.

• Supply – the amount of goods in a given market (new cars, homes, shoes, etc.

• Law of Supply- as prices in a particular market increase, the quantity supplied of the product increases (more profit potential)

Elasticity & Shifts in Demand & Supply• Price changes affects the supply & demand of products

differently. • Big changes in supply & demand when prices change =

ELASTIC products. • Little changes = inelastic products.

• Factors other than price can affect Supply & Demand.

• Demand can change at every price offered if: population changes, tastes change, advertising, price of related products, subs, future price exp.

• Supply can change at every price if: costs rise of fall (gas, wages), more competition, govt reg, tax, subsidies, number of sellers, future profit exp, etc.

Equilibrium: Ceilings & Floors

• When supply & demand intersect on a graph, market is in equilibrium.

• Surpluses occur when supply exceeds demand.

• Shortages occur when demand exceeds supply.

• Ceilings are prices set BELOW equilibrium (rent control- consumers benefit)

• Floors are set ABOVE equilibrium (minimum wage- producers benefit)

Market Structures• Markets in which Businesses compete can be identified based

on a number of factors: number of firms, barrier to entry, etc.

• 4 structures: • Perfect Competition – large # of firms selling the same exact product / very easy

to enter the market (wheat, corn)

• Monopolistic Competition – many firms selling similar but not identical products / relatively easy to enter (fast food, nail salon, jeans,etc)

• Oligopoly – a few large firms dominate. Very difficult to enter, just a few choices for consumers (Soft Drinks, Breakfast Cereals, Satellite TV, etc)

• Monopoly – one firm in the market/ extreme barriers to entry. Total control over price, no choice for consumers (local electric co.)

Business Organization • Sole Proprietorship –

- Advantages – total control or business & profits - Disadvantages – hard to raise money & expand. Short lived.

Partnerships- Advan. – allows for specialization, less* liability- Disadvan- disagreements, less profits, less control.

Corporations - Advan – raise lots of money fast, no personal liability for owners. - Disadvan- lose of control, profits are split among all stock owners.

Macro – study of entire economic system • Economist use data to compare economies & measure

economic health.

• Most significant of these is GDP: measure of all products and services produced in an economy in a given year.

• Expenditures used are: C + I + G + (X-M)• Used products, intermediate products, underground &

non markets activities are excluded.

• Measures Final product & services made in the U.S. only!!!

Macro problems:

• Recession – 2 or more quarters of slow or negative GDP growth.

• Unemployment: Cyclical, structural, seasonal, & frictional • Underemployment & discouraged workers. • Labor force = those 16 & older working or looking for work

• Inflation – rising prices through an economy. • Quantity, Cost Push, & Demand Pull • CPI – measures a “market” basket of goods & compares the current

price with prices from previous years.

• CPI = This years prices ----------------------------------------- X 100 Previous years prices

Solving Macro Problems • The FED – conducts monetary policy.

3 Fed tools to affect aggregate Demand & supply 1. Open market operation – increase or decrease money supply via the

buying and selling of govt. bonds2. Open market committee – changing the DISCOUNT RATE, the

interest the FED charges to banks. 3. Reserve Requirement – adjusting the money banks must keep on

hand (in reserve)

The Govt. uses FISCAL POLICY tools: 2 Govt Tools1. Taxing 2. Spending

-Progressive Taxes affect wealthy people (income tax) -Regressive Taxes affect lower income people (sales tax)

Govt. Spending – Discretionary (change from year to year) & Mandatory Spending (already budgeted by law)

Taxing – affects consumer demand, lower taxes more aggregate demand. Govt. Spending impacts the GDP.

International trade • Specialization among nations creates the need for TRADE. • Both sides benefit by trade & trade creates more efficient economic systems. • Nations analyze the comparative advantages they to determine what they need

to produce (export) vs. what they should trade for (import)

• Case Study: Corn Wheat • • US 75 100

• Canada 60 40

• U.S. has an absolute advantage producing both corn & wheat. • Our opportunity cost of producing 75 tons of corn = 100 tons of wheat• The opp. Cost of producing 100 tons of wheat = 75 tons of corn.

• Canada’s opp cost of producing 60 tons of corn = 40 tons of wheat • Canada’s opp cost of producing 40 tons of wheat = 60 tons of corn.

• We give up more by producing corn compared to Canada, so we need to import corn & specialize on wheat production – Canada & the U.S. both benefit with more production.

•

Trade Barriers/ Protectionism • Trade Barriers – usually intended to protect industries or

firms of the country using them.

• Tariffs, quotas, VER’s, standards, etc.

• Trade agreements & treaties have been established to eliminate barriers & create free trade zones & partnerships.

- NAFTA, ASEAN, & the European Union are regions with very limited trade barriers.

Exchange Rates • When International Trade occurs nations exchange their currency for

goods from another country. • The value of a nation’s currency in relation to another’s is known as

the exchange rate.

• Ex. One U.S. Dollar can be exchanges for (.70 Euro), and I Euro can be exchange for ($1.42)

• COSTS & Benefits

• Strong Dollar = cheap imports & cheap expensive exports / travel is cheaper & trade deficits increase.

• Weak Dollar = expensive imports & cheap American exports / travel is

more expensive / trade surpluses may occur.

Personal Finance • Savings – money put aside for later use, may earn a little return with

small interests (Savings Account)

• Investments – money that are paid to businesses with risk involved but potentially larger returns (Stocks)

• Banks offers services ranging from savings & checking accounts, to credit & other loans (mortgages) & investments (money market accounts).

• Accounts are insured by the FDIC. • Credit • Simple interest is interest charged on just the principle of the loan

( Borrow 10,000 at .05% annually = $10,500• Compound interest is charged on the principle & any interest already

charged. (1000 X 10% = $1,100- Don’t pay and next month you are charged 1,100 X 10% = $1,110. And so on ….

Investments • Stocks = ownership• Stocks Pay dividends & may increase in value for a CAPITAL

GAIN

• Bonds represent a loan to the issurer of the BOND & pay back the principle & periodic interest to the bond holder.

• Investors are encouraged to DIVERSIFY their investments to lessen risk – spreading money over many types of investments (Stocks & Bonds) - Mutual Funds allow investors to buy share of the fund, & pool money together with many investors to reduce risk. These funds are managed by professionals & offer many differing returns.

Insurance For the “what ifs” in life

deductible- the amount owed out of pocket before insurance will pick up the tab in case of accident

Premium- the amount owed each month to the insurance company in order to sustain coverage

Remember, higher premium=lower deductible