econ unit 3

the product market

the place where good and services produced by businesses are sold to households

the resource(factor) marekt

the place where resources (land, labor, capital, and entrepreneurship) are sold to businesses

private sector

part of the economy that is run by individuals and businesses

public sector

part of the economy that is run by individuals and businesses

factor payments

Payment for the factors of production, namely rent, wages, interest, and profit.

transfer payments

When the government redistributes income (ex: welfare, social security).

subsidies

Government payments to businesses.

demand for labor

different quantities of workers that businesses are willing and able to hire at different wages.

supply for labor

different quantities of individuals that are willing and able to sell their labor at different wages.

who demands labor

firms

who supplies labor?

individuals

eqilibrium

wage (The price of labor) is set by the market

what shifts the demand for labor

* price of the output
* productivity of the worker
* change in the price of other resources

derived demand

the demand for resources is derived by the products they produce

what shifts the supply of labor?

* education and training
* availability of alternative options
* immigration and mobility of workers
* cultural expectations
* working conditions
* preferences for leisure

to earn profit, firms must make _______

products/output

______ are the resources used to make outputs

inputs

input resources are also called ______

factor

fixed resources

Resources that don’t change with the quantity produced

variable resources

Resources that do change with the quantity produced

the law of diminishing marginal returns

As variable resources (workers) are added to fixed resources (ovens, machinery, tool, etc.), the additional output produced from each additional worker will eventually fall.

marginal revenue product

The additional revenue generated by an additional worker (resource).

in perfectly competitive product markets, the marginal revenue product equals __________ __times__ _______

marginal product of the resources times the price of the product

marginal resource cost

The additional cost of an additional resource (worker).

In perfectly competitive labor markets the MRC equals

the wage set by the market and is constant.

The Human Capital Argument-

Education actually makes you more productive by giving you the skills to succeed in the workforce

The Signaling Argument-

Getting a diploma “signals” to potential employers that you are more likely to be a valuable employee (regardless of your actual skills).

ability bias arguments

Students that attend college are already more intelligent and hard working than non-college bound students. They would earn more money even if they didn’t go to college.

minimum wage

A minimum amount employers are allowed to pay their workers, its a wage floor

labor market imperfections

* insufficient/misleading job information
* geographical immobility
* unions
* wage discrimination

insufficient/misleading job information

This prevents workers from seeking better employment.

geographical immobility

Many people are reluctant or too poor to move so they accept a lower wage

unions

Collective bargaining and threats to strike often lead to higher that equilibrium wages

wage discrimination

Some people get paid differently for doing the same job based on race or gender

soft skills

Skills needed in ALL jobs, regardless of field or specialty

* work ethic
* teamwork and communication
* time management and punctuality
* good character

income types

* hourly wages
* salary
* independent contractors
* dividends vs capital gains

hourly wages

Pay for every hour worked; usually paid weekly or every two weeks.

salary

Pay for a job that is not tied to a specific set of hours worked; paid every two weeks of monthly.

independent contractors

Workers who provide a good or service under a one-time contract and do not work regularly for an employer.

dividends vs capital gains

Dividends are paid out to shareholders based on the profit of a corporation.

3 tax systems

* progressive
* regressive
* proportional

progressive tax systems

The percentage rate increases as income increases.

People with higher incomes pay a higher percentage than those with lower incomes

regressive

The percentage rate decreases as income increases.

Taxes that are a flat fee (same dollar amount) are a larger percentage of a lower income level.

proportional tax systems

The percentage rate does not change with income level.

All taxpayers pay the same percentage of their income, but will be a different dollar amount.

sales tax

a tax added to the price of consumer goods and services.

property tax

a tax paid on the value of the real estate that people own.

budgeting

a plan to manage your money by monitoring your income and tracking your expenses.

why create a budget?

* understand where your money goes
* find uses for your money that will increase your wealth
* allocate money for all necessities
* live within your means
* meet financial and savings goals

how to budget

1. calculate your expenses
2. determine your income
3. set a savings goal or a debt payoff goal
4. record your spending habits

saving

* Any money you have left over after expenses are paid is eligible to become savings.
* can be accomplished by putting money into a savings account or simply holding cash.

investing

If the money you are saving is put into an account or asset that earns interest,

options for investments

* savings accounts
* certificates of deposit
* money market accounts
* stocks, bonds, mutual funds

financial institutions

an entity that acts as the middleman between two parties in a financial transaction.

payday loan companies

provide a small loan in exchange for a portion of your paycheck.

title pawn lenders

provide short term loans to fill gaps between income and expenses based on the collateral of you car title.

every investment has some level of ____ and some level of potential ___

risk/return

diversification

* Invest your money in a variety of investment types that mature at different rates or times.
* If investing in stock, explore mutual funds or spread investments into different industries and locations.

return

the money an investor receives above and beyond the sum of money initially invested.

bonds

loans, or IOUs, that represent debt that the government or a corporation must repay to an investor.

bonds’ basic components

* coupon rates
* maturity
* par value

bonds are desirable from the issuer’s point of view

1. once the bond is sold, the coupon rate for that bond will not go up or down
2. unlike stock, bonds are not shares of ownership in a company

disadvantages of bonds

1\. The company must make fixed interest payments, even in bad years when it does not make money.

2\. If the issuer does not maintain financial health, its bonds may get a lower bond rating. This makes it harder to sell future bonds.

types of bonds

* savings bonds
* treasury bonds
* municipal bonds
* corporate bonds
* junk bonds

stock

Corporations can raise money by issuing _______ which represents ownership in the corporation.

stock owners can earn a profit in two ways:

* dividends
* capital gain

dividends

portions of a corporation’s profits, are paid out to stockholders of many corporations.

capital gain

earned when a stockholder sells stock for more than he or she paid for it. A stockholder that sells stock at a lower price than the purchase price suffers a capital loss.

stockbroker

a person who links buyers and sellers of stock.

stock exchanges

* new york stock exchange
* nasdaq-amex
* the otc market
* day trading

short term investments

* certificates of deposit
* money market mutual funds

certificates of deposits

are funds that are deposited for a fixed amount of time (6 months -3 Years).

money market mutual funds

are funds that are deposited for a fixed amount of time (6 months -3 Years).

individual retirement accounts

* traditional ira
* roth ira

traditional ira

allows you to make a contribution without paying taxes.

When you withdraw from the account, you will pay taxes.

roth ira

contributions are taxed as they are put into the account.

You will pay no further taxes when you withdraw the money.

simple interest

earned on the principal only.

compound interest

earned on the principal AND any previously earned interest.

buying on credit

borrowing money for many reasons

credit worthiness

* character
* capacity
* collateral

other factors affecting credit worthiness

* conditions
* money

how is credit score determined

FICO

5 factors that affect your credit score

* payment history
* amounts owed
* length of history
* new credit
* credit mix

types of loans

* secured loans
* unsecured loans
* conventional loans
* non-conventional loans
* conforming loans
* non conforming loans

secured loans

rely on an asset as collateral & have lower interest rates, such as home loans (mortgages) and auto loans.

unsecured loans

do not require collateral, can be more difficult to qualify for, and have higher interest rates. These can be used for a wide range of reasons (debt consolidation, home renovations, emergencies, etc.)

secured loans

rely on an asset as collateral & have lower interest rates, such as home loans (mortgages) and auto loans.

unsecured loans

do not require collateral, can be more difficult to qualify for, and have higher interest rates. These can be used for a wide range of reasons (debt consolidation, home renovations, emergencies, etc.)

closed-ended loans

they are one time loans whose balances decrease as payments are made and can’t be borrowed again.

open-ended loans

meaning that your available credit changes as purchases and payments are made. As long as you have available credit, you can keep using the credit card.

conventional loans

like typical mortgage loans, are not insured by a government agency.

non-convential loans

also called government loans, are backed by a government agency such as the Federal Housing Administration or Department of Veterans Affairs.

conforming loans

meet maximum loan amount requirements set by Fannie Mae and Freddie Mac corporations

who provides credit

Banks, credit unions, car dealerships, department stores, and gas stations all issue credit.

what happens when you swipe your credit card?

1. card holder
2. merchant
3. merchant account holder
4. visa/mastercard
5. issuing bank
6. visa/mastercard
7. merchant account provider
8. merchant

advantages of credit cards

* using a credit card wisely helps build good credit score
* credit cards offer a higher level of security than cash- a stolen credit card can be cancelled and your funds protected
* some cards offer rewards such as cash back or airline miles

risks of credit

* credit cards often have high interest rates and fees
* using a credit card unwisely and being irresponsible with payments can cause debt to add up fast
* applying for too many cards can be damaging to your credit score

insurance

provide asset protection and reduce the risk of financial loss., works off a system of shared liability

types of insurance

1. health insurance
2. disability insurance
3. life insurance
4. car insurance
5. property insurance