UTHS Economics Review

Economics

The study of choice under conditions of scarcity.

Scarcity

Limited resources vs. unlimited wants.

Choice

Deciding how to allocate time, money, and resources.

Need

Essential for survival (e.g., food, water, shelter).

Want

Improves quality of life but not necessary for survival (e.g., music, ice cream).

Economic Systems

The way a country organizes its economy to address scarcity.

Questions Economic Systems Must Answer

What will be produced? How will it be produced? For whom will it be produced?

Traditional Economy

Based on customs, traditions, and beliefs.

Command Economy

Government makes all decisions and owns property.

Market Economy

Individuals freely buy/sell; minimal government interference (laissez-faire).

Mixed Economy

Combines command and market elements.

Production Possibility Curve (PPC)

Shows trade-offs and opportunity costs.

Opportunity Cost

The cost of choosing one thing over another.

PPC Points

Point on curve: Efficient use of resources; Point inside curve (O): Underutilization of resources; Point outside curve (X): Non-feasible with current resources/tech.

Factors Affecting PPC

Tech improvements or more resources → PPC shifts outward; Resource loss (e.g., drought) → PPC shifts inward.

Adam Smith

Wrote The Wealth of Nations.

Laissez-faire

Government should not interfere in markets.

Invisible Hand

Markets self-regulate.

Government Role in U.S. Economy

Product safety (e.g., warning labels), Workplace safety via OSHA, Public interest (e.g., seat belt laws, nutrition labels), Regulates market imperfections.

U.S. Economic Features

Free enterprise system = market economy + limited regulation.

Public vs. Private Sector

Public: Government-involved transactions (e.g., school jobs); Private: Non-governmental transactions (e.g., working for NFL).

Non-feasible production points

Outside PPC curve—unachievable with current resources.

Point O

Inefficient—California wouldn't choose it.

Opportunity cost from A to B

Increases; more corn is sacrificed for cheese.

Drought effect

PPC curve shifts inward.

Tech improvements

PPC curve shifts outward (more production possible).

Law of Demand

Consumers buy more of a good/service when the price decreases, and less when the price increases.

Substitution Effect

Consumers switch to cheaper alternatives when prices rise.

Income Effect

Price increases reduce purchasing power, affecting consumption.

Demand Schedule

A chart showing quantities consumers will buy at different prices.

Demand Curve

A graph of the demand schedule.

Shifts in Demand Curve

Only non-price factors can shift the demand curve.

Elastic Demand

Sensitive to price changes.

Inelastic Demand

Not sensitive to price changes.

Example of Inelastic Demand

Gasoline - essential, no substitutes.

Law of Supply

Producers offer more at higher prices, and less at lower prices.

Movement in Supply Law

Opposite of demand: Price and quantity move in the same direction.

Supply Schedule

Chart showing quantity supplied at each price.

Supply Curve

Upward-sloping: As price ↑, quantity supplied ↑.

Movement along the Supply Curve

Caused by price changes.

Shifts in Supply Curve

Non-Price Determinants include cost of production, technology improvements, number of suppliers, producer expectations, government regulations.

Right Shift in Supply Curve

Indicates an increase in supply.

Left Shift in Supply Curve

Indicates a decrease in supply.

Elastic Supply

Producers can easily change production (e.g., haircuts).

Inelastic Supply

Hard to change output quickly (e.g., apples need time to grow).

Market Equilibrium

Equilibrium: Quantity demanded = quantity supplied.

Graphical Representation of Equilibrium

Where demand curve intersects supply curve.

Disequilibrium

Shortage (excess demand): Price too low; Surplus (excess supply): Price too high.

Government Price Controls

Includes Price Ceiling and Price Floor.

Price Ceiling

Max price allowed by law; Example: Rent control.

Price Floor

Minimum price allowed by law; Example: Minimum wage.

Non-Price Determinants of Supply & Demand

Includes consumer income, consumer tastes, number of consumers, expectations, competition, substitutes & complements.

Complementary Products

Used together (e.g., hamburgers & buns); If price of one rises, demand for the other falls (and vice versa).

Market Definition

A market is any place where buyers and sellers negotiate the price of goods/services.

Perfect Competition

Conditions include many buyers and sellers, identical products, full product knowledge, free entry/exit from the market.

Examples of Perfect Competition

Corn, gasoline, grapes.

Monopolistic Competition

Similar to perfect competition but with differentiated products.

Oligopoly

A few large firms dominate; high entry barriers (e.g., airline industry).

Monopoly

One seller dominates the market; often illegal due to lack of competition and high prices.

Sole Proprietorship

Owned by one person; Pros include full control and keeps all profits; Cons include unlimited liability and hard to attract employees.

Partnership

Owned by 2 or more people; General Partnership shares responsibilities and liabilities.

Corporation

Legal entity separate from owners; can own property, enter contracts, sue/be sued.

Franchise

Business model where entrepreneur pays to use parent company's brand & model.

Stock Market Basics

Stocks are ownership in a corporation; Bonds are loans to corporations/government.

Market Trends

Bull Market: Stock prices rising; Bear Market: Stock prices falling.

Buying on Margin

Paying part of the stock's price and borrowing the rest; risky.

Stock Market Crash of 1929

Wild selling = prices dropped rapidly.

The Great Depression

Massive debt and bank closures followed the 1929 crash.

SEC (Securities and Exchange Commission)

Created to regulate the stock market and prevent crashes.

Bartering

Early trade was based on exchanging goods/services directly.

Medium of Exchange

Common currency accepted by all in society.

Store of Value

Maintains value over time (unlike perishables like water).

Unit of Account

Standard way to measure and compare the value of goods/services.

Commodity Money

Currency with intrinsic value (e.g., gold, silver, rice, cigarettes).

Representative Money

Paper money backed by a commodity (e.g., gold).

Gold Standard

U.S. dollars were once exchangeable for gold.

Fiat Money

Money with no intrinsic value; declared legal tender by government.

Importance of Banks

Banks process most payments (checks, debit, credit, online).

Banks as Financial Intermediaries

Connect savers and borrowers.

Savings-Economic Growth Relationship

More savings → More loans → More businesses → More economic growth.

History of American Banking

Timeline of significant events in American banking history.

Federal Reserve System (The Fed)

Central bank of the United States.

Federal Reserve Board

Located in Washington, D.C., sets reserve requirements for banks.

Federal Reserve Banks

12 banks across major U.S. cities that supervise and regulate regional banks.

FDIC (Federal Deposit Insurance Corporation)

Insures all U.S. bank accounts (currently up to $250,000).

Member Banks

Nationally chartered banks must join the Federal Reserve System.

Federal Open Market Committee (FOMC)

Includes 7 members from the Board of Governors and 5 regional Federal Reserve Bank presidents. Determines U.S. monetary policy (e.g., money supply management).

How Banks Create Money

Basic process where initial deposits lead to multiple rounds of loans, creating new money.

Reserve Requirement

The percentage of deposits that banks must keep on hand and not loan out.

Money Multiplier Effect

The process where an initial deposit can lead to a larger total amount of money in circulation, e.g., a $1000 deposit can generate $9000.

Digital Money

Most money in circulation is digital, not physical.

Investment Options

Different types of investments categorized by risk level and potential return.

Risk-Return Tradeoff

Higher risk investments offer the possibility of higher returns, but also greater chances of loss.

Certificate of Deposits (CDs)

Loan to a bank with a fixed interest rate & term, FDIC-insured, making them risk-free.

Bonds

Loan to a corporation or government for a fixed time with regular interest.

Bond Ratings

Ratings by credit agencies that indicate the risk level of bonds, e.g., AAA is extremely low risk.

Junk Bonds

High-risk bonds that offer higher interest rates (e.g., 7.5%) due to their higher risk.

Stocks

Buying stock makes you a part-owner of a company, with potential earnings from dividends and price increases.

Mutual Funds

Investors pool money to buy many stocks and bonds, reducing the risk of any single company failing.

Investment Principles

Guidelines that govern investment strategies, including risk-return tradeoff and the age rule.