EPF STUDY GUIDE REAL

Specialization

When individuals or businesses focus on producing one type of good or service efficiently, leading to higher productivity.

Market Economy

An economic system where supply and demand determine production, pricing, and distribution of goods and services, with minimal government intervention.

Adam Smith

An economist known as the father of modern economics, who introduced the idea of the "invisible hand" and believed in free markets.

Invisible Hand

The concept that individuals pursuing their own self-interest in a free market benefits society as a whole, without any central planning.

Laissez-Faire

The belief in minimal government intervention in economic affairs, allowing markets to operate freely.

Wealth of Nations

A famous book written by Adam Smith in 1776 that discusses the workings of a market economy and the benefits of capitalism.

Incentives

Rewards or punishments that motivate people to make certain economic choices, such as higher pay or tax breaks for businesses.

Command Economy

An economic system where the government makes all decisions regarding production, distribution, and pricing of goods and services.

Karl Marx

A philosopher and economist who co-authored "The Communist Manifesto" and developed theories on socialism and communism.

Communist Manifesto

A political document written by Karl Marx and Friedrich Engels, advocating for a classless society and the abolition of private property.

Agribusiness

Large-scale farming and food production businesses that focus on efficiency and profit, often involving industrial methods.

Traditional Economy

An economy where customs, traditions, and beliefs determine how goods and services are produced and distributed, often seen in rural or indigenous communities.

John Maynard Keynes

An economist who believed that government intervention is necessary to manage economic cycles, particularly during recessions.

Fiscal Policy

Government decisions regarding spending and taxation to influence the economy, especially to manage inflation, employment, and growth.

Deficit Spending

When the government spends more money than it collects in taxes, leading to borrowing and increasing national debt.

Assembly Line

A manufacturing process in which each worker or machine is responsible for a specific part of production, allowing for mass production of goods.

Mixed Economy

An economic system that combines elements of both market and command economies, with some government intervention but also private enterprise.

Golden Parachute

A large financial payout or benefits package given to executives when they leave a company, often after a merger or acquisition.

Scarcity

The basic economic problem that arises because resources are limited while human wants are unlimited, creating the need for choices.

Henry Ford and the Assembly Line

Revolutionized automobile production by using assembly lines to make cars more efficiently, lowering costs and making them affordable.

Cold War

A period of political tension and military rivalry between the United States and the Soviet Union, which influenced global economics and politics.

Tradeoff

The idea that in making a decision, choosing one option requires giving up another, due to limited resources.

Price Floor and Ceiling

A price floor is a minimum price set by the government (e.g., minimum wage), while a price ceiling is a maximum price (e.g., rent control).

Bartering

The exchange of goods or services directly for other goods or services, without using money.

Robotics

The use of machines or robots to perform tasks that are typically done by humans, often improving efficiency in production.

Minimum Wage

The lowest legal wage that employers can pay their workers.

Examples of Monopolies

US steel (JP Morgan and Andrew Carnegie), oil (John D. Rockefeller), and Microsoft (Bill Gates).

Labor

The human effort (physical and mental) used in the production of goods and services.

White and Blue Collar

White-collar workers typically have office jobs (e.g., managers, accountants), while blue-collar workers usually perform manual labor (e.g., construction workers).

Complement Goods

Goods that are often used together, like printers and ink cartridges, or shoes and shoe polish.

Examples of Oligopolies

A small amount of companies dominate a market, like the US car market with Ford, Chrysler/Dodge, and General Motors.

Supply

The amount of a good or service that producers are willing and able to sell at different prices.

Substitute Goods

Goods that can replace each other in use, like tea and coffee.

Merger

The combination of two or more companies into one, often to reduce competition and increase market power.

Horizontal and Vertical Mergers

A horizontal merger is when companies in the same industry combine, while a vertical merger is when companies at different stages of production join (e.g., a manufacturer and a supplier).

Demand

The amount of a good or service that consumers are willing and able to buy at different prices.

Monopoly

A market structure where one firm controls the entire supply of a good or service, limiting competition.

Cost-Benefit Analysis

A process of comparing the costs of an action to the benefits it will bring to determine if it is worthwhile.

Surplus

When the quantity of a good or service supplied exceeds the quantity demanded, often leading to lower prices.

Oligopoly

A market structure where a small number of firms dominate the industry, often leading to limited competition.

Invention

The creation of a new product or idea, often through technological innovation.

Shortage

When the quantity of a good or service demanded exceeds the quantity supplied, often leading to higher prices.

Profit Motive

The driving force behind businesses and individuals making economic decisions to earn as much profit as possible.

Innovation

The process of developing new products, services, or methods that improve upon existing ones.

Price Change

A movement in the price of a good or service, influenced by changes in supply and demand.

Opportunity Cost

The value of the next best alternative that must be given up when making a decision.

3 Economic Questions

Every society must answer: what to produce, how to produce it, and for whom to produce.

What?

Refers to the types of goods and services to produce in an economy.

How?

Refers to the methods or resources used to produce goods and services.

For Whom?

Refers to the distribution of goods and services -- who gets what in an economy.

Competition

The rivalry between businesses to attract customers and improve their products or services, often leading to lower prices and innovation.

4 Factors of Production

The resources used to produce goods and services: Land, Labor, Capital, Entrepreneurship.

Equilibrium Price

The price at which the quantity of a good supplied equals the quantity demanded.

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Renewable vs. Nonrenewable Resources

Renewable resources can be replenished naturally (e.g., solar energy, wind), while nonrenewable resources cannot be replenished (e.g., oil, coal).

Standard of Living

The level of wealth, comfort, and material goods available to a person or community.

Monetary Policy

The actions of a central bank (like the Fed) to control the money supply and interest rates to stabilize the economy.

Business Cycle

The natural rise and fall of economic activity over time, including periods of expansion and contraction.

Expansion

A phase in the business cycle where the economy is growing, businesses are producing more, and unemployment is lower.

Peak

The highest point in the business cycle, just before the economy starts to slow down.

Contraction

A phase in the business cycle where the economy shrinks, businesses produce less, and unemployment rises.

Trough

The lowest point in the business cycle, when the economy starts to recover.

Federal Reserve System (FED)

The central bank of the United States, responsible for regulating the money supply and stabilizing the economy.

Board of Governors

The group of people who oversee the Federal Reserve System, including the chairperson.

Scott Bessent

The current U.S. Treasury Secretary (as of the guide's writing), playing a significant role in shaping economic policy.

Kevin Warsh

Current Chair of the Federal Reserve (as of the guide's writing).

3 Purposes (of the Fed)

The Federal Reserve has three main purposes: controlling inflation, maximizing employment, and stabilizing the financial system.

Discount Rate

The interest rate the Federal Reserve charges banks for loans, influencing how much banks lend to consumers and businesses.

GDP (Gross Domestic Product)

The total value of goods and services produced within a country in a year.

Per Capita GDP

The GDP divided by the population, showing the average income of people in a country.

Tight Money

A policy where the Federal Reserve raises interest rates or reduces the money supply to slow down the economy and control inflation.

Loose Money

A policy where the Federal Reserve lowers interest rates or increases the money supply to stimulate the economy.

Reserve Requirement

The percentage of deposits that banks must keep in reserve and not lend out, set by the Federal Reserve.

Hyperinflation

Extremely rapid and out-of-control inflation, leading to a collapse in the value of currency.

Deflation

A decrease in the general price level of goods and services, increasing purchasing power.

Economics

The study of how people, businesses, and governments make decisions about producing, distributing, and consuming goods and services.

Circular Flow of Economic Activity

A model showing how money moves through the economy between households, businesses, the government, and the foreign sector.

Factor

Resources used in the production of goods and services, such as labor, capital, and land.

Product

Goods and services produced in the economy.

Foreign

Refers to the international sector in the circular flow, involving imports and exports.

Government

The sector that collects taxes and spends money to influence the economy.

Consumer Price Index (CPI)

A measure of the average change in prices paid by consumers for goods and services over time, based on about 400 products.

Microeconomics

The study of individual economic behavior, like how consumers and businesses make decisions.

Economic Interdependence

When countries or businesses rely on each other for goods, services, and resources.

Unemployment

The state of being without a job while actively looking for work.

Macroeconomics

The study of the overall economy, including inflation, unemployment, and GDP.

Competition and the Effect on Price

When businesses compete with each other, prices often decrease to attract customers.

Stock Market

A marketplace where people buy and sell shares of companies.

Wall Street

The financial district in New York City, often used to refer to the U.S. financial markets.

Crash of 1929

The stock market crash that led to the Great Depression, a severe economic downturn.

The Standard & Poor's 500

An index of 500 large companies used to measure the performance of the U.S. stock market.

NASDAQ

A global electronic marketplace for buying and selling securities, known for tech companies.

Dow Jones

An index of 30 major U.S. companies used to track stock market performance.

Law of Diminishing Return

The principle that as you add more of one resource (like labor) to a fixed amount of others (like machines), the additional output will eventually decrease.

Elasticity of Products and Price

Measures how much the quantity demanded of a product changes when the price changes

Adam Smith's Ideas

The power of free markets and competition to drive economic growth and efficiency.

Fair Tax

A tax that is seen as just and equitable, where people contribute based on their ability to pay.

Expenditures and Revenue

Expenditures are money spent by the government or businesses; revenue is the income or money the government collects, often through taxes.

National Budget

A plan for how the government will spend and receive money over a period of time.

Balanced (Budget)

A budget where the government's expenditures and revenues are equal.