ECON 201 Exam Study Guide

4 types of economic resources

4 types of economic resources

land labor capital entrepreneurship

examples of land resource

water, forest, minerals, natural gas

labor

physical or mental talents of human beings

capital

produced goods that are used to produce other goods and services

examples of capital

plants, machines, equipment, tools

entrepreneurship

special mental talent needed to set up a business, assemble needed resources, and risk own money

economic growth effect on PPC graph

PPC shifts right; nation moves from left to right

• moving from left point to right point

5 questions economy must answer

a) What goods and services to produce. b) What resource mix or technology to use. c) How to distribute the output. d) How to accommodate changes. e) How to promote economic growth.

circular flows of economy

• Resources, such as, land, labor, capital, and entrepreneurial ability flow from households to businesses. • Payments for the resources, such as, rent, wage, interest, and profit flow from businesses to households. • Goods and services flow from businesses to households. • Payments for goods and services flow from households to businesses. • Households supply resources and demand goods and services. • Businesses supply goods and services and demand resources.

points inside PPC graph represent

unemployment rate >5%

points ON PPC graph represent

employment rate of 5%

origin of PPC graph

represents 100% unemployment (nothing is produced, no resources)

circular flow model (economics)

• households supply resources and demand goods/services

• businesses supply goods/services and demand resources

• resources & payments flow from households to businesses

• payments for resources & goods/services flow from businesses to households

payments for resources (examples)

rent, wage, interest, profit

negative externalities

market system overproduces a product

positive externalities

market system underproduces a product

market system does not produce

a product with public good characteristics

consumption expenditure

Consumption (2010) = Durable goods (11%) + Non-durable goods (29%) + Services (60%).

investment

expenditures made by businesses on:

• new structures

• new equipments/software

• new residential housing

• additional inventories

advantages of proprietorship

quicker decisions and fewer taxes

disadvantages of proprietorship

1. whole burden on proprietor

2. limited skills, experiences, expertise

advantages of partnership

1. Wide range of skills, experiences, and expertise

2. Wide client/customer base

3. Fewer taxes

advantages of proprietorships and partnerships

1. Easy to form or to dissolve

2. Fewer legal hassles

disadvantages of proprietorships and partnerships

unlimited liabilities inability to raise large sums of money

disadvantages of partnerships

conflict of interest and delayed decision making

advantages of corporation

1. Limited liabilities

2. Ability to raise large sums of money (through new stocks and bonds)

3. Wide range of skills, experiences, and expertise

4. Economies of scale and scope

5. Wider market

6. Lower taxes

7. Perpetuity of life

disadvantages of corporation

1. The Principal-Agent problem (due to conflict of interest between the stockholders and the managers)

2. Double taxation (corporate income tax and individual income tax)

determinants of the level of consumption

• disposable income

• wealth

• availability of credit

• real interest rate

• households' expectation of future prices/income

• stock of duration goods

• taxation

• demonstration effect

stockholders

owners of corporation

bondholders

lenders of corporation; not owners

stabilization

a) Stabilization of real output (GDP) b) Stabilization of employment c) Stabilization of prices

direct taxes

taxes imposed on person/entity

examples of direct taxes

individual income tax, corporate income tax, property tax, estate tax, etc.

indirect taxes

taxes imposed on things

examples of indirect taxes

excise duty (tax), sales tax, customs duty, gift tax, etc.

sources of US federal REVENUES

• individual income taxes (47%)

• corporate income taxes (8%)

• social insurance/retirement receipts (36%)

• excise taxes (3%)

• other (6%)

federal expenditure items

• Social Security benefits (20%)

• national defense (20%)

• income security (17%)

• Medicare (14%)

• health (10%)

• net interest (6%)

• other (6%).

net investment calculation

gross investment - depreciation

ending value of capital stock

beginning capital stock + net investment

principles of taxation

1. adequacy

2. broad basing

3. compatibility

4. convenience

5. earmarking

6. efficiency

7. equity

8. neutrality

9. predictability

10. simplicity

induced consumption (IC)

consumption (C) - autonomous consumption (AC)

average propensity to consume (APC)

consumption (C) / disposable income (Y)

Average Propensity to Save (APS)

1 - APC (average propensity to consume)

Marginal Propensity to Consume (MPC)

ΔC/ΔY change in consumption / change in disposable income

Marginal Propensity to Save (MPS)

1 - MPC

opportunity cost

cost in terms of foregoing alternatives