Economics Final

Why we have to make choices

People make choices because they cannot have everything they want. All choices require giving up something (opportunity cost) Economic decision-making requires comparing both the opportunity cost and the monetary cost of choices with benefits.

Classification of wants

Goods= tangible things with measurable life spans
Services= intangible items

Classification of cost

economic goods/services = positive cost
nuisance goods/services = negative cost
free goods/services = zero cost

Opportunity cost

The satisfaction you give up or the regret you experience for not choosing differently.

Stewardship

Stewardship is an ethical value that embodies the responsible planning and management of resources.

Intrinsic Value

based on the nature of the product

Subjective Value

determined by the usefulness of the buyer

Microeconomics

choices made by individual units (bringing or buying lunch)

Macroeconomics

large-scale economic choices and issues (starting a business)

Types of economic models

Tabular
Line
Production possibilities curve (PPC)
Circular flow model
The basic circular flow

Advantages to a line graph

Provides significantly more data for the relationship between two things

PPC

Production possibilities curve

2 main players in the circular flow model

Business firms
Households

4 main factors of productions

Entrepreneurship
Land
Labor
Capital

4 factors of cost

Rent
Wages
Interest
Profit

Transfer Payments

Payments of money or goods to persons for which the government expects no specific economic repayment

Dissaving compared to saving

When you take out money vs. when you put in money

Value is determined...

By the buyer

The principle of diminishing marginal utility

People tend to receive less and less (diminishing) additional (marginal) satisfaction (utility) from any good or service as they obtain more and more of it during a specific period of time

Where prices come from

value= determined by buyer
Price= determined by buyer and seller
Supply and demand

Demand

a willingness of consumers to purchase a product and their act of purchasing it

The law of demand and demand curve

Everything else being held constant, the lower the price charged for a good or service, the greater the quantity of it people will demand, and the higher the price, the lower the quantity they will demand.

Change in demand conditions

A change in people’s incomes
A change in the price of related goods
A change in people’s tastes and preferences
A change in people’s expectations

Kinds of goods

Normal
Inferior
Substitute
Complementary
Fad items

Supply

The amount of goods and services business firms are willing and able to provide at different prices

Business Firm

Include all sellers of goods and services, not just major corporations

Law of Supply

The higher the price buyers are willing to pay, other things being held constant, the greater the quantity of a product a firm will produce and that the lower the price consumers are willing to pay, the smaller the quantity the supplier will produce

Supply Curve

A graph illustrating the quantities of an item that suppliers are willing to produce at various prices

How does the supply chart move as the demand moves?

Leftword shift if decrease in supplies
Rightword shift if increase in supplies

Supply Shift Factors

Changes in Technology
Changes in production costs
Changes in the price of related goods

Market equilibrium point? Price?

the point at which the demand curve and the supply curve for an item intersect
the price corresponding to the intersection of an item’s supply and demand curves; the price at which consumers are willing to buy the same quantity that suppliers are willing to produce

Surplus

when you have an excess quantity

Shortage

when you don’t have enough

Carrying Costs

storage
security
insurance
Spoilage
loss of income while the product is sitting idle
interest costs on financing the unsold production

Economic Problem of a Society

How best to accomplish its economic goals

National Economic Goals

Low level of unemployment
A stable price level
A healthy rate of economic growth
Market distribution: returns based on personal input

Output Question

what will the nation produce?

Input Question

how will the nation produce its goods?

Distribution Question

who will receive what the nation produces?

Consumer Goods

purchased for personal use

Capital Goods

used to produce consumer goods. Ex. a factory

Command Economy

A powerful individual or a committee decides the proportion of consumer goods to capital goods and the specific items it will manufacture
Decisions= too important to be left to the whims of the market

Market Economy

Natural adjustment of capital and consumer spending
Based on economic laws designed by God

Labor intensive

when mostly people do the work

Capital Intensive

when machines do the work

Money

anything that a society commonly uses and generally accepts in payment for goods and services.

Legal Tender

if it is offered as payment for a debt, creditors must accept it.

Functions of money

Means of payment
Lower cost of doing business
Simpler than bartering

Bartering

the exchange of one person’s goods or services for another’s

Full bodied coin

contains an amount of gold or silver equal to its face value

Token coin

contains a quantity of metal less than its face value

M1

available for immediate spending
Paper money, coins, checks

M2

the M-1 supply, plus all money that is available to spend after a short delay
Savings accounts, small-denomination time deposits, money market funds

Number of district sections for banks

12

Reserve Requirement

the percentage of deposits that banks must keep on hand

Regulations and standards on the federal reserve system

Independence
Checks on the Fed
To provide a uniform and elastic currency
To regulate member banks
To clear checks and debit card transactions
To act as the nation’s fiscal agent
To serve as the banker’s bank
To create money