Economics Finals Quick Study Guide

good luck

Factors of Production (land)

fresh water lake or river, trees for lumber etc.

Factors of Production (labor)

someone paid to work—employee

Factors of Production (physical capital)

tools, machines, and equipment used to make goods

Factors of Production (human capital)

education or training to learn a skill

Production Possibilities Frontier

shows alternate ways to use resources

economic growth

PPF shifts right

underutilization

PPF has point inside the curve

Free Market Economy

business owners decide what to produce and consumers make decisions on what to buy

Command/Central Economy

government owns all factors—consumers have no choices

negative externality

pollution from a new plant or big factory

positive externality

a new plant helps local businesses make more money

full employment (95%) level can increase what

increases Standard of Living (GDP per capita)

product market

households purchase goods and services from firms

Law of Demand

as P increases QD goes down (and vise versa)

what increases Demand (D line shifts right)

more income, more population, marketing, of goods in advertising tv, social media, and etc.

factors that decrease Supply (S shifts left)

input materials cost goes up, wages go up, or a natural disaster (fire, flood) destroys your warehouse or crops

equilibrium price is when…

quantity demand = quantity supplied

monopoly

1 seller controls total market—the least competitive market

natural monopoly

a gas, water, or electric company is given area of state to operate in

oligopoly

a few firms (2-4) control 70% or more of the market

perfect competition

1 identical product like selling tomatoes

monopolistic competition

many sellers and many buyers in a highly competitive market. here they use non-price competition (quality, customer service, location) to differentiate their products

GDP

final $ value of all new goods and services produced and sold in the U.S. in 1 year

real GDP

takes out inflation because you use last year’s prices and this year’s output

business cycle expansion

increasing GDP and decreasing unemployment

business cycle contraction

decreasing GDP and increasing unemployment

inflation

general increase in overall price levels (as measured by CPI)

tariffs

tax on imported goods, helps protect important domestic industries

fiscal policy

use of taxes and spending by government to influence economy

John Maynard Keynes

favored government spending to help create jobs and correct economy during the Great Depression

budget deficit

when the government spends more than revenue from taxes. This increases the national debt every year. A budget surplus is tax revenue>spending

if congress decides to lower spending…

it can’t be too mandatory items like Social Security and Medicare. It has to be discretionary programs like Defense, Education, and etc.

The FED (Federal Reserve Bank) is made up of…

7 Board of Governors and 12 Regional District Banks. The FED is in charge of monetary policy ( money supply). The FOMC (Federal Open Market Committee) conducts open market operations (they buy or sell government bonds)

The FED can increase the money supply by…

buying a bond (writing a check), lowering interest rates, lowering reserve %. This is expansionary monetary policy because it put more money in hands of the public

when the FED increases the money supply…

then capital spending (physical and human capital) increases. Firms spend more on investment projects, new goods, and etc.

Wealth of Nations (1776) written by Adam Smith states…

buyers and sellers can determine prices of goods based on their own self-interest. The government should not be involved

mutual fund

is a variety of stocks, bonds, and other financial assets

young people take more risk in investing while…

older people buy more bonds than stocks because they are considered safer

3 uses of money

unit of account (price), store of value (savings), medium of exchange (buying). Inflation causes your purchasing power to decrease. Inverse effect on your ability to exchange money for goods

a checking account is better for regular transactions (medium of exchange) while…

a savings account is for (store of value) earning interest

comparative advantage

when 1 person or country has the lowest opportunity cost of producing a good/service. When this happens, you can specialize in what you are best at and trade for the other. At a job, you can make the most money doing what you are good at and hire someone else for less money to do the basic things so you can just focus on the task that makes you the most money