Key Concepts in US Economic Systems and Structures

Command elements in the US economy

Monopoly Laws, Emissions Standards, Quality Assurance Laws, Licenses

Product market

The market where businesses sell goods and services.

Revenue

Money paid to businesses for goods and services.

Costs

Money paid by businesses for resources.

Income

Money paid to households for resources.

Spending

Money paid by households for goods and services.

Rent

Income paid for land.

Interest

Income paid for capital.

Wages

Income paid for labor.

Profits

Income paid for entrepreneurs.

Subsidies

Government money given as incentives to businesses.

Welfare

Government money given directly to households.

Taxes

Money given by businesses and households in exchange for public goods.

Monopoly

Market structure with only one seller of a particular product.

Oligopoly

Market structure in which a few very large sellers dominate an industry.

Monopolistic Competition

Market structure that has all the conditions of perfect competition except identical products.

Perfect Competition

A market structure characterized by a large number of well informed independent buyers and sellers who exchange identical products.

Benefits of competition

Higher quality goods and services, improved service, lower prices, increased innovation, more adaptive workforce.

Advantages of a command economy

Capable of quick, dramatic change; many basic public services available at little or no direct cost

Disadvantages of a command economy

Does not meet the needs and wants of consumers; Lacks effective incentives to get people to work; Requires large bureaucracy, which consumes resources; Has little flexibility for day to day change; Inefficient allocation of resources

Advantages of traditional economies

Sets forth clear economic roles for all members of the community; stable, predictable, and continuous life

Disadvantages of traditional economies

Discourages new ideas; Stagnation and lack of progress; Lower standards of living

Advantages of market economies

Individual freedom; capable of gradual adjustment to change; lack of gov't interference; high variety of goods and services; higher degree of consumer satisfaction; higher standards of living

Disadvantages of market economies

Rewards only productive resources (not the young, old, or sick); does not produce public goods; workers and businesses face uncertainty from competition or change

Good

Tangible economic product that is useful, relatively scarce, transferable to others; used to satisfy wants and needs

Scarcity

Fundamental economic problem facing all societies that results from a combination of limited resources and people's virtually unlimited wants

Economic

Social science dealing with the study of how people satisfy seemingly unlimited and competing wants with the careful use of scarce resources

Need

Basic requirement for survival; includes food, clothing, and/or shelter

Want

Something we would like to have but it is not necessary for survival

Factors of Production

Productive resources that make up the four categories of land, capital, labor, and entrepreneurship

Land

Natural resources or 'gifts of nature' not created by human effort; one of four factors of production

Capital

Tools, equipment, and factories used in the production of goods and services; one of four factors of production

Labor

People with all their abilities and efforts; one of the four factors of production, does not include the entrepreneur

Entrepreneur

Risk-taking individual in search of profits; one of four factors of production

Gross Domestic Product

Dollar value of all final goods, services, and structures produced within a country's national borders during a one-year period

Service

Work or labor performed for someone; economic product that includes haircuts, home repairs, forms of entertainment

Value

Worth of a good or service as determined by the market

Paradox of Value

Apparent contradiction between the high value of a nonessential item and the low value of an essential item

Utility

Ability or capacity of a good or service to be useful and give satisfaction to someone

Wealth

Sum of tangible economic goods that are scarce, useful, and transferable from one person to another; excludes services

Economic Growth

Increase in a nation's total output of goods and services over time

Productivity

Measure of the amount of output produced with a given amount of productive factors; normally refers to labor, but can apply to all factors of production

Human Capital

Sum of peoples' skills, abilities, health, and motivation

Specialization

Division of work into a number of separate tasks to be performed by different workers

Opportunity Cost

The loss of the next best alternative use of money, time, or resources when one choice is made rather than another

Economic Model

Simplified version of a complex concept or behavior expressed in the form of an equation, graph, or illustration

Cost-Benefit Analysis

Way of thinking that compares the cost of an action to its benefits

Standard of Living

Quality of life based on ownership of necessities and luxuries that make life easier

Commodity

Kind of money where items of value are traded for other items of roughly the same value

Representative

Kind of money where a paper note can be exchanged at a financial institution for pre-determined amount of valuable goods (i.e. gold, etc...)

Fiat

Kind of money based on trust in the stability and power of the government that mints currency

Three basic questions of economics

What is the produce? How to produce it? For whom to produce?

Inflation

a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency

GDP

Which statistic measures the total size of an economy?

GDP per capita

Which measures (roughly) the average wealth of individuals in an economy?

Real GDP

Which is better for comparing a countries economic growth from year to year?

Healthy level of inflation

What is generally considered to be a healthy level of inflation for a developed economy? 3%

Price doubling time at 3% inflation

At 3% inflation prices double every... 24 years

4 pillars of the American Free Enterprise system

Economic Freedom, Voluntary Exchange, Private Property Rights, Profit Motive

Proportional Tax

imposes the same percentage tax rate on everyone, regardless of income

Progressive Tax

imposes a higher percentage rate of taxation on higher incomes than lower incomes

Regressive Tax

imposes a higher percentage tax rate on lower incomes than higher incomes

Example of Proportional Tax

Medicare

Example of Progressive Tax

Federal Income Tax

Example of Regressive Tax

Sales Tax

Taxable income sources

Wages, investment interest, lottery winnings, rental income, cash earnings, salary, commissions

Non-taxable income sources

gifts, inheritance, welfare, child support, retail cash rebates, alimony

Federal Tax Return Form

1099

New employer tax withholding form

W-4

Employer end of year income reporting for individual tax returns

W-2

Individual Retirement Account

Retirement account opened by the retiree apart from any employer

Roth IRA

Type of retirement account that taxes contributions but not withdrawals

Traditional IRA

Type of retirement account that taxes withdrawals, but not contributions

401(k)

Type of retirement account sponsored by a for-profit employer

403(b)

Type of retirement account sponsored by a non-profit employer

Structural Unemployment

Type of Unemployment that involves changes in the structure of the labor market that make some skills obsolete. Most of these jobs will never come back.

Frictional Unemployment

Type of unemployment where people are temporarily unemployed or between jobs

Cyclical Unemployment

Type of unemployment that results from an economic downturn or recession. Drop in demand for goods & services result in drop in demand for labor and employers are forced to lay off workers.

Natural Rate of Unemployment

3-6%, sum of structural & frictional unemployment (two kinds of unavoidable unemployment)

Highest Unemployment in US History

Great Depression 25.6%

Groups not considered part of the labor force

retired, children, disabled, military personnel, full time students, homemakers, prison inmates & mentally insane (the institutionalized)

Categories not calculated in the unemployment rate

the underemployed and discouraged workers (those who have stopped looking for a job)

Traditional Economy

The use of scarce resources stems from ritual, habit, or custom. Economic decisions are made by ancestors or elders.

Market Economy

The use of scarce resources is dispersed throughout the society. Economic decisions are made by individuals.

Command Economy

The use of scarce resources is determined by a central authority. Economic decisions are made by the government.

Mixed Economy

The only kind of economic system that exists in the real world. All other systems are theoretical ideals.

Socialism

Basic productive resources are gov't owned, the rest are privately owned. Gov't plans and directs allocation of resources in key industries.

Capitalism

Productive resources are privately owned and operated. Resources for production are obtained by individuals' desire for profit but the gov't may promote competition and provide public goods.

Communism

All productive resources are gov't owned and operated, centralized planning directs resources, and gov't makes all economic decisions.