FM 116 Chapter 2

Economy

A financial and social system of how resources flow through society, from production to distribution, to consumption

Economics

The study of the choices that people, companies, and governments make in allocating society's resources

*Macroeconomics

The study of a country's overall economic dynamics, such as the employment rate, the gross domestic product, and taxation policies

*Microeconomics

the study of smaller economics units such as individual consumers, families, and individual businesses

*Fiscal Policy:

Government efforts to influence the economy through taxation and spending

Debt ceiling:

The maximum amount Congress lets the government borrow

Fiscal Cliff:

Across-the-board spending cuts and sharp tax hikes scheduled to hit at the same time that could dramatically decrease the U.S. budget deficit

*Budget Surplus

Overage that occurs when revenue is higher than expenses over a given period of time

*Budget Deficit:

Shortfall that occurs when expenses are higher than revenue over a given period of time

*Federal debt:

The sum of all the money that the federal government has borrowed over the years and not yet repaid

*Monetary Policy

Federal Reserve decision that shape the economy by influencing interest rates and the supply of money

The Fed

- Headed by a seven-member Board of Governors

- Duties of the FED:

-Bailing out shaky firms during a financial crisis

-Providing banking services for member banks

- Set and manage monetary policy

- Oversee the operation of the 12 Federal Reserve Banks

*Open market operations

federal reserve function of buying and selling government securities, which include treasury bonds, notes, and bills

- The Fed's most frequently used tool

*discount rate

the rate of interest that the FED charges when it loans funds to banks

Reserve requirement*

a rule set by the FED, which specifies the minimum number of reserves (or funds) a bank must hold, expressed as a percentage of the bank's deposits

*Money Supply

The total amount of money within the overall economy

*M1 Money Supply:

All currency - paper bills and metal coins - plus checking accounts and traveler's checks

*M2 Money Supply:

All of m1 plus most savings accounts, money market accounts, and certificates of deposits (low-risk savings vehicles with fixed term, typically less than one year)

Money

Anything generally accepted as a medium of exchange, a measure of value, or a mean of payment

Commercial Bank

Privately owned financial intuitions that accept demand deposits and make loans and provide other services for the public

Open Market Operations:

The Federal Reserve function of buying and selling government securities, which include treasury bonds, notes, and bills

*An economic system:

Structure for allocating limited resources

*Capitalism

An economic system - also known as the private enterprise or free market system - based on private ownership, economic freedom, and fair competition

The Four Fundamental Rights of Capitalism

1. The right to own a business and keep after-tax profit

2. The right to private property

3. the right to free choice

4. the right to fair competition

Four Degrees of Competition

1. Pure Competition

2. Monopolistic Competition

3. Oligopoly

4. Monopoly

*Pure competition

- A market structure with many competitors selling virtually identical products. Barriers to entry are quite low

- Examples: agriculture

*Monopolistic Competition

- A market structure with many competitors selling differentiated products. Barriers to entry are low

- producers have some control over the price of their wares, depending on the value that they offer their customers

- a successful product usually attracts new suppliers quite quickly

- examples: clothing industry, restaurant businesses

*Oligopoly Competition

- A market structure with only a handful of competitors selling products that can be similar or different. Barriers to entry are typically high

- Example: Gasoline business, the car manufacturing industry, soft drink industry, computer business, and network television

- Example: Cereal brands (Kellogg's, General Mills)

- Usually requires a huge upfront investment

*Monopoly Competition

- A market structure with one producer completely dominating the industry, leaving no room for any significant competitors. Barriers to entry tend to be virtually insurmountable

- Usually are not good for anyone byt the company that has control

- Monopolies can harm the economy so most are illegal according to federal legislation such as the Sherman Antitrust Act of 1890 and Clayton Antitrust Act of 1914

*Natural Monopoly

· A market structure with one company as the supplier of a product because the nature of that product makes a single supplier more efficient than multiple, competing ones. Most natural monopolies are government sanctioned and regulated

· Example: Public utilities

*Supply

The quantity of products that producers are willing to offer for sale at different market prices

*Supply Curve:

The graphed relationship between price and quantity from a supplier standpoint

X-axis = supply, y-axis= price

*Demand

The quantity of product that consumers are willing to buy at different market prices

*Demand Curve:

The graphed relationship between price and quantity from a customer demand standpoint

X-axis= quantity, y-axis= Price

*Equilibrium Price:

The price associated with the point at which the quantity demanded of a product equals the quantity supplied

*Socialism:

- An economic system based on the principle that the government should own and operate key enterprises that directly affect public welfare such as utilities, telecommunications, and healthcare

- These economies usually have higher taxed that help wealth get distributed more evenly

*Communism:

- An economic and political system that calls for public ownership of virtually all enterprises, under the direction of a strong central government

- Concept given by Karl Marx

- Countries like North Korea and Cuba continue to function under communist structures and their people are facing drastic shortages and even starvation

*Mixed Economies

Economies that embody elements of both planned and market-based economic systems

*Privatization

The process of converting government-owned businesses to private ownership

*GDP

The total value of all final goods and services produced within a nation's physical boundaries over a given period of time

- Real GDP is adjusted for inflation, unlike normal GDP

- All domestic production is included

- Vital measure of economic health

- Compares the growth among nations

*Unemployment rate:

The percentage of people in the labor force over age 16 who do not have jobs and are actively seeking employment

Business cycle:

The periodic contraction and expansion that occur over time in virtually every economy

- Explained with contractions, recovery, and expansion

*Contraction

A period of economic downturn, marked by rising unemployment and falling business production

*Recession

An economic downturn marked by a decrease in the GDP for two consecutive quarters (6 month)

*Depression

A long-lasting recession (12 months, or 4 quarters)

Trough

Very bottom of the contraction

*Recovery

A period of rising economic growth and employment

*Expansion

A period of robust economic growth and high employment

Price levels:

measure used to evaluate economic well-being

*Inflation

A period of rising average prices across the economy

*Hyperinflation

An average monthly inflation rate of more than 50%

*Disinflation

A period of slowing average price increase across the economy

*Deflation

A period of falling average prices across the economy

CPI and PPI

The government used price indexes to evaluate

*Consumer Price Index

A measure of inflation that evaluates the change in the weighted-average price of goods and services that the average consumer buys each month

*Producer price index:

A measure of inflation that evaluates the change over time in the prices that businesses pay each other for goods and services on a weighted average

*Productivity

· The basic relationship between the production of goods and services (output) and the resources needed to produce them (input)

equation: output/input

goal of productivity

The goal is to produce more goods and services, using fewer hours and other inputs