Economics TEKS Review

Scarcity

Scarcity

having unlimited needs and wants but only limited resources to meet those unlimited needs and wants

Factors of Production (FOP)

- the things necessary for a business to produce goods or services
- C.E.L.L.

C.E.L.L.

- Capital Resources
- Entrepreneurship
- Land (Natural) Resources
- Labor (Human) Resources

Capital Resources

- anything by used to make a finished product
- capital goods: used to make a consumer good
- consumer goods: used to satisfy human wants
- ex: computer, airplane, cell phone

Entrepreneurship

- risk-taking involved in starting a new business
- entrepreneurs activate and stimulate all economic activity
- they start a business by putting something at risk
- ex: Mark Zuckerberg, Facebook, store manager

Land (Natural) Resources

- anything in its natural state - oil, natural gas, coal, trees
- not made by humans
- ex: forest, river, coal

Labor (Human) Resources

- humans physically and mentally working
anyone who works for pay
- ex: engineer, teacher, farmer

Other FOPs

- Technology: use of science to create or find new products
- Education/Knowledge: the key to all other FOPs

Opportunity Cost

- the value of what you give up when you make an economic decision
- ex: the value of having fun at a party

Constant Opportunity Cost

- straight line in graph
- when you give up the same amount of money every time

Increasing Opportunity Cost

curved line on graph

Efficient Production point

a point on the line

Inefficient

- "A"
- aka underutilization
- FOPs aren't being used to the maximum level
- unemployment is the most common cause

Unattainable

- "X"
- impossible right now
- the curve represents the maximum use of the FOPs

Economic Growth

we need FOPs and technological innovations to show that the economy is growing

Microeconomics

- studies how businesses make decisions and interact in markets
- individual economic decisions
- consumers, businesses, and workers (labor)
- business profit and loss
- supply and demand

Macroeconomics

- the study of the economy as a whole
- examines economic activity on a national scale
- unemployment
- inflation (price level)
- Gross Domestic Product (GDP)

Macroeconomics v.s. Microeconomics

- Macroeconomics examines economic activity as a whole (on a national level)
- Microeconomics just examines individuals and businesses

Economic questions

1. What to produce?
2. How to produce?
3. For whom to produce?

- They are important because to solve scarcity, societies must make choices and must ask these three questions before they can make an important decision

Traditional economies

- relies on tradition to answer the three economic questions
- little room for change
- revolves around family and gender lines
ex: the amish

Types of Economies

- command
- communism
- socialism
- capitalism
- free market

- economic systems continuum shows the types of economies from most government interference to least government interference

Command economy

- greatest gov't interference
- gov't controls FOPs and answers economic questions
- no economic or political freedoms
- ex: Cuba, North Korea

Communism

- centrally planned economy
- gov't has all the economic and political power
- a type of command economy
- gov't owns FOPs and are authoritarian
- ex: Cuba, North Korea

Socialism

- gov't has permission to run major industries but also have democracy
- even wealth distribution
- ex: Western Europe (UK, France, Venezuela)

Capitalism

- FOPs are primarily owned and people answer the economic questions
- voluntary exchange of money and products
- free market with government regulations
- ex: U.S., F.A.A., F.D.A

Free Market

- least gov't interference
- people own FOPs and answer economic questions
- businesses exist to make a profit
- gov't is laissez-faire (hands-off approach)
- ex: none

Difference between Communism and Socialism

- with socialism there is an even distribution of wealth for the good of society, democracy, and the gov't has permission to control businesses
- Communism: the gov't controls everything, there's no democracy, there's no economic freedom

Adam Smith

- classical economist
- founder of modern economics
- believed in laissez-faire
- though hands-off gov't would allow the invisible hand help people

The Invisible Hand

- self-interest is the motivating force and competition is the regulating force in the pure market economy
- competition increases variety and improves quality while keeping prices low

Karl Marx

- command economy
- ideas led to communism
- believed capitalism led to instability because capitalists exploit workers
- gov't should control FOPs

John Maynard

- capitalist
- influenced today's economy
- FDR's advisor
- believed that gov't should start spending in order to put money into private sector programs
- wanted gov't intervention during economic turmoil

F.A. Hayek

- critic of socialism and all gov't intervention
- believed in free market system
- believed economic control leads to loss of other freedoms

Milton Freidman

- American economist
- advisor to president reagan
- wanted less gov't intervention in the economy
- wanted deregulation (removal of restrictions) of industries

Product Market

- Physical flow (goods and services)
- Monetary flow (money)
- households are buyers
- businesses are sellers
ex: buying tickets to a concert, tickets coming in mail

Factor Market *

- Physical flow (FOPs, labor)
- Monetary flow (wages, salary)
- households are sellers
- businesses are buyers
ex: taco bell hires you, you get your paycheck

Economizing Problem

resources are limited and wants are unlimited

Marginal Utility

additional satisfaction or happiness we get from consuming one more unit of a product

Diminishing Marginal Utility

decreasing satisfaction as you consume additional units of a product

Marginal Analysis

the study of the costs and benefits of doing a little bit more of an activity versus a little bit less

Unemployment

- the most common cause of inefficiency (point A) in macroeconomics
- the ideal rate is 5% or less

Production Possibilities Frontier (PPF) *

- a graphic representation of the scarcity reality
- it models the production possibilities for two products
- it can represent the production possibilities for one individual company or for an entire company
- points on it represent efficiency
- points inside it represents inefficiency (point A)
- point outside it represents unattainable (point X)
-

Events that could cause movements or shifts in a PPF

- curved line (increasing opportunity cost)
- changes in amount of resources or advancements in technology

How to model a depression on the PPF

- plot point A (inefficient)

Market economy

economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets

Mixed economy

- market-based economic system with limited government involvement
- capitalism is an example because it has aspects of a free market and government regulations

Changes in government roles in the U.S. Economy over time

there are significantly more regulations

Laissez-Faire

the belief that the government should not interfere with decisions made in a market economy

Wealth Distribution

- a comparison of the wealth of various members or groups in a society
- it has become skewed because the rich get more than those with less money

Importance of Property Rights

In a capitalist country, property rights must be protected

Five Economic Goals

1. Economic Efficiency - making the most of resources because they are scarce
2. Economic Freedom - freedom from government intervention in the production and distribution of goods and services
3. Economic Security and Predictability - assurance that goods and services will be available, payments will be made on time, and a safety net (programs that protect people from bad economic decisions) will protect individuals in times of economic disaster
4. Economic Equity - fair distribution of wealth (not equal, but fair)
5. Economic Growth and Innovation - innovation leads to economic growth, and economic growth leads to a higher standard of living

Demand

a schedule that shows the various amounts of products that consumers are willing and able to buy at various prices at a particular time

The Law of Demand

- as prices rise, quantity demanded falls
- as prices fall, quantity demanded rises
- there's an inverse relationship between them

Demand Curve

- a graphic representation of a demand schedule
- price on y-axis
- quantity demanded on x-axis

Change in Quantity Demanded

- there has been a change in the price of the product
- criteria: one item, price change, happening now (not in the future)

Change in Demand

- a non-price factor (determinant) has caused demand to increase or decrease
- increase in demand (shift to the right)
- decrease in demand (shift to the left)

Non-price Determinants of Demand

- the factors that create a change in demand (shift to the curve)
- T.I.B.E.R.

Tastes and Preferences

- centers around what is cool vs uncool or what is popular vs unpopular
- fads, ads, social trends, tv, etc.

Income of Consumers

- as income increases, consumers will tend to consume more
- as income decreases, consumers will tend to consume less
- consumers will make economic decisions based on their own best interest

Buyers (# of)

- increase in the number of consumers, increases demand
- decrease in the number of consumers, decrease demand

Expectations of Consumers

- if consumers expect positive things, they will demand more
- if consumers expect negative things, they will demand less
- categories: expectations of overall health of the economy, expectations of future price changes, personal expectations

Related Goods (price of)

- Substitute goods: a related good that can be used in place of another good (apple vs Samsung, coke vs pepsi, nikes vs adidas)
- Complementary goods: goods used in tandem and jointly demanded. Things you purchase together (peanut butter and jelly, cell phones and cell phone chargers, hot dogs and hot dog buns)

Elasticity of Demand

- the extent to which a change in price changes quantity demanded
- how responsive a buyer is to a price change
- big changes in quantity demanded when price changes = ELASTIC
- small changes in quantity demanded when price changes = INELASTIC

Factors that Determine Elasticity

1. Desire of product (need and want)
2. Availability of Substitutes
3. Expense (does it take a large portion of your income or a small one)

Why a Product has Elastic Demand

- it's a luxury item (want)
- the product has many substitutes
- the product tends to be expensive (steak, lobster, luxury sports car, iphone)

Why a Product has Inelastic Demand

- people need it (need)
- it's addictive
- the product has few, if any, substitutes
- it's cheap (gasoline, electricity, salt, tobacco)

Supply

a schedule that shows the various amounts of a product that producers are willing and able to produce and make available at various prices at a particular time

Law of Supply

- as prices increase, quality supplied rises
- as prices fall, quantity supplied falls
- there's a direct relationship between prices and quantity supplied

Change in Quantity Supplied

- change in the price of a product
- up or down movement on supply curve
- Criteria: one item, price change, happening now (not in the future)

Change in Supply

- an increase in supply is reflected by a shift to the right of the original curve
- a decrease in supply is reflected by a shift to the left of the original supply curve

Non-Price Determinants

T.O.N.E.R.S.
- Technology
- Other goods
- Number of sellers
- Expectations
- Resource costs
- Subsidies/taxes

Technology

- tech improvements lead to lower costs and increased supply
- assume that tech innovations lead to increases in supply

Other goods (prices of)

a rise in the price of soccer balls may lead to an athletic company producing less basketballs

Number of Sellers

as more firms enter a market, the supply curve shifts to the rights

Expectations of Firms

- the impact of this varies depending on the situation
- Categories: business expectations of the overall health of the economy, future price changes, and consumer behavior

Resource Prices/Costs

- items used to produce other items
- a decrease in resource prices leads to an increase in supply (more profit)
- an increase in resource prices leads to a decrease in supply (less profit)
- labor is the costliest resource price for producers
- minimum wage is a resource cost

Subsidies and Taxes

- subsidies are "taxes in reverse." Gov't pays producers to produce
- subsidies can be granted and removed by the gov't
- increases in business or corporate taxes lead to reductions in supply

Elasticity of Supply

- a supplier's responsiveness to a price change
- Factors that determine elasticity: availability of resources required to make the product, amount of time required to make the product, skill level of the worker needed to make the product

Elastic Supply

- price change causes a significant change in the quantity supplies
- What has to be true of a product to allow a seller to quickly increase production if the market goes up: abundance of resources required to make the product, product can be made quickly and easily, low skill level of workers required

Inelastic Supply

- price change causes very little change in the quantity supplied
- This happens because: product requires scarce resources, it takes a long time to make, it requires a high skill level of workers
- ex: microchips

Perfectly Inelastic Supply

- change in price doesn't affect supply
- ex: 1 acre lots of land around a lake with a 100ft of lake frontage

Equilibrium

- the market clearing price and quantity
- where quantity supplied equals quantity demanded
- a market is more likely to be in disequilibrium

Disequilibrium

any price and quantity that is not at equilibrium

Excess Demand

- a price below equilibrium results in excess demand (aka shortage)
- if there is excess demand, prices will move toward equilibrium (they will rise)

Excess Supply

- a price above equilibrium results in excess supply (aka surplus)
- if there is excess supply, prices will move away from equilibrium (they will decline)

Price Floor

- a gov't imposed "interference" in the market
- prevents prices or wages from dropping to equilibrium
- minimum wage laws
- agricultural products
- above equilibrium
- sets a minimum price that can be legally charged for a product (you can lower the price until you hit the floor)

Price Ceiling

- a gov't imposed "interference" in the market
- prevents prices from rising to equilibrium
- ex: rent control (NYC), flu shots
- sets a maximum price that can be legally charged for a product

Types of Businesses

1. Sole Proprietorship
2. Partnership
3. Corporation
4. Franchise
5. Non-Profit Organization

Sole Proprietorship

- a business owned and operated by one person (can have employees but only one owner)
- Advantages: easy to begin, you claim all profits, you're your own boss
- Disadvantages: unlimited liability (responsible for all company debts), you're responsible for all aspects of the company, most difficult to raise revenue
- most earn honest incomes
- most run their businesses part time

Partnerships

- 2 or more individuals agree to own and operate a business together
- Advantages: they pool their own resources and business skills, easy to create (but should have a contract), little gov't regulation/taxation, they share business responsibilities, they share risks
- Disadvantages: difficult to raise revenue, must share profits, unlimited liability (can include both partners' liability)
- decision making can be difficult, need a clear boss

Types of Partnerships

1. General partnership
2. Limited (silent)
3. Limited (partner)
4. Limited liability

General Partnership

the partners share equally in both responsibility and liability

Limited (silent)

only one partner is required to be a general partner

Limited (partner)

- does: contribute money
- does not: manage the business or have unlimited personal liability

Limited Liability (LLP)

- all partners are limited partners
- functions the same as general partnerships except that all partners have limited personal liability in certain situations

Corporations

- business organization that is treated by law as an individual but is owned by stockholders
- a legal creation that can: acquire resources, produce and sell products, incur debts (sell bonds), sue and be sued
- separate from the stockholders that own it

Advantages of Corporations

- long life potential , business doesn't end because founder dies
- effective at raising revenue (selling stocks, issuing bonds)
- limited liability: stockholders only risk what they have invested, stockholders can't be sued but the corporation can
- can mass produce product and specialize human resources

Disadvantages of Corporations

- some red tape (state gov't regulations) and expense to get a corporate charter
- double taxation: corporate taxes are taxed when earned, dividend income is taxed when investors make profits

Stocks

- part ownership in a corporation
- stock owners vote for the corporate officers
- vote is in proportion to percentage of stocks owned
- stock owners get a share of the corporate profits (dividends)

Bonds

- if you purchase a corporate bonds, you're lending money to the corporation
- the corporation promises to pay the value of that bond plus interest
- bonds are typically viewed as a safer investment but usually pay a smaller rate of return
- stocks and bonds are also known as securities

Percentage of Firms

- 20% corporations
- 8% partnerships
- 72% sole proprietorships