Economics Study Guide

In a market economy, what is produced is determined by what?

Supply and demand, consumer demand.

What are the four factors of production?

• land

• labor

• capital

• Entrepreneurs

What is the term that describes the american econmic system?

Free enterprise system

An advantage of a market economy is its ability to do what ?

Ability to adjust to change overtime

What is the difference between a need and a want?

A need is a basic requirement of survival, while a want is something that we would like to have but is not necessary for survival. 

What is a durable good?

A good that lasts for at least three years when used regularly

What is a nondurable good?

An item that wears out or lasts for fewer than three years when used regularly.

Labor

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

What is opportunity cost?

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

Why has Capitalism become the economic system of choice in many parts of the world?

It generates wealth

What are the characteristics of a capitalistic free enterprise system?

• Economic Freedom

• Voluntary Exchange

• Private Property Rights

• Profit Motive

• Profit

• Competition

What does economic freedom mean to an individual?

People get to make their own economic decisions. People choose their occupations, employers, and how to use their money.

What does economic freedom mean to a business?

Businesses how to produce, where to produce, what to produce, who to produce for.

Voluntary Exchange

Act of buyers and sellers freely and willingly engaging in market transactions; characteristic of capitalism, and free enterprise. 

Private property gives people the incentive to do what?

 Incentive to work, save, invest.

Why is the regulatory role of the government controversial?

Businesses don’t like to be told how to run their affairs.

Mixed or modified free enterprise economy?

Its an economy which people and businesses carry on their economic affair freely but are subject to some government intervention and regulation

As a regulator the national government is charged with doing what?

Ensures competition

Command Economy

An economic system characterized by a central authority that makes most of the major economic decisions.

A market economies strengths include what?

• High degree of individual freedom.

• Adjusts gradually to change overtime.

• Relatively small degree of government interference.

• Decision making is decentralized.

• Large variety of goods and services.

• High degree of consumer satisfaction.

What are disadvantages of a command economy?

• Ignores the basic wants and needs of consumers.

• The system gives people incentive to fill their quotas instead of producing a good product.

• Requires a large decision making bureaucracy.

• The planning bureaucracy lacks the flexibility to deal with minor day to day problems.

• Rewards for individual incentive initiatives are rare in a command economy.

What is the description of the medical care and public housing that socialist countries provide?:

 It is often limited and may deteriorate over time in quality.

What is a horizontal merger?

A combination of two or more firms producing the same kind of product.

What is a vertical merger?

Combination of firms involved in different steps of manufacturing or marketing.

What is a conglomerate?

Firm with four or more businesses making unrelated products with no single business responsible for majority of its sales.

What is a multinational?

Corporation producing and selling without regard to national boundaries and whole business activities are located in several different countries. 

A multinationals strength include what?

• Help spread technology worldwide

• Generate new jobs

• Produces tax revenue for the host country

A weakness of a multinational is what?

• May be able to influence the political life of the host nation

• May exploit the economy by paying low wages

• Take away jobs at home

Studying economics provides people with a working knowledge of what?

Knowledge of economic incentives, laws of supply and demand, price system, economic institutions, and property rights that makes the US economy function

Standard of living

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

What are nonprofit organizations?

Economic institution that operates like a business but does not seek financial gain; schools, churches, and community service organizations.

Labor union

Organization that works for its members’ interests concerning pay, working hours, health coverage, fringe benefits, and other job related matters

What are the requirements for demand to exist?

Desire, ability, and willingness to buy a product.

Satisfaction a consumer enjoys by purchasing one more unit of a project is called what?

Marginal utility

If the price of a product falls, producers will generally do what?

Produce less

What does the law of demand state?

Quantity demanded varies inversely with its price.

What does the law of supply state?

The quantity offered for sale, varies directly with its price. If prices are high, suppliers offer greater quantities for sale. If prices are low, smaller quantities are offered for sale.

According to the law of demand high prices will result in what?

Low demand

If the price of a product drops, consumers pay less, resulting in what?

The consumer having some extra money to spend.

Reasons for why change in demand can occur include what?

Price of related goods

Increase in consumer income means what for people?

Consumers can afford to buy more at all possible prices. They have extra income to spend.

Market failures are caused by what?

Market failures occur whenever one of the conditions necessary for competitive markets does not exist. When such conditions are not there it leads to inadequate competition, inadequate information, resource immobility, lack of public goods, and externalities.

What are public goods?

Economic products that are paid for and consumed collectively; such as highways, national defense, police, and fire protection.

Market structure

Market classification according to number and size of firms, type of product, and type of competition; nature and degree of competition among firms in the same industry.

In economic terms what is an oligopoly?

A market structure dominated by a small number of large firms. For example Boeing and Airbus dominate the commercial plane market.

In order for perfect competition to exist there must be what?

• There must be a large number of buyers and sellers.

• Buyers and sellers deal in identical products.

• Each buyer and seller acts independently.

• Buyers and sellers are reasonably well-informed about products and services.

• Buyers and sellers are free to enter into, conduct, or get out of business.

Collusion

Agreements, usually illegal, among producers to fix prices, limit output, or divide markets.

Price ceilings

Highest legal price that can be charged for a product.

What are disadvantages of rationing?

• Almost everyone feels as though their share is too small.

• High administrative cost of rationing.

• Negative impact on the incentive to produce

What are advantages that prices have as a method of allocating resources?

• Prices are neutral because they favor neither the producer nor the consumer.

• Prices are usually flexible.

• Prices are familiar and easy to understand.

• Prices have no cost of administration.

Diminishing marginal utility

 Decrease in satisfaction or usefulness as additional units of a product are acquired.

What is resource immobility?

When land, capital, labor, and entrepreneurs do not move to markets where returns are the highest. Instead they tend to stay put and sometimes remain unemployed.

What type of tax is a sales tax?

A regressive tax

What is a value-added tax (VAT)?

Tax on the value added at every stage of the production process

What are advantages of a value-added tax (VAT)?

It tends to be virtually invisible

What is a flat tax?

A proportional tax on individual income after a specified threshold has been reached.

What are disadvantages of the flat tax?

• Removes many of the incentives built into the current tax code

• No one knows exactly what rate is needed to replace the revenues collected under the current tax system

• There is no clear answer as to whether a flat tax would further stimulate economic growth.

What are advantages of the flat tax?

• The simplicity it offers to taxpayers.

• It would close most tax loopholes if it did away with deductions and exemptions.

• It reduces the need for tax accountants, tax preparers, and even a large portion of the IRS.

Most labor disputes occur over what issue?

Pay and working conditions

Wage

A standard argument of pay given for work performed

What is the equilibrium wage/equilibrium wage rate?

Wage rate leaving neither a surplus nor a shortage in the market.

What is collective bargaining?

Process of negotiating between union and management representatives over pay, benefits, and job-related matters.

What are general types of unions?

Closed shop, Union shop, Modified union shop, and Agency shop.

According to the theory of negotiated wages, wages are determined by what?

The strength of organized labor.

Giveback

Wage, fringe benefit, or work rule given up when renegotiating a contract.

if a labor dispute results in a works stoppage, labor and management lose what?

Money/Profits

Signaling theory says employers higher people with what characteristics?

Intelligence, perseverance, and maturity.

Market theory of wage determination says a worker salary is determined by what?

Supply and Demand

What is the office that prepares the federal budget?

Office of Management and Budget (OMB).

What are congresses options for dealing with the federal budget?

Approve, modify it, or disallow it.

The president's federal budget must be approved first by what?

The House of Representatives.

Mandatory spending

Federal spending authorized by law that continues without the need for annual approvals of congress.

Discretionary spending

Spending for federal programs that must receive annual authorization

What are causes of a reduction in state revenue?

Revenue generated by a sales tax and income tax falls due to a decline in the general level of economic activity.

What are entitlement?

Program or benefit using established eligibility requirements to provide health, nutritional, or income supplements to individuals

What is deficit spending?

Annual government spending in excess of taxes and other revenues

Why can the U.S. Government never go bankrupt?

• Repayment: They issue new bonds to pay off old ones. 

• We also owe most of the money to ourselves.

• Purchasing power

What are pay-as-you-go provisions?

A requirement that new spending proposals or tax cuts must be offset by reductions elsewhere in the budget,

What is the line-item veto?

Power to cancel specific budget items without rejecting the entire budget.

What are spending caps?

Legal limits on annual discretionary spending.

What is a sin tax?

Relatively high tax designed to race revenue and discourage consumption of socially undesirable products.

What is a regressive tax?

Tax where the percentage of income paid in tax goes down as income rises.

Arbitration

Agreement by two parties to place a dispute before a third party for a binding settlement; also called binding arbitration.

Frictional unemployment

Unemployment caused by workers changing jobs or wanting to go to new ones

What are factors that affect the growth of the US population?

• Fertility Rates

• Life expectancies 

• Immigration rates

Stagflation

Combination of stagnant economic growth and inflation

What is the federal reserve system?

Privately owned, publicly controlled central bank of the US.

Characteristics of money include what?

• Portable → Easy to carry and exchange

• Durable → Not easily destroyed or altered

• Divisible → Easy not to divide into smaller parts so people use only as much as they need

• Limited Supply → Scarce, maintains money’s value

Today most money exist in what form?

Electronic bookkeeping entries

The Federal Reserve Board of Governors directs and controls the Fed’s activities which include what?

• Set Policies

• Regulate Banks

• Conducts Monetary Policy → Expands or Contracts the money supply to affect the cost and availability of credit

What are responsibilities of the Federal Reserve System?

Provides financial services to the government, regulates financial institutions, maintains payment system, enforces consumer protection laws, and conducts monetary policy. Issues money.