Economics and Financial Concepts

Factors of production

Land, Labor, Capital, and Entrepreneurship

Opportunity cost

The cost of taking an opportunity, what you give up to get, such as 20 days for summer school to take a class; time is money.

Self-regulating nature of a mixed economy

Self-regulation through self-interest creating competition which encourages innovation and growth creating efficiency. Invisible hand is when all of these concepts work together to keep the market fair without any kind of centralized planning or direction.

Voluntary exchange

Where two parties agree to exchange goods and services for the benefits of both parties.

Free rider

Someone who gains benefits from goods and services without contributing to its cost or effort.

Supply shifts

Happen based on the potential for increased revenue; as the price of an item increases, producers produce more.

Demand shifts

Occur when the desire to own something and the ability to pay for it influences it; when the price of a good/service is lower, the quantity demanded is greater.

Sole proprietorships - Advantages

Easy to start, full control, sole receiver of profit after taxes.

Sole proprietorships - Disadvantages

Personal liability, limited access to resources both physical and human, lack of permanence.

Partnerships - Advantages

Easy to start, ability to raise capital, shared decision making.

Partnerships - Disadvantages

Liability, potential for conflict, lack of permanence if general partner moves on.

Corporations - Advantages

Stockholders, potential for growth, long life, hire best employees, borrowing power.

Corporations - Disadvantages

Difficult to start, more taxes, owners have little control, subject to more regulations.

Unemployment

Defined as a worker who must be temporarily out of work but have a job lined up or actively searching for a job.

Job market changes in the last 100 years

Shifted from manufacturing heavy industry to computer related industries.

Wages for specific jobs

Determined by supply and demand in the labor market; if the cost of labor is too high, it can lower demand; the higher the wages for labor, the more supply of labor.

Unions

Organizations of workers who join together to advocate for their collective interests.

Fiat money

Objects that have value because the government decrees they do.

FDIC

Federal Deposit Insurance Corporation.

How banks make money

Through interest.

Investment

A trade off, involves risk, investing into a risk that could potentially yield higher returns

Bond

Loan to a corporation or government

Maturity

Date of payment to bond holder

Stock

Voting owners, shares to own the company

Dow Jones (Dow 30)

Market index of 30 prominent companies

Mutual Fund

Pools the savings of individuals and invests this money in a variety of financial assets

Pension plan

Retirement savings plan offered by employers

GDP

GDP is the dollar value of final goods/services produced within a country's borders in a given year, calculated: consumption + investment + government expenditure + (exports - imports)

Expenditure Approach

Amount spent on four categories of goods/services: consumer, business investments, government, net exports

Income Approach

Add up all the incomes in the economy

Real GDP

GDP measured in current prices, use current year's prices to calculate output

Nominal GDP

GDP expressed in constant/unchanging prices, gives more accurate indication of an increase in production, use a base year price

Underground economy

Production or income that is never recorded or reported to the government

Four phases of a business cycle

Expansion, peak, contraction, trough

Seasonal unemployment

When industries slow or shut down for a season

Structural unemployment

When a worker's skills do not match those that are needed for jobs

Underemployment

Working at a job they are overqualified for

Normal (healthy) unemployment rate

4%-6%

Quantity theory

Too much money in the economy

Market basket

Items included: Food and beverages, housing, apparel, transportation, medical care, recreation, education and communication and other goods and services

Tax

Taxes are mandatory contributions to the state government so that they can get the money it needs to operate

Corporate Tax

Tax on the profit of a corporation

Income Tax

Can be corporate or individual, direct tax, determined every year, used to pay government bills

Progressive Tax

Percentage of tax increases as income increases

Mandatory spending

Revenue that congress is required to spend on certain programs or the national debt, social security and Medicare

Discretionary spending

Revenue that congress can spend freely on whatever programs they choose, defense is the largest

Fiscal policy

Use of government spending and revenue collection to influence the economy

Expansionary fiscal policies

Policy intended to increase output done through tax increases and decreases in government spending

Classical economies

Belief that the free market laws of supply and demand should regulate the economy, government keeps hands off, if market was thrown into disequilibrium no prediction on how long it would recover

Debt and Deficit

Deficit - More expenditures than revenues per fiscal year; Debt - Total amount of money the government owes its bond holders

Federal Reserve

Conduct the nations monetary policy

Lender of last resort

An institution, typically a central bank that provides emergency assistance to financial institutions that are facing severe funding difficulties and are unable to borrow from other sources

Fractional reserve banking

Banking system where banks keep only a portion of their deposits in reserve and lend out the rest