Economics Final Study Guide (1-8)

Need (1.1)

-something like air, food, or shelter that is necessary for survival

Want (1.1)

-an item that we desire but that is not essential to survival

Goods (1.1

-physical objects such as clothes or shoes

Services (1.1)

-actions of activities that one person performs for another

ex: haircuts, dental checkups, and tutoring

Scarcity (1.1)

-people cannot have everything they need and want

-all the goods we produce are scarce

-implies limited quantities of resources to meet unlimited wants

-no one can have an endless supply of everything and a limit is always reached

Shortage (1.1)

-occurs when producers will not or cannot offer goods or services at the current prices

-situation in which a good or service is unavailable

-temporary or long term

-caused by wars/droughts

-ex: a rack is empty one day at a store but 4 days later it is overflowing

Factors of Production (1.1)

Land, Labor, and Capital

-the resources that are used to make all goods and services

-also known as factor resources

-factors of production are land, labor, and capital

Land (1.1)

-all natural resources to produce goods/services

-materials found in nature

-ex: fertile land for farming and products that are in or on the land such as coal, water, and forests

Labor (1.1)

-effort that a person devotes to a task for which they are paid

-medical aid provided by a doctor, tightening of clamp by assembly line worker, artists creation of a painting, repair of a television

Capital (1.1)

-any human made resource that is used to produce other goods and services

-physical and human capital

example popping corn- labor and capital

labor; the human effort needed to pop the corn

capital; corn-popping device

Physical Capital (1.1)

-all human made goods that are used to produce other goods and services; tools and buildings

-important because it can save time and money

-building gives workers protection and space

-tools help workers produce a good or service

-physical capital makes us more productive (assembly line)

benefits:

1. extra time

2. more knowledge

3. more productivity

Human Capital (1.1)

-the skills and knowledge gained by a worker through education and experience

-we need both physical and human

-ex: doctors use stethoscopes and their schooling to provide their services, assembly line workers use equipment and skills acquired through training and practice to produce goods

Entrepreneur (1.1)

-pull all the resources together

-ambitious leader who combines land, labor, and capital to create and market new goods and services

-new ideas, businesses, create new industries, and fuel economic growth

Trade-off (1.2)

-all individuals, businesses and large groups of people make decisions that involve these

-an alternative that we sacrifice when we made a decision

-all the alternatives that we give up whenever we choose one course of action over others.

Guns or Butter (1.2)

-a phrase that refers to the trade-offs that nations face when choosing whether or not to produce more or less military or consumer goods

-ex: a country that decides to produce more military goods ("guns") has fewer resources to devoter to consumer goods ("butter") and vice versa

-resources are limited!

-steel used to make a tank is o longer available for building the dairy equipment needed to make butter

Opportunity Cost (1.2)

-one alternative of a trade off is more desirable than all the others

-an opportunity cost is the most desirable alternative given up as the result of a decision

-it is what is given up for the better option

-the opportunity cost is what you're willing to sacrifice

Thinking at the Margin (1.2)

-deciding whether to do or use one additional unit of some resource

-Decisions involve adding or subtracting one unit such as one minute or one dollar

-used when deciding how much more or less to do

-She could have made her decision by looking at how many extra hours to study that morning which would be thinking at the margin (Karen should look at the opportunity cost of each extra hour of studying and compare it to the benefit)

Production Possibilities Curves (1.3)

-graphs help us see how one value relates to another value

-it shows alternative ways to use an economy's resources

-axes can show goods, services, farm goods, factory goods, or capital goods

-taxes can display any pair of specific goods or services such as hats on one axis and shoes on the other

-decide which goods or services to examine

Production Possibilities Frontier (1.3)

-the line that shows the maximum possible output for that economy

-the line drawn shows combinations of the production of both shoes and watermelons

-any point on the represent represent a point at which the company is using all of its resources to produce a maximum combination of those two products

Efficiency (1.3)

-using resources in such a way as to maximize the production of goods and services

-An economy producing output levels on the production possibilities frontier is operating efficiently

Underutilization (1.3)

-any point inside the line indicates an underutilization of resources

-using fewer resources that the economy is capable of using

-using much less than the maximum possible production

Cost (1.3)

-the alternative we give up when we choose one option over the other; the alternative that is given up because of a decision

-cost always means opportunity cost

-switching from shoes to watermelons costs something-

-a production possibilities graph shows the cost of producing more of one item. To move from point c to d on this graph has a cost of 3 million pairs of shoes

Law of Increasing Costs (1.3)

-explains increasingly expensive trade offs

-states that as we shift factors of production from making one good or service to another, the cost of producing the second item increases

-as production switches from one item to another, more and more resources are necessary to increase production of the second item and the opportunity cost increases

If the economy was using fertile land to grow watermelons:

-after the best land was used up, farmers had to use poorer land that could produce less per acre than the fertilizer could

-to increase output of the poorer land, farmers had to use more land and other resources

As we move along the curve....

we trade off more and more to get less and less additional output

Economic System (2.1)

the method used by a society to produce and distribute goods and services

-What goods and services should be produced?

-How should these goods and services be produced?

-Who consumes these goods and services?

Factor Payments (2.1)

-the income people receive for supplying factors of production - land, labor, capital, or entrepreneurship

-landowners receive rent, workers get wages, and people who invest receive interest

-each society answers the question of distribution based on its combination of societal values and goods

Safety Net (2.1)

-people feel the government should provide some kind of safety net for people who are poor, unemployed, or facing some economic disadvantage

-set of government programs that protect people experiencing unfavorable economic conditions

-injuries, layoffs, natural disasters or severe shortages

Traditional Economy (2.1)

-economic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services

-what do produce, how to produce it, and who to distribute it too

-little room for change/innovation

-around the family

-gender lines

-communities that stay small and close

-support entire groups

-ex: agriculture/hunting lie at the center of the people's lives, law, and religion

-few mechanisms to deal with environmental disasters (flood and drought)

-remain stagnant, resisting change

-slow to adopt new ideas

-no access to everyday goods

-lack modern conveniences/low living standard

Market Economy (2.1)

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

-made by individuals, based on exchange/trade

-also called free markets, or capitalism

Centrally Planned Economy (2.1)

-economic system in which the central government makes all decisions on the production and consumption of goods and services

-central economy alone answers the questions

-sometimes called command economies

Command Economy (2.1)

-economic system in which a central authority is in command of the economy; a centrally planned economy

-a central authority is in command of the economy

Mixed Economy (2.1)

-market-based economic system with limited government involvement

-market based economic system in which the government plays a limited role

Specialization (2.2)

-each of us produces one or a few products

-ex: nurse cares for the sick, baker makes baked goods, mechanic specialized in repairing machinery

-Specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities

-leads to efficient use of resources (capital, land, and labor) b/c it is easier to learn one task or a few tasks very well than to learn them all

Household (2.2)

-person or group of people living in the same residence

-own the factors of production- land, labor, and capital

-consumers of goods and services

Firm (2.2)

-business

-organization that uses resources to produce a product, which it then sells

-transform inputs, or factors of production, into outputs or products

-Firms purchase/rent line, hire workers and pay them wages for their work

-borrow money from households to purchase capital, paying household interest or profits in return

Factor Market (2.2)

-firms purchase factors of production from households and this arena of exchange is called the factor market

-market in which firms purchase the factors of production from households

____________ purchase factors of production from _________________

firms

households

Profit (2.2)

the financial gain made in a transaction

Product Market (2.2)

-top half of the diagram

-the market in which households purchase the goods and services that firms produce

-households purchase the products made by firms with the money they received from firms in the factor market

Self-Interest (2.2)

-Adam Smith published "The wealth of nations"

-described how a market functions

-an economy is made out of countless individual transactions

-in a transaction, the buyers and sellers consider only their own self-interest

-one's own personal gain

-it is the motivating force in the free market

-spurs consumers to purchase certain goods and services and firms to produce them

Incentive (2.2)

-consumers who chase their own self-interest have the incentive to look for lower prices

-hope of reward or the fear of punishment that encourages a person to behave in a certain way

-people respond to positive (lower prices) and negative incentives

-seek profits by increasing sales

-if striped shirts are outselling polka-dot shirts, the manufacturer has incentive to produce more striped shirts because it will make them more profit

-if another manufacturer wants to sell the same shirt, then they would have to drop the selling price because consumers will buy the lower priced shirt

Incentives come in two forms

monetary and nonmonetary

monetary

an incentive that rewards in the form of money

nonmonetary

incentives reward consumers and businesses in other ways, such as gifts, services, and other goods

Competition (2.2)

-economists call this struggle among producers for the dollars of consumers

-causes more production and moderates firms's quests for higher prices

Self interest is the _____________ force and competition is the _______________ force

motivating//regulating

Invisible Hand (2.2)

-self interest and competition work together to regulate the marketplace

Socialism (2.3)

-social and politica philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society

-real equality can only exist with political and economic quality

-equality is possible only if the public controls the centers of economic power

-requires a high degree of central planning

-government owns major industries, such as utilities

Communism (2.3)

-arose out of socialism

-characterized by a centrally planned economy with all economic political power resting in the hands of the government

-society can only come after a violent revolution

-authoritarian

Laissez Faire (2.4)

-left to their own own make the free market system provide the greatest benefit for consumers and raise the standard of living

-laissez faire: doctrine that government should not intervene in the marketplace

-Smith acknowledge the need for a limit degree of government intervention

Private Property (2.4)

-property that is owned by individuals or companies, not by the government or the people as a whole

Free Enterprise (2.4)

-an economic system characterized by private or corporate ownership of capital goods; investments that are determined by private decision rather than by state control; and determined in a free market

Privatize (2.4)

-to make the transition, state firms must be privatized

-state firms that are sold to individuals and then allowed to compete with one another in the marketplace

-to sell state run firms to individuals

Profit Motive (3.1)

-the force that encourages people and organizations to improve their material well being

-business owners and managers make these choices themselves and operate in ways that will maximize their profits

-forces management to exercise financial discipline because it makes people economically responsible for their own success or failure

-rewards innovation, lets companies grow, and improves productivity by allowing more efficient companies to make more money

Private Property Rights (3.1)

-the concept that people have the right and privilege to control their possessions as they wish

-allows people to make their own decisions about their own property

Free Contract (3.1)

-allows people to decide what agreements they want to enter into

Voluntary Exchange (3.1)

-allows people to decide what and when the want to buy and sell, rather than forcing them to buy or sell at particular times or at specific prices

Competition (3.1)

-the rivalry among sellers to attract customers while lowering costs

-provides consumers with the choice of a large variety of goods

-make their own decision

-signal producers what to produce and how much to make

-interest groups

Interest Group (3.1)

-a private organization that tries to persuade public officials to act or vote according to the interests of the group members

-form around economic issues, like taxation, farm aid, and land use

Public Disclosure Laws (3.1)

-require companies to give consumers important information about their products

-fuel efficiency label, energy efficiency tags, etc

-consumers can evaluate some important aspect of the products they are buying

Public Interest (3.1)

-the concerns of the public as a whole

-government started regulating cars, food, medicine, and other things affecting one's health to serve the public interest

Macroeconomics (3.2)

-the study of the behavior and decision making of entire economies

-examined major trends for the economy as a whole

Microeconomics (3.2)

-the study of economic behavior and decision making of small units, such as individuals, families, households, and businesses

Gross Domestic Product (GDP) - (3.2)

-the total value of all final goods and services produced in an economy

-economists follow the country's GDP and other key statistics to predict business cycles

Business Cycle (3.2)

-a period of macro-economic expansion followed by a period of contraction, or decline

-major fluctuations

-last months to many years

why business cycles?

-economic decisions about factors such as prices, production, and consumption are made by individuals and businesses acting in their own self interest

-government plays a role in attempting to prevent wild swings in economic behavior

Technology (3.2)

-the process used to produce a good or service

-improvements allow economy to produce more output from the same or smaller quantity of inputs, or resources

-increased GDP and give the US a competitive advantage

-more efficient and productive

Public Good (3.3)

-a shared good or service for which it would be inefficient or impractical to make consumers pay individually and to exclude nonpayers

-dams are another example of public goods

When a good or service is public,

1. the benefit to each individual is less than the cost that each would have to pay if it were provided privately and

2. the total benefits to society are greater than the total cost

-market doesn't provide he good, government does

Public Sector (3.3)

-finances public goods

-the part of the economy that involves the transactions of the government

Free Rider (3.3)

-associated with public good

-someone who would not choose to pay for a certain good or service, but who would get the benefits of it anyway if it were provided as a public good

Externality (3.3)

-all public goods involve side effects

-an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

-can be positive or negative

Positive externalities

-public goods that generate benefits to many people, not just those who pay for the goods

-can also be created by private sectors (some say it is more efficient and cheaper)

-benefit can be gained by someone who did not purchase it

Negative externalities

-some decisions to produce goods and services generate unintended costs

-cause part of the cost of producing a good or service to be paid for by someone other than the producer

Poverty Threshold (3.4)

-an income level below that which is needed to support families or households

-relative figure determined by the federal government and adjusted periodically

Welfare (3.4)

-effort to ease property is to collect taxes and redistribute some of those funds in the form of welfare

-welfare: government aid for the poor

-includes many redistribution programs

-began under FDR after the GD

-increased under Johnson and the war on poverty

-welfare soared in the 1970s and 1980s

-in the 1990s, critics of welfare voiced increasing concern about people becoming depending on welfare and being unable or unwilling to get off of it

-income redistribution discourages productivity, thus aggravating poverty

-1996 welfare changed

Law of Demand (4.1)

DEMAND:

-the desire to own something and the ability to pay for it

-says that when a good's price is lower, consumers will buy more of it

-when a price is higher, consumers will buy more of it

-as the price gets higher, we buy less of it

-patterns: -two ways consumers change spending patterns and explain why increase in price decreases the quantity purchased

Substitution effect (4.1)

-law of demand is the result of two separate patterns that overlap

-one of the patterns

-when consumers react to an increase in a good's price by consuming less of that good and more of other goods

-pizza rises, people buy more tacos and salads and not buy pizza and the demand of pizza drops

-pizza drops and now pizza will be substituted for tacos and salads, causing the quantity of pizza demand to rise

Income effect (4.1)

-law of demand is the result of two separate patterns that overlap

-one of the patterns

-the change in consumption resulting from a change in real income

-when prices increase, it feels like we have less money and people must cut back on purchases

-consumption is measured by the amount being bought, not the amount of money spent to buy it

-when price goes up, quantity of demand goes down so the income effect leads to the law of demand

-goes the same on the other end, price goes up, feel wealthier

Demand Schedule (4.1)

-law of demand explains how the price affects the quantity demanded of that item

-demand: willing and able to buy it at the price it is

-you want the good and you can buy it

-even if you want something, you might not demand them

-demand something if you can buy it and you have enough money to buy it at the current price

-demand schedule: table that lists the quantity of a good that a person will purchase at each price in a market

Market Demand Schedule (4.1)

-a table that lists the quantity of a good all consumers in a market will buy at each different price

-helps producers know how customers would react to price changes

-created when adding up the demand schedules of every buyer in the market

-predict sales at different prices

-created by surveying the customers and then adding up all the quantities demanded by all individual consumers at each price

-market schedule is like the demand schedule but higher quantities

-at higher prices, the demand is lower

Demand Curve (4.1)

-took all the numbers in a demand schedule and plot them on a graph

-a graphic representation of a demand schedule

-y axis: lowest to highest prices

x-axis: lowest to higher quantity of goods

-graph shows quantity and demand for one person only and one good

-assumes that other factors are held constant that affect demand are held constant

-demand curve slopes downward to the right. As the price decreases, the quantity demanded increases and vice versa

-law of demand again: higher prices will lead to lower quantities demanded

-demand curve: one person

-market demand curve: all consumers at the same prices

-prices stay the same in the market curve but quantities increase

-only accurate for a specific set of market conditions

-if less people are in an area, a place would sell less even if prices stayed the same

Normal Good (4.2)

-incomes affects his or her demand for most goods

-most items we purchase

are normal goods: goods that consumers demand more of when their income increases

Inferior Good (4.2)

-an increase in income causes demand for these goods to fall

-goods you would buy in smaller quantities or not at all, if your income were to rise and you could afford something better

-macaroni and cheese, generic cereals, used cars

Complements (4.2)

two goods that are bought and used together

-skis and ski boots

-increase in price of ski boots will cause people to buy fewer boots and fewer skis

Substitutes (4.2)

goods used in place of one another

-skis and snowboards

-snowboards are substitutes for skis so as the price of snowboards rises, the demand for skis will also rise and the demand for snowboards will fall

-if the price of skis rise, the demand for skis decrease and the demand for snowboards rise

Elasticity of Demand (4.3)

-describe the way that consumers respond to price changes

-a measure of how consumers react to a change in price

-dictates how drastically buyers will cut back or increase their demand for a good when the price rises or falls

Inelastic (4.3)

-your demand for a good that you will keep buying despite a price increase

-unresponsive to price chages

if the elasticity of demand is less than one. A price increase has small effect on the number of items bought

Elastic (4.3)

-buy less of a good after a small price increases

-highly elastic demand: responsive to price changes

-percentage change in demand of a good divided by the percentage change in the price of the good

-percentage change of demand/ percentage change of price

-always be negative because an increased price will lead to a decreased demand and vice versa

-negative sign is dropped

if the elasticity is greater than 1. When a price increases causes less of an item to be bought

price range

-elasticity varies at every price level

-demand for a good can be highly elastic at one price and inelastic at a different price

-inelastic: price rising 50% from 20 cents to 30 cents; price is low and people will still buy as much as they did before

-elastic: price increases 50% from $4 to $6 and demand will be elastic because people may buy less

-even though the percentage is the same, the demand changes

Unitary Elastic (4.3)

unitary elastic

-percentage change in demand is equal to the percentage change in price

-ex: when the price of something rises 50%, the store will sell exactly half as many copies as before

Law of Supply (5.1)

supply: -the amount go goods available

-the higher the price, the larger the quantity produced

-develops from the choices of both current and new producers of a good

-individual firms changing their level of production

-firmed entering or exiting the market

-as the price rises, existing firms will produce more in order to earn additional revenue

-new firms will have an incentive to enter the market to earn a profit for themselves

-if the price falls, some firms will produce less, and others might drop out of the market

Quantity Supplied (5.1)

-describe how much of a good is offered for sale at a specific price

Supply Schedule (5.1)

-shows the relationship between price and quantity supplied for a specific good

-a chart that lists how much of a good a supplier will offer at different prices

-supply for a very specific set of conditions

-only how the price of one item affects the output of the business and all other factors that could change the restaurants output decisions are assumed to remain constant

Market Supply Schedule (5.1)

-all of the supply schedules of individual firms in a market can be added up to create this

-how much of a good all suppliers will offer at different prices

-shows the relationship between prices and total quantity supplied by all firms in a particular market

-useful when we want to see the total supply at a certain place in a large area, like a city

-lists the same prices as those in the supply schedule for a single pizzeria but the quantities are much larger because there are many large pizzerias in the community

-supply more items at higher prices= law of supply

Supply Curve (5.1)

a graph of the quantity supplied of a good at different prices

similar to a demand curve but the horizontal axis is the measure of the quantity of the good supplied, not the quantity demanded

Market Supply Curve (5.1)

-a graph of the quantity supplied of a good by all suppliers at different prices

-same on the vertical axis

-the quantities of pizza supplied at each price are much larger in the market supply curve

Elasticity of Supply (5.1)

-it always rises form left to right

-at a higher price, leads to a higher output

-a measure of the way quantity suppliers reacts to a change in price

-measure of the way suppliers respond to a change in price

-tells how firms will respond to changes in the price of a good

Elastic, inelastic, and unitary elastic

-same values of elasticity

> 1: supply is very sensitive to changes in price and is considered elastic

< 1: supply is not very responsive to changes in price and is considered inelastic

percentage change is perfectly matched by an equal percentage change in quantity supplied, elasticity is exactly one and supply is unitary elastic

Marginal Product of Labor (5.2)

the change in output from hiring one additional unit of labor

measured the change in output at the margin, where the last worker has been hired or fired

Increasing Marginal Returns (5.2)

-specialization increases output per worker, so the second worker adds more to output than the first

-there are benefits from specialization in the first three workers in the example above, meaning the firm enjoys a rising marginal product of labor for the first three workers

Diminishing Marginal Returns (5.2)

-when more workers are hired, the marginal product is still positive but the marginal produce shrinks as each worker joins the company

-after hiring a certain amount of workers, the benefits of specialization end.

-At this point, adding more workers increases total output, but at a decreasing rate

-this is called diminishing marginal returns- the first will produce less and less output from each additional unit of labor added to the mix

-problem gets worse as more workers are hired and the amount of capital remains constant

-wasted time with more workers waiting for supplies will add less and less to total output at the factory

Fixed Cost (5.2)

-cost that does not change no matter how much of a good is produced

-involve the production facility, cost of building, equipping a factory, office, store or restaurant

-examples are rent, repairs, taxes, salaries of workers