Economics Final

Shortages

When producers can/will not offer prices at the current rate. Occur when producers don’t have a feel for the market.

Factors of Production

land (natural resources), labor (workforce), capital (human + physical)

Human vs Physical Capital?

Human: knowledge/skills gained thru education/experience

Physical: tools, machines, buildings

2 Functions of Entrepenuers

Create new goods/services

Create new jobs

Guns vs Butter

military vs consumer goods

Underutilization

Production possibilities curve not maxed

Things that lead to underutilization

1) Lower educated/skilled workforce

2) Older population

3) Population with higher percent of health issues

Relation between tech & resource usage

Directly related. Why continual push to increase tech. Must balance where getting resource from and what gaining.

3 Key Economic Questions and what determines how to answer

1) What g/s to produce

2) How to produce g/s

3) Who consumes g/s

Based on economic system of country

Economic Goals + Societal Values

Based on economic system

1) Economic efficiency

2) Economic security + predictability

3) Economic equity

4) Economic growth + innovation

5) Environmental Protection

6) Full Employment (healthy unemployment: 4-6%)

7) Universal medical care

2 Innovation Protections

Patents: Inventions (components)

Copyright/Trademarks: Creations

4 Types of Economic Systems and What They Are

1) Traditional - physical goods exchanged

2) Mixed Market - varying levels of government involvement (ex: USA)

3) Command - centrally planned

4) Free Market - price and production based solely on supply vs demand

2 Examples of Centrally Planned Economies

1) Soviet Union

2) North Korea

“Invisible Hand”

coined by Adam Smith, saying that consumer vs producer competition leads to economic regulation by itself

4 Advantages of Free Market Systems

1) Tends to have greater economic efficiency

2) Allows for greater economic freedom (no zoning laws)

3) Greater economic growth

4) Greater level of consumer sovereignty

Old Soviet Union Notes

• Centrally planned economy.

• Had committees making 5-year plans, mainly focused on agriculture and industrial sector

• Farmers put on huge collectives

• No incentive to work

4 Standard problems with Centrally Planned Economies

1) Poor quality of g/s

2) Diminishing production

3) Unreasonable goals are set

4) Big bureaucracy makes government slow to react to changing needs

3 U.S. Constitutional Economic Protections

1) Eminent Domain

2) Strict taxation rules and must be for public rules

3) National income tax

4 Basic Principles of Free Enterprise

1) Profit Motive

2) Open opportunity

3) Economic rights

4) Consumer purchasing dictates which products are made or not

Public utilities have not much competition

Role of gov is ensuring consumers have full info (causes spillover costs) and protecting health, safety, and well-being of people

Poverty Most Common Demographics

• Children

• Single parent households headed by female

2 Interventions to Break Cycle of Poverty

1) Education

2) Job Skills

4 In-Kind Benefits (Poverty Support Systems)

1) food giveaways

2) food stamps

3) subsidized housing

4) medicaid

3 Cash Transfer Programs

1) Stimulus Checks

2) Unemployment Benefits

3) Workers Compensation

3 Goals for Policy Makers

1) healthy unemployment rate

2) economic growth

3) economic stability

4 Reasons for Demand Curve Shift

1) Income Effect

2) Consumer Expectation

3) Population Demographic

4) Consumer Taste and Advertising

Elasticity vs Total Revenue

Elastic Demand: P up, TR down

Inelastic Demand: P up, TR up

3 Things that Impact Elasticity of Demand

1) Availability of Substitutes

2) Relative Importance

3) Necessity vs Luxury

Elasticity of Supply vs Time

More elastic as time goes on, but dependent on industry

2 Components of Production Cost (w/ example) and What They Add Up To

1) Fixed Cost - salary, rent

2) Variable Cost - utilities, wages, resources

Combine to give Total Costs

3 Components of Perfect Competition (w/ example industry)

1) High number of firms with same product

2) Market in equilibrium

3) Producers have no control over price

Example Industry: Milk

2 Barriers to Entry

1) Level of tech required

2) Skills required to operate it

2 Components of Monopoly and 2 Common Monopolies

1) High barriers to entry

2) Have to choose price or output (low price for high output)

1) Regional

2) Public Utilities

3 Components of Monopolistic Competition

1) Lots of firms

2) Slight control over price

3) Differentiated product

Non-Price Competition Forms

1) Physical Characteristics

2) Location

3) Service

Definition of Oligopolies and 3 Common Oligopolies

Market where top 2-3 firms control 70-80% of output

1) Soft drinks

2) Breakfast cereals

3) Airlines

3 Concerns of Government Leaders for Oligopolies

1) Price Leadership - so dominant they can have dramatic influence over price

2) Collusion

3) Cartels - formal org to set price or output (ex: OPEC or avocados)

What Legislation Breaks Monopolies Up w/ 2 Key Targets

Sherman Antitrust Act breaks up big orgs

1) U.S. Steel

2) Standard Oil

3 Types of Business Organizations

1) Sole Proprietorship

2) Partnership

3) Corporations

4 Pros + 4 Cons of Sole Proprietorship

PROS:

1) Easy to start up

2) Get all the profits

3) Sole decision maker

4) Easy to discontinue

CONS:

1) Unlimited personal liability

2) Limited access to resources

3) Hard to attract/maintain good workers

4) Short lifespan

3 Categories of Partnership (w/ definition) and 2 Pros + 2 Cons

1) General - greatest liability, most common

2) Limited - one general, any number of limited

3) Limited Liability - lowest liability, all partners limited in certain situations

PROS:

1) More capital

2) Favorable taxation (only your share of profits)

CONS:

1) 1 partner must take on unlimited liability

2) End w/ conflict

3 Recent Mergers Accepted and 2 Recent Mergers Denied

ACCEPTED:

1) SiriusXM

2) Lowe’s + Orchard Supply Hardware

3) TicketMaster + LiveNation

DENIED:

1) Office Depot + Staples (conducted study)

2) JetBlue & Spirit

4 Pros and 4 Cons of Corporations, along with general note of stock type

PROS:

1) Last long

2) Transferability of ownership of stock

3) Stockholders get dividends quarterly

4) Easier to gain capital

CONS:

1) Higher regulation

2) Double taxation

3) Hard to start up

4) Potential loss of founder control

STOCK TYPE:

1) Closely held vs publicly held

3 Examples of Franchises, 4 Pros, 2 Cons

EXAMPLES:

1) McDonald's

2) 7-Eleven

3) Subway

PROS:
1) Built-in reputation

2) Standardized quality

3) National advertising

4) Training and support

CONS:
1) Franchise fees

2) Royalties

3 Types of Mergers

1) Vertical

2) Horizontal

3) Conglomerate

3 Employment Requirements (one with 3 parts)

1) Non-military

2) Over 16 years old

3a) Worked >= 1 hr for pay in last week

3b) Worked >= 15 hrs w/o pay in family business

3c) Held a job but did not work due to illness, vacation, labor disputes, or weather

Unemployment Requirement

Looked for job in last 4 weeks

5 Categories Outside Labor Force

1) Full-time students

2) Stay-at-home parents

3) Retirees

4) Military

5) Not looking for job

2 Changes in Labor Force from 1950s

1) Greater diversity of race and sex within workplace

2) Greater number of jobs typically held during one’s career

4 Skill Levels of Workers (w/ example)

1) Unskilled (no specialized training) - McDonald’s cashier

2) Semi-skilled (some specialized training) - lifeguard

3) Skilled (specialized training) - electrician

4) Professional (advanced skills/education) - doctor

2 Things Beside Skill Level Impacting Wages

1) Minimum Wage Laws

2) Safety Laws

Collective Bargaining

Negotiations between employee and employer about terms of employment

Mediation vs Arbitration

Independent, neutral 3rd party comes and makes:

M) Suggestions

A) Legally binding decisions

3 Uses of Money

1) Medium of Exchange

2) Unit of Account

3) Store of Value

6 Characteristics of Money

1) Durable

2) Portable

3) Easily Divisible

4) Uniformity

5) Limited Supply

6) Acceptibility

3 Sources of Money’s Value

1) Commodity money - intrinsic value

2) Representative money - back by some commodity

3) Fiat money - backed by trust in government (must be limited supply)

4 Financial Intermediary Examples

1) Banks

2) Credit Unions

3) Finance Companies

4) Life Insurance Companies

Risk/Liquidity/Return of Savings Account

low risk / high liquidity / low ror

Risk/Liquidity/Return of CDs

low risk / low liquidity / high ror

Risk/Liquidity/Return of Bonds

low risk / low liquidity / high ror

3 Components of Bonds

1) Coupon Rate: interest rate that issuer pays

2) Maturity: duration after which payment to bond holder is due

3) Par Value: amount that investor pays to purchase bond

2 Bond Rating Companies, Rating Range, and 3 Things Impacting Bond Ratings

1) Standard & Poors

2) Moody’s

AAA/Aaa - D

1) Ability to make interest payments

2) Ability to make maturity payment

3) Financial standing of issuer

2 Pros and 2 Cons for Bond Issuers

PROS:

1) Once sold, the coupon rate cannot change

2) Unlike stockholders, bond holders do not own shares of company or get profit

CONS:

1) Companies have to make fixed interest payments regardless of how they are doing financially

2) If financial health of issuer suffers, bonds can be downgraded

5 Types of Bonds w/ Risk Level

1) Savings Bond - low risk

2) Treasury Bonds, Bills, and Notes - low risk

3) Municipal Bonds - low risk

4) Corporate Bonds - moderate risk

5) Junk Bonds / High Yield Bonds - high risk

2 Asset Market Classifications

1) Capital - money lent for > 1 year

2) Money - money lent for < 1 year

2 Types of Markets (w/ example)

Primary - financial asset can only be redeemed by OG holder

ex: savings bond

Secondary - assets can be resold

ex: stocks

4 Functions of Financial Institutions

1) Saving money

2) Investing money

3) Storing money

4) Loans

4 Impacts on Willingness to do Job (not financial)

1) Danger

2) Benefits

3) Location

4) Vacation

2 Reasons why Female Wages are lower than those of Males

1) Discrimination - glass ceiling

2) Societal views - steered towards lowing paying jobs

3 Causes of Inflation

1) Quantity Theory

2) Demand Pull Theory

3) Cost Push Theory

4 Types of Unemployment

1) Frictional

2) Seasonal

3) Structural

4) Cyclical

4 Key Economic Variables

1) Business investment

2) Interest & Credit

3) Consumer Spending

4) External Shocks

4 Categories Business Analysts & Economists for Predictions

1) Consumer g/s

2) Business g/s

3) Government g/s

4) Net exports/imports

4 Characteristics of Good Tax

1) Simplicity

2) Efficiency

3) Certainty

4) Equity

2 Determining Factors in Fairness of Taxes

1) Benefits Received Principle

2) Ability to Pay Principle

5 Limits of Fiscal Policies

1) Difficult to alter spending levels

2) Difficult to predict future

3) Delayed results

4) Political pressure

5) Difficulty coordinating fiscal policies