econ exam

what is the basic fundamental problem of economics

too many wants and not enough resources

What is Adam Smith's invisible hand?

Individuals acting in their own self-interest.

Economics is...

The study of how people seek to satisfy their needs and wants by making choices

Trade-offs are

Alternative choices we could make when making decisions

Markets

Bring buyers and sellers together to exchange goods and services

thinking at the margin

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

marginal cost

the cost of producing one more unit of a good

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good or service

7 economic principles

scarcity forces trade offs,

cost versus benefits,

thinking on the margin,

incentives matter,

trade makes people better off,

markets coordinate trade,

future consequences count

what is a good

physical products that can be purchased

What is a service?

work that is performed for someone

factors of production

land, labor, capital

natural resources

materials found in nature that are used by living things

human resources

the broad category of human efforts, both physical and mental, used to produce goods and services

capital resources

The tools, equipment, and buildings that are used to produce goods and services

Entrepreneur

A person who starts up and takes on the risk of a business

marginal utility

satisfaction or usefulness obtained from acquiring one more unit of a product

human capital

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

opportunity cost

the most desirable alternative given up as the result of a decision

Scarcity

Limited quantities of resources to meet unlimited wants

choice

the act of selecting among alternatives

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

Continuum of mixed economies

The degree of government intervention in the marketplace varies among nations

What are the 3 questions all economies try to answer?

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

what are the economic goals all economies try to reach

efficiency, equity, economic freedom, full employment, economic growth, security, and stability.

which economic system is most common

mixed economy

Traditional Economy

An economy in which production is based on customs and traditions and economic roles are typically passed down from one generation to the next.

command economy

An economic system in which the government/ruler controls a country's economy.

market economy

Economic decisions are made by individuals or the open market.

mixed economy

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion.

government role in circular flow model

government is a buyer (demand) in both the product and resource markets

firm's role in circular flow model

in the Product Market are producers of goods and services

product market role in circular flow model

To provide goods and services to households, the product market purchases them from businesses, generating revenue.

factor market role in circular flow model

the market in which the factors of production are bought and sold

households role in circular flow model

buyers in the market for goods and services

Specialization of labor

Focusing work effort on a particular product or a single task

division of labor

Division of work into a number of separate tasks to be performed by different workers

voluntary exchange

the act of buyers and sellers freely and willingly engaging in market transactions

How does trade increase the value of an item?

It transfers the item to someone who values it more

How does trade make people better off?

Trade makes us wealthier, increases the variety and quantity of goods, lowers the prices of goods, and gets us things that we would not be able to produce on our own.

what is the advantage for businesses being multinational or outsourcing to another country?

availability of cheap overseas labor is one of the biggest advantages of outsourcing. Lower tariffs and duties, and local market access, can be added incentives to move production offshore

absolute advantage

the ability to produce a good using fewer inputs than another producer

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

Law of Demand

as price increases, quantity demanded decreases

Law of Supply

as price increases, quantity supplied increases

factors of elasticity of demand

availability to choose substitutes, whether a good is a necessity of a luxury, share of income spent on the good, length of time elapsed since price change

factors of elasticity of supply

1. availability of inputs
2. time

six demand shifters

changes in:

income

\# of consumers

consumer tastes and preferences

consumer expectations

the price of substitute goods

the price of complementary goods

6 supply shifters

Changes in the cost of inputs

Changes in the number of producers

Changes in conditions due to natural disasters or international events

Changes in technology

Changes in producer expectations

Changes in government policy

price ceiling

A legal maximum on the price at which a good can be sold

price floor

A legal minimum on the price at which a good can be sold

4 questions that determine what specific market structure a market is in?

number of producers, similarity of products, ease of entry, control over price

perfect competition

a market structure in which a large number of firms all produce the same product

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

Oligopoly

A market structure in which a few large firms dominate a market

Monopoly

A market in which there are many buyers but only one seller.

Legal Monopolies (examples)

1. Natural Monopolies
2. Licensed Monopolies
3. Government Issued Monopolies

Cartel

a formal organization of producers that agree to coordinate prices and production

negative externality

the harm, cost, or inconvenience suffered by a third party because of actions by others

positive externalities

benefits created by a public good that are shared by the primary consumer of the good and by society more generally

public goods

Goods, such as clean air and clean water, that everyone must share.

what are the characteristics of money

durability, portability, divisibility, uniformity, limited supply, acceptability

what is the difference between a debit and credit card?

Debit cards typically pull funds from a checking account, while credit cards charge purchases using a line of credit.

what are M1 and M2 money supply composed of

M1 is liquid assets, M2 is near-money

how does the banking system connect savers and borrowers

financial intermediary (mutual funds, pension funds, life insurance companies and banks.)

how does personal savings in a bank help the economy expand/grow?

a higher saving rate will result in a higher level of physical capital over time, allowing the economy to produce more goods and services

FDIC (Federal Deposit Insurance Corporation)

an agency developed by the federal government to regulate banking and and investment activivties

deposits

money added to a bank account

CDs

a financial derivative that allows an investor to swap or offset their credit risk with that of another investor

mutual funds

A pool of money used by a company to purchase a variety of stocks, bonds or money market instruments. Provides diversification and professional management for investors.

Stocks

shares of ownership in a company

Bonds

Certificates of debt that carry a promise to buy back the bonds at a higher price

how are large businesses organized as corporations

on the bottom, employees. then middle management(managers and department heads), then senior management(corporate officers and CEOs) then board of directors, then shareholders

Sole Proprietorship

A business owned by one person. advantages: ease of start up, few restrictions. Disadvantages: unlimited liability and Limited growth potential.

board of directors

a group of persons elected by the stockholders to manage a corporation

unlimited liability

The owner is personally and fully responsible for all losses and debts of the business

CEO (Chief Executive Officer)

the person who is in charge of a company

LLC (Limited Liability Company)

Limited liability, pass through income taxation, flexibility

partnerships

businesses with two or more owners. advantages: ease of star up, few restrictions. Disadvantages: Unlimited liability for general partners, conflict between partners

Corporation

A business owned by stockholders who share in its profits but are not personally responsible for its debts. advantages: limited liability, growth potential. disadvantages: complexity of start-up, loss of control

Franchise

A business established or operated under authorization to sell or distribute a company's goods or services in a particular area. Advantage: Little to no industry experience is necessary. disadvantage: Lack of Independence

Who is in the labor force?

Above 16 years old

Able and willing to work

Not institutionalized (jails, hospitals)

Not in military, in school full time, or retired

Who is not in the labor force?

Jobless people not actively seeking employment (no efforts made in four weeks)

Retirees

Students

Institutionalized