econ final

ECONOMICS FINAL EXAM REVIEW

UNIT 1: BASIC ECONOMIC CONCEPTS

In this unit, we discussed how economics is fundamentally the study of decision-making.  All economies, no matter what structure they take, have to make decisions about how to allocate their scarce resources.  All decisions inherently come with trade-offs and costs.  The question becomes, how do we make those decisions?  We also examined the various types of business structures weighing the pros/cons of each to determine which kind of business structure would be best for different situations.  We evaluated the different market structures in order to understand the role competition plays and its effects on prices in the marketplace.

BASIC ECONOMIC CONCEPTS AND VOCABULARY

1. Alejandro is an entrepreneur who is hoping to open a new business to provide an essential service to his town.  Alejandro describes himself as a “Jack-of-all-trades.”  He is good at doing a lot of things, including construction and fine woodworking, computer programming and network engineering, cooking and beer-making, as well as athletic and physical training.  Alejandro is looking for some advice in trying to decide what kind of business to open, and he is seeking your help.  In the space below, write some advice for Alejandro using all of the economics vocabulary terms listed below.
   

   1. Scarcity - The idea that we can not have everything that we want. We have to have limits. These limits are the scarcity of resources.

   2. Choice- The option you chose when making a decision. 

   3. Trade-off- All options avalible when making a decision. Giving up one thing for another. 

   4. Opportunity cost- The next best alternative you didnt chose in your trade-off. 

2. Based on the advice you gave Alejandro, he decided to open a physical training  business (you pick the type of work).  In creating his business plan, he must make sure that he has all of the factors of production in place.  To help him do so, complete the chart below:

3. Alejandro lives in the United States, but he also has several siblings and cousins spread out around the world.  Many of his relatives are also business owners, but they all face different rules and expectations because of the different types of economies they live in.  In the chart below, explain how each type of economy would affect the ways a business owner would run their business:

CIRCULAR FLOW MODEL

4. Draw and label the circular flow diagram in the space below.  Be sure to include all markets and three sectors of the economy, as well as labeled arrows to show the physical and money flows. 

MARKET STRUCTURES

5. Define Market Structures:

Market structures describe how businesses are organized in different industries, based on the number of sellers, types of products, and competition level. 

6. Complete the chart below regarding market structures:

BUSINESS ORGANIZATIONS

7. Complete the chart by defining each type of business structure, giving examples and listing advantages and disadvantages associated with each.

UNIT 2: SUPPLY AND DEMAND

In this unit, we analyzed the ways that market economies meet the needs of individuals through the interaction of supply and demand.  The equilibrium price and quantity of goods provided in a market economy are determined by the intersection of supply (how much producers are willing to sell at any given price) and demand (how much consumers are willing to buy at any given price).  

SUPPLY AND DEMAND VOCABULARY

8. Define the following terms:

   1. Law of Demand: The inverse relationship between price and quantity demanded. (When the price goes up the quantity demanded goes down, when the price goes down the quantity demanded goes up)

2. Law of Supply:  The direct relationship between quantity supplied and price. (As price increases quantity supplied increases, as price decreases quantity supplied decreases)

3. Equilibrium: When the quantity supplied and quantity demanded are equal to each other at a given price  - occurs where the supply and demand curves intersect. 

9. Complete the table below concerning supply and demand:

Shift-entire curve shifts right or left

Movement- A movement along the curve happens when only the price of the good changes

SUPPLY, DEMAND, AND EQUILIBRIUM

Decide whether each statement is true or false.  If the statement is false, change something to make it true.

10. A rightward shift of the supply curve indicates that there is an increase in supply. T

11. A decrease in the price of a Netflix subscription would shift the supply curve for Redbox rentals to the 

right. F. A decrease in the price of a Netflix subscription would shift the demand curve for Redbox rentals to the left because they are substitutes.

12. If the population of a town decreases, the demand for food will shift to the left T. 

13. An increase in the price of mustard would affect the supply of hot dogs. F. An increase in the price of mustard would affect the demand for hot dogs (a complement), not the supply.

14. Cellphone chargers are considered substitutes for cell phones. F. They are complements

15. An increase in the demand for chicken will cause the equilibrium price to increase and the equilibrium quantity to decrease.  F.  An increase in demand for chicken will cause both the equilibrium price and equilibrium quantity to increase.

16. A shortage exists when the quantity supplied is larger than the quantity demanded. F. A shortage occurs when the quantity supplied is LESS than the quantity demanded.

17. The government passes a law that requires all car manufacturers to implement certain safety measures.  Therefore, the 

supply of cars decreases. T

18. A decrease in the supply of apples will cause the equilibrium price to increase and the equilibrium quantity to decrease. T

19. The demand for an inferior good decreases as the income of consumers increases. T

EQUILIBRIUM AND PRICE CONTROLS

20. A market is in equilibrium when quantity supplied equals quantity demanded.  This is the point where the supply and demand curve intersects on the graph.

21. Draw a supply and demand graph in the space to the right.  Be sure to include all appropriate labels.

ELASTICITY

25. For both supply and demand, elasticity measures how responsive quantity  is to a change in price.

Inelastic demand- the quantity demanded changes very little due to price changes. 

• A rise or fall in the price of a product results in little or no change in the quantity demanded.

Elastic demand-  the quantity demanded changes a lot due to price changes

• A fall in the price of a product increases the quantity demanded of a good or service a lot

• A rise in the price of a product decreases the quantity demanded of a good or service a lot

26. In the space below, draw a graph of each of the following types of demand curves:
    

Relatively Elastic Demand Relatively Inelastic Demand

27. Which product would have a more elastic demand: gasoline or expensive jewelry?  Explain why.

Expensive jewelry would have a more elastic demand because it is a luxury item, and people can choose not to buy it if the price increases. Gasoline, on the other hand, is a necessity for many, so demand is less responsive to price changes. For gasoline you also do not have time to decide whether or not to change your habits. 

28. Which product would have a more elastic supply: an orange grove or an orange juice stand?  Explain why.

An orange juice stand would have a more elastic supply because it can quickly adjust the amount of juice produced or sold. An orange grove has less elastic supply because it takes years to grow more oranges, making it harder to respond quickly to changes in price.

PUBLIC VS PRIVATE GOODS AND EXTERNALITIES

29. Explain the differences between a public good and a private good. 

A public good is a good that is both rivalrous and excludable (ex. free public park). A private good is something that is non-rival and non-excludable (ex. your car). 

30. Which type of good, public or private, is efficiently provided by the free-market system to meet the needs of individuals? 

Private goods are efficiently provided by the free-market system because businesses can charge consumers directly and compete to meet individual needs.

31. Which type of good, public or private, does the government have to help provide so that it meets the needs of individuals?

The government provides public goods to ensure access for everyone.

32. Complete the chart below concerning externalities:

UNIT 3: PERSONAL FINANCE 

In this unit, we studied the importance of personal finance and addressed the question: How do I plan for the future?  We analyzed the relationships between education, skill-level, employment, and wages.  We estimated payroll calculations and studied the role of taxes.  We studied the purpose of banks, credit, insurance, and investing, and we applied our knowledge through a simulation of the process of making a budget. 

EDUCATION, SKILL, AND EMPLOYMENT

33. What is the general relationship between wage and skill level?  

In general the higher the skill level the higher the wage. This is because skilled workers are more productive and are greater in demand.

34. Besides skill-level, what other factors may influence wages?

Labor unions, discrimination, minimum wage, location 

35. Complete the chart below concerning skill levels:

TAXES

36. What is the purpose of taxes? 

The goal of taxes is to provide public goods, fund government programs, and redistribute wealth. 

37. What is your tax money used for?

Infrastructure, education, national defense, research, public parks, social security, welfare benefits, schools, etc. 

38. Complete the chart below concerning the types of taxes:

CREDIT, BANKING, AND INVESTING

39. Complete the chart below by defining each term and explaining what each one would be used for:

40. Explain the difference between saving and investing, and when/why you would want to use each.

Saving keeps your money in a safe place for short-term goals like vacations or emergencies with little to no risk.

Investing is putting your money in places like mutual funds, stocks, bonds, real estate, etc. for long term growth with higher risk but more potential. 

41. Explain the relationship between risk and reward when it comes to investing.

Rewards…

Potential for higher return

Investments can gain value over time

Can make a profit if you sell for a higher price than initially invested

Risk…

Harder to access cash

Always involves risk - can lose money

42. How would someone make a decision between different types of investments? (ex: bonds, stocks, mutual funds, CDs)

Evaluate how much risk you can afford and how quickly you may need the money. Generally, the younger you are the riskier you can be for long-term investment.

Least to most risky: Bonds, mutual funds, stocks

INSURANCE

43. Suzette is a recent college graduate and is living on her own in the “real world” for the first time.  Suzette has to make some decisions about insurance, but doesn’t know very much about it.  In the space below, explain to Suzette the basics that she needs to know about each of the following:

    1. Purpose of insurance:

Insurance is a way to protect yourself financially. Minimizes risks of financial loss in the future. You pay money to help cover something that might be financially devastating in the future. 

2. Types of insurance:

Auto 

Home, renters, health, life, disability, travel, pet, etc. 

3. Insurance payments:

Deductible: out-of-pocket costs due to accident - pay for all before insurance will pay 

Premium: set monthly payment

Co-pay: flat-fee each time you visit the doctor or get a prescription filled

UNIT 4: MACROECONOMICS

In this unit we applied our understanding of materials learned in previous units to study large scale economies and international trade.      

PRODUCTION POSSIBILITIES

To the right is a PPC graph for the planet of Tatooine, which can produce either droids or spaceships. 

44. What does PPC stand for, and what does the graph to the right show us?

PPC - Production possibility curve 

The graph shows the trade-offs between producing spaceships and droids, illustrating scarcity, opportunity cost, and efficient resource use.

45. How does the PPC represent the concept of scarcity?

There are scarce resources available, so there are limits to production. This creates the outer “bounds” of the curve.

46. Label each of the following on the PPC to the right:

    1. A point that is efficient

    2. A point that is inefficient

    3. A point that is unattainable

    4. A movement between two points that would represent a trade-off.

47. If Tatooine decides to move from point to another along the curve, the amount of spaceships they would give up to make an additional droid would be called their opportunity cost.

48. The PPC model above of Tatooine’s production shows the law of constant opportunity costs.  How do you know this?

This graph shows constant opportunity costs. In order to produce an additional unit of one good, you give up the same amount of the other good every time. The two goods use identical resources to produce.

49. Draw a PPC model in the space to the right that would show the law of increasing opportunity costs instead. 

50. Southtown is a small farming community that can produce either wheat or steak.  For each of the graphs below, provide an example/description that would account for demonstrated following shifts in the PPC:

The PPC shifts outward for wheat and steak. This could be caused by technological advancements or an increase in resources to improve production for both goods. 

2.  The PPC shifts outward for only steak. This could be caused by better cattle farming or an innovation only for steak production

3. The PPC shifts inward for both wheat and steak. This could be caused by a loss of resources from wheat and steak, reducing the ability to produce both goods. 

ABSOLUTE AND COMPARATIVE ADVANTAGE

51. Explain how absolute advantage is different from comparative advantage.

Absolute advantage is when a country can produce more goods using the same resources as another country. Comparative advantage is when a country can produce a good at a lower opportunity cost than another country.

52. What does specialization mean?  Which type of advantage is most important in deciding which product each person/country should specialize in?

Specialization is when countries choose to produce the products they have the comparative advantage in (the lowest opportunity cost to produce). Comparative advantage is most important in deciding specialization.

53. The islands of Fiji and Tahiti both produce swimsuits and beach balls.  Using the same amount of time and resources, Fiji and Tahiti have the following production possibilities:

• Fiji can make either 32 swimsuits or 16 beach balls every hour 

• Fiji’s opportunity cost of producing swimsuits is ½ beach ball, and its opportunity cost of producing beach balls is 2 swimsuits

• Tahiti can produce either 24 swimsuits or 8 beach balls per hour

• Tahiti’s opportunity cost of producing swimsuits is ⅓ beach ball, and its opportunity cost of producing beach balls is 3 swimsuits

Based on this information, which of the following statements is accurate?

1. Fiji has the absolute advantage and comparative advantage for both products.  Therefore, they should not engage in trade.

2. Fiji has the comparative advantage but not the absolute advantage for both products.  Therefore, they should not engage in trade.

3. Fiji has the absolute advantage for swimsuits but not beach balls.  Tahiti has the comparative advantage for both products.  Therefore, Fiji should make swimsuits and Tahiti should make swimsuits.

4. Fiji has the comparative advantage for beach balls and swimsuits.  Tahiti has the absolute advantage for both products.  Therefore, they can trade but it doesn’t matter who makes which product.

5. Fiji has the absolute advantage for both products, but only has the comparative advantage for beach balls.  Therefore, they should produce beach balls and trade with Tahiti for swimsuits.

INTERNATIONAL TRADE POLICIES

54. What kinds of things would a country have to consider when determining their foreign trade policies?

A country should consider factors like comparative advantage, resource availability, economic goals, impact on domestic industries, job creation or loss, national security, trade balances, and relationships with trading partners.

55. Define and explain the following trade terms:

1. Trade Barrier (include embargo, tariff, quota)

Laws that restrict foreign goods from entering a country.

2. Free Trade Agreement

A free trade agreement is a pact between countries to reduce or eliminate trade barriers, such as tariffs and quotas, to encourage the flow of goods and services.

3. Protectionism

Economic policy that justifies trade barriers is based on the idea of shielding domestic industries and workers from foreign competition.

MACROECONOMIC MEASURES AND THE BUSINESS CYCLE

56. Label the important parts of the business cycle below.  Be sure to include labels for the axes and the regions of the graph!

57. What are some economic indicators that would suggest an economy is in a phase of expansion?

Expansion- (aka recovery) Period of economic upturn when output (GDP) and employment are rising.

Indicators of economic expansion include rising GDP, lower unemployment, increased consumer spending, higher business investment, and growing industrial production

58. What are some economic indicators that would suggest an economy is in a phase of contraction?

Contraction- (aka recession) Period of economic downturn when output (GDP) and employment are falling.

Economic contraction is indicated by rising unemployment, falling GDP, reduced consumer spending, and lower business investment.

59. What happens when an economy is experiencing stagflation?

A unique combination of slow economic growth and high inflation - not represented well by a position on the Business Cycle

60. Unemployment is one of the biggest indicators of the business cycle.  Complete the chart below:

61. What is the labor force?  Give some examples of people who are NOT in the labor force:

The labor force is people who are working or actively looking for work. 

Examples of people not in the labor force:

Retired individuals

Stay-at-home parents

Full-time students not seeking jobs

People who have stopped looking for work (discouraged workers)

62. Which type of unemployment is the most concerning for an economy?  Why?

Cyclical unemployment is the most concerning because it occurs during economic downturns, and it reflects broader problems in the economy, leading to widespread job losses.

FISCAL AND MONETARY POLICY

63. Define fiscal policy, explain who implements it, and list its two tools:

Fiscal policy is actions taken by the legislative or executive branch to influence the economy using the federal budget.

64. Define monetary policy, explain who implements it, and list its three tools:

65. Answer the following questions about the FED.

66. Complete the chart below explaining the differences between contractionary and expansionary policies.