econ review - circular flow

CIRCULAR FLOW

Q: How does wealth flow between: a) households and businesses? b) households and government? c) businesses and government?
A:

• a) Households provide labor and receive wages from businesses; they spend that income on goods/services.

• b) Households pay taxes to the government and receive public goods/services in return.

• c) Businesses pay taxes and receive infrastructure/support from the government.

Q: How do transactions occur in the product and resource markets for households, businesses, and government?
A:

• Households buy goods in the product market and sell labor in the resource market.

• Businesses sell goods in the product market and buy resources/labor in the resource market.

• Government buys from both markets and collects taxes.

BUSINESS ORGANIZATIONS

Q: What is a sole proprietorship?
A: One-owner business. Easy to start, full control, but owner has unlimited liability.
Examples: Local bakery, freelance photographer.

Q: What is a partnership?
A: A business owned by two or more people. Types: general, limited, LLP.
Examples: Law firms, medical practices.

Q: What is a corporation?
A: A legal entity owned by shareholders. Limited liability, can raise large capital.
Examples: Apple, Microsoft.

Q: What is a multinational?
A: A corporation that operates in more than one country.
Examples: Nestlé, Toyota.

Q: What is a franchise?
A: A business model where a person buys the right to operate using an existing brand.
Examples: McDonald’s, Subway.

Q: What are mergers and their types? Why do they happen?
A: Mergers combine firms to expand or reduce competition.
Types:

• Horizontal (same industry)

• Vertical (supply chain)

• Conglomerate (unrelated industries)

Q: What is a conglomerate? A cooperative? A non-profit?
A:

• Conglomerate: Owns unrelated businesses.

• Co-op: Owned and operated by members (e.g., credit unions).

• Non-profit: Focuses on a mission, reinvests profits.

Q: Why is wealth so unevenly distributed among business types?
A: Most businesses are sole proprietorships or small partnerships and generate little wealth, while corporations (which are fewer) control most of the market's wealth.

LABOR, WAGES, & UNEMPLOYMENT

Q: What is the law of demand for workers?
A: As wages rise, businesses demand fewer workers.

Q: What is the law of supply for workers?
A: As wages rise, more people are willing to work.

Q: What is the equilibrium point for labor and wages?
A: The wage at which the number of workers businesses want equals the number of workers available.

Q: How do firms respond to high wages?
A: They may automate, outsource, or reduce hiring.

Q: How do workers respond to low wages?
A: They may quit, unionize, or not enter the field (especially in competitive markets).

Q: How is the labor force defined?
A: People 16+ who are working or actively looking for work.

Q: What defines employment and unemployment?
A:

• Employed: Currently working.

• Unemployed: Not working but actively seeking a job.

Q: What are the four types of unemployment?
A:

• Frictional: Between jobs.

• Seasonal: Based on time of year.

• Structural: Skills don’t match job market.

• Cyclical: Due to economic downturns.

Q: Why include unemployed people in the labor force?
A: They’re still available and looking for work.

Q: Who is excluded from the labor force?
A: Retirees, students not job-seeking, discouraged workers.

Q: How do labor unions influence wages? Why do workers strike?
A: Unions negotiate better wages/benefits. Workers strike to demand change.

Q: Why do employers resist unions?
A: Unions increase labor costs and reduce control.

Q: How do skills influence wages?
A: Higher skill = higher pay. More demand for skilled workers.

Q: How are skills categorized?
A:

• Unskilled (no training)

• Semi-skilled (basic training)

• Skilled (technical training)

• Professional (advanced degrees)

Q: How are labor, wages, and education connected?
A: More education = higher productivity = higher wages.

Q: What are the learning and screening effects?
A:

• Learning effect: Education boosts productivity.

• Screening effect: Education signals competence to employers.

Q: Why are good employees hard to find/keep? What are fringe benefits?
A: High demand + low supply of skilled workers. Fringe benefits = healthcare, retirement, PTO.

Q: What is a discouraged worker? What is underemployment?
A:

• Discouraged worker: Gave up job hunting.

• Underemployment: Working below skill level or part-time unwillingly.

Q: What is age discrimination?
A: Bias against hiring or promoting older workers.

Q: How has union membership changed over time?
A: Rose in early 1900s, peaked mid-century, declined recently due to globalization and automation.

POVERTY

Q: What’s the poverty threshold and rate?
A:

• Threshold: Income cutoff for basic needs.

• Rate: % of people below that line.

Q: What causes poverty?
A: Low education, job loss, single-parent homes, discrimination, poor health.

Q: What’s the income distribution in the US?
A: It’s highly unequal—top earners hold most income.

Q: How does government reduce inequality?
A: Taxes, welfare, Medicaid, food stamps, and housing programs.

Q: What is the Lorenz Curve?
A: A graph showing income inequality—the further from the diagonal, the worse the inequality.

Q: What are the key ideas from Life at the Top?
A: Even the wealthy face stress and poor health; money doesn't guarantee health or happiness.

TAXES

Q: Why does the government tax? What do they tax?
A: To fund services.

• Federal: Income, payroll.

• State: Sales, income.

• Local: Property, local sales.

Q: How do taxes affect the economy?
A: They influence how people work, spend, and invest.

Q: What are the three tax structures?
A:

• Progressive: Higher income = higher rate.

• Proportional: Everyone pays same %.

• Regressive: Hurts lower income more (e.g. sales tax).

Q: How do tax structures relate to Fair Share, Fair Start, Free Market?
A:

• Fair Share: Higher earners pay more.

• Fair Start: Equal opportunity.

• Free Market: Minimal taxes.

Q: What makes a “good” tax?
A: Fair, simple, efficient, hard to avoid.

Q: How do tax incentives affect behavior?
A: Encourage certain actions (e.g., buying a house, going green, investing in education).

Q: How is the federal income tax filed?
A: Filed annually using W-2s, 1040s, etc. It’s progressive.

Q: What are payroll withholdings?
A:

• FICA: Includes Social Security & Medicare.

• Taken out of each paycheck to fund retirement and health benefits.

Q: Why are taxes taken out of every paycheck?
A: To spread the payment out and avoid a big burden at tax time.