Economics Study Guide

📘 Introductory Material

What is the study of economics?
The study of how people, businesses, and governments make choices about scarce resources.

What is opportunity cost?
The value of the next best alternative given up when a decision is made.

What does it mean to “think at the margins”?
Analyzing the additional benefits and costs of a decision (e.g., "one more hour of studying").

How are incentives connected to economics?
Incentives motivate behavior and decision-making (e.g., tax breaks, bonuses, discounts).

What are the three questions all economies must answer?

1. What to produce?

2. How to produce it?

3. For whom to produce?

What are the primary economic systems in use today?

• Traditional – Based on customs and traditions

• Command – Government makes decisions

• Market – Decisions based on voluntary exchange

• Mixed – Combines elements of all three

What is a Production Possibilities Frontier (PPF)?
A graph that shows the maximum output combinations of two goods given resources and technology.

What are the four factors of production?

1. Land – Natural resources

2. Labor – Human effort

3. Capital – Tools, equipment, factories

4. Entrepreneurship – Risk-takers who combine the other three

📈 Supply and Demand

What is the law of demand?
As price falls, quantity demanded rises (and vice versa), ceteris paribus.

How do you construct a demand curve?
Plot price on the vertical axis and quantity demanded on the horizontal axis—downward sloping.

What causes a movement along the demand curve?
A change in price of the good itself.

What causes a shift in the demand curve?
Changes in:

• Consumer income

• Preferences

• Prices of substitutes/complements

• Population

• Expectations

What is the law of supply?
As price rises, quantity supplied rises (and vice versa), ceteris paribus.

How do you construct a supply curve?
Upward-sloping line—price vs. quantity supplied.

What causes a movement along the supply curve?
A change in the price of the good.

What causes a shift in the supply curve?
Changes in:

• Input costs

• Technology

• Number of sellers

• Expectations

• Taxes/subsidies

What condition is created when the demand and supply curves intersect?
Equilibrium – the market-clearing price and quantity.

What happens when the government intervenes in the marketplace?

• Price ceilings (e.g., rent control) can cause shortages.

• Price floors (e.g., minimum wage) can cause surpluses.

🏢 Business Structures

What are the four (five?) main ways to structure a business?

1. Sole proprietorship

2. Partnership

3. Corporation

4. Limited Liability Company (LLC)

5. (Optional: Cooperative)

Benefits and disadvantages:

📈 Inflation

Define inflation:
A general increase in prices and fall in purchasing power.

How is inflation calculated?
Using price indices like the CPI or PCE.

What is the Consumer Price Index (CPI)?
Measures changes in prices of a market basket of consumer goods and services.

What is the Personal Consumption Expenditures (PCE) index?
A broader measure that includes a wider range of expenditures and adjusts for substitution.

CPI vs. PCE:

• CPI: Fixed basket, used for COLA

• PCE: More comprehensive, used by Fed

Is inflation good or bad?

• Moderate inflation is normal.

• High inflation erodes purchasing power.

• Deflation can signal recession.

💰 Gross Domestic Product (GDP)

Define GDP:
The total value of all goods and services produced in a country in one year.

Ways to calculate GDP:

1. Expenditure approach: C + I + G + (X - M)

2. Income approach: Add up all incomes earned

Nominal vs. Real GDP:

• Nominal – measured in current dollars

• Real – adjusted for inflation

🧑‍💼 Employment/Unemployment

Why is having a job important?
Income, stability, and contributions to economic growth.

How is the unemployment rate calculated?
Unemployed ÷ labor force × 100

Other useful employment data:

• Labor force participation rate

• Underemployment

• Job openings

Skills to become sought-after:

• Communication

• Critical thinking

• Adaptability

• Tech literacy

Industries with job growth:

• Health care

• Tech

• Renewable energy

• Data analysis

How to improve job prospects:

• Gain skills and experience

• Internships

• Networking

• Strong resume and interview skills

🏦 Money and Banking

Define money:
Anything widely accepted as payment for goods/services.

Three types of money:

1. Commodity money

2. Representative money

3. Fiat money

Three functions of money:

1. Medium of exchange

2. Unit of account

3. Store of value

What is fractional reserve banking?
Banks keep a fraction of deposits as reserves and lend out the rest.

🏛 Fiscal Policy

Define fiscal policy:
Government’s use of spending and taxation to influence the economy.

Impact on economy:

• Stimulate growth during recessions

• Cool inflation during booms

Spending priorities:
Education, defense, infrastructure, healthcare, social programs

How taxation works:

• Progressive: Higher income = higher tax rate

• Regressive: Hurts low-income more

• Proportional: Flat tax rate

Budget deficits:

• Occur when spending > revenue

• Can lead to national debt

Measuring economic health:

• GDP growth

• Unemployment rate

• Inflation rate

🏛 Monetary Policy

Define monetary policy:
Actions by the Federal Reserve to manage money supply and interest rates.

Federal Reserve structure:

• Board of Governors (7 members)

• 12 regional banks

• FOMC (Federal Open Market Committee)

Federal Reserve governance:
Board appointed by President, confirmed by Senate

FOMC structure:
7 Board members + 5 regional bank presidents (rotating)

Tools of monetary policy:

1. Open market operations

2. Discount rate

3. Reserve requirements

Expansionary policy examples:

• Lower interest rates

• Buy bonds

• Lower reserve requirements

Contractionary policy examples:

• Raise interest rates

• Sell bonds

• Increase reserve requirements

Criticisms of the Fed:

• Lack of transparency

• Too much power

• Can misread data

🌎 International Trade and Globalization

Why engage in international trade?

• Access resources

• Specialization

• Lower prices

• Greater variety

Advantages of trade:

• Efficiency

• Economic growth

• Consumer choice

Disadvantages of trade:

• Job loss in some sectors

• Dependence on foreign countries

• Environmental concerns

World Trade Organization (WTO):
Global organization that promotes and regulates international trade.

Barriers to free trade:

• Tariffs

• Quotas

• Subsidies

• Embargoes

📈 Investing

Ways to invest:

• Stocks

• Bonds

• Real estate

• Mutual/index funds

• Retirement accounts (e.g., Roth IRA, 401(k))

Why are index funds recommended?

• Low fees

• Diversification

• Long-term growth potential

Why is compounding important?
It allows investments to grow exponentially over time.

How to evaluate a company (before buying stock):

• Earnings reports

• Debt levels

• Market trends

• Management team

• Competitor analysis