Econ BASIS 8 : PreComp

_{money money money}

Unit 1

Scarcity

Scarcity is the fundamental economic problem

• “unlimited wants, limited resources”

The Opportunity Cost of an item is the best NEXT item that you could have gotten.

The Trade-Offs of an item are ALL of the other things you could have gotten.

Factors of Production

• Land: natural resources

• Capital: tools, equipment, and machinery

• Labor: people with all of their efforts, abilities, and skills

• Entrepreneurs: risk-taking individuals in search of profits

Production Possibilities Curve

The PPC is a fundamental concept that helps explain how economies allocate resources and make decisions about trade-offs and opportunity costs.

Economic Growth

Economic Growth occurs when a nation’s total output of goods and services increases over time. What factors make it possible for an economy to grow?

• 1. Increase in Productive Resources

  • a. population growth (labor)

  • b. increase in capital goods (tools, equipment, machinery, and factories)

• 2. Increase in Technology/Innovation

• 3. Increase in Human Capital

Economic Systems

Every society must answer four basic economic questions.

1. What to produce?

2. How to produce?

3. How much to produce?

4. For whom to produce?

Types of Economic Systems

• Traditional

• Market (Free)

• Command (Communist)

• Mixed

Advantages/Disadvantages of a Command Economy

• Advantages

  • Capable of dramatic change in a short time

  • Many basic education, health, and other public services available at little or no cost

• Disadvantages

  • Does not meet wants and needs of consumers

  • Lacks effective incentives to get people to work

  • Requires large bureaucracy, which consumes resources

  • Has little flexibility with day-to-day changes

  • Lacks room for individual initiative

Advantages/Disadvantages of a Free Market Economy

• Advantages

  • Individual Freedom

  • Competition & Innovation

  • Diversity & Quality of Goods & Services

  • Property Rights

• Disadvantages

  • Income Inequality

Adam Smith

• “father of modern economics”—wrote The Wealth of Nations

• used the metaphor of the invisible hand

• opposed trade barriers (mercantilism)

Law of Diminishing Marginal Utility

Diminishing Marginal Utility—the decrease in satisfaction or usefulness from having one more unit of the same product

Unit 2

Budgets

Budget Surplus—when the amount of income exceeds the amount spent

Balanced Budget—when the amount of income is equal to the amount spent

Budget Deficit—when the amount of income is less than the amount spent

Income

Gross Income—income before taxes and adjustments

Net Income—earnings after taxes, garnishments, and contributions

Housing, food, and transportation/utilities make up the larges portion of an individual’s budget

Mortgages

A mortgage is a loan used to buy a home, the lender retains the right to take the property if the borrower does not repay the money they have borrowed + interest.

A downpayment is the amount a buyer pays upfront when purchasing a home.

Home Equity is the difference between the amount you owe on a mortgage and what the home is worth

Tax Systems

A progressive tax rate is when the amount you’re taxed increases as your income increases

A proportional tax rate is when the amount you’re taxed stays the same as your income increases

A regressive tax rate is when the amount you’re taxed decreases as your income increases

Marginal Tax Rates—the amount of additional tax you pay for every additional dollar or income

Default Risk

Default Risk—the likelihood that a borrower will not make the required payments on a debt, such as a loan or credit card

Credit Cards

Minimum Payments—the smallest amount you can pay on your credit card bill each month to avoid late fees and maintain good credit standing

Compound Interest—interest on the remaining balance (principal + accrued interest)

Rule of 72

The Rule of 72 is a simplified formula that calculates how long it’ll take for an investment to double in value, based on it’s rate of return.

• 72/Rate of Return = Time for investment to double

Financial Assets

Cash

• Certificates of Deposits (CDs)

Equities

• Stocks

Fixed Income

• Bonds

Alternative Investments

• Real Estate

Liquidity

Liquidity is the ability to quickly convert an asset to cash or how easily something can be bought or sold.

Unit 3

Law of Demand

Law of Demand—When the price goes up, quantity demanded goes down. When the price goes down, quantity demanded goes up.

Change in Quantity Demanded—a change that is graphically represented as a movement along the demand curve

Change in Demand—when a change in demand occurs, people want to buy different amounts of a product at the same price. A change in demand results in a shift of the demand curve and can happen for server reasons, also known as determinants.

• P — preferences and tastes of consumers

• R — price of related goods

• I — income of consumers

• C — number of consumers

• E — consumer expectations of future prices

Law of Supply

Law of Supply—When the price of a product goes up, quantity supplied goes up. When the price goes down, quantity supplied goes down.

Change in Supply—when a change in supply occurs, businesses offer different amounts of a product for sale at the same price. A change in supply results in a shift of the supply curve and can happen for several reasons, also known as determinants.

• S — subsidies and taxes for producers

• P — price of inputs/resources

• E — producer expectations of future price changes

• N — number of producers

• T — technology and productivity

Equilibrium

Equilibrium—also known as the market clearing price is when quantity demanded is exactly equal to quantity supplied. It is where the demand and supply curves intersect.

Shortages and Surpluses

Markets can also be in disequilibrium.

Shortage—a shortage is the result of buyers wanting to purchase more units than sellers offer at a given price.

• causes prices to rice

Surplus—a surplus occurs when sellers produce more units than buyers will purchase at a given price.

• causes prices to drop

In the absence of government intervention (price ceilings/floors), shortages and surpluses are corrected by market forces.

Price Controls

Price Floor—lowest legal price that can be paid for a product

Price Ceiling—highest legal price that can be charged for a product

• Gouging occurs when a seller increases the price of goods to a level that is much higher than is considered to be reasonable or fair.

Unit 4

Short-Run & Long-Run Production

Short-Run Production—period so short that only the variable inputs (usually labor) can be changed

Long-Run Production—period long enough to change the amounts of all inputs

Production Function & Specialization

Production can be illustrated with a production function—a figure that shows how total output changes when the amount of a single variable input (usually labor) changes while all other inputs are held constant. The production function can be illustrated with a graph or with a schedule.

Economies of Scale

Economies of Scale

• As a firm becomes larger, there is an increasingly efficient use of personnel, plant, and equipment. This results in a lower cost per unit because the cost of production is spread over more units.

Constant Returns to Scale

• When all inputs (like labor and capital) in a production process are increased by a certain percentage, the output will also increase by the same exact percentage, resulting in a proportional relationship between inputs and outputs

Diseconomies of Scale

• This is where a company’s average cost per unit increases as the company’s output increases. It is the opposite of economies of scale.

Market Structures

Revenue

Total Revenue—total amount earned by a firm from the sale of its products

• TR = Q x P

Total Profit

Total Profit = Total Revenue - Total Cost

• π = TR - TC

• π = (Q x P) - TC

Costs

Accounting (explicit) Costs—direct monetary expenses a business incurs to provide services

Economic (implicit) Costs—non-monetary costs that arise when a business uses an asset or resource it already owns, without paying for it

Accounting vs. Economic Profits

Economic Profit—the difference between total revenue and total explicit and implicit costs

• economic profit = TR - (TEC + TIC)

Accounting Profit—the difference between total revenue and total explicit costs

• accounting profit = TR - TEC

Profit Maximization

Use marginal analysis to determine the profit-maximizing quantity of output.

• Profit Maximizing Rule

  • MR = MC

Cost and Revenue Review

Cost

• Fixed Cost—always the same and always has to be paid

• Variable Cost—varies depending on level of production

• Marginal Cost—extra cost per additional unit of output

If MC = MR

• Profit-Maximizing quantity of output

Revenue

• Marginal Revenue—extra revenue from one additional unit of output

• Total Revenue—revenue based on number of units multiplied by average price per unit