Economics Final Exam Review Answers – Flashcards
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shortage
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a situation in which a good/service is unavailable or a situation in which the quantity demanded is greater than the quantity supplied (excess demand)
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factors of production
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land, labor and capital; the 3 groups of resources that are used to make all goods and services
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Guns or butter
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phrase that refers to the trade-off that nations face when choosing whether to produce more or less military or consumer goods
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Scarcity
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limited quantities of resources to meet unlimited wants
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Opportunity Cost
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the most desirable alternative given up as a result of a decision
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Competition
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the struggle among producers for the dollars of consumers; the rivalry among sellers to attract customers while lowering costs
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Free Rider
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someone who would not choose to pay for a certain good/service, but who would get the benefits of it anyway if it were provided as a public good
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Public goods
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a shared good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers
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product market
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the market in which households purchase the goods and services
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economic system
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the method used by a society to produce and distribute goods and services
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producing max goods and gaining max profit
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what makes an economy efficient?
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law of increasing costs
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as we shift factors of production from making one good or service to another, the cost of producing the second item increases
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thinking at the margin
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deciding whether to do or use one additional unit of some resource (deciding how much more or less to do)
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human capital
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skills and knowledge gained by education or experience
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physical capital
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human made goods used to produce other goods (ex: tools, buildings)
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possibilities curve
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shows alternative ways to use an economy's resources
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centrally planned
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economic system in which a central authority is in command of the economy
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traditional
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economic system that relies on habit, custom or ritual to decide questions of production and consumption of goods and services
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market
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economic system where decisions on production and consumption of goods and services are based on voluntary exchange in markets
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mixed
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economic system that is market based with limited government involvement
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to promote economic fairness
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why is there some government intervention in the free market system?
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economic efficiency, economic freedom, economic growth
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Advantages of the free market economic system
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no pure market economy exists on a meaningful scale, goals are difficult to achieve
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disadvantages of a free market economic system
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Karl Marx
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philosopher with a socialist philosophy and wrote communist manifesto
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Adam Smith
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philosopher that was the father of economics, believed in a free market and the "invisible hand" drove the market, not the government and markets are driven by rational self interest and competition
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Vladimir Lenin
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led the bolsheviks to take control of Russia in 1917 and the bolsheviks adopted the term communist
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regulates economic activities
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What role does competition play in the free market?
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Positive externality
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beneficial side effects
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negative externality
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bad economic side effects
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gives benefits when you retire
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what does social security do?
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demand
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the desire to own something and the ability to pay for it
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inferior goods
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a good that consumers demand less of when their incomes increase
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normal good
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a good that consumers demand more of when their incomes increase
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ceteris paribus
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Latin phrase that means "all other things held constant"
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demand schedule/curve
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a table that lists the quantity of a good a person will buy at each different price
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complementary goods
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two goods that are bought together and used together
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substitute goods
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goods used in place of one another
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elasticity
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measure of how consumers react to a change in price
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inelastic demand
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type of demand not sensitive to change in price
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elastic demand
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type of demand that is very sensitive to a change in price
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price up, demand up, price down, demand down
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what happens to demand when price is expected to go up/down in the future
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law of demand
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economic law that states that consumers buy more of a good when its price decreases and less when its price increases
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law of supply
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tendency of suppliers to offer more of a good at a higher price
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elastic supply
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type of supply that deals with goods that are wants or luxury items
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inelastic supply
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the type of supply that deals with goods that are the basic necessities
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when price is up, supply is down; when price is down, supply is up
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what happens to supply when a price is expected to go up or down in the future?
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time
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what influences elasticity of supply most?
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price ceiling
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max price that can be legally charged for a good/service
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price floor
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minimum price for a good or service
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non-price competition
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a way to attract customers though style, service or location but not a lower price
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cartel
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a formal organization of producers that agree to coordinate prices and production
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natural monopoly
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a market that runs most efficiently when one large firm supplies all of the output
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equilibrium
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the point at which quantity demanded and quantity supplied are equal
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rent control
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a price ceiling placed on rent
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minimum wage
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a minimum price that an employer can pay a worker for an hour of labor
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in attempt to create a society in which everyone was equal
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why did communists use a command system?
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increase in supply means equilibrium goes down; decrease in supply means that equilibrium goes up
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how does an increase/decrease in supply affect equilibrium?
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unbalanced supply and demand or a shift in supply or demand
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what causes the market to behave inefficiently?
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monopoly
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a market structure in which a market is dominated by a single seller
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monopolistic competition
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a market stucture in which many companies sell products that are similar but not identical
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perfect comeptition
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a market structure in which a large number of firms all produce the same product
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oligopoly
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a market structure in which a few large firms dominate a market
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price discrimination
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division of customers into groups based on how much they will pay for a good (ex: senior citizens discount, children's discount and a student discount)
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they only survive if every member keeps to its agreed output levels and no more (otherwise prices fall and firms lose quota) but members cheat and produce more than its quota
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why do cartels often fail?
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the consumers can turn to substitute products
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why can't a monopolistic competition of perfect competition firm raise its prices too high?
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many buyers/sellers to participate in the market, sellers offer identical products, buyers and sellers are well informed about products, sellers are able to enter and exit the market feely
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what must be present for a market to be perfectly competitive?
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they guarantee that companies can profit from their own research without competition
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why are patents encouraged?
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airline, trucking, banking, railroad, natural gas, and television broadcasting idnustries
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which industries have been deregulated
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vertical merger
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combination of 2 or more firms in different stages of producing the same good or service
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horizontal merger
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combination of 2 or more firms comepeting in a market with the same good or service
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EEOC (equal employment opportunities commission)
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equal right of all citizens to the opportunity to employment regardless of gender, age, race, country of origin, religion or disabilities
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royalties
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share of earnings given as payment
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fringe benefits
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payment other than wages or salaries
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collective bargaining
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process in which union and company representatives meet to negotiate a new labor contract
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assets
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money and other valuables belonging to an individual or business
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non-profit organization
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institution that functions much like a business but does not operate for the purpose of generating profits
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trade association
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nonprofit organization that promotes the interests of a particular industry
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cooperative
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a business organization owned and operated by a group of individuals for their mutual benefit
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ease of startup, relatively few regulations, sole receiver of profit, full control and easy to discontinue
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advantages of a sole proprietorship
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unlimited liability, limited access to resources, lack of permenance
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disadvantages of a sole proprietorship
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ease of startup, shared decision making and specialization, larger pool of capital
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advantages of a general partnership
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unlimited liability, potential for conflict
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disadvantages of a general partnership
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limited liability for owners, transferable ownership, ability to attract capital, long life
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advantages of a corporation
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expense and difficulty of startup, double taxation, potential loss of control by founders, more legal requirements and regualtions
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disadvantages of a corporation
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general partnership, limited partnership, limited liability partnership
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what are the differences of the different types of partnerships?
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75% Sole; 7% partner; 20% corp
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what percentage of businesses are sole proprietorships? Partnerships? Corporations?
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a corporation has a separate entity apart from that of owners and workers
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what is the major difference between corporations and other business organziations
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wages increased
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how have wages changed over the last 20 years?
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1935 (wagner act gave workers right to organize and required companies to bargain in good faith with unions)
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unions gained rights
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stock split
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the division of a single share of stock into more than one share
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barter system
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the direct exchange of one set of goods or services for another
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FDIC (Federal deposit insurance corporation)
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the government agency that insures customer deposits if a bank fails
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Dow-Jones
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index that shows how certain stocks have traded
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Blue-Chip Stock
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high quality companies that are large and reliable
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Diversification
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spreading out investments to reduce risk
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growth stock
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a company stock that tends to increase in capital value rather than yield high income
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coupon rate
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the interest rate that bond issuer will pay to a bond holder
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liquid assets
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easy to sell and convert into cash
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greenbacks
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paper currency issued by north during civil war
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mortgage
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specific type of loan that is used to buy real estate
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money provides a means for comparing the values of goods and services
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how does money as a unit of account work?
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objects have value because the holder can exchange them for something else of value
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how does representative money work?
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money has value because the government has ordered that it is an acceptable means to pay debts
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how does the fiat system work?
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it entitles its holder to buy goods and services based on the holder's promise to pay for those goods and services
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how do credit cards work?
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savings bond
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type of bond that is a low denomination bond issued by the US government
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municipal bond
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type of bond that is issued by a state or local government or municipality to finance such improvements such as highways, state buildings, libraries, parks and schools
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junk bond
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type of bond that is a lower rated, potentially higher paying bond
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corporate bond
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type of bond that a corporation issues to raise money to expand its business
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wanted strong central govt-- in favor of national bank to issue single curency, handle federal funds and monitor other banks
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what was the federalists opinion on banking?
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banks charter not renewed, no national banks, only state banks that issued their own currency
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what happened during free banking era?
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issuing bonds
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how do bonds make a profit?
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low risk: bonds; high risk: stocks, real estate
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which investments are high/low risk
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GDP
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total value of all final goods and services produced in a particular economy; the dollar value of all final goods and services produced within a country's borders in a given year
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discouraged worker
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worker not willing to put out work
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capital deepening
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process of increasing amount of capital per worker
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business cycles
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a period of macroeconomic expansion followed by a period of contraction
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cost-push inflation
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theory that inflation occurs when producers raise prices to meet increased costs
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workfare
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a program requring work in exchange for temporary assistance
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market basket
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a representative collection of goods and services
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business investment, interest rate, credit, consumer expectations, external socks
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what effects business cycles?
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nominal GDP
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current prices
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real gdp
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constant/unchanging prices
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expansion, peak, contraction, trough
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different points of the business cycle
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4-6%
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unemployment rate goal
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full employment
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the level of employment reached when there is no cyclical employment
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underemployed
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working at a job for which one is over qualified or working part time when full time work is desired
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seasonal unemployment
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unemployment that occurs as a result of harvest schedules or vacations or when industries slow or shut down for a season
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frictional unemployment
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unemployment that occurs when people take time to find a job
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structural unemployment
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unemployment that occurs when workers skills do not match the jobs that are available
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means tested program
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programs that provide cash/services to people who meet a test of need based on income and assets
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fica
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taxes that fund social security and medicare
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excess reserves
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reserves of cash more than required amounts
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supply side economics
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believes tax cuts help economy by raising supply
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entitlement program
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government program that guarantees certain benefits to a particualr group
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budget surplus
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situation in which govt taxes more than it spends
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budget deficit
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situation in which govt spends more than it takes in
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OMB (Office of Management and Budget)
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govt office that manages the federal budget
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they can use the money sooner, bettter chance of less people underpaying, decreases collection costs
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why does govt not collect taxes all at once?
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operating budget
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budget for day-to-day expenses
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capital budget
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budget for major capital or envistment expenditures
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property taxes (also sales, excise and income taxes)
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how do local govts collect the majority of their revenue
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expansionary policy
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policy that believes in raising govt spending and tax cuts
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contractionary policy
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policy that believes in lowering govt spending and higher taxes
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it is hard to change spending levels, predict future and the results are delayed
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why is it hard to make a balanced fiscal policy
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classical economics believe in lassiez faire, little to no govt intervention and keneysian believes the govt needs to interfere
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difference between classical and keneysian economics
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govt spend more than it took in
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why did debt increase during President Reagan's term in office?
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to offset natural business cycles
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why does the fed alter monetary policy?
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to supervise and regulate member banks and serve public efficiently
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why does the fed exist
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12
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how many federal reserve districts are there?
