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Economics

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the science that deals with production, allocation, and use of goods and services

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Microeconomics

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study of how the systems affect one business or parts of the economic system

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Macroeconomics

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study of the entire system of economics

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Scope of economics

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1. Description of economic activity 2. Analysis of economic activity (What it means?) 3. Explanation of economic activity(How you came to this? 4. Prediction of the future of economic activity

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Scarcity

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insufficient supply or amount of something needed, a shortage of goods or services that are needed

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Needs

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a basic requirement for survival

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Wants

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something a person would like to have, but is not necessary for survival

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Goods

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a useful, tangible item

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Types of goods

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1. Durable good- lasts 3 years or more when regularly used 2. Nondurable good- lasts fewer than 3 years when regularly used 3. Consumer good- intended for final use by individuals (consumers) 4. Capital good- tool or good that is used by businesses to produce other products (producers)

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Service

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work that is performed by someone

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Value

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a worth that can be expressed in currency

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Paradox of Value

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some things that are most needed have low value; some things that are least needed have high value

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Wealth

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accumulation of tangible goods that are scarce, have utility, and are transferable between people

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TINSTAAFL

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"There is no such thing as a free lunch"

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Basic economics choices made by societies

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1. What to produce? 2. How to produce? 3. For whom to produce?

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Producers

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make and sell things

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Consumer

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buy and use things

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Factors of production

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Land, Labor, Capital, and Entrepreneurs

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Opportunity cost for producers

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the value of the best alternative given up

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Trade-offs for consumers

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alternative choices that are given up in favor of the choice made

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Opportunity cost for consumers

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the value of the next best alternative given up

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Law of increasing opportunity cost

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as production of one good increases; the opportunity cost to produce an additional good will increase

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Instant gratification

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desire to experience pleasure or fulfillment without delay or deferment

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Delayed gratification

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is the ability to resist the temptation for an immediate reward and wait for a later reward

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Production possibilities curve/frontier(PPC)

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a diagram that represents various combinations of goods and services an economy can produce when all its resources are used efficiently

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Efficient production

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achieved when a product is created at its lowest average total cost; measures whether the economy is producing as much as possible without wasting precious resources

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Consumer rights

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right to safety; right to be informed; right to choose; right to be heard; right to redress (receive adequate payment for harm caused by producers)

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Consumer responsibilities

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include important evident to state case; report problems immediately; keep a copy of all documents sent to producer; keep cool; keep accurate records

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Economic growth

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occurs when a nation's total output of goods and services increases over time

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Creating economic growth

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productivity; human capital, division of labor and specialization; economic interdependence

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Circular flow of economic activity

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see next cards

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Market

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location or another mechanism that allows buyers and sellers to exchange a specific product; markets can be local; national; global; or virtual; large economies can be made up of many different types of markets

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Factor market

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where all factors of production are bought and sold; where individuals earn income

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Product market

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where individuals spend incomes; where producers sell goods and services

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Economic system

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organized way a society provides for the wants and needs of its people

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Free enterprise/market economy

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private citizens own and use the factor of production to generate profits; buyers and sellers meet to determine price and quantity a) Advantages of free enterprise economy: individual freedom; usually adjusts to changes gradually; small degree of government interference; decentralized decision making greater innovation; product development and economic growth, consumer satisfaction; goods privately owned b) Disadvantages of free enterprise economy: economic inequality; may not provide enough basic needs; high degree of uncertainty

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Command Economy

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government owns all factors of production and determines how these factors are combined to produce goods and services within the economy a) Advantages of command economy: can change drastically based on government decisions; most citizens receive goods and services they may not otherwise receive b) Disadvantages of command economy: most benefits the people in command; loss of freedom; may produce inferior quality goods; slow due to large bureaucracy; so things don't get done (problems don't get solved); doesn't get reward innovation or excelling in role; inefficient use of resources

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Mixed Market Economy

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has characteristics of both free enterprise and command economies

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Traditional Economies

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use of scarce resources stems from rituals; habit; or custom a) Advantage of traditional economy: everyone knows place b) Disadvantage of traditional economy: lacks development

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Free Enterprise Capitalism

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private citizens own and use factors of production to generate profits

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Advantages of free enterprise

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individual freedom-adjusts to change gradually-small government

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Disadvantages of free enterprise

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inequality-high uncertainty

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Entrepreneurs

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risk takers who do something new

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Demand

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the desire; ability; and willingness to buy a product or service

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Law of Demand

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the quantity demanded of a product varies inversely with its price; when price goes up demand goes down

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Demand schedule

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table of the quantity demanded of a good at different price levels

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Demand curve

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illustrates how much quantity demanded changes when the price changes

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Change in demand

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represented as a movement along a demand curve

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Shift in demand

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right or left

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Variables

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quantities of data that change and from which we want to establish trends

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Positive/Direct Relationship between variables

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two numbers or other variables where an increase or decrease in one variable causes the same change to occur in the second variable

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Negative/Indirect Relationship between variables

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two variables which move in opposite directions; when one of the variables increases the other variable decreases

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Law of diminishing marginal utility

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as more of a product is consumed the less satisfaction a consumer gets from here; hence consumers are prepared to pay less

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Income effect

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as the price of a good falls; real income- what consumers can buy with their money income; rises and consumers increase their demand

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Substitution effect

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as the price of one good fails, it becomes relatively less expensive; there assuming other alternative products stay at the same price; at lower prices the good appears cheaper; and consumers will switch from the expensive alternative to the relatively cheaper option

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Demand life cycle

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the cycle through which every product goes through from introduction to withdrawal or eventual demise

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Factors that affect demand

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consumer income; consumer tastes; substitutes; complements; expectations; and number of consumers

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Elasticity

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a measure of responsiveness that describes the way a dependent variable changes its response to a change in an independent variable

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Elastic Demand

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change in price causes a relatively larger change in quantity demanded; happens when consumers have other options

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Inelastic Demand

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change in price causes a relatively smaller change in quantity demanded; happens when consumers don't have many other options

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Determinants of demand elasticity

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a good's price elasticity of demand is largely determined by the availability of substitute goods

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Supply

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total amount of a specific good/service that is available to consumer

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Law of supply

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producers will offer an increased supply of an item as its price rises

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Supply schedule

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listing of quantities of a particular product that a producer would supply at all possible prices in the market

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Supply curve

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graph showing various quantities supplied at all possible prices in the market

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Market supply curve

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an upward sloping curve depicting the positive relationship between price and quantity supplied

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Quantity supplied

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amount that a single producer or all producers bring to the market

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Change in quantity supplied

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change in amount offered for sale in response to a change in price

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Change in supply

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suppliers offer different amount of a product for sale at all possible prices in the market

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Supply elasticity

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measure of the degree to which the quantity supplied responds to a change in price

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Elastic supply

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change in price causes proportional larger change in quantity supplied

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Inelastic supply

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change in price causes proportional smaller change in quantity supplied

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Unit of elastic supply

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change in price causes equal change in quantity supplied

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Theory of production

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profits=total revenue - total costs to produce total revenue = price x quantity

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Stages of production

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stage 1-increasing marginal returns stage 2- decreasing returns stage 3-negative returns

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Fixed cost

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costs that a producer incurs even if there is little to no production

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Variable costs

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cost that changes when the business' rate of operation or output changes

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Total cost

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sum of the fixed and variable costs

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Marginal cost

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extra cost incurred when producing one more unit of output

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Profit-maximizing quantity of output

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volume of production where marginal cost and marginal revenue are equal

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Break-even point

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level of production that generates just enough revenue to cover operating costs

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Supply and demand equilibrium

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quantity demanded equals quantity supplied

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Pure competition

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(DNE) 1. Very large numbers 2. Identical products 3. Freedom of entry and exit

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Perfect competition

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same characteristics but includes 4. Perfect knowledge by all buyers and all sellers of all conditions in the market 5. Perfect mobility of resources

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Monopolistic competition

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may have all the conditions of pure competition except for identical products

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Oligopoly

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few very large sellers dominate the industry

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Monopoly

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only one seller of a product-no competition-very rare

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Types of monopolies

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natural monopolies-one firm can produce the product cheaper than everyone else. Geographic monopoly-absence of other sellers in a certain area. Technological monopoly-ownership or control of manufacturing method

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How does government protect consumers from monopolies?

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using a modified free market-creates protection agencies-and requires producers to disclose certain information to consumers

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Causes of market failures

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1) not enough competition 2) not enough information 3) resources that won't move 4) too few public goods 5) externalities or spillover effects

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Modified free market

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market economy with various levels of gov. intervention

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Sole proprietorship

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individual runs company

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Partnership

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two partners run company

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Corporation

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business recognized as a separate legal entity with some rights as individual

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Cooperative

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run by people-benefits all members-owners (common in health, art, retail, restaurant)

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S Corporation

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similar to corporation-taxed on personal level

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Limited Liability Company

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taxed like a sole proprietorship but protected like a corporation (protects personal possessions)

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Money

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any item or verifiable record used as a means of exchange that is accepted as payment for goods and services

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Main functions of money

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1) Medium of exchange-something that is accepted by all parties; something anyone may possess to exchange goods or services 2) Store of value-holds value over time 3) Unit of account-common measure of value of goods and services

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Characteristics of modern money

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portability; durability; divisibility; scarcity

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Federal Reserve

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provide the nation with a safe, flexible and stable monetary and financial system

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FDIC

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is the U.S. corporation insuring deposits in the United States against bank failure.

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U.S. Financial Institutions (Identify and define)

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is a company engaged in the business of dealing with monetary transactions, such as deposits, loans, investments and currency exchange

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Bonds

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formal long-term contract requiring repayment of borrowed money and interest at regular intervals over time

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Par value

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amount borrowed that must be paid back

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Bond maturity

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life of a bond

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Coupon rate

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rate of interest paid

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Certificate of Deposit

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loans to financial institutions

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Corporate Bond

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a debt security issued by a corporation

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Municipal Bond

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bonds issued by state and local governments (issued to pay for public projects)

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Government Savings Bond

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low domination bonds issued by the government

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Treasury Notes and Bonds

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federal government borrows money from public for at least a year and pays interest every six months

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Treasury Bill

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short term with maturity of 4;13; 26; or 52 weeks

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IRA

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Individual Retirement Accounts

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Mutual Fund

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funds created when investors deposits are pooled so that stocks or bonds can be purchased

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Money market mutual fund

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open-ended mutual fund that invests in short term debt securities such as treasury bills

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Capital markets

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money loaned for more than one year

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Money markets

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money loaned less than one year

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Primary markets

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only the original issuer can sell or repurchase a financial asset

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Secondary markets

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can be sold to someone other than the original issuer

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GDP

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gross domestic policy- total market value of all final goods and services produced within a country's borders during a 12-month period

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Real GDP

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uses quantity sold against a historical base year; accounts for inflation since prices on goods may go up but quantity sold may not

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GDP per capita

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GDP per person (real GDP divided by population)

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GNP

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gross national product- market value of goods and services produced by labor and property supplied by U.S. residents

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NNP

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net national product- GNP minus depreciation charges for wear and tear on capital equipment

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NI

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national income- NNP minus indirect business taxes

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PI

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personal income- total amount of income going to consumers before income taxes

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Disposable Personal Income

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PI minus income taxes

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Inflation

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general rises in prices

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Deflation

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general decline in prices

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CPI

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consumer price index- comprehensive statistical series that tracks monthly changes in the prices paid by consumers for a representative selection of goods (market basket)

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Market basket

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representative selection of 300 commonly purchased goods and services that are compared with a base period

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Causes of inflation

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Demand-pull: all economic sectors try to buy more than the economy can produce Cost-Push-Rising: input cost drives up the cost of manufacturing Wage-Price Spiral: higher prices force workers to ask for higher wages; if higher wages occur; producers roll the increase into the cost of goods and services Excessive Monetary Growth: money supplied grows faster than the real GDP

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Results of inflation

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1. Reduced purchasing power: a dollar buys less 2. Distorted spending patterns: people may stop buying something as a result of increased prices 3. Encouraged speculation: people purchase something expecting the price to go up 4. Distorted Distribution of Income: leaders receive lose value on the money paid back

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Business cycle

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fluctuation in economic activity that an economy experiences over a period of time

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Recession

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period of at least two consecutive quarters of decline in GDP

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Taxes

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a) Federal income tax: the federal government levies a tax on personal income; the federal income tax provides for national programs b) FICA: federal insurance contribution act- provides benefits for retired workers and their dependents as well as for disabled workers and their dependents; also known as Social Security tax c) Allowance certificate: completed by the employees and used by the employer to determine amount of income tax to withhold d) Payroll taxes: Social Security and medicare taxes e) Medicare: medical benefits for when they reach 65

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Regressive taxes

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everyone pays the same fixed amount; takes a larger percentage of income

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Progressive taxes

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tax rate increases as the taxable income increases; takes more from those able to pay more

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Proportional taxes

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tax that takes the same percentage of income groups

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State taxes

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Income taxes assessed to a citizen by a state taxing authority agency

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What can be taxed?

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wage, salaries, bonuses, commissions, and some trips

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The Great Recession

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2007-2009 drastic recession period caused by housing market, poor banking practices, and housing inflation

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