Economics Final Study Guide Test Questions – Flashcards
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scarcity
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limited quantities of resources to meet unlimited wants
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shortage
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a situation in which a good or service is unavailable; a sutiatuion 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 three groups of resourcs that are usedt o make all goods and services
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guns or butter
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a phrase that refers to the trade-off that nations face when choosing whether to produce more or less military or conusmer goods
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opportunity cost
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the most desirable alternative given up as the result of a decision
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trade-offs
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an alternative we sacrifice when we make a decision
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thinking at the margin
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deciding whether to do or use one additional unit of some resource
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production possibilities curve
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a curve that shows alternative ways to use an economy's resources
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production possibilities frontier
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the line on a production possibilities graph that shows the maximum possible output for a specific economy
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efficiency
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using resources in such a way as to maximize the production of goods and services
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underutilization
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using ffewer resources than an economy is capable of using
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Economic Question 1
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What goods and services should be produced?
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Economic Question 2
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How should these goods and services be produced?
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Economic Question 3
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Who consumes these goods and services?
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factor payments
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the income people receive for supplying factors of production
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traditional economy
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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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centrally planned economy
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economic system in which the central government makes all decisions on the production and consumption of goods and services
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market economy
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economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets
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mixed economy
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economic system that combines the free market with limited government involvement
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self-interest
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one's own personal gain
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specialization
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the concentration of the productive efforts of individuals and firms on a limited number of activities
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public disclosure laws
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laws requiring companies to provide full information about their products
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indicators of economic stability
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general price levels; health of the nation's financial institutions
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gross domestic product (GDP)
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the total value of all final goods and services produced in a particular economy
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technology
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the process used to produce a good or service
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macroeconomics
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the study of the behavior and decision making of entire economies
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microeconomics
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the study of the economic behavior and decision making of small units, such as individuals, families, and businesses
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externalities
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an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume
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safety net
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government programs that protect people experiencing unfavorable economic conditions
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TANF
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Temporary Aid for Needy Families
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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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substitution effect
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when consumers react to an increase in a good's price by consuming less of that good and more of other goods
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income effect
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the change in consumption resulting from a change in real income
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demand curve
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a graphic representation of a demand schedule
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reasons for demand shifts
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consumer's income; consumer expectations; changes in size of populations; consumer tastes and advertising
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complements
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two goods that are bought and used together
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substitutes
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goods used in place of each other
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elastic demand
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describces demand that is very sensitive to a change in price
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inelastic demand
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describes demand that is not very sensitive to a change in price
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factors affecting elasticity
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avaliability of substitutes; the good's relative importance; neccessities versus luxuries; price change over time
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total revenue
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the total amount of money a firm receives by selling goods or services
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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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supply curve
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a graph of the quantity supplied of a good at different prices
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elasticity of supply
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a measure of the way quantity supplied reacts to a change in price
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fixed cost
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a cost that does not change, no matter how much of a good is produced
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variable cost
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a cost that rises or falls depending on how much is produced
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marginal cost
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the cost of producing one more unit of a good
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government influence on supply
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giving out payments that support a business or marke, or a subsidy; reduce the supply by adding excise taxes; regulation
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other influences on supply
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future expectations of prices; number of suppliers
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equilibrium
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the point at which quantity dmeanded and quantity supplied are equal
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disequilibrium
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describes any price or uantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market
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excess demand
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when quantity demanded is more than quantity supplied
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excess supply
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when quantity supplied is more than quantity demanded
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advantages of prices
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incentives to purchase a good; act as signals; prices are flexible; price system is free
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price ceiling
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a maximum price that can be legally charged for a good or service
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price floor
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a minimum price for a good or service
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surplus
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situation in which quantity supplied is greater than quantity demanded; excess supply
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search costs
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the financial and opportunity costs consumers pay when searching for a good or service
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rationing
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a system of allocating scarce goods and services using criteria other than price
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Conditions of Perfect Competition
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many buyers and sellers 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 freely
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barriers to entry
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any factor that makes it difficult for a new firm to enter a market
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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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government monopoly
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a monopoly created by the government
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economies of scale
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factors that cause a producer's average cost per unit to fall as output rises
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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
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conditions of monopolistic competition
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many firms; few artificial barriers to entry; slight ontrol over price; differentiated products
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nonprice competition
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a way to attract customers through style, service, or location but not a lower price
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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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collusion
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an agreement among firms to divide the market, set prices, or limit production (illegal in U.S.)
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cartel
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a formal organization of producers that agree to coordinate prices and production (illegal in U.S.)
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price fixing
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an agrement among firms to charge one price for the same good (illegal in U.S.)
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antitrust laws
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laws that encourage competition in the marketplace
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government deregulation
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the removal of some government controls over a marketplace
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corporation
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a legal entity owned by individual stockholders
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advantages of corportations
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limited liability for owners; transferable ownership; ability to attract capital; long life
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disadvantages of corporations
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expense and difficulty of start-up; double taxation; potential loss of control by the founders; more legal requirements and regulations
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horizontal merger
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the combination of two or more frims competing in the same market with the same good or service
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vertical merger
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the combination of two or more firms involved in different stages of producing the same good or service
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multinational corporation (MNC)
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large corporation that roduces and sells its goods and services throughout the world
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business franchise advantages
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management training and support; standardized quality; national advertising programs; financial assistance for start-ups; centralized buying power
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business franchise disadvantages
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high franchising fees and royalties; strict operating standards; purchasing restrictions; limited product line
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consumer cooperative
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retail outlet owned and operated by consumers
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service cooperative
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cooperative that provides a service rather than a good
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producer cooperative
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agricultural marketing cooperatives that help members sell their products
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nonprofit organizations
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institutions that function much like a business, but does not operate for the purpose of generating profits
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professional organization
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nonprofit organization that works to improve the image, working conditions, and skill elvels of people in particular occupations
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business organization
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an establishment formed to carry on commercial enterprise
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labor unions
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an organization of workers that tries to improve working conditions, wagers, and benefits for its members
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3 uses of money
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medium of exchange; unit of account; store of value
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6 characteristics of money
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durability; portability; divisibility; uniformity; limited supply; acceptability
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commodity money
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objects that have value in and of themselves and that are also used as money
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representative money
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objects thath ave value becasue the holder can exchange them for something else of value
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fiat money
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legal tender; has value because the government has decreed that it is an acceptable means to pay debts
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M1 money supply
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represents money that people can gain access to easily and immediately to pay for goods and services
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M2 money supply
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consists of all the assets in M1 plus several additional assets
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functions of financial institutions
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storing money; saving money; provide loans; provide mortgages; credit cards; interest
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types of financial institutions
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commercial banks; saving and loan associations; savings banks; credit unions; finance companies
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electronic banking
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Automated Teller Machines (ATMs); debit cards; home banking; Automatic Clearing Houses (ACHs); stored value cards
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structure of the Federal Reserve
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Board of Governors; 12 District Reserve Banks; Member Banks; The Federal Open Market Committee (FOMC)
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Federal Open Market Committee (FOMC)
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part of the Federal Reserve; makes key decisions about interest rates and the growth of the United States money supply; meets eight times a year in private; members drawn from Board of Governors
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Board of Governors
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these people oversee the Federal Reserve System; headquartered in Washington D.C.; seven members appointed by the President of the U.S.; 14-year terms
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Federal Advisory Council (FAC)
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a research arm of the Fed; collects information about each district and reports to the Board of Governors abotu economic conditions with their districts; consists of one member from each FR district
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monetary policy
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the actions the Federal Rserve takes to influence the level of real GDP and the rate of inflation in the economy
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benefits of buying stock
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dividends; capital gains
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risks of buying stock
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losing money
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dividend
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the portion of corporate profits paid out to stockholders
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capital gain
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the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the seller
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capital loss
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the difference between a lower selling price and a higher purchase price, resulting in a financial loss for the seller
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income stock
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this stock pays dividends at regular times during the year
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growth stock
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this stock pays few or no dividends
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common stock
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investors who buy this stock are voting owners of the company
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preferred stock
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investors who buy this stock are nonvoting owners of the company
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New York Stock Exchange (NYSE)
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the country's largest and most powerful exchange; began in 1792
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National Association of Securities Dealers Automated Quotations (NASDAQ)
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the American market for over-the-counter securities; created in 1971
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bear market
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a steady drop in the stock market over a period of time
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bull market
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a steady rise in the stock market over a period of time
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Dow Jones Industrial Average (The Dow)
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measures how certain stocks have traded daily since 1896; represents 30 large companies in various industries
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Standard & Poor's 500 (S&P 500)
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measures a broader picture of stock performance; tracks the price chagnes of 500 different stocks as a measure of overall stock market performance
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Great Crash of 1929
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a period in the early 20th century that ended in a horrifying collapse of the stock market
