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economics

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the study of the choices people make when buying and selling, spending and saving

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wants/needs

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- needs are the things that you can't live without - wants are luxury items

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consumers

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a person who buys or uses a good/service

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consumer sovereignty

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a. the ability of consumers to choose which goods and services are produced b. consumer rule

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barter

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the use of goods/services instead of money as a means of exchange

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basic economic systems

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a. how a nation organizes for production b. types: 1. traditional 2. market 3. command 4. mixed

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traditional economic system

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system where economic decisions and questions are based on tradition and what older generations have done

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market economic system

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a. economic decisions and questions are based on buyers and sellers actions in the marketplace b. also called free enterprise system

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command economic system

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economic decisions and questions answered by the government or a central authority

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free enterprise

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another name for capitalism

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private property

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a piece of land, building, vehicle, or other things owned by an individual, family, or group

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public property

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property owned by the government for public use

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eminent domain

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the right of the government to obtain private property for public use: compensation fair market value

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competition

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a state of rivalry among sellers and among buyers for goods and services

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communism

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- Karl Marx - an economic and political system in which all property is publicly owned, and the government makes all what, how, and who decisions - Communist Manifest

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capitalism

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- Adam Smith - an economic system in which the means of production are privately owned, and the what, how, and who questions are answered by the market - The Wealth of Nations

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socialism

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- a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout society - ownership of resources: government owns big industries, other businesses privately owned

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mercantilism

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- economic system based on trade - wealth measured by gold/silver - trade controlled by monarch - colonization important

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dynamic economy

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changing economy

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mixed economic system

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an economic system that combines both private ownership and government ownership of the means of production

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law of supply

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an economic principle stating that the quantity of an item offered will increase as prices rise and decrease as prices fall

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law of demand

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an economic principle stating that the quantity of an item demanded will increase as prices fall and decrease as prices rise

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scarcity

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a. the condition resulting from the fact that there is not enough of everything to go around; shortage b. when demand is greater than supply

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surplus

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a. a quantity larger than is needed b. when supply is greater than demand

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equilibrium price

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a. aka market price b. when supply and demand are equal

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producers

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one who makes a good or provides a service

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productivity

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a. the quantity of output for every unit of input b. output per worker

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circular flow of the economy

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Household--taxes&labor-->Government Household--income&work-->Business Business--goods&services&taxes-->Government Business--goods&services&wages-->Household Government--services&income--Business Government--services&wages-->Household

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retailer

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the seller of the final product to the consumer

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wholesaler

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a businessperson who buys from producers and sells to retailers

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wage

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hourly fee for work performed

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profit

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a. money earned from the operation of a business after expenses have been paid b. income minus expenses

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real income

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income adjusted for inflation

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gross income

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income before taxes

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GDP

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a. gross domestic product b. the total value of the goods and services produced by a nation's economy in a year c. components: consumer spending business investments government spending d. measures growth of economy

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GNP

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-Gross National Product - the sum of all goods and services produced in a nation in a year - GDP + net exports

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commercial banks

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an institution whose principal function is to provide checking accounts and loans for business firms and individual customers

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statement savings

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-based on money market notes -notes rang in value from $10,000 to $100,000 -purchased by money market fund -liquid: some have check writing privileges -higher rate of return -not insured

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certificate of deposits

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- CD's - fixed rate of return for a specific period of time (3 months-5 years) - minimum deposit ($500) - penalty for early withdrawal - safety- FDIC - rate of return: higher - liquidity: very low

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NOW accounts

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an interest bearing checking account - negotiable order of withdrawal - requires minimum daily balance ($500) - rate of return: very low (0.25%) - safety- FDIC - Liquidity- very liquid

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credit unions

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an association of people of similar interest offering members services similar to those offered by savings banks

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money

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anything generally accepted in payment for goods and services

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money supply

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- M1 - currency - checks - travelers checks

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currency

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coins and paper money issued by government and legal as a means of exchange

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FDIC

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-federal deposit insurance corporation -guarantees the safety of bank accounts up to $250,000

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interest

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the charge for the use of borrowed money, expressed as a percent

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simple interest

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-the amount of interest based on a principal amount and not on earned interest -equation: i=price*rate*time

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compound interest

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-interest earned on savings and on interest previously earned -equation: price(1+rate)^time

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APR

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a. annual percentage rate b. the percentage cost of credit on a yearly basis

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principal

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the original value of a loan or deposit to which interest may be added

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IRA

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- individual retirement account - set up by individuals with earned income - contributions to a certain may be tax deductible - can't withdraw until the age of 59 1/2

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401 K

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-pension plan run by employer for the employees -allows an employee to contribute a portion of their wages to a special account

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pension plans

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-offered by employer -not portable/transferable -based on years of service

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advertising

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message designed to promote a product, a service, or an idea

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conspicuous consumption

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buying as a means of showing ones wealth or status

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media

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source of information to the public such as television, radio,

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inflation

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an extended period of rise in the prices of goods and services, newspapers, the internet

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demand-pull

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rising prices caused by generally increasing demand

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cost-push

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rising prices caused by the generally increasing costs of doing business

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inflationary spiral

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the recurring of wage increases followed by price increases followed by further wage increases and price increases

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CPI

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-Consumer Price Index -also known as cost of living index -used to measure inflation and the purchasing power of the dollar -conducted by surveys by the Bureau of Labor -based on 400 goods(market basket)

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insurance

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a method of protection against financial loss by sharing the risk with others

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term life

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life insurance usually for a 1-5 year period that may be renewed, but at a higher premium each term -cheaper -renewable -no cash value

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straight life

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a form of life insurance that also provides for forced savings and cash value -has cash value -has double indemnity -more expensive -lasts life of policy holder

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policy

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a contract between the insured and the insurance company guaranteeing payment should the policy holder incur specified losses

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cash value

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the dollar value an individual will receive if an insurance policy is redeemed before its due date -never equals face value

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homeowners insurance

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protection to cover costs of various types of potential risks to the owner of a house or apartment

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major medical

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type of health insurance that covers hospital expenses, surgical costs, and doctor's services

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consumer credit

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form of a loan

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installment loans

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- down payment(percentage of sale price) -fixed number of payments(interest + principal) -item purchased serves as collateral

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charge accounts

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-issued by retailers -credit line (credit limit) -interest charged on unpaid balance(monthly balance),minimum monthly payment -ownership occurs at time of sale -late fees

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credit cards

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-issued by financial institutions -credit limit -late fees -$50 liability limit -annual fee

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finance charge

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total cost of borrowing

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3 c's of credit

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1. capacity: ability to pay 2. collateral 3. character: willingness to pay (credit history)

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secured loans

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a loan in which the borrower pledges something of value in case the loan is not repaid ( backed by collateral)

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non secured loans

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not backed by collateral

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federal reserve system

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function- responsible for making monetary decisions & policy board of governors: -7 members -members appointed but the President -length of term: 14 years -current chairman(Ben Bernanke) -purpose: administer programs OMC- federal open market committee -purpose: same as fed reserves purpose - 12 members - New York president

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SEC

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federal agency responsible for regulating the buying and selling of stocks and bonds

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s corporations

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a special type of small business firm that is a corporation but does not have to pay corporate income taxes

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non profit corporations

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an institution organized as a corporation for specific purposes (charities, schools) and not supposed to make a profit -tax exempt

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government corporations

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government organization that provides a service that could not be provided by other businesses or corporations and typically charges for its services

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3 stock exchanges

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1. new york stock exchange (NYSE) - listed - the big board exchange 2. american stock exchange (AMEX) -listed -the curb exchange -otc stock 3. national association of securities dealers automated quotations (NASDAQ) -unlisted

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stocks

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shares in the ownership of a corporation

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common stock

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a security that represents ownership in a corporation and entitles the owners to vote in the selection of the corporation's board of directors

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preferred stock

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shares of stick that pay a fixed dividend before dividends are paid to holders of common stock

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dividends

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a share of a company's profits that is issued to stockholders

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p/e ratio

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- price earnings ratio - ratio of stock price to earnings - also known as earnings multiplier (calculate by dividing current price of stock by earnings per share)

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proxy

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a transfer of a stockholder's right to vote in a corporate election to another person or group

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corporate bonds

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an investment security by which a corporation promises to pay back a loan

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debenture bonds

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bonds that are unsecured (not backed by any collateral)

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junk bonds

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-high-risk, higher-interest bonds -bonds rated below BBB

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zero bonds

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bonds with no interest

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premium bonds

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bonds selling above par/face value

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discount bonds

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bonds selling below par/face value

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budget

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plan for spending money

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fixed expenses

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a budget expense that does not change from month to month

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variable expenses

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one that may be increased or diminished and that is not necessary

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federal budget

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the plan of the US government indication how much money it expects to receive (revenues) and how much it expects to spend

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surplus

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one in which anticipated revenue will be greater than anticipated expenditures

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balanced

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one in which receipts exactly equal expenditures

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deficit

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one where the anticipated spending of government exceeds anticipated revenues

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national debt

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the total amount of money that the federal government owes

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OMB

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-Office of Management and Budget -prepares the federal budget and monitors spending

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merger

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a. combination of businesses b. problems: - monopolies - costly

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vertical merger

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combination of businesses that act as suppliers

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horizantal merger

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combination of businesses that deal with the same things

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conglomerate merger

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business combination that deals with unrelated goods/services

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monopoly

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a. one seller of good/service in market b. controls the entire supply of good/service c. harmful effects: - destroys competition - wastes resources - creates higher prices - may not satisfy consumer wants

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legal monopolies

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1. patents 2. copyrights 3. natural

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copyright

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exclusive right given to authors and artists; lasts lifetime + 50 years

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patent

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exclusive right given to an inventor; lasts 15-17 years

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natural monopoly

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public utilities (single firm is more efficient)

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regulatory agencies

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government offices set up to oversee the way companies in a designated industry do business

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FTC

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- federal trade commission - protects consumers from misleading advertising -reviews advertising claims -can order a company to change their ad

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oligopoly

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a. market controlled by a small number of companies b. market expensive to enter

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antitrust laws

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legislation designed to prevent business firms from gaining monopolies in their field

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ICC act

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- first antitrust law - interstate commerce act - created first federal regulatory agency (abolished in 1996)

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sherman act

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-made all types of monopolies illegal - difficult to enforce -first law that included ALL types of businesses

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clayton act

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-strengthened the sherman act -defined restraint of trade

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4 factors of production

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1. human resources (labor) 2. natural resources (land) -renewable -nonrenewable 3.capital -physical (equipment) -monetary 4. entrepreneurship

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3 basic economic questions

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1. what product is being produced? 2. how the product is being produced? 3. for whom is the product being produced for?

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demand & supply curve (determine equilibrium price)

answer

...

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organizational structure of a corporation

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stockholders board of directors corporate officers management employees

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advantages of sole proprietorship

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1. earn all profits 2. no conflicts

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disadvantages of sole proprietorship

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1. unlimited liability 2. limited life

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advantages of partnership

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1. "two heads better than one" 2. more capital

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disadvantages of partnership

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1. unlimited liability 2. limited life

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advantages of corporation

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1. limited liability 2. unlimited life

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disadvantages of corporation

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1. expensive/difficult to start 2. limited capital

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3 ways corporations obtain funds

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1. retained earnings 2. debt financing 3. equity financing

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monetary policy

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decisions made by the OMC to control money supply

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how fed controls money supply

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1. reserve requirement: amount of funds that banks must hold in reserve against deposits made by their customers 2. discount rate: interest rate Fed charges member banks 3. buying & selling government securities

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benefits of competition

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1. better quality products 2. lower prices

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3 basic types of insurance

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1. life 2. health 3. liability & property

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4 advertising techniques

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1. basic appeals 2. attention getting headlines 3. slogans 4. testimonials

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purpose of social security

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1. help people who were in need of economic assistance 2. provided by the government to protect its citizens

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FICA tax

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tax that serves as a source of funding for social security

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bulls vs. bears

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bull- one who expects the price of stocks to rise bear- one who expects the price of stocks to fall

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"invisible hand"

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profit motive

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Laissez Faire

answer

let them do mercantilism no government control of trade government: 3 purposes: -defense -stable currency -law and order

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