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Prices

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The monetary value of a product as established by supply and demand. Prices are, and must be, 1)flexible 2)familiar 3)neutral 4)have no cost of administration

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A set of assumptions that can be listed in a table, illustrated with a graph, or even proven algebraically to help analyze behavior and predict outcomes.

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Economic Model

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A situation in which prices are relatively stable and the quantity of goods or services provided are equal to the amount of goods or services demanded.

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Market Equilibrium

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When quantity supplied is greater than quantity demanded this occurs

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Surplus

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Basic requirements for survival (water, food, shelter, etc.)

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Need

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Ways of expressing our needs

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Wants

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3 Basic Economic Questions

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What to produce, How to produce, and For Whom to produce

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Factors of Production

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Land- natural resources; Labor- People with all their efforts and abilities; Capital-Includes the tools, equipment and factories used in production; Entrepreneurs- people who start a new business

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An item that is economically useful or satisfies an economic want

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Goods

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Work that is performed for someone

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Service

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A location or other mechanism that allows buyers and sellers to exchange a certain economic product

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Market

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Measure of the amount of outputs produced over a certain amount of inputs in a specific period of time

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Productivity

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An alternative choice (ex- a basketball over a shoe)

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Trade-offs

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The cost of the next best use of time, money, or resources when one choice is made over another.

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Opportunity Costs

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A diagram representing various combination of goods/services that an economic system can produce when all factors of production are fully employed.

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Production Possibility Curve

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An organized way of providing for the wants and needs of a people

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Economic System

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One in which a central authority makes most of the What, How, and For Whom decisions. Economic issues are settled by the gov't an people have little say in how basic economic questions are answered.

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Command Economy

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Advantages of Command Economy?

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1)Can change direction in a short amount of time 2)Health/public services are available at everyone at little cost; regardless of income

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Disadvantages of Command Economy

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1) Not designed to meet the wants of consumers 2) Eliminates incentive to work 3) Requires a large decision-making bureaucracy 4) Has a hard time dealing with minor day to day problems 5)People with unique ideas have a hard time advancing

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People, firms, and businesses act in their own best interests to and the What, How, and For Whom questions.

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Market Economy

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Advantages of Market Economy

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1) Can adjust to change over a relatively short amount of time 2) Individual Freedom 3) Small Govt Influence 4) Decision making is decentralized 5) Variety of Goods/Services 6) Consumer Satisfaction

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Disadvantages of Market Economy

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1) Does not provide for the basic needs of everyone in the society (young sick old) 2) Does not provide enough of the services that people value (National defense, universal education) 3) Uncertainty

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3 Reasons For Market Economy Failure

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1) Lack of competition 2) Resources must be free to move from one activity to another. 3) Lack of information

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a rise in the general levels of prices

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Inflation

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Where private citizens, many of whom are entrepreneurs, own the factors of production.

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Capitalism

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The extent to which people are better off at the end than they were at the beginning

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Profit

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The Role of the Government in American Economy

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1) Protector 2) Provider/Consumer 3)Regulator 4)Promoter of Nat'l Goals

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A business that is owned and ran by one person. Owner has unlimited liability in the business.

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Sole proprietorship

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6 Advantages of Sole Proprietorship

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1) Ease of start up 2) Ease of management 3) Owner benefits solely from success 4) Business does not have to pay separate business income taxes 5) Psychological satisfaction 6) Ease of getting out of business

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6 Disadvantages of Sole Proprietorship

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1) Unlimited Liability 2) Difficult to raise financial capital 3) Lack of size and efficiency 4)Limited managerial experience 5) Difficult to attract qualified employees 6) Limited Life

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A business jointly owned by two or more persons.

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Partnerships

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6 Advantages of Partnership

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1) Ease of start up 2) Ease of management 3) Lack of special taxes 4) Attracts financial capital more easily than proprietorship 5) Larger and more efficient 6) Easier to attract talent than in proprietorship

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3 Disadvantages of Partnership

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1) Responsible for the acts of all partners 2) Limited Life 3) Potential for conflict

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Occurs when the quantity demanded is greater than the quantity supplied

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Shortage

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Condition that results from a society not having enough resources to produce all the things people would like to have

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Scarcity

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Is a form of business organization recognized by law as a separate legal entity having all the same rights as a citizen. These rights allow a corporation to buy/sell property, enter into legal contracts, and be sued.

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Corporations

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6 Advantages of Corporation

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1) Ease of raising financial capital 2) Professional management 3) Limited liability 4) Unlimited life 6) Easy transfer of ownership

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4 Disadvantages of Corporation

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1) Difficult and expensive to get charter 2) Shareholders have little say in how the business is run 3) Double taxation 4) High government regulation

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Non cash charge a firm takes for the general wear and tear on its capital goods.

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Depreciation

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Type of merger where two companies merge that make the same kind of product. Rockerfeller (Standard Oil) is the most common example

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Horizontal Integration

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Type of merger where two companies merge that are involved in different stages of manufacturing. The most common example is Carnegie Steel.

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Vertical Integration

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The quantity demanded of a good or service varies inversely with the price

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Law of Demand

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The extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product

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Marginal Utility

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This occurs when the amount of a product produced changes due to price.

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Quantity Supplied

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Change in quantity demanded because of a change in the relative price of the product

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Substitution Effect

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Products that can be used in place of other products (ex- butter and margarine)

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Substitutes

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A good whose use increases the use of its related goods.

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Complements

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A measure of responsiveness that tells us how a dependent variable such as quantity responds to an independent variable such as price.

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Elasticity

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A given change in price causes a proportional change in quantity demanded

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Unit Elastic

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Determinants of Demand Elasticity

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1) Can purchase be delayed 2) Are substitutes available 3) Price versus income

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The principle that the supplier will normally offer more for sale at higher prices than at lower prices

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Law of Supply

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A government payment to an individual, business, or other group to encourage or protect a certain type of economic activity.

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Subsidy

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States that, in the short run, output is changed while one input is varied and the others are held constant.

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Law of Variable Proportions

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3 Stages of Production

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Increasing returns, diminishing returns, and negative returns

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The stage where output increases at a diminishing rate as more units of a variable input are added

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Diminishing Returns

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The cost that a plant incurs even if the plant is idle and the output is zero

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Fixed Costs

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

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Variable Cost

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Sum of the fixed and variable costs

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Total Cost

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Total output or total product a business needs to sell in order to cover its total cost

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Break-Even Point

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A situation in which the prices are relatively stable and the quantity of goods or services provided is equal to the quantity demanded.

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Market Equilibrium

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The use of advertising, giveaways, or other promotional campaigns to convince buyers that the product is somehow better than the other brand.

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Non-Price Competition

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Market structure in which a few very large sellers dominate the industry

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Oligopoly

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Market structure with only one seller of a particular product

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Monopoly

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A market situation in which the cost of production is minimized by having a single firm producing the product

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Natural Monopoly

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Monopoly that is based on ownership or control of a manufacturing method, process, or other scientific advance.

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Technological Monopoly

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A monopoly the government owns and operates

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Government Monopoly

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Debts and obligations to others

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Liabilities

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Situation in which the outcome is not certain but the probabilities can be estimated

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Risk

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Job Applicant Protection

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Protects from discrimination because of race, gender, religion, and age.

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Situation in which the average cost of production falls as the firm gets larger.

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Economics of Scale

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Government grants exclusive rights to manufacture, use, or sell any new or useful invention for a specific period of time

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Patents

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A product sold at an initial loss to attract customers for a future profit

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Loss Leader

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Just a plain monopoly

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Pure Monopoly

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Producers produce more and buyers buy less. So supply goes up and demand goes down.

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High Price

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Producers produce less and buyers buy more. So supply goes down and demand goes up.

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Low Price

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How Corporations Are Owned

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Owned through shareholders who own either common stock or preferred stock.

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Stock that represents basic ownership of the corporation and allows one vote per stock held. This vote goes toward electing the Board of Directors.

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Common Stock

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Non voting ownership of a corporation. They get their dividends back before common stock holders.

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Preferred Stock

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Consumer Protection

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Enforces laws against false and misleading advertisement, unsafe food and drugs, environmental hazards, and unsafe automobiles.

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Benefits of Entrepreneurship

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1) new products 2) greater competition 3) more production 4)higher quality 4) lower prices

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Disadvantages of Entrepreneurship

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1)High rate of failure 2) Most commonly there is Unlimited Liability to the entrepreneur

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