ECONOMICS DPM REVIEW

Scarcity is everywhere! (Unlimited needs/wants-Limited resources) When a choice is made, the opportunity cost is the value of what

is given up. Therefore, all countries must make choices when answering the

three economic questions. What should be produced? Who should produce them? Who will get them?

The Factors of Production (FOPS): Land (natural resources) Labor (people working) Capital (things businesses use to make money) Entrepreneurship (people who invent things, for example)

Basic Economic Ideas

The PPF

Shows the possible combinations of two goods that can be produced

Shows scarcity and opportunity cost: make more of one, give up some of the other

Points inside the curve are possible, but underutilizing resources

Points outside the curve are impossible for now, but might be in the future with technology advances

Supply and Demand

Demand curve: shows what consumers are willing and able to buy at various prices Price goes up, quantity

demanded goes down Supply curve: shows

what consumers are willing and able to by at various prices. Price goes up, quantity

supplied goes up

Supply and Demand

Markets will return to equilibrium without government interference

A price of $1 will create a shortage where the quantity demanded is greater that the quantity supplied. Government imposed=

price ceiling A price of $3 will create a

surplus where the quantity supplied is greater than the quantity demanded Government imposed=

price floor

Supply and Demand

Determinants Demand Curves will shift

due to changes in: Taste and Preferences

of consumers Income of consumers Buyers (number of) Expectations of

Consumers Related goods (price

of) Supplements and

complements

Supply Curves will shift due to changes in: Technology Other goods (price

of) Number of Sellers Expectations of Firms Resource Prices Subsidies and Taxes

Subsidy- “tax in reverse”

Shifting Supply and

Demand Curves INCREASE TO THE

RIGHT DECREASE TO THE

LEFT

Circular Flow Model

Remember: Firms purchase stuff in the factor market People purchase stuff in the product market Below: Red arrows are physical flow and green arrows are

monetary flow

Types of Economic

Systems

Command• Total amount of government interference

Communism

• Large amount of government Interference

• Example- China, North Korea

• Karl Marx

Socialism• Some government interference, government owns the FOPS

Capitalism• Market system with a amall amount of government interference

• Example- United States

Free Market• No government interference

• Adam Smith

The Business Cycle

GDP: total dollar value of all final goods and

services produced in an economy in a year (measures the growth of the US economy by calculating output of businesses in America)

Types of Unemployment: Seasonal Structural Frictional Cyclical

Economic Indicators

Revenue: money taken in by the federal

government, largest source of revenue- income taxes

Expansionary Fiscal Policy: Government lowers taxes and increases spending (practiced during contraction in business cycle)

Contractionary Fiscal Policy: Government raises taxes and decreases spending (practiced during inflationary period)

American Fiscal Policy

Set up to regulate the US monetary policy and

control the supply of American currency Tools of the FED:

Discount Rate-Amount of interest The Fed charges member banks to borrow money

Reserve Requirement: Percentage of deposits that member banks are forced to hold onto

Open Market Operations: The Fed’s action of buying or selling US government securities

The Federal Reserve

Money is used as a unit of accounting when you

compare prices of the same item at different retailers Exchange Rate: the amount of foreign currency that can

be bought with US currency (effects the price of imports) Absolute Advantage/Comparative Advantage:

Absolute: country/company can make more of an item than another

Comparative: country/company can produce an item at a lower opportunity cost

Protectionism vs Free Trade: protectionists want barriers to trade while those in favor of Free Trade do not

Money and Trade

LEVELS OF

COMPETITION Thus, the MARKET STRUCTURE for an

American business depends on their unique competitive situation

There are 4 basic levels of competition Pure Competition Monopolistic Competition Oligopoly Pure Monopoly

Tips for Credit Cards: Charge only what you

can afford, pay your balance each month, stay away from cash advances)

Which pays more interest: checking or savings account

Are US Treasury Bonds typically seen as a safe investment

Personal Finance