Economics Final Review

Do Now:

• Take out your review sheet. Circle those terms that you are unsure of.

Chapters covered

• 1 – What is Economics?• 2 – (section 1) Economic Systems• 4 – Demand• 5 – Supply• 6 – (section 2) The Price System at work• 9 – Sources of Government Revenue• 10 – Government Spending• 13 – Economic Performance• 14 – Economic Instability• 15 – The Fed and Monetary Policy• 16 – Achieving Economic Stability• 17 – (sections 1 & 2) International Trade

Needs vs. WantsNeed - Required for survival - water, food,

shelter Want - a way of expressing a need - food is

a need and Taco Bell is a want.

the study of how people try to satisfy what appears to be

seemingly unlimited and competing wants through the use of scarce

resources

What is Economics?

Microeconomics is the study of how…

• Individuals• Households• Businesses• Industries

Make economic decisions

Microeconomics revolves around two very important concepts:

•Demand

•Supply

MACROECONOMICS

Part of economic theory that deals with the

economy as a whole and decision making by large units such as the United

States government

Scarcity – a lack of resources

• You may desire to purchase a …

• … but the ability may not be there due to a scarcity of…

The Fundamental Economic Problem is…

“There is no such thing as a free lunch”

Everything has a cost – time and/or money

What does this mean???

Scarcity Choices Opportunity Costs

the value of the next best choice that one gives up when making a decision...

Can be money, time, or resources

Opportunity costs =

OR

Tradeoff –

Opportunity Cost –

choosing between two things

the thing given up in order to attain the other thing

accumulation of products that are tangible, scarce, useful, and transferable from one person to another

Wealth =

Why are some things more valuable than others?

Value- worth of a good or service based on dollars and cents

Good- item that is economically useful or satisfies a want1- Consumer good- intended for purchase by individuals examples- store bought items

2- Capital good- goods that are used to produce consumer goods

example- machines in factories

Service- work or labor performed for someone

Why are some things more valuable than others?

Paradox of Value- Contradiction between the high value of nonessentials and low value of

essentials

Water vs. diamonds

Utility- capacity to be useful and provide satisfaction

Scarcity + Utility = Value

Essential with littlevalue

Non- Essential with high value

Practice

Economics may best be defined as a(n)

A. scientific study of supply and demand.

B. study of efforts to satisfy seemingly unlimited wants with scarce resources.

C. limited description of economic activities.

D. extended application of cost-benefit analysis.

Practice

What is the fundamental problem of economics?

A. scarcity

B. capital

C. the factors of production

D. labor

Practice

What are the fundamental questions of economics?

Land, labor, capital, and entrepreneurs are the

A. results of supply and demand.

B. result of production.

C. basis of employment.

D. factors of production

Practice

Which of the following would most likely be studied in a microeconomics course? A) the cycling trends of unemployment and inflationB) the size of the federal budget deficitC) the interaction between labor and productionD) the history of world trade and globalization

Practice

For something to have value it must

A. cost a lot of money.

B. have utility.

C. be on sale.

D. never go out of style

Practice

Which of the following is NOT a capital good?

A. a bulldozer at a construction site

B. a cash register at a clothing store

C. an oven at a bakery

D. a television set for sale at an appliance store

Practice

The accumulation of economic products that are tangible, scarce, useful, and transferable is

A. wealth.

B. profit.

C. value.

D. scarcity.

Practice

The opportunity cost of becoming an entrepreneur is the

A) income one could be making in another field

B) the value of collateral one puts up for entrepreneurial loans

C) the operating costs of the business

D) business taxes one pays to the gov’t

Do Now:

• Describe the circular flow of economic activity.

The Circular Flow Model shows how capitalistic societies are economically

interdependent.

Markets• A market is location that allows buyers and

sellers to exchange economic products• Examples- supermarket, mall, internet

Economic Interdependence - economic activities in one part of the country or world affect what happens elsewhere

Two types of markets

• Factor Market

-where productive resources are bought and sold.

Entrepreneurs hire:land in return for rentlabor in return for wages

and salariescapital in return for interest

Two types of markets

• Product Market

- where producers sell their goods and services to consumers.

Households spend their money on goods and services and businesses get revenue

Productivity

• The amount of goods and services produced per unit of input

• Productivity has an impact on what producers can supply at various prices

Specialization

• Leads to greater productivity

• Workers/business/countries focus on production of one good.

• Same as division of labor

The PPF helps to answer the economic questions “What to Produce?” and “How

to produce it?”

Production Possibilities Frontier- graph that shows the various possible combinations of output that can be produced when all resources are fully employed. It is used to show the opportunity costs associated in the production of two items.

All points on the curve represent the use of fully employed resources

What to do with resources available?

Point A

Country can produce70 guns and 300 butter

Point B

40 Guns and 400 butter

Because of Scarcity point D is impossible for this country to reach at this point

Inefficiency- when resources are not being fully employed

Point e shows the inefficient use of resources

Opportunity Cost Point A

Country can produce70 guns and 300 butter

The opportunity cost of increasing production of butter by 100 units is 30 guns which must be given up

Law of increasing opportunity cost: opportunity cost increases as more of a good is produced. As production of guns increases so the does the amount of butter that must be given up.

Expansion in the production curve

•How can the curve move to the right?

•New Technology

•Better use of or increases in resources

• Improvements in labor

Outward movement of curve= economic growthInward movement= shrinking of the economy

1- What is the opportunity cost of moving from D to E? 3 units of grain

2- What is the opportunity cost of moving from E to C? 7 units of wine

3- Which point on the graph represents resources that are not being fully employed? point a

4- What is one way that point b could be reached? (answers on previous slide)

cd

e

f

Demand

• The desire and ability to purchase a good or a service

• Demand represents the consumer’s point of view

Law of Demand

As the price of an item goes down, demand goes up; as the price of an item goes up, demand goes down.

EXAMPLE:

If the price of flip flops is $5 per pair, 50 people may go to buy them. If the price went up to $50 per pair, there may only be five people who would buy them.

Demand Curves & Schedules

D$50

$5

5 50

Price

Quantity5$50

25$25

50$5

Quantity

Demanded

Price

$25

25

Curve

Schedule

Factors which affect demand

can be used in place of other products– ex: butter and margarine

the use of one increases the use of the other– ex: computers and software

Substitutes:

Complements:

ELASTICITY of DEMAND

• Demand Elasticity: the extent to which a change in price causes a change in the quantity demanded

• Elastic: when a given change in price causes a relatively larger change in the quantity demanded.

• Inelastic: the given change in price causes a relatively small change in the quantity demanded.

DETERMINING ELASTICITY

1) Can a purchase be delayed? INELASTIC If a consumer’s need is urgent and can not be put off

demand tends to be inelastic. (Diabetes Insulin, Tobacco addictive)

2) Are adequate substitutes available? ELASTIC If they are people can switch back and forth between

them. (Gasoline from a particular station. However, gas as a

whole is inelastic)

3) Does the purchase use a large portion of income? If yes then demand tends to be elastic, if no demand

tends to be inelastic.

Supply

• The desire and ability to sell a good or service to people

• Supply represents the producer’s point of view

Law of Supply

As the price of an item goes up, supply goes up; as the price of an item goes down, supply goes down.

EXAMPLE:If the price of flip flops is $5 per pair, 50 people may go to buy them; however, the store might only stock 5 pairs.

If the price went up to $50 per pair, there may only be five people who would buy them; however, the store would want to make a lot of money so they would make sure they had 50 pairs on the shelves.

Supply Curves and Schedules

50

25

5

$5 $25 $50

Quantity

Price

S

50$50

25$25

5$5

Quantity

Supplied

Price

Schedule

Curve

Demand and Supply Curves and Schedules

$50

$25

$5

5 25 50

Surplus

Shortage

50$505

25$2525

5$550

Quantity

Supplied

PriceQuantity

DemandedD S

Curve Schedule

Pri

ce

Quantity

Equilibrium

Government Regulations

and the Price System

• Price Ceiling – maximum legal price that can be charged for a product (ex: rent control)

D S

Equilibrium

Shortage

Surplus

Price

Ceiling

Price

Floor

$50

$25

$5P

rice

5 25 50

Quantity

• Price Floor – lowest legal price that can be charged for a product (ex: minimum wage)

Practice• Draw a market equilibrium graph for a

milk. • Identify the equilibrium price.• Identify the equilibrium quantity.• Illustrate what happens when demand for

milk decreases.• What happens to equilibrium

price/quantity?• If the price of cookies goes up, what will

happen to equilibrium price for milk?

Do Now:

• Identify and explain the 3 basic types of economic systems.

Economic Systems• All Societies have something in common - what is it? An Economy

3 types of Economies:• Traditional: allocation of scarce resources and nearly all other

economic activity stems from rituals, habitat, or custom. Roles are defined by the customs of the elders.Ex: African tribes, Australian Aborigines, Inuits

• Command: a central authority makes most of the WHAT, HOW, and FOR WHOM decisions.Ex: North Korea and Cuba

• Market: People and firms act in their own best interest to answer the WHAT, HOW, and FOR WHOM questions. Ex: United States

Practice

How does the demand curve respond to an increase in demand?

A) the curve shifts left

B) the curve shifts right

C) movement along the curve

D) no change

Practice

All of the following are examples of complements EXCEPT

A) butter and margarine

B) flashlights and batteries

C) peanut butter and jelly

D) cameras and film

Practice

A company decreases the price of milk by 10% and the company’s total revenues fall significantly. What term best describes the demand for milk?

A) elastic

B) inelastic

C) unit elastic

D) demand elastic

Practice

Price floors that are artificially high are likely to cause

A) a price ceiling

B) a surplus

C) an equilibrium

D) a shortage

Practice

Which of the following is NOT a strength of a market economy?

A) it can adjust to change over time

B) it gives producers and consumers freedom

C) it has decentralized decision making

D) it supports all of its people

Economic Indicators• GDP- Gross Domestic Product- Includes everything that is produced

within a country’s borders

• GNP- Gross National Product- Anything that is produced by a company headquartered in a specific country or produced by a country’s citizens

EX:

TOYOTA (Japanese Company)

• If produced in the US, would count for US GDP

• If produced in the US, would count for Japan’s GNP

APPLE (American Company)

• If produced in China, would count for China’s GDP

• If produced in China, would count for US’s GNP

What is NOT included in GDP? underground economy, resale items, intermediate products, services and goods bought and sold off the books

Other Economic Indicators

• Unemployment rate - The percentage of the work force that are willing and able to work but do not have jobs.– Frictional -- Seasonal– Structural -- Technological– Cyclical

• Full Employment – lowest possible unemployment rate – considered to be below 4.5%

Who does the labor force consist of?

Other Economic Indicators

• Inflation- The general rise in prices. Inflation is measured by a Price Index

Who is hurt the most by inflation?

Lenders, those on a fixed income

–Demand-Pull – “too much money chasing too few goods” – aggregate demand outpaces aggregate supply

- Cost-Push - caused by large increases in the cost of important goods or services where no suitable alternative is available

Other Economic Indicators

• CPI- Consumer Price Index -

looks at a market basket of goods and services to calculate the rate of inflation

- Prices are compared to prices during the base year in order to determine the rate of inflation

Draw the Business Cycle

Recession: GDP falls for 2 consecutive quarters (6 months)

Do Now:

• What are the three types of taxes?

• How is each one applied?

Government Spending• The federal budget is presented by the

President of the U.S. and approved by Congress

• Federal, State and Local governments raise money through taxation.

Three Types of Taxation• Progressive Tax –

Income % income paid in tax

Amount of tax

Family A $10,000 10% $1,000

Family B $50,000 20% $10,000

Family C $100,000 30% $30,000

PROGRESSIVE TAX

people with more income pay a higher percentage of that income in taxes than do those with less income. Ex – income tax

Three Types of Taxation• Regressive Tax –

Income % income paid in tax

Amount of tax

Family A $10,000 20% $2,000

Family B $50,000 4% $2,000

Family C $100,000 2% $2,000

REGRESSIVE TAX

everyone pays the same amount, regardless of income; therefore, the percentage of income paid in tax is greater for lower-income people

Three Types of Taxation• Proportional Tax –

Income % income paid in tax

Amount of tax

Family A $10,000 20% $2,000

Family B $50,000 20% $10,000

Family C $100,000 20% $20,000

PROPORTIONAL TAX

takes the same percentage of income from all income groups

Assessing Fairness in Taxation

• Benefits Received Principle – A concept of tax fairness that states that people should pay taxes in proportion to the benefits they receive from government goods and services

Ex: people who use a toll road

should pay the toll; people who

use a park should pay the park

fees.

Assessing Fairness in Taxation

• Ability to Pay Principle – A concept of tax fairness that states that people with different amounts of wealth or different amounts of income should pay at different tax rates.

Ex: Progressive income tax

Government Spending

• Federal Budget has two categories of spending– Discretionary– Mandatory (Only

Social Security, Medicare and Interest Payments on National Debt)

Government Spending

• Budget Surplus - revenues exceed expenditures

• Budget Deficit - expenditures exceed revenues

• National Debt - amount of money borrowed to cover our deficit

Practice

All of the following are included in GDP EXCEPT

A) The income from a garage sale

B) The value of a new car

C) The value of a new house

D) The sale of an ice cream cone

Practice

All of the following are basic sectors of the United States economy EXCEPT

A) Income sector

B) Consumer sector

C) Government sector

D) Investment sector

Practice

An assembly line worker in an automobile plant is laid off during a recession. She is

A) Seasonally unemployed

B) Frictionally unemployed

C) Cyclically unemployed

D) Technologically unemployed

Practice

What are two phases of the business cycle?

A) Peak and trough

B) Depression and recession

C) Depression and expansion

D) Recession and expansion

Practice

Paying $1,000 tax on $10,000 of taxable income, $4,000 on $20,000 of taxable income, and $20,000 on $60,000 of taxable income is an example of a tax system that is

A) proportional

B) regressive

C) progressive

D) average

Practice

The ability to pay principle of taxation states that

A) only people who have the ability to pay should be taxed

B) those who benefit from government services should pay for them

C) people should be taxed according to their ability to pay

D) the gov’t should assess taxes only if it is clear that citizens will have the ability to pay

Functions of Money $$$

• Medium of exchange: It can be used to purchase goods and services.

• Unit of account: It can be used to compare the value of different goods and services.

• Store of value: It can be held to buy something in the future.

Monetary Policy

• Determined by the Federal Reserve, or the Fed

• Concerned with LONG TERM economic health – ex: inflation, money supply

Tools of Monetary Policy

• Open Market Operations – buying and selling government securities

• Adjusting the discount rate – the interest rate charged on short-term loans to banks by the Federal Reserve

• Adjusting reserve requirements – the percentage of deposits that banks must keep on reserve in their vaults or on deposit with the Fed

Tight (Contractionary) Monetary Policy

• Recommended when the economy is in danger of creating inflation– raise reserve requirement– raise discount rate – sell bonds

• all of these decrease the money supply

Loose (Expansionary) Monetary Policy

• Recommended when the economy is showing signs of low economic and employment growth– lower reserve requirement– lower discount rate – buy bonds

• all of these increase the money supply

Fiscal Policy

• Determined by the President and Congress

• Concerned with SHORT TERM economic health – ex: unemploymentStabilize the economythrough taxing andspending

Demand-Side Policies

• Designed to increase or decrease total demand in the economy

• Keynes – only the government is big enough to step in and offset changes in investment sector spending– Expansionary – increase government

spending, lower taxes– Contractionary – decrease government

spending, raise taxes

Supply-Side Policies

• Designed to stimulate output and lower unemployment by increasing production rather than demand– Smaller role for government -

DEREGULATION– Lower federal taxes