Semester Final Review Notes Scarcity Unlimited

Semester Final Review Notes

Scarcity • Unlimited wants and limited resources

Scarcity Impact • Scarcity causes the need for society to make choices which leads to an opportunity cost

Factors of Production (Inputs, resources, factors) • Capital- (physical) human-made tools that make other goods (human) the training to use those tools • Entrepreneur- The individual who puts the other factors together to produce a good or service • Land- Natural resources that are used in the process of making a good or service • Labor- Workers

Examples of Factors/Inputs/Resources

Property Rights and Efficiency • Property rights protects individuals’ ownership of resources and encourages individuals to take risks. • Efficient use of factors of production increases our benefits

• Thinking at the Margin- Marginal Analysis –Analyzing the cost and benefit of consuming one more additional unit of something –An Incremental decision- not an either or decision –Production Possibilities Frontier shows all your choices and the opportunity costs using marginal analysis

Consumer • An individual that purchases goods and services for their own personal satisfaction.

Producer • An individual that makes a good and service to sell to make a profit.

Investor • An individual that uses their assets to acquire stocks, bonds or real estate for the express purpose to increase their wealth.

Saver • An individual that puts their money in a financial institution (bank) to store for future use.

Production Possibilities Frontier A Unattainable Fu ll P D Underproduction inefficient B rod uc E tio n C

PPC a) Shows your opportunity cost when you make a decision b) Trade-offs or the things you give up when you want more of one good over another c) Unattainability are points outside the PPF d) Efficiency is any point on the PPC and inefficiency is any point inside the PPC e) Growth of the PPF shows increased standard of living through increases in tech and factors

Opportunity Cost • The cost of making a choice. It is the best alternative you gave up to have the choice you made.

Opportunity Cost and Trade-offs • Trade-off all the other options you had when making a choice and the opportunity cost is the best alternative of your trade-offs that you sacrificed when making a decision

Market Economy • Invisible hand- supply and demand sets prices not some govt. or group. • Profit Motive • Consumer Sovereignty • Competition- Choice • Growth • Laissez-faire- government hands off the economy • Freedom to trade • Efficiency to compete • Self-interest

Types of Economies • Command – the government decides the three key economic questions of what goods and services should be produced, how these goods and services should be produced, and who consumes these goods and services • Market – decisions of what, how and who produces goods and services are determined by the market • Traditional – History and cultural norms (tradition) decide the answers to the 3 economic questions • Mixed – is the market economy with a limited role of government included

Competition • Firms that battle against one another to make a profit which usually causes them (firms) to keep costs down and efficiency up. • This leads to lower prices and better quality of goods and services.

Consumer Sovereignty • The consumer dictates (decides) what goods and service should be produced and what they are willing to pay for it.

Government Regulation • Government regulates corporations to stop unfair business practice to protect consumers and competition. • Creates more cost for business and consumers.

Profit Motive • The driving force behind a firm producing a good or service and to do it as efficiently as possible.

Public Good • No one owns it. Anyone can use it. Non-excludable and non-rival. • Public parks and public school

Private Good • Owned by someone. • Excludable and rival • A Steak or a car.

Mixed-Market Economy • Invisible hand- supply and demand sets prices not some govt. or group. • Profit Motive • Consumer Sovereignty • Competition- Choice • Growth • Government regulation • Protection of resourses for future use • Subsidies • Safety nets

Laws of demand/supply • Demand: – the consumer buys more of a good when its price decreases and less when its price increases and vice versa • Supply: – the tendency of suppliers to offer more of a good at a higher price. The higher the price, the larger quantity produced and vice versa.

Ceteris Paribus • All other variables are held constant so we can see what affect the independent variable will have on the dependent variable. • What affect a change in price will have on a change in quantity • It causes a movement along the curves.

Equilibrium • The point at which supply and demand meet establishing the price and quantity produced

– Demand by population as a whole Price d 1 • A change in demand is a shift in the entire demand curve (Caused by five factors) an – Demand by an individual m De demanded is caused by a change in price affecting a movement along the curve Quantity Price • Change in Demand Vs. Change in the Quantity Demanded A change in the quantity Quantity

To review: Change in Quantity Supplied Vs. Change in Supply • A change in the quantity supplied refers to the movement from one point to another on the curve - Change in price • A change in supply means the entire supply curve shifts ( Based on the 6 factors) 4 4 P 3 r i 2 c 1 e 1 2 3 4 Quantity

Supply and Demand Graph Which way does the demand line move if demand increases? 1 ly pp Su d 1 an Price d 2 an m De Quantity Is there a new equilibrium point? YES

Supply and Demand Graph Su ppl y 2 ly d 1 an Su pp m De Price 1 Which way does the supply line move if supply increases? Quantity Is there a new equilibrium point? YES

Government Price Controls • Price Ceilings – Gov’t imposing maximum prices on goods that are deemed “essential” – Rent control in NYC – Can lead to black markets to provide supply where there is a high demand

Price Ceilings 1 ly pp Su d 1 an P 1 m De Price Government intervention to keep prices low so there is a ceiling set on prices that they can not go above. There is very little incentive for firms to supply products at the lower price. This leads to a shortage. P 2 Excess Demand Quantity The price is below the equilibrium point therefore there is a shortage due to excess demand

Price Floors –Gov’t imposing minimum prices to reward suppliers for their efforts or to keep them in business –Sometimes referred to as price supports –Minimum wage and supports to agriculture

Price Floors Government intervention to keep prices high so there is a floor in which prices can not go below. There is very little incentive for consumers to demand products at the higher price. Su d 1 an pp ly 1 m De Price Excess Supply Quantity The price is above the equilibrium point therefore there is a surplus due to excess supply

Supply and demand schedule Price of Widgets Number of Widgets People Want to Buy Number of Widgets $1. 00 10 $2. 00 90 40 $3. 00 70 70 $4. 00 40 140 Equilibrium is where supply and demand equal

Market definition • Any place where voluntary exchange occurs between a buyer and a seller and a good or service is bought and sold.

Circular Flow Butter Firms Factor Market Wages Labor $ Government F a c t o r s Mixed Economy Butter Taxes $ G & S Money Goods and Services Product Market Taxes Household

Resource (Factor or Input) Market • Households sell factors of production (CELL) • Businesses buy factors to make goods/services

Product Market • Households demand/buy a vast array of goods and services • Businesses supply/sellers (of) these products

Voluntary Exchange • Individuals are free to buy and sell what they wish without any coercion.

• Firms and households rely on each other for the flow to work properly. • Government steps in when the flow is either too slow or too fast.

Rule of Law and Contracts • Protects property rights and ensures agreements which provides trust and security for investors that helps promote economic development

Four Market Structures • Perfect Competition – A market structure in which a large number of firms all produce the same product – Low barriers, homogeneous product, perfect knowledge and price taker • ex. The market for gasoline comes close to perfect competition because a large number of gas stations sell gasoline and one gallon of gas is very much like another • Monopoly – A market dominated by a single seller • ex. One company, Debeers of South Africa, has almost total control over the world’s diamonds.

Four Market Structures cont. • Monopolistic Competition – A market structure in which many companies sell products that are similar but not identical – Differentiated product, low barriers and a price searcher • ex. The market for denim jeans is monopolistically competitive because jeans can vary by size, color, style, and designer. • Oligopoly – A market structure where a few large firms dominate a market • ex. Airlines, breakfast foods, and household appliances

Different Types of Monopolies • Natural monopoly occurs where only one firm would survive like a gas station in a small town • Vertical monopoly is where two firms merge that are from different stages of production of a good. – Andrew Carnegie when he merged a railroad and iron ore mine. • Horizontal monopoly is owning all companies in the same industry – John Rockefeller and Standard Oil

Costs to a Firm • Total Cost = Fixed costs + Variable costs • Fixed Cost = Cost that does not change no matter how much of something is being produced. EX. (Rent will be that same regardless of how much product is being produced. ) • Variable Cost = A cost that changes depending on how much of something is produced. The more product being produced, the more the variable cost. (Labor) • Marginal Cost = The cost of producing one more of something.

Golden rule of profit maximization • MR=MC • A firm should increase its output as long as the marginal revenue earned from the additional product is more than or equal to the marginal cost of the product.

3 Major types of taxes • 1. Regressive tax - a tax for which the percentage of income paid in taxes decreases as income increases. ex: sales tax • 2. Progressive tax – a tax for which the percentage of income paid in taxes increase as income increases. ex: graduated income tax • 3. Flat/Proportional tax – a tax for which the percentage of income paid in taxes remains the same for all income levels. ex: 6% tax on $30, 000 and 6% tax on $500, 000.

Marginal Vs. Average Tax Rate • A marginal tax rate is the tax paid on additional or incremental income. • An average tax rate is the total tax paid divided by total taxable income – $10, 000 in taxes divided by $100, 000 income = 10% average tax rate

FICA Tax • Regressive because they apply to only a fixed absolute amount of your income • FICA taxes were 7. 65%, – 6. 2% Social Security • but that only applies to first $115, 500 of income. So if you made $231, 000, only 3. 825% would be taxed – 1. 45% Medicare • Individuals over $200, 000 pay an additional. 9% • $250, 000 for married couples • Employers also pay 7. 65 for you into FICA for a total 15. 30%.

Inflation • Inflation- General increase in price level caused by – cost push (supply shock) or demand pull (too many dollars chasing too few goods). – The dollar cannot buy as much as it did before. – Three types: chronic, hyper, and creeping.

Deflation • Deflation- General decrease in price level making money have more value. You can buy more with the same amount of money

Hyperinflation Hyperinflation- extreme rapid inflation Countries like Germany in 1922 -3 and Zimbabwe today. Money is worthless

Tax vs. Subsidy • Tax is money paid to the government. • Subsidy is money received from the government to encourage you or a firm to do something. – A rebate on solar panels – City funding the building of the new Cubs stadium.

Peak/Prosperity Exp a nsio n Business Cycle Rec on cti n ra nt ssio Co ece R over y Peak Trough Re ce ss io n

Commerce Department • Supervises and regulates business in the US. It also collects business data and is charged with promoting economic growth.

Bureau of Labor Statistics • Under the labor department • Measures inflation and unemployment

Demand Side Economics • The idea that if you stimulate aggregate demand by reducing taxes or government spending that the economy will return to full production. • Ideas of John Maynard Keynes

Supply Side Economics • The idea that the government stimulate aggregate supply by reducing government regulation, reducing taxes especially on business and a stable money supply • Says Law – Supply creates its own demand.

Borrower • Individual that takes out a loan for either a purchase or an investment

Lender • An individual or institution that loans money in return for interest

Fixed Income • Income that is set for a period of time like a year. Salary • Is negatively impacted by inflation

Cost of Living • The price for purchase basic necessities like housing, food and clothing. • Inflation causes the cost of living to rise

Measuring Price • CPI (Consumer Price Index) – Major price index to measure the price level of goods and services purchased by households. – Calculated by the Bureau of Labor Statistics – Establishes Cost of Living Adjustments (COLA) • Increases as inflation rises • Allows you to continue to buy the same goods

• CPI (Consumer Price Index)– Index determined by measuring the price of a standard group of goods meant to represent the typical “market basket” of a typical urban consumer. It is used to measure inflation. ,

Unemployment • Unemployment–An individual who is part of the labor force who is willing and able to work but cannot find employment. Full employment is between 4%-6% unemployment.

GDP (Gross Domestic Product) • GDP (Gross Domestic Product)– The dollar value of all final goods and services produced within a country’s borders in a given year. Anyone who lives within the boundaries of the US is counted in our GDP, including foreigners.

Determining the Labor Force • Labor force includes employed and unemployed individuals who wish to work • All people who are over 16 years of age, not institutionalized, and are looking for employment & want to be employed • Not in L. F. Housewives/husbands, students, slackers, military, retirees not included • About 50% of total pop. is labor force • Unemployment Rate = (those unemployed) / (labor force) X 100 • Bureau of Labor Statistics takes survey of 60, 000 households each month

Full Employment • The condition that exists when the unemployment rate is equal to the natural unemployment rate. • It does not equal zero unemployment. • Full employment is usually considered 4%-6% unemployment

Unemployment • Natural Unemployment – Frictional Unemployment - Search unemployment I. e. In between jobs caused by natural frictions in supply and demand. High school and college graduates seeking 1 st full-time employment are included – Structural - Change in the structure of consumer demand change in technology. Example • Change from typewriters to computers, automation in auto industry caused by long-lasting shift in demand • Unnatural Unemployment – Cyclical - Caused by recession part of cycle • Seasonal - Orange picker, but it is winter • Unemployment = Nat. unemployment + Cyclical • Discouraged worker is one who has quit looking –no longer part of the labor force • Underemployed - working at a job you are overqualified for

Impact of Unemployment • High unemployment reduces a nation’s output and standard of living • It negatively impacts wages because the supply of workers is greater than the demand • High unemployment usually reduces inflation because wages tend to fall which is a cost of production. Reduced cost of wages increases supply reducing prices • Economic growth is negatively affected by unemployment because of the reduced production.

Fiscal policy • Government (President and Congress) involvement in the economy is to either stimulate the economy out of a recession or slow the economy during a period of inflation. • The two tools of fiscal policy are – Changes in taxes – Changes in spending on government projects/programs

Two tools to affect the economy • Expansionary Fiscal Policy- to fight a recession- decreasing taxes and/or increasing spending to stimulate the economy. • Contractionary Fiscal Policy- to fight inflationincreasing taxes and/or decrease spending to slow the economy down

Crowding Out • Government spending pushes up interest rates and eliminates opportunities for business crowding the businesses out of the marketplace • Public education crowded out private education.

WHAT IS THE FEDERAL RESERVE SYSTEM? • The “Fed” is an Independent Regulatory Agency in control of our money supply – This gives it the ability to make politically sensitive decisions without the fear of political interference or pressure. • Not all banks are members of the Fed. All national banks (banks that have branches in more than one state) must be a member. Just over one-third of all banks are members.

6 Responsibilities of the FED 1. Regulating the Money Supply 2. Maintaining the reserve requirement 3. Clearing Checks 4. Replacing and Supplying Paper Currency 5. Financial agent (banker) for the U. S. Government 6. Supervises member banks

3 functions of money • 1. Medium of Exchange: replaced barter system, anything used to determine value in the exchange of goods and services. • 2. Unit of Account: means for comparing the values of goods and services, makes price shopping and comparisons possible. • 3. Store of Value: keeps its value over time, can be stored rather than used. Inflation can be a challenge to this function.

6 characteristics of money • 1. Durability: can withstand physical wear and tear, will not spoil like wheat or olive oil. There are still Roman coins around that are over 2, 000 years old, durability. • 2. Portability: needs to be portable, easy to carry with people as they travel and go about their business. Gold bars are not very portable. • 3. Uniformity: any two units of money must be uniform, or the same in what they will buy. This is why dried fish wouldn’t work well; they are different sizes and you wouldn’t get as much for a small fish as you would get a large fish. They are not uniform.

Fiat vs. Representative money • Fiat money is also called “legal tender” and it has value because the government says it has value–It may not have any intrinsic value, but has value because of faith in government • Representative money: objects that have value because the holder can exchange them for something else of value. Examples would be an I. O. U. , or a receipt that allows the holder to exchange it for gold or silver. U. S. silver certificates

MONEY SUPPLY - M 1 • Liquid money- easy to use immediately to buy • Currency (Cash) in circulation • checking accounts (demand deposits) • travelers’ checks • currently about $1. 1 trillion

M 2 • Broader measure of amount of money in economy • “Near Money” • All M 1 money + – savings accounts – money-market funds – small deposits (less than $100, 000) CD’s

Three tools of the Federal Reserve/How they expand contract the economy • Open-market operations-buying and selling of government securities: – Expansionary- Buy bonds which increases the money supply lowering interest rates and stimulating aggregate demand – Contractionary- Sell bonds which decreases the money supply raising interest rates and slowing aggregate demand

Three tools of the Federal Reserve/How they expand contract the economy • Discount Rate – raising or lowering the interest rate to banks: – Expansionary • Lower the discount rate to banks, this enables banks to lower interest rates to consumers which encourages consumers to borrow money for purchases which expands the economy. – Contractionary • Raise the discount rate to banks which makes interest rates higher for consumers. This slows borrowing and spending and causes the economy to contract.

Three tools of the Federal Reserve/How they expand contract the economy • Reserve Requirements – the percentage of deposits a bank must hold in reserve for customer withdrawal needs: – Expansionary • lower the reserve requirement. This makes more money available in excess reserves for loans which increases the money supply and expands the economy. – Contractionary • increase the reserve requirement. This makes less money available in excess reserves for loans which reduces the money supply which causes the economy to contract.

Standard of Living and Investment • The level of quality of life that individuals expect. House, spouse, 2 cars and happy life. • We expect our standard of living to improve with age. • Standard of living improves with increase in investment of capital. Output increases and productivity increases which improves our standard of living.

Specialization and Trade • Becoming very good and efficient at producing one good or service so that you are competitive and resources are not wasted. • Countries specialize and then trade when they have a comparative advantage. • Trade is exchanging goods and services with other country’s citizens

International Trade • Why trade –Increases our standard of living and allows us to have more than what we can produce –Through specialization we can have more

Trade Quotas • Import quotas: limit the amount of a good that can be imported. – Import quotas reduce foreign competition, protect jobs, and punish countries.

Trade Barriers • Any restriction on trade that limits goods and services being exchanged between countries • Used to –protect domestic firms and workers from foreign competition –Raise tax revenue –Punish other countries

Tariffs • Tariff (custom duties): tax on imports also called protectionism. – Tariffs are used to raise tax revenue, reduce foreign competition, protect jobs and punish countries. – Protectionism can reduce a country’s standard of living by denying citizens in that country cheap foreign goods • Embargos- stop trade

Country’s Economic Development • Developed country such as the US, most of western Europe or Japan, are grouped under the term newly industrialized countries. • Per capita GDP Greater than $10, 000 • Developing Nations: countries with more advanced economies than other countries, but which have no yet fully demonstrated the signs of a developed country • have maintained sustained economic growth other the years and exhibit good economic potential are termed as emerging markets. • The Big Emerging Market (BEM) economies are Argentina, Brazil, Chile, China, Egypt, India, Indonesia, Mexico, Philippines, Poland, Russia, South Africa, and South Korea. • Per capita GDP btween $3, 000 -$10, 000 • Less Developed such Sub-Saharan Africa, most of Asia and Central America • Per capita GDP less than $3, 000

2 free trade agreements • NAFTA (North American Free Trade Agreement): eliminate all tariffs and other trade barriers between Canada, Mexico and the United States by 2009 • European Union • APEC (Asian-Pacific Economic Corporation): nonbinding agreement to reduce trade barriers along the Pacific Rim including the United Stated, Mexico, and Canada. • MERCOSUR: The Southern Common Market is similar to the European Union that includes Brazil, Argentina, Paraguay and Uruguay. • CARICOM: The Caribbean Community and Common Market from South America and the Caribbean.

Compare investment options • Savings: –retaining some of one’s income rather than spending all of it. • Spending: –Using your income to satisfy wants

SHORT VS. LONG TERM SAVINGS PROS AND CONS • Short goals – Emergency funds/Rainy day – High liquidity – Achieve short-term goals like a car or prom dress – Save for special occasion – Personal safety net • Long goals – Retirement (Early) – Larger purchases like a house – Reduce S. S. dependency – Comfortable retirement/ with toys

Want vs. Need • Need is something you can not live without – Food, water, clothing, medicine and shelter • Want is something you wished you had but may not be able to afford it after you have satisfied your needs. – Vacation trips, going out to dinner and entertainment

Rule of 72 - Affects of Compound Interest • Rule of 72 - invest early and your $ grows larger – 72/ (interest x 100 ) = time it takes for your investment to double – Example - $10, 000 investment at 9% =. 09 • 72/(. 09 x 100) = 8 years – Practice • 10% with a $10, 000 investment – how long will it take to double? • 3% with a $10, 000 investment- how long will it take to double? • $10, 000 will double to $20, 000 in 6 years – what is the interest rate? • $10, 000 will double to $20, 000 in 12 years – what is the interest rate? • $20, 000 initial investment has grown to $80, 000 in 16 years- what is the interest rate? • $20, 000 initial investment has grown to $320, 000 in 24 years- what is the interest rate?

Key consumer terms defined • Return – The money you earn from an investment • Liquidity – How quickly you can convert an asset into cash and how quickly money changes hands • Risk/Return (Reward) Relationship – The higher the risk the greater the return – The lower the risk the lower the return • Risk/Return (Reward) with Liquidity Relationship – The higher the risk the greater the return the lower liquidity – The lower the risk the lower the return the higher the liquidity

Short-term Vs. Long-term Investment Vehicles • • Savings Account Money Market Short-term CD’s Saving is storing for the immediate future consumption • • Mutual Funds Long-term CD’s IRA’s Roth IRA’s Real Estate Collectables Bonds Investing is putting money into the stock, bond markets or other investments for the purpose of making money

Federal Deposit Insurance Corporation • Insures deposits up to $250, 000 person per institution in case a bank goes bankrupt.

Compare investment options (cont. ) • Stocks: A certificate of ownership in a corporation. The purchase of corporate stock may result in dividends from the company or capital gain if the stock is sold at a higher price than it was purchased at.

Compare investment options (cont. ) • Bonds: A loan to a govt or business. Treasury bills, T-notes, and T-bonds are all bonds issued by the federal government (actually, the FED) to creditors. – Also corporate bonds and municipal bonds

Diversification • Spreading money out over a variety of different investments to reduce the risk if one of the investments does poorly.

Portfolio • Is the entirety of your investments and other assets.

Mutual Funds • Mutual Funds: A purchase of a mutual fund is actually the purchase of a stock in a company that purchases stocks, bonds and savings from other companies. A mutual fund is a more diversified investment than that of buying corporate stocks or bonds.

Maturity • When bonds become due and the principle to be repaid.

Yield • The return on an investment. How much money your money made after taxes and fees.

Return • What your investment earned in a year before taxes and fees.

TYPES OF STOCK Common Stock Voting rights- one vote per share Paid dividends but receive them after preferred stockholders Most common stock Preferred Stock Have first rights after bankruptcy of all stockholders Get dividends first Have no voting rights Usually are special shareholders

Stock Measurements • Bull vs. the Bear Market – Bull - market is rising steadily- brokers and investors are buying – Bear- market is declining steadily- brokers and investors are selling • Dow Jones Industrial Average – 30 companies stock prices on NYSE • S & P 500 – 500 companies that combine NYSE, NASDAQ-AMEX and OTC stocks

TYPES OF BONDS • • • Savings Bonds – Issued by the federal gov’t. – Very safe but low yield – Interest payments each year are not sent to the bondholder – Purchaser buys the bond below the par value and at maturity is given the par value • $100 savings bond bought at $50 for 20 years pays $100 @ maturity Treasury Bonds-10 to 30 yrs. Maturity( T Bills-3 -12 mon. or T Notes-1 -10 yrs) – Issued by the Treasury Dept. of the federal gov’t – Safe but low yield – Exempt from all taxes but federal taxes Municipal Bonds ( Munis) – State and local bonds that cities or counties sell to raise funds – Usually safe (but rated) and tax exempt from state and federal

Types of Bonds Continued • Corporate Bonds – Sold by corporations to expand business – Taxable like income – Moderate risk depending on the stability of the corp. – Watched By the Securities and Exchange Comm. (SEC) • independent govt. agency that regulates the financial markets • Junk Bonds – High risk, low rated and high yield bonds – Allows high risk companies to find funding that are in financial trouble

BOND RATINGS • Why should you care about a bond’s rating? – Rated by two companies 1. Moody’s 2. Standard & Poor – AAA rated bond is a very little risk investment but also yields a low return. – D rated bonds have a high risk of you losing your investment but also has a high rate of return.

INVESTMENTS FOR RETIREMENT • Risk vs. Reward – Usually a direct relationship • as return rises usually risk rises as well – Liquidity- how quickly I can get my money or move my money (inverse relationship with risk) • the more liquid the lower the return • Affects on Investments – Taxes- income vs. capital gains – Loss of investment – Inflation is your enemy if your return on your investment is less than the inflation rate • Your money is eaten by inflation – Fees of brokers