economics final exam review. unit 1: fundamental principles in economics

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Economics Final Exam Review

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Opportunity Cost -The cost (value) of what is given up when deciding between two alternatives - Seen in PPC diagrams

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Economics Final Exam Review Unit 1: Fundamental Principles in Economics Opportunity Cost -The cost (value) of what is given up when deciding between two alternatives - Seen in PPC diagrams Scarcity A Situation that exists when there are not enough resources to meet unlimited human wants Production Possibilities Curve (PPC) Represents: -How much of a good can be produced (measures opp. cost) -The greatest combination of 2 goods - The limits of your industry CAKESCAKES COOKIES PRODUCTION IMPOSSIBILITY UNDERUTILIZATION EFFICIENCY Production Possibilities Curve Underutilization Economic resources are not being used to their full potential, resulting in fewer goods and services Efficiency: Economic resources are used to produce the maximum amount of goods and services WHAT IS PRODUCTION IMPOSSIBILITY ? ANY POINT OUTSIDE OF THE CURVE THAT CANNOT BE ACHIEVED Consumer Sovereignty Specialization: -Consumers help determine what gets produced by what they buy Focus efforts in one or a few areas to increase productivity Circular Flow of the Economy -shows ALL interactions in a market economy -money flows in one direction while products flow in the opposite direction Circular Flow Model Consumer Good: -tangible product intended for personal use by individuals Ex: cell phone, food, clothes Service -action performed for someone else Ex: haircutting, cleaning, nursing care Bull Market -stock market prices are rising Bear Market -stock market prices are falling Factors of Production: 1. Land: natural resources (oil, water, etc.) 2. Labor: human effort, skill in producing goods & services (workers) 3. Capital: tools & machines used in production (oven in a bakery) 4. Entrepreneurs: people who start businesses 1.What to produce? 2.How to produce? 3.For Whom to produce? Three Basic Economic Questions Adam Smith vs. Karl Marx Capitalism/ Market Economy The Wealth of Nations Productivity-specialization Increases efficiency Invisible Hand-competition drives the market everyone acts in their own best interest Govt Role limited involvement in economy Trade- free trade makes nation wealthier anti mercantilism Communism/Socialism The Communist Manifesto Das Kapital Tension between worker & owner would lead to revolt & create a new classless society Capitalism & Industrial Rev. Caused wage slavery Three major Stock Exchanges in U.S. New York Stock Exchange (NYSE) NASDAQ American Stock Exchange (AMEX) 7. C represents Efficiency 8. B represents Impossibility 9. A represents Underutilization 10. Gain more resources Unit 2: Economic Systems Traditional Economy -decisions based on habit & custom -everyone has set role Market Economy -decisions made by producers & consumers -based on supply & demand Ex: USA, Hong Kong, UK Command Economy -decisions made by govt -centrally planned economy Ex: Cuba, North Korea Mixed Market Economy -mix of all three econ. systems Ex: US is market based with some government involvement Most common type of economic system today Capitalism -Factors of production are owned privately by individuals -market economy Communism -factors of production are owned by the government - Command economy Privatization -Process of transferring state owned property to individuals and businesses Nationalization -Process of transferring private ownership to public or government ownership Economic System AdvantagesDisadvantages Traditional-role is known -predictable life -dislike new ideas - Lower standard of living Market-individual freedom -large variety of goods & services -competition -rewards only productive members of society -no govt safety nets of market fails Command-basic services provided by govt -govt controls resources- can produce items that benefit society -doesnt meet needs of consumers -inefficient production -little freedom-harsh conditions Unit 3: Supply & Demand Law of Demand -price & quantity demanded are inversely related P D Law of Supply -price & quantity supplied are directly related PS PS Demand & Supply Curve: Movers vs. Shifters: MOVEMENT along the same curve when PRICE changes SHIFT to a new curve when something OTHER than price changes Elasticity of Demand: -Degree to which price changes affect quantity demanded Inelastic Demand -Change in price has little effect on quantity demanded Elastic Demand -Change in price has BIG effect On quantity demanded Factors that Determine Elasticity Are there good substitutes? Yes = elasticNo = inelastic What proportion of income does it use? Large = elasticSmall = inelastic Is it a necessity or a luxury? Luxury = elasticNecessity = inelastic Substitute -Item can be used in place of Something else (competitors) Ex: sugar & Splenda, Pizza & Sub Complement -Goods used together Ex: Hammer & nails, Xbox & Game Surplus Supply is greater than demand Shortage Demand is greater than supply Fixed Costs (FC) -costs that are constant & Business must pay Ex: rent, fees, insurance Variable Costs (VC) -costs that can change as Productions levels change Ex: wages, shipping Total Costs = FC + VC Market Equilibrium -point where supply & demand curves meet Quant. Demanded = Quant. Supplied 1. Water = 2 Inelastic 2. Coffee =1. Elastic 3. Chocolate =1. Elastic 4. Salt = 2. Inelastic Elastic or Inelastic? Elastic & Inelastic Curves Inelastic Demand Inelastic Supply Elastic Supply Elastic Demand B D CA Supply & Demand for Hot Dogs $1 $2 $3 $4 $ S1 S2 D1 D2 S1 D1 D2 Supply Curve SHIFTS with changes in: - input costs - technology - productivity - # of producers -Producer expectations - Government Action Demand Curve SHIFTS with changes in: - Consumer Income -Consumer Taste/Popularity - Price of Substitutes - Price of Complements -Consumer Expectations -Market Size In the following questions, determine if the supply curve will Shift In (Left) (SL), Shift Out (Right) (SR) or Move Along the Curve (M). _____ 1. What will happen to the supply curve for iPads if Apple lowers the selling price of them? _____ 2. What will happen to the supply curve for automobiles if Nissan were to leave the auto industry? _____ 3.. What will happen to the supply curve for solar panels if the federal government rejects a subsidy to help pay for the costs? _____ 4.. What will happen to the supply curve for pizza if Edies raises the prices of its pizza? _____ 5. What will happen to the supply curve if Moog workers become more efficient? M SL M SR $10 $15 $20 $25 $ $ S2 S1 Supply for National Fuel In the following questions, determine if the demand curve will Shift In (Left) (SL), Shift Out (Right) (SR) or Move Along the Curve (M). ____ 1. What will happen to the demand curve for IBM if they lower the price of their PCs? ____ 2. What will happen to the demand curve for bottled water if there is a hot week forecasted? ____ 3. What will happen to the demand curve for chocolate the week leading up to Valentines Day? ____ 4. What will happen to the demand curve for Sabres Jerseys at the beginning of the NHL Season? M SR $1 $2 $3 $4 $ D1 D2 \ Demand For Lipton Iced Tea Are the following Substitutes (S) Or Complements (C)? 7._____ Paperback book and ebook 8._____ Cellphone and a charger 9._____ Hot dogs and Hot dog buns 10._____ Coffee and tea S C C S Unit 4: Wages, Labor Unions & Unemployment UNEMPLOYMENT RATE : The percentage of the labor force that is jobless and actively looking for work Structural Unemployment- -available jobs dont match skills of available workers (caused by: changes in technology or outsourcing) Frictional Unemployment: -temporary unemployment caused by workers moving from one job to another Cyclical Unemployment -caused by part of the business cycle with decreased economic activity (recession) Seasonal Unemployment -unemployment linked to Seasonal work Underemployment: -people working part-time who want to work full time, or people working below their skill level (not counted in U3) Full Employment: -no unemployment due to decreased economic acvtivity Equilibrium Wage -wage where quantity of workers demanded equals quantity of workers supplied Labor Unions -organization of workers seeking To improve wages & working conditions Collective Bargaining -unions & management meet to compromise on wages, etc. -established by unions Union Shop -after being hired workers must Join the union Right to Work Law -legislation that makes it Illegal to require workers to Join unions (outlaws union shops) Who is counted in the official (U3) Unemployment rate? -People 16+ years old -Must be actively seeking a job in the past month -People who are not working, but are able to work Directions: For each of the following, indicate whether the group would be classified as Employed (E), Unemployed (U), or not counted (NC). Wharton, TX has a population of 9,000. Of that 9,000: 1. ________ 6,000 work as paid employees. 2. ________ 1,100 are unemployed, but are looking for work. 3. ________ 1,400 are unemployed and have given up looking for work. 4. ________ 450 are retired and go to Tim Hortons daily. 5. ________ 50 quit their jobs last year to go back to college. Now, calculate the following: ________ 6. How many people would be included in the workforce? ________ 7. What is the unemployment rate for Wharton, TX? ________8. How many people from above would be considered discouraged workers? E U NC 7,100 1, % 9.___ Your company downsized & you were laid off. 10.___You worked as a teacher for 30 years & retired one year ago 11.___You go to college full time and work part-time as a waitress at Red Robin at night. 12.___ Youre 21 and never looked for a job. 13.___ You lost your job at Ford due to budget cutbacks and now you work part-time delivering pizza. 14.___You just graduated college and have been applying for jobs for 2 months but havent been hired yet. U NC E E U Unit 5: Business Organizations and Market Structures Sole Proprietorship -business owned & operated by one person (Most common type of business in USA) Partnership -business owned by two or more people Corporation -business owned by shareholders (stocks) Multinational Corporation -large corporation with branches in several countries Franchise -business where the owner pays a a parent company to sell their products themselves Vertical Merger -when firms involved in different steps of manufacturing come together Horizontal Merger -Two or more firms that produce a similar kind of product join together Conglomerate -firm that has at least 4 businesses that make unrelated products GE Oligopoly -A few large sellers dominate an industry and sell similar products -Ex: Pepsi and Coke Outsourcing -corporation moves business operations from its home country to foreign nation Ex: Textile plant closes in Georgia & opens up a new plant in China 1.___ Merger between 2 companies that make similar products. 2.___Wal-mart operates plants in China, U.S. and Mexico. 3.___ Merger between a producer and supplier. 4.____ Adidas bought Reebok in ____GE produces airplane engines, home appliances & medical equipment Vertical 2. Horizontal 3. Multinational 4. Conglomerate Sole Proprietorships Advantages Easy to open and close Few regulations Freedom and control Owner keeps Profit Disadvantages Limited funds Limited life Unlimited liability Partnerships Advantages Easy to open and close Few regulations Access to resources Joint Decision Making Specialization Disadvantages Potential for conflict Limited life Unlimited liability Corporations Advantages Access to Resources Professional Managers Limited Liability Unlimited Life Disadvantages Start-Up Cost and Effort Heavy Regulation Double Taxation Loss of Control Unit 6: Taxation & Government Spending . Benefits-Received Principle -Those who benefit from government services should pay tax Examples: Gas tax Road Tolls Sales Tax Sin Tax Progressive Tax - Higher tax rates for higher incomes -As income increases, percentage paid in taxes also increases Proportional Tax (Flat Tax) -Takes the same percentage of income for all taxpayers Regressive Tax -Taxes that have more of a negative impact on lower incomes Examples: Gas tax, road tolls, sales tax, sin tax Mandatory Spending -Spending on program is required by law Examples: Social Security Medicare Interest on Debt Discretionary Spending -Spending programs that govt. planners can make choices about - Can be cut or eliminated Examples: Defense Education Transportation Deficit Spending: -spending in excess of revenue National Debt -Total amount borrowed from investors Current Debt: $17.5 trillion Unit 7: Money, Banking & The Federal Reserve System Fiat Money -currency declared to have value by the government M1: Currency & check deposits M2: M1 + savings accounts, CDs & money market accounts Federal Deposit Insurance Corporation (FDIC) -Insures customers money if bank fails Fed Monetary Policy Tools: Open Market Operations Fed buys or sells govt securities (bonds) to add or subtract from a banks reserves - Most commonly used Discount Rate -Interest rate the Fed charges banks to borrow money Reserve Requirement -Fed requires banks to keep a percentage of deposits on reserve (10%) - cant be used for loans What are the properties of money? -Stable -Scarce -Acceptable -Durable -Portable -Divisible -Uniform Fractional Reserve Banking System -Fed requires banks to keep a percentage of deposits in vaults in reserve -usually 10% -These reserves are NOT allowed to be used for loans -By making loans banks create moneyprovide money to others to spend in the economy -Banks make loans with the excess reserves 3. Federal Reserve Structure: A. How many Fed districts? 12 B. Who oversees the Fed? -Board of Governors controls Fed -FOMC (Federal Open Market Committee) and Advisory Committee also play a role C. What are functions of Fed? -Regulate/Supervise member banks -Control monetary policy -Distribute & destroy currency -Pass consumer legislation -Act as bank for govt & other banks Gross Domestic Product (GDP) The market value of all final goods & services produced within a nations borders in a given time period 1. What is counted in GDP? -must be final good/service -must be new good, not used -must be produced within a countrys borders Business Cycle Series of growing & shrinking periods of economic activity Business cycles are measured by increases or decreases in real GDP Would the following be included in GDP? 2.___You pay Verizon $150 a month for service. 3.___Computers produced by Apple in China. 4.____You paid $3000 for a used snowmobile 5.____You bought $75 worth of groceries at Wegmans. 6.____Gap bought cotton and linen fabrics to make shirts and pants Y N N Y N 1.____ Contraction 3.____Trough 2.____ Peak 4.____ Expansion C B D A Calculating GDP Examples: In 2012 you bought a used car for $4000. It was originally purchased in 2004 for $ You have your mechanic fix it for $ ____How many dollars are recorded in 2012 GDP? 6.____ How many dollars are recorded in 2004 GDP? $550 $13000 In 2011 you bought a new set of skis For $2000 and a used ski rack for $150. In that same year you bought a ski lift Ticket to Holiday Valley Ski Resort for $ _______ How many dollars would be recorded in 2011 GDP? $2500