ECONOMICS SEOCT REVIEW

Scarcity and its effects

• All resources are scarce• Productive resources (factors of production)

– Land– Labor– Capital– entrepreneurship

• Scarcity leads to 3 questions:– What to produce– How to produce– For whom to produce

Scarcity and its Effects Cont’d

• Different economic systems answer the three basic economic questions differently– Command Economy – government makes all

decisions (North Korea)– Free-Market Economy – producers and consumers

make the decisions (no true free market systems in existence)

– Mixed-Market Economy – producers and consumers make the decision with guidance (regulation) from the government (United States)

Role of Government in a Market (U.S.) Economy

• Provide public goods and services• Redistribute income to meet needs of poor

– (collect money through taxes and redistribute through welfare programs)

• Resolve market failures – Use of Fiscal Policy (taxes and spending)– Use of Monetary Policy (actions by the Federal

Reserve)– Regulations to protect property rights of citizens– Deregulation – allow businesses to operate in free

market

Fundamental Concepts Cont’d

• Scarcity forces us to make choices – Results in opportunity costs, trade-offs or engaging in

voluntary trade• used when parties feel that will benefit (gain) from the trade• Basis of U.S. economy

• Rational Decision Making Model– Define the problem– List the alternatives– Evaluate the alternatives (compare opportunity costs

and benefits)– Make a rational decision

Production Possibility Curve (Production Frontier)

– shows production efficiency (b,c,d) underutilization (a) and impossibilities (x)

Fundamental Concepts

• Specialization, division of labor, increased labor force and investment in education, training, technology, and resources increases productivity and improves efficiency– All of these lead to economic growth and

improved standards of living

Fundamental Concepts Review Questions

• trees, minerals and the real estate on which a company builds its main manufacturing center are all __________.

• Following a massive storm, people buy up all the flashlights and bottled water in the area faster than the producers can resupply them. The people in the area now face _________ regarding the flashlights and bottled water?

• Paying for an employee’s health insurance is a way of investing in _________ __________ to increase production possibilities.

• Using a production possibility curve, a company can determine the ______________ _________ of increasing production of one product over another

MICROECONOMIC CONCEPTS

Circular Flow Model

• Three economic actors: households (individuals), businesses (firms) and government

• Individuals provide labor and other factors of production to businesses in exchange for money (wages/income)

• Businesses provide goods and services to households in exchange for money (revenue)

• Government uses taxes from households and businesses to provide services and money (transfer payments/subsidies) to households and businesses

11Product Market

Resource Market

Businesses IndividualsGoods and Services$$$ Revenue $$$ $$

$ Spen

ding $

$$Goods a

nd

Service

s

SUPPLYDEMAND

DEMANDSUPPLY

$$$ Costs

$$$

Resourc

es

$$$ Income $$$Resources

(Factors of

Production)

MICROECONOMIC CONCEPTS

• Product Market where consumers purchase final goods/products

• Factor Market where businesses hire their labor and buy the goods needed to produce their products

Microeconomic Concepts Cont’d

• Fiat Money – represents value – has value because the government says it does

• The Role of Money– Medium of exchange – Standard of value– Includes paper and coins– Includes transactions such as online

transactions, debit card transactions, online stock trades

Microeconomic Concepts

Market Influences

Supply

• Supply – willingness and ability of a producer to provide goods/services to consumers (aggregate supply)

• Law of Supply – As price increases, quantity supplied increases

• Represented by an outward and upward shaped curve on a graph

Supply

• Shift in supply refers to the change in total supply, not the quantity supplied

Shifters of Supply

• Availability of resources

• Number of sellers

• Technology

• Government action (excise tax/subsidy)

• Opportunity cost of alternate product

• Expectations for future products

Demand

• Consumers willingness and ability to purchase a product (aggregate demand)

• Law of Demand: as price decreases, quantity demanded will increase

• Represented by a downward and outward sloping curve

Shifters of Demand

• Shift in demand refers to a total change in demand, not just quantity demanded

Shifters of Demand

• Number of Consumers• Tastes and Preferences• Price of Related Goods

(substitutes/complements)• Income (normal & inferior goods)• Future Expectations

• Changes in PRICE don’t shift the curve. It only causes movement along the curve

Supply and Demand

Price

• Equilibrium Price– Quantity demanded equals quantity supplied– Also known as Market Clearing Price– Prices below equilibrium will result in a shortage– Prices above equilibrium will result in a surplus

• Price Elasticity– Sensitivity to price– Price elastic – demand changes as price changes– Price inelastic – demand does not change significantly

as price changes (steep almost vertical demand curve)

Inflation and Interest Rates

• Inflation – general rise in prices throughout the economy– Increased productions costs– Increased prices– Decreased demand– Decreased supply

• Interest Rates– Amount paid to borrow money– High interest rates

• Fewer loans• Decreased demand

Government Action Wage and Price Controls

• Wage Controls– Minimum wage – lowest wage employers can pay

their employees• Pros and Cons

• Price Controls– Price Ceiling – highest price producers can charge

• Set below equilibrium

• Causes shortages– Price Floor – lowest price producers can charge

• Set above equilibrium• Causes surpluses

Microeconomic Concepts

Competition

Market Competition

• Spectrum of competition – one end has no competition and the other is VERY competitive

Competition in a Free Market

Perfect Monopolistic Perfect

Competition Competition Oligopoly Monopoly

Pure Competition

• Large number of sellers

• Identical products

• No barriers to entering market

• Free exchange of price information/but market controls price

Monopolistic Competition

• many sellers

• Similar but differentiated products

• Producers have more control over price

• Examples: fast food chains

Oligopolies

• Only a few producers

• More control over prices than monopolistic competition – conspire with competitors to control prices

• Example: breakfast cereals, auto manufacturers

Monopolies

• One producer

• No adequate substitutes

• High barriers to entry

• Produce less and charge higher prices

Business Organizations

• Sole Proprietorship– Individual owner– Most common type of business– Accounts for small percentage of revenue in economy– Owner has unlimited liability– Business has limited life

• Partnership– Two or more owners– Share liability– Pool resources

Business Organizations

• Corporation– Owned by shareholders (stockholders)– Limited liability for shareholders– Unlimited life– Profits are taxed twice

• Franchise– Sole proprietors purchase local rights to trademark

corporation– Pays a licensing fee – Lack flexibility

Macroeconomic Concepts

Measuring Economic Activity

• Gross domestic product (GDP)– Total value of all goods and services– High GDP = healthy economy (usually)

• Per capital GDP – value per household– Better indication of standard of living

• Consumer Price Index - monthly changes in costs of goods and services– Rise in prices = inflation– Drop in prices = deflation (can lead to increased

unemployment)– Rise in prices and rise in unemployment = stagflation

Measuring Economic Activity Cont’d

• National Debt – money owed by the federal government

• National Deficit – the amount of money “over budget” in a given year– Government spends more than it collects in taxes in a

given year

• Economic Growth – GDP grows, CPI remains at levels that increase profits w/o causing inflation, national debt shrinks (or at least stays level)

Measuring Economic Activity Cont’d

• Net Exports – Total exports minus total imports– The more exports the more money that flows into the

economy– Positive net exports = growing economy

• Unemployment Rate – percentage of total labor force that is not working– Cyclical unemployment– Structural unemployment– Frictional unemployment– Seasonal unemployment

Measuring Economic Activity Cont’d

• Fiscal Policy – governments decisions to tax and spend (made by Congress)– Taxes

• Income tax• Capital gains tax• Property tax

– Spending• Domestic programs (education, healthcare)• Welfare programs (income redistribution)• National Defense programs

– Increased spending leads to increased taxes, leaving citizens with less disposable income

Measuring Economic Activity Cont’d

• Monetary Policy –Federal Reserve controls the flow of money in the economy– Easy-money policy– Tight-money policy– Required reserve ratio (RRR) - – Discount Rate – – Open Market Operations

• Controls the sell/purchase of U.S. Treasury Bonds– Sell bonds to decrease money supply– Buy bonds to increase money supply

Measuring Economic Activity Cont’d

• Federal Reserve (organization)– Board of Governors

• Appointed by U.S. President• Sets monetary policy• Federal Reserve Chairman – Ben Bernanke

– Federal open Market Committee– 12 Regional Federal Reserve Banks– Numerous Private Member Banks

Measuring Economic Activity Cont’d

• The Business Cycle

INTERNATIONAL ECONOMY

INTERNATIONAL ECONOMY

• International Economics – how economies in different countries impact one another

• International Trade – buying an selling goods across international borders

• Exports – goods sold to another nation• Imports – goods bought from another country• Market Advantage –

– Absolute advantage – one country can produce a product using less resources than another country

– Comparative advantage – one country can produce a product at a lower opportunity cost than another country

International Economy

International Economy

• Trade Restrictions and Barriers– Used to protect domestic industries or for national

security– Quota – limitation on the number of imports– Tariffs – taxes on imports– Embargo – refusing to trade with another country

(often used to punish)– Standards – specific guidelines on imports to make

them meet high standards established by FDA, EPA, – Subsidies to domestic industries to help them

compete

International Economy

• Trade Organizations– World Trade Organization (WTO)– European Union (EU)– Association of Southeast Asian Nations

(ASEAN)– United Nations (UN)– North American Free Trade Agreement

(NAFTA)

Trade Organizations

• World Trade Organization (WTO) – Establishes rules fr international trade– Helps resolve disputes between member

nations

• European Union (EU)– Trading union consisting of 25 European

nations– Facilitates trade and commerce– Seeks to create a unified regional economy

International Trade Organizations

• Association of Southeast Asian Nations (ASEAN)– Aims to accelerate economic growth, social

progress and cultural development among its members

• United Nations (UN)– Seeks effective solutions to economic matters

through diplomacy– Helps determine how worldwide economy

responds to international circumstances

International Trade Organizations

• North American Free Trade Agreement (NAFTA)– Lowered trade barriers between U.S., Canada

and Mexico– Allows U.S. businesses greater access to

foreign markets (positive)– Possible loss of U.S. jobs (negative)

International Economy

• Balance of Trade – rate at which a nation trades with other nations

• Favorable balance of trade – country exports more than it imports

• Unfavorable balance of trade- country imports more than it exports

• Balance of Payments – value of money coming into a country due to exports minus imports

International Economy

• Exchange Rates – worth of one nation’s currency in any other nation– Fixed exchange rate – price that is tied to a stable

currency of a developed nation– Floating exchange rate – determined by supply and

demand

• Currency Appreciation – benefits domestic consumer

• Currency Depreciation – benefits foreign buyers

USD EUR JPY GBP CHF CAD AUD HKD

USD – 1.3450 0.0111 1.5698 1.0798 0.9940 1.0433 0.1289

EUR 0.7435 – 0.0082 1.1672 0.8028 0.7391 0.7757 0.0958

JPY 90.490 121.69 – 142.03 97.708 89.938 94.393 11.663

GBP 0.6370 0.8568 0.0070 – 0.6878 0.6332 0.6646 0.0821

CHF 0.9261 1.2457 0.0102 1.4539 – 0.9206 0.9662 0.1194

CAD 1.0059 1.3531 0.0111 1.5792 1.0862 – 1.0495 0.1297

AUD 0.9585 1.2892 0.0106 1.5045 1.0350 0.9527 – 0.1236

HKD 7.7575 10.433 0.0857 12.177 8.3760 7.7113 8.0936 –

Foreign Exchange Cross Rates

•Majors

•Americas

•Europe, Middle East & Africa

•Asia-Pacific

International Economy

• Factors affecting exchange rates– Interest rates– Productivity– Consumer taste– Economic stability

• Purchasing Power – actual amount that can be bought with a given unit of money

• Purchasing Power Parity – same product sells for same amount of currency in different countries

PERSONAL FINANCE

Personal Decision Making

• Use Rational Decision Making Model

• Respond to Incentives– Positive incentives –Engage in activities that

benefit me economically (increased income, profit, revenue)

– Negative incentives – avoid activities that could harm me economically (decrease income, profit, revenue)

Worker’s Earnings

• Worker’s earnings: pay received from an employer- – determines how much I have to spend, save

or invest

• Earning potential: how much a person is likely to receive in pay– Influenced by skills, education, training, – Highly successful people investment as much

time/money on education and training as possible

TAXES

• Progressive tax – increases as income increases – Tax Bracket Married (FJ) Single– 10% Bracket $0 – $17,400 $0 – $8,700– 16% Bracket $17,400 – $70,700 $8,700 - 35,350– 25% Bracket $70,700 – $142,700 $35,350 – $85,650– 28% Bracket $142,700 – $217,450 $85,650 – $178,650– 33% Bracket $217,450 – $388,350 $178,650 – $388,350– 35% Bracket Over $388,350 Over $388,350

TAXES CONT’D

• Regressive Tax– Percentage paid in tax increases as income

decreases (sales tax)

• Proportional Tax – everyone pays the same amount proportional to their income (also known as flat tax)

FINANCIAL INSTITUTIONS

• Commercial Banks – receive deposits of money, extend credit and provide loans

• Credit Unions – similar to banks, but serve only members of CU

• Savings and Loans Associations – originally established to make home mortgage loans (aka thrift institutions)

INVESTING: Why? To Have a good retirement!!!

• Looking for a RETURN (eventual payoff) on my investment

• RISK (chance of loosing investment) in hope for the payoff

• KEY: MAKE SURE I WILL STILL BE OK IF I LOOSE THE MONEY– STOCKS – shares in a company– MUTUAL FUNDS – pool of money from many

investors that are used to buy a range of stocks– BONDS – loans to a company or the government

CREDIT

• GOOD– Allows me to have goods or services now and pay

later (Student loans, House, Furniture, Car)

• Bad– Interest charged makes me pay more in the long run

• Credit Worthiness – based on credit score– Can affect interest rates you pay on all loans– Can affect insurance rates– Can affect employment opportunities

INTEREST RATES

• Simple interest – applied only to the value of the principle

• Compound Interest – applied to principle and the accrued interest

INSURANCE

• Life – provides money upon one’s death• Health/medical – covers medical expenses• Disability – provides income (usually 60% of

normal wages) when a person is unable to work• Liability – pays when a person is held financially

responsible for an accident• Homeowners – covers damage to policy holders’

home (limited liability for accidents on property)• Comprehensive – usually held by businesses to

cover actions of employees

Online practice test

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