Economics Final Exam Review

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Economics Final Exam Review
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What is scarcity?Scarcity is the idea that there
are a limited amount of resources to meet
unlimited wants and needs. If you have a limited
supply of workers and cannot finish a job, that
is an example of scarcity.
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Why is scarcity a basic problem of economics?The
definition of economics is the study of efforts
to satisfy seemingly unlimited wants with scarce
resources.
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Why is choice a basic problem of economics?The
whole point of economics is trying to understand
why people make the choices they make. If you
make a choice, there are costs. Economists want
to know what costs people are willing to
sacrifice in order to chose the alternative.
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What does a production possibility curve tell
you?The opportunity cost of a decision
Guns
Butter
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What is opportunity cost?The most desirable
alternative given up for the decision
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What is a traditional system?A system where the
economy is based on customs, habit, and ritual
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Give an example of a traditional system.A tribal
community in Africa
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What is a command system?A system where the
government controls the economy and makes all
economic decisions. There is not a lot of
uncertainty because everything is government
controlled.
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Give an example of a command system.Former
Soviet Union, North Korea
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What is a market system?A system where the
economy has little or no government control. The
market is regulated by competition and motivated
by self-interest. It does not provide for
everyones basic needs. It does provide
individual freedom for producers and consumers.
Consumers play a key role in WHAT is produced.
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Give an example of a market system.The US (with
some government intervention)
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How does the U.S. system compare with Russia?
France? China? Mexico?Russia is in transition to
a market system. France has a similar market
system. China is in transition moving away from
a command system to a market based system. Mexico
has a similar market system.
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What does a circular flow model tell you?The
flow of resources between households and firms.
Product market is where money flows from
households to firms in exchange for goods from
the firms. The factor market is where the money
flows from firms in the form of income to
households in exchange for their factors of
production (land, labor and capital).
Factor Market
Factors of Production
Income
Households
Firms
Product Market
Payment
Goods and Services
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Use an example to explain the circular flow
model.You go to work for ABC inc. in exchange
for a paycheck. Then you purchase a shirt from
ABC inc. in exchange for payment. The government
may take taxes from your paycheck and charge
taxes on the sale of the goods.
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How does government action affect the circular
flow model? Regulations over production, labor
laws, taxes, etc.
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Who is Adam Smith and why is he important? He
was a free market philosopher and a classical
economist.
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What societal values influence traditional
economies?Custom, ritual, habit, family
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What societal values influence command
economies?Government control, order, total
equity
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What societal values influence market
economies?Freedom, choice, self-interest,
competition
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What are the economic rights of individuals as
consumers?They determine the products that a
free enterprise economy provides. Choose who to
purchase from. Choose what products to purchase.
Choose what price willing to pay.
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What are the economic responsibilities of
individuals as consumers?They must let producers
know what they want by making purchasing
decisions.
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What are the consequences of economic decisions
made by individual consumers?If they purchase a
product, that lets the producer know that there
is demand for that product
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What are the economic rights of businesses?They
have the right to start any legal business. They
can produce whatever will earn them a profit. If
they are not making money, they have the right to
leave the market.
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What are the economic responsibilities of
businesses?Disclose required information to make
buyers more knowledgeable and safer.
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What are the consequences of economic decisions
made by businesses? Positive externalities an
economic side effect that generates unexpected
benefitsNegative externalities economic side
effect that generates unexpected cost
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What is profit motive?One of the basic
principles of free enterprise. Businesses are
driven by the desire to make money.
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What ordinances and regulations must be followed
if someone wants to start a business? Not all
businesses are required to have licenses.
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What is voluntary exchange? One of the basic
principles of free enterprise. Consumers and
producers choose who to buy and sell from.
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What are private property rights? One of the
basic principles of free enterprise. Individuals
have the right to own property and land. They can
use it as they wish and transfer it if they want
to.
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What is competition?One of the basic principles
of free enterprise. Businesses can adjust their
prices and products to attract consumers.
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What are the benefits of individual freedom to
consumers in the U.S. free market system?Choice
of what to buy, rights, protection from products
and businesses
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What are the benefits of individual freedom to
producers in the U.S. free market system?Choice
of what to sell, rights, protection from consumers
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What is the role of the government in the US free
enterprise system?Regulation (laws, taxes),
protection, assistance (subsidies)
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Why does the government make rules and
regulations in the US free enterprise system?
Protect consumers through disclosure law
(forcing companies to give consumers information
about their products and services) and producers
through regulations
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How does technology affect productivity?
Improvements in technology allow an economy to
produce more output from the same or a smaller
quantity of inputs.
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Analyze the ethical policy of Union Pacific Corp
(pg. 74-75)The issue at the center of the debate
was toxic waste clean-up
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What causes changes in demand?According to the
law of demandprice. If price goes up, demand
goes down. If price goes down, demand goes up.
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Who is Mary Kay Ash and why is she important?She
started Mary Kay cosmetics. She is one of the
most successful female entrepreneurs ever.
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What causes changes in supply?According to the
law of supplyprice. If price goes up, supply
goes up. If price goes down, supply goes down.
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Why is it beneficial to have a variety of goods
available?More competition, lower prices, more
choices for consumers
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What causes changes in price?When supply
increases, prices fall and quantity demanded
increases to reach new equilibrium
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What does a supply and demand graph tell you?
Supply
Price
Equilibrium
Demand
Quantity
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How do you use a supply and demand schedule to
interpret a supply and demand graph?Use the
numbers to draw the graph. You cannot use a graph
to make a schedule!
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What are responsive prices and why are they
generally a good thing? They can change easily
when there are shifts in supply or demand. You do
not end up with shortages or surpluses.
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What is pure competition?A market structure
where many buyers and sellers participate, both
are well informed about products, sellers are
able to enter and exit the market freely, no
seller sells a product above the prevailing
market price.
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Name an example of a pure competition.Tomatoes
or any agricultural market
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What is a monopolistic competition?A market
structure where many companies sell similar but
not identical products
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Name an example of a monopolistic
competition.Denim Jeans, soft drinks
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What is an oligopoly?A market structure where
few large firms dominate the market
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Name an example of an oligopoly.Airlines Also
cartels which only work if the members keep to
their agreed output.
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What is a monopoly?A market structure dominated
by a single seller
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Name an example of a monopoly? ATT, Standard
Oil Trust, The Public Water Company
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Who is Bill Gates and why is he important?CEO
and Chairman of Microsoft. He dropped out of
Harvard to form his computer software company and
become one of the richest, most influential
entrepreneurs ever.
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What are the characteristics of sole
proprietorships?Least regulated form of
business, zoning laws often keep them from doing
business from home, unlimited personal liability
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What are the characteristics of
partnerships?General partnership- partners share
liability. Limited Liability Partnership (LLP)
all partners are limited from personal liability
in certain situations.
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What are the characteristics of corporations?A
corporation has a separate entity apart from that
of the owners and workers
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What are the advantages and disadvantages of sole
proprietorships?Adv least regulatedDis
zoning laws, unlimited personal liability
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What are the advantages and disadvantages of
partnerships?Adv in a limited partnership you
only lose your initial investment Dis Tied to
partners actions
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What are the advantages and disadvantages of
corporations?Adv- corporation has a separate
entity apart from owners and workers Dis no
one person in control
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What are the major events in the history of the
labor movement in the US?The Industrial
Revolution and manufacturing initiated the labor
movement in the early 1800s which changed the
face of the US labor force
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Who is Karl Marx and why is he important?He
wrote the Communist Manifesto and Das Kapital He
was the father of communism/socialism
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How do people use credit to get more
stuff?People use their credit cards at stores
and the credit card issuer pays the store.
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What role does interest play in the use of
credit?Interest is the money paid for the use of
credit. It is essentially the cost of credit.
Interest from loans is the largest source of
income for banks.
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What do financial institutions do?Bring together
funds that savers provide and then lend those
funds to others which leads to economic expansion
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How has the role of financial institutions
changed over time?Expanded investment
opportunities, provided additional services for
more people than ever before
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How do financial institutions affect
households?Investment opportunities, loans
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How do financial institutions affect businesses?
Investment opportunities, loans to grow
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What is insurance and why do people insure their
stuff?Insurance is money paid to an insurer to
be used in the event of an emergency. If nothing
happens, the money is usually not paid back to
the consumer.
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What is the economic impact of investing in the
stock market?Gives companies the funds to grow
and expand their businesses
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What is the economic impact of investing in the
bond market?Money is used by company/government
to expand and grow. It does not just sit unused
until it reaches maturity.
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What are the benefits savings accounts?Safe,
guaranteed interest, extremely liquid
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What are the risks of savings accounts?Virtually
none, low return
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What are the benefits of mutual
funds?Intermediaries buy short term financial
assets and investors receive higher interest,
diversified investment
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What are the risks of mutual funds?Not insured
by the FDIC
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What are the benefits of pension funds?Often
tax-deferred
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What are the risks of pension funds?Depends on
the type but usually fairly low risk, funds
restricted until retirement
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What are the benefits of insurance?Provides
funds in the event of an emergency (home, life,
health)
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What are the risks of insurance?Money is not
usually paid back if there is no emergency
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What are the benefits of CDs?No fees, Insured by
FDIC, higher interest than a savings account,
safe
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What are the risks of CDs?Minimum deposits,
restrictions on access to money,
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What are the benefits of bonds?Safe, high
interest, bondholders have first claim to assets
if a company goes bankrupt
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What are the risks of bonds?No access to money
until bond matures, Junk bonds are very high risk
but have a potentially higher return.
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What are the benefits of stocks?Potentially high
return, Easily liquidated
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What are the risks of stocks?Very risky, losses
can be large, requires understanding of the stock
market
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What is the impact of business cycles on US
history? During the 90s, there was a recession,
and although inflation remained at less than 3
percent, unemployment fell to very low levels.
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How is economic growth measured?Real GDP per
capita because prices and population change over
time
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How is economic stability measured? By looking
at general price levels
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Who is Andrew Carnegie and why is he
important?He was a entrepreneur in the steel
industry
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What are the economic effects of the development
of communication and transportation systems in
the US?Provide easier methods of communicating
information and exchanging goods and services.
For example, the internet has made a huge impact
on the economy.
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When new technologies emerge, what economic
effect do they have on the old way of doing
things?An examplea countrys production
possibilities increase because the workers become
more skilled at using a computer. This is an
example of growth caused by technology.
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How do technological innovations change the way
goods are manufactured, marketed and
distributed?They generally make manufacturing,
marketing and distribution easier and less
expensive.
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Give some examples of types of economic
information available as a result of
technological innovations?Stock prices on the
internet, economic news in the newspaper, Fed
announcements on CNN
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How do scientific discoveries and technological
innovations create the need for rules and
regulations to protect individuals and
businesses?The growth of the internet has made
it necessary for the government to make
regulations regarding the security of information
online
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What are the effects of unequal distribution of
economic factors of production? Unequal
distribution of the 4 factors (land, labor, human
capital, physical capital) inhibits economic
growth
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How is full employment measured?When there is no
cyclical unemployment (does not take into account
dropouts)
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What kinds of taxes are paid at the local level
and what are they used for?Most of the tax money
goes to elementary and secondary education
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What kinds of taxes are paid at the state level
and what are they used for?Sales and income
taxes provide the most revenue in most states
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What kinds of taxes are paid at the national
level and what are they used for?Most money
comes from income taxes.
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What are the different categories of revenues in
the US federal budget?Taxes and non-tax revenue
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What are the different categories of expenditures
in the US federal budget?Fastest growing
category of expenditures in recent years has been
entitlement programs
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What is taxation and why are taxes included in
the Constitution?To provide for common defense
and general welfare (they must be the same in
every state)
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How have taxes impacted contemporary issues and
policies? One of the major challenges facing the
federal government is the rapid growth of
entitlements
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What are the major goals of US economic
policy?Growth, stability, balanced budget,
reduced debt, employment
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What impact do fiscal policy decisions have on
the economy?Fiscal policy is the use of taxing
and spending to influence economic activity.
Policies can either cause the economy to expand
or contract
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Who is John Maynard Keynes and why is he
important?He developed Keynesian economics which
takes a broader view of the economy than
classical economics
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What is the Fed and why is the Federal Reserve
System set up the way it is?12 districts, to
make sure every state has access to the Fed. It
was created to provide consumers w/access to
funds for business expansion. The Fed coordinates
regulatory activities and examines banks
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What are the 3 basic tools used to implement US
monetary policy?The buying and selling of
government securities, reserve requirements,
discount rate
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Why are economic policies used and what effect do
they have?Monetary policies are use to control
the money supply. They are used to lessen the
effect of natural business cycles. Expansionary
policies are used to increase output and create
jobs in the short term
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Where is oil an abundant resource? The middle
east
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Why is this an issue for the US?We use a lot of
oil. It is the largest category of nonrenewable
energy in use in the US
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What is absolute advantage?A term related to
nations engaged in trade. When a nation can make
the most of something given all of the resources
available
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What is comparative advantage?A term related to
nations engaged in trade. When a nation can make
the most of something with the least opportunity
cost involved.
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How does comparative advantage affect how and why
countries trade?Sometimes countries will import
a good they are able to produce because their
trade partner has the comparative advantage.
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What is the impact of US imports on the US and
its trading partners?If a country reduces their
imports into our country, the demand for
comparable domestic goods will most likely
increase.
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What is the impact of US exports on the US and
its trading partners?If we reduce our exports,
the demand for those goods MAY OR MAY NOT change.
There is no way to tell for sure. Some goods may
increase in demand while others will decrease
because people will find alternatives
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Why do exchange rates fluctuate?They are
influenced by supply and demand in a flexible
rate system.
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How changes in exchange rates of world currencies
affect the balance of trade?If the currency
depreciates, the countrys products will become
cheaper to other nations. If the currency
appreciates, the countrys products will become
more expensive in other nations.
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How does free trade affect economic
activity?Free trade makes it easier for
importers and exporters to do their business
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How do trade barriers affect economic
activity?They restrict the growth of export
industries in developing countries. If trade
barriers are used to make domestic goods cheaper,
domestic manufacturers may lose the economic
incentive to become more efficient. Tariffs also
help shield infant industries from competition
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What are some benefits to participating in a free
trade agreement?Trade barriers and tariffs are
reduced or eliminated, trade significantly
increases
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What are the costs of participating in a free
trade agreement?Jobs can be eliminated in one or
both countries (although with NAFTA an equal
number of jobs were created and eliminated)
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Describe the level of development in the US,
Mexico, Iraq, China, India, Russia, Germany,
Afghanistan, Brazil, and Indonesia.US
developedMexico- developedIraq
underdevelopedChina developingIndia-
developingRussia- developingGermany-
developedAfghanistan- underdevelopedBrazil
developingIndonesia underdeveloped
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How do societal values affect the economic
development of nations?Societies who value
tradition, habit, ritual and custom develop much
slower than those who value self-interest,
competition, and freedom. Things like from
weapons, corrupt leaders and colonialism all
prevent development
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What are property rights?A set of laws that
protect peoples claim to land and other
property. If property rights are certain,
entrepreneurs are more likely to make large
investments.
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Trace Transition of USSR

• Lenin comes to power
• The govt. organizes land into state farms
• Gorbachev implements glasnost and perestroika
• Yeltsin is elected in the 1st democratic election
• Gorbachev resigns end of USSR

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Trace Transition of China

• Mao Zedung comes to power
• The Great Leap Forward
• The Cultural Revolution
• Deng Xiaoping comes to power
• Peoples communes are replaced with contract
  responsibility

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What is interest?

• The money you pay to borrow money
• The percentage of principle paid to investors as
  an incentive to invest money.
• It is the cost of credit
• It is the primary source of income for banks

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How do you eliminate Credit Card Debt?

• Stop charging/using the credit cards
• Pay off the cards with the highest interest rates
  first
• Pay more than the minimum payment even if it is
  just a few dollars
• Be very careful about companies who claim they
  will help you eliminate debt and fix your credit!

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What are you rights when buying a home?

• You can hire a realtor
• You can tour the property
• You can have a pre-sale inspection done
• You have a certain amount of time to change your
  mind once you sign the contracts

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What are your responsibilities when buying a home?

• You must secure financingqualify for a mortgage
• You must be present at the closing

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How can you prepare to make the change from
renting to buying?

• Save a down-payment
• Do your research
• Save a rainy day fund in case of emergency
• Pay down any debt you might have

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What are the steps to starting up a small
business?

• Research/Design/Education
• In some cases, licenses/certifications
• Production
• Marketing
• Sales
• Accounting

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How and why should someone invest in the Stock
Market?

• How?
• Meet with a stock broker/financial advisor
• Research companies
• Why?
• Potentially large returns

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How do you plan for retirement?

• 401K
• IRA/Roth IRA
• Pension/Company Retirement
• Mutual Fund
• Do not rely on Social Security!!!!

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How should you start saving money?

• Pay yourself firstdirect deposit money into a
  savings account straight out of your paycheck so
  you never miss it.
• Cut expenses that are not necessary (Starbucks,
  fast food, etc.) and put that money into savings.

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What are the different types of bank accounts?

• Savings
• Checking
• Interest bearing
• General Use
• Money Market
• Certificate of Deposit

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How do you balance a checkbook?

• Get balance from bank statement
• Add any outstanding deposits
• Subtract any outstanding checks/debits
• Compare the balance to your account register

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How and why should you take out a loan?

• How?
• From a bank or credit union
• Not a pawn shop or check cashing outlet!
• Why?
• Car Loan
• Home Loan
• Student Loan
• NOT spending money, big screen TV, etc

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Who needs to be insured and how do you get
insurance

• Who?
• Life young families with children
• Car everyoneits the law!
• Health everyone!!
• Homeowners/Renters everyone!!
• How?
• Contact an insurance company to apply
• Sign up through work

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How and why should you give to charity?

• How?
• ResearchBBB online, Atty. Gen office
• Why?
• Others needier than yourself
• Tables could be turned
• Good karma!

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What scams are out there and how do you avoid
them?

• Many scams are out there to prey on people who do
  not know any better or are desperate for .
• If it sounds too good to be true, it probably is
• Research BBB online, Atty. Gen Office, ask a
  friend who investedgoogle is probably the LEAST
  reliable way to research a scam

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