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Semester Final Review Notes Economics Study of how people satisfy their needs and wants by making choices.

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2 Semester Final Review Notes

3 Economics Study of how people satisfy their needs and wants by making choices

4 Scarcity Unlimited wants and limited resources

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

6 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

7 Examples of Factors/Inputs/Resources

8 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

9 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

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

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

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

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

14 Full Production Underproduction inefficient Unattainable A B C D E

15 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

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

17 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

18 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

19 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

20 Define Marginal Analysis What affect adding one more additional unit have on your utility (satisfaction). What is the cost/benefit of one more?

21 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.

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

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

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

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

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

27 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

28 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.

29 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.

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

31 A change in the quantity demanded is caused by a change in price affecting a movement along the curve – Demand by an individual A change in demand is a shift in the entire demand curve (Caused by five factors) – Demand by population as a whole Demand 1 Price Quantity Price Quantity

32 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) PricePrice Quantity 1 2 3 123 4 4 PricePrice 1 2 3 123 4 4

33 Supply and Demand Graph Which way does the demand line move if demand increases? Demand 1 Supply 1 Price Quantity Demand 2 Is there a new equilibrium point? YES

34 Supply and Demand Graph Which way does the supply line move if supply increases? Demand 1 Supply 1 Price Quantity Supply 2 Is there a new equilibrium point? YES

35 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

36 Price Ceilings Demand 1 Supply 1 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. Price Quantity The price is below the equilibrium point therefore there is a shortage due to excess demand Excess Demand P1 P2

37 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

38 Price Floors Demand 1 Supply 1 Price Quantity Excess Supply 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. The price is above the equilibrium point therefore there is a surplus due to excess supply

39 Supply and demand schedule Price of WidgetsNumber of Widgets People Want to Buy Number of Widgets $1.0010010 $2.009040 $3.0070 $4.0040140 Equilibrium is where supply and demand equal

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

41 Circular Flow Factor Market Firms Product Market Household Government Goods and Services Labor Money Wages Mixed Economy FactorsFactors G & SG & S Taxes Butter Taxes Butter $ $

42 Households sell factors of production (CELL) Businesses buy factors to make goods/services

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

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

45 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.

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

47 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.

48 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

49 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

50 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.

51 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.

52 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.

53 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

54 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%.

55 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.

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

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

58 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.

59 Peak Contraction Recession Trough Recovery Peak/Prosperity Recession Business Cycle Expansion

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

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

62 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

63 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.

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

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

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

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

68 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

69 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.,

70 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.

71 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.

72 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

73 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

74 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 1st full-time employment are included – Structural - Change in the structure of consumer demand and 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 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 Discouraged worker is one who has quit looking –no longer part of the labor force Underemployed - working at a job you are overqualified for Underemployed - working at a job you are overqualified for

75 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.

76 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

77 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 inflation- increasing taxes and/or decrease spending to slow the economy down

78 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.

79 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.

80 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

81 Affects of Monetary Policy  Regulating the Money Supply. – Business cycles travel through inherent patterns of expansion and recession. The Fed steps in to adjust the money supply to smooth out these shifts.

82 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.

83 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.

84 Federal Open Market Committee Structure (cont.) – Made up of the 7 Board of Governors and 5 of the 12 Federal Reserve banks with the NY Fed always voting – The Federal Open Market Committee (FOMC) the FOMC makes key decisions about interest rate and the growth of the U.S. money supply. It decides when and how much government securities to buy or sell

85 FED short responses (cont.) Structure (cont.) – Member banks All nationally chartered banks must be a member of the Federal Reserve System, the remaining member banks are state chartered and join voluntarily. About one third of all banks are members of the Federal Reserve System. – The Federal Open Market Committee (FOMC) the FOMC makes key decisions about interest rate and the growth of the U.S. money supply.

86 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

87 Liquid money- easy to use immediately to buy Currency (Cash) in circulation checking accounts (demand deposits) travelers’ checks currently about $1.1 trillion

88 Broader measure of amount of money in economy “Near Money” All M1 money + – savings accounts – money-market funds – small deposits (less than $100,000) CD’s

89 Three tools of the Federal Reserve/How they expand and 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

90 Three tools of the Federal Reserve/How they expand and 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.

91 Three tools of the Federal Reserve/How they expand and 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.

92 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.

93 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

94 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

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

96 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

97 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

98 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

99 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.

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

101 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

102 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

103 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?

104 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 Key consumer terms defined

105 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

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

107 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.

108 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

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

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

111 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.

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

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

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

115 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

116 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

117 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-10to 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

118 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

119 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.

120 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

121 Compare profit types for investors Interest: the price paid for the use of borrowed money. ALSO: Money earned by deposited funds. Dividends: the portion of corporate profits paid out to stockholders. Capital gains: the difference a higher selling price and a lower purchase price resulting in a financial gain for the seller. OFTEN: The profit made from selling shares of stock at higher than the purchase price.

122 Key consumer terms defined Mortgage: a specific type of loan that is used to buy real estate Credit rating: an evaluation made by credit bureaus of a borrower’s (debtor’s) overall credit history. Humans with good credit rating can more easily borrow money and command lower interest rates. Collateral: property used to secure a loan. If the borrower (debtor) defaults on the loans, the lender (creditor) takes ownership of the collateral. Ex: car, home. Budget: a plan for saving and spending. The goal is to live WITHIN your budget

123 Imports and Exports Exports are goods that are sent to another country for sale. Imports are goods that are brought in from another country for sale. Exports – imports = our trade balance. A favorable balance occurs when exports exceed imports. An unfavorable balance of trade occurs when imports exceed exports.

124 Continued Voluntary export restraints: self-imposed limitation on the number of products that are shopped to a particular country. A country will impose these restrictions on themselves to avoid the importing country from establishing harsh import quotas. Product standards Government license Trade barriers lower trade between countries and lead to higher prices in each country for those goods being restricted. The term protectionism refers to the belief that barriers protect domestic industries from foreign business competition.

125 Issues related to Globalization Cultural Imperialism: is the practice of promoting or artificially injecting the culture or language of one culture into another. – Music, food, work ethic, religion clothing or lifestyle for example through economics – Fast food instead of traditional meals – gender equality promoted

126 Issues related to Globalization Outsourcing: is subcontracting a process, such as product design or manufacturing, to a third-party company or country. The decision to outsource is often made in the interest of lowering a firm’s costs or making better use if time and energy costs, or to make more efficient use of land, labor, capital, (information) technology and resources. Outsourcing became part of the business language during the 1980’s.

127 2 fiscal policy tools Increasing taxes and/or cutting spending to slow the economy down --- decreasing taxes and/or increasing spending to stimulate the economy. Expansionary fiscal policy would involve tax cuts on either or both businesses and individuals and increasing discretionary spending on such things as roads or bridges. Contractionary policy would be the opposite.

128 National Debt National debt- All the money the federal government owes to bondholders. – numerous years of budget deficits – 15 trillion dollars-

129 Budget deficit- Government spends more than it takes in in tax revenue in a year which adds to the national debt.

130 Budget surplus- Government takes in more tax revenue than it spends in a year which reduces the debt. The last surplus was in 1997.

131 SEC SEC (Securities & Exchange Commission) – Regulates the stock and bond markets

132 Cont’d 4. Divisibility: must be easily divides into smaller units or denominations. This is why a cow would be difficult. 5. Limited supply: gives it value. This is why gravel rocks would not be a good source of currency. They are too common, and anyone could go out and scoop up a handful. If diamonds were as common as gravel, they too would have little value. This is why it is important for the government to limit the supply of currency; if they print too much it has little value just like in post WWII Germany when they printed too much. 6. Acceptability: it has to be widely accepted in your economy. Everyone in an economy must be able to exchange the objects that serve as money for goods and services.

133 Work theories of: (cont.) John Maynard Keynes – supported a form of demand-side economics that encourages government action to increase or decrease demand and output.

134 Work theories of: Adam Smith (Father of Capitalism) – believed that in a market economy, where the people were free to pursue their own interests, restricting the role of government (laissez-faire), was best for an economy. The “invisible hand” and self interest could guide a nation’s resources to their most productive use. Karl Marx (Father of Communism) – He believed that wealth should be spread evenly throughout society. He thought that if the owners of the capital, or “capitalists,” would get richer by profits produced by the workers, or “proletariats” they would get poorer and would revolt.

135 Advantages/Disadvantages of Sole Proprietorships AdvantagesDisadvantages simple to establish/ease to start upunlimited personal liability relatively few regulationslimited access to resources sole receiver of profitlack of permanence full control easy to discontinue

136 Advantages/Disadvantages of Partnerships AdvantagesDisadvantages ease of start uppotential conflict shared decision making and specializationunlimited liability larger pool of capital taxation

137 Advantages/Disadvantages of Corporations AdvantagesDisadvantages as owners, stockholders have limited liabilitydifficulty and expense of start up corporation can sell stocks to raise moneydouble taxation corporation can borrow money by selling bonds loss of control corporations can continue doing business after death of founders or owners more regulations than other kinds of business

138 Types of Partnerships General- All partners share liability and risk Limited- General partner carries all liability & risk but limited partners do not – Silent provide only financial resources but have no input – Nominal Provide name only

139 Role of stockholders By selling their stocks on the stock market (to shareholders, a corporation can raise money to purchase resources (C.E.L.L.). Stockholders are the owners of a corporation and elect its leadership

140 FED short response History: – Federalists wanting a strong national government favored a national bank, central banking began in 1790 with the establishment of a first national bank which printed a single currency, reviewed banking practices and helped the federal government carry out its duties and powers. – Anti-federalist favoring states rights and fearing a strong federal government prevented the national bank charter from being renewed in 1811 and a period of banking chaos occurred until federalists pushed through another national bank charter in 1816 to restore order.

141 FED short response (cont.) History (cont.) – Anti-federalists again toppled the national bank in 1836 and a period of chaos, fraud, and “Free Banking” lasted until congress passed the Federal Reserve Act of 1913.

142 FED short response (cont.) Purpose – The Federal Reserve functions as the government’s banker by maintaining the treasury’s checking account, issuing and distributing currency that the treasury prints and processing government payments like social security checks, purchases and tax refunds. It serves as a bankers’ bank by clearing checks, supervising lending practices and being a lender of last resort. It regulates the nations banking system and also uses monetary policy to regulate the nation’s money supply.

143 FED short response (cont.) Structure – The Fed consists of: A board of 7 governors appointed for staggered 14 year terms. These governors are appointed by the President and confirmed by the Senate. The President also appoints one of the 7 governors to act as the chairman of the board of governors to head the board for a 4 year term. The Senate also confirms this appointment. – 12 District Reserve Banks The country is divided into 12 federal districts with one Federal Reserve Bank in each district. Each Federal Reserve Bank has a board of 9 directors regulated by congress.

144 FED short response (cont.) Structure (cont.) – FOMC (cont.) This committee is made up of the 7 governors from the Fed’s board and 5 District bank presidents. The president of the New York District bank is a permanent member and the 4 other district presidents serve one0year terms on a rotating basis. The 7 Governors hold a majority vote. Decisions of the FOMC are announced by the chairman of the board of governors.

145 Three types of business or organization Sole Proprietorships – a business owned and managed by a single individual. The individual earns all the firm’s profits Partnerships – is a business owned by two or more individuals who agree on a specific division of responsibilities and profits. Three types: general, limited, and limited liability. Corporation – a legal entity owned by individual stockholders

146 CORPORATION STRUCTURE Stockholders own the business and elect a Board of Directors Board makes major decisions of corp. Board elects a Chairman of the Board Board selects a President and/or Chief Executive Officer (CEO), who hires the other leaders of the company President and/or Chief Executive Officer (CEO) make day to day decisions of production and sales with their corporate officers

147 Corporation Hierarchy

148 Elasticity of demand a measure of how consumers react to a change in price, how buyers will cut back or increase their demand for a good when the price rises or falls – effected by availability of viable substitutes time to find substitutes portion of the budget

149 Elastic, inelastic, and unitary demand Elastic – a demand for a good that is very responsive to price changes- % change in quantity demanded is greater than % change in price Inelastic – a demand for a good that you will keep buying despite a price increase- % change in quantity demanded is less than % change in price Unitary – the percentage change in quantity demanded is exactly equal to the percentage change in price (=1)

150 Elasticity of demand Formula Elasticity = Percentage change in quantity demanded Percentage change in price to find the percentage change in quantity demanded or price, use the following formula: subtract the new number from the original number, and divide the result by the original number. Ignore any negative sign, and multiply by 100 to convert this number to a percentage: Percentage Change = Original number – New number x 100 Original number

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