Scarcity
The basic problem of economics
3 Factors of Production
Land, Labor, and Capital
Opportunity Cost
Value of something that is given up in order to obtain something else.
Production Possibilities Curve
Model used to determine opportunity cost
3 Main Economic Questions
What to produce? How to produce? For whom to produce it?
Free Market
Economic system based on voluntary exchange and private property
Mixed
Economic System in which individuals and government answer economic questions.
Command
Economic system in which the government answers all the questions
Profit
The main incentive in a market economy
Creator of the invisible hands theory
Adam Smith
Demand Curves go.....
Down!
Law of Demand
Price and quantity demanded are inversely related
Complementary Goods
Goods normally purchased together
Substitute Goods
Goods that are normally purchased instead of one another
Normal Goods
Goods whose demand increases as income increases
Inferior Goods
Goods whose demand decreases as income increases
Elastic Goods
Goods whose demand level is very sensitive to changes in price
Inelastic Goods
Goods whose demand level is not sensitive to changes in price
Law of Supply
Price and level of supply move in the same direction
Input Costs
The cost of goods along a supply chain to a final good- has a major impact on final price.
Supply Curves go.....
Up!
Surplus
Supply is higher than demand
Shortage
Demand is higher than supply
Equilibrium
The point at which supply and demand are equal
Price Ceiling
The highest a price can be, typically set below market value
Price Floor
The lowest a price can be, typically set above market value
Three Basic Business Structures
Sole Proprietorship, Partnership, Corporation
Sole Proprietorship
Business structure with one owner, very high level of risk
Partnership
Business structure with multiple owners, medium level of risk
Corporation
Business structure with ownership in the form of stock. Low risk, high start up
Stocks
Representation of ownership in a corporation
Monopoly
Market structure with one supplier controlling the price
Natural Monopoly
Market structure with one supplier that is not harmful to consumers. There is no need for a second supplier.
Oligopoly
Market structure with a few suppliers controlling the market and raising prices
Monopolistic Competition
Market structure with several suppliers with a a few dominating most of the market. Differentiated products
Perfect Competition
Market structure with numerous suppliers in which price fixing is almost impossible. Easy entry and exit.
Non-Price Competition Tools
Tools designed to build brand loyalty without price change- advertising, location, and extra services.
Public Goods
Goods and services provided to citizens by the government, generally funded by taxes.
Taxes
Compulsory payments from citizens to their governments in order to fund public goods
Mandatory Spending
65% of the Federal Budget that includes Social Security, Medicare, Veteran's Benefits, Transportation, and Agriculture
Discretionary Spending
28% of the Federal Budget including education, military, and anything else not included in mandatory
Interest on Debt
7% of the Federal Budget
Progressive Tax
Taxation system that increases the percentage of taxation as income increases. Ex- American income tax
Regressive Tax
Taxation system in which the percentage of taxation decreases as income increases
Proportional Tax
Taxation system in which the percentage of taxation is the same across all incomes
Fiscal Policy
Government interventions to stabilize the economy through taxation and government spending
Monetary Policy
Operations by The Fed designed to stabilize the economy.
Keynesian Economics
The philosophy that the government should stimulate the economy in times of need through fiscal policy.
The Federal Reserve System
America's central banking system that includes 12 regional banks, the FOMC, and Janet Yellen
Fractional Reserve Banking
A banking system in which only a percentage of deposits are kept on hand and banks are permitted to invest or lend the rest.
Required Reserve Ratio
The percentage of deposits that banks must keep on hand. (Cannot be lent or invested)
Cyclical Unemployment
Unemployment based off the typical economic cycle
Seasonal Unemployment
Unemployment caused by the changing of seasons or off periods for a certain industry
Structural Unemployment
Unemployment caused by a mismatch of skills and available work
Frictional Unemployment
Unemployment that is characterized by an in between period for jobs.
GDP Formula
Consumer Sector, Government Sector, Investment Sector, Net Exports
GDP
Gross Domestic Product- the total dollar value of all goods and services in an economy in a given year.
Aggregate Demand and Supply
Economic indicator that typically matches consumer spending patterns in an economy
Medium of Exchange
Function of money that gives us the luxury of not bartering for goods and services
Unit of Account
Function of money that serves to provide prices and place value on goods and services
Store of Value
Function of money that serves as a means to hold and keep wealth
6 characteristics of money
Durability, Portability, Divisibility, Limited Supply, Uniformity, and Acceptability
M1
All liquid assets serving as money- cash, coins, checking accounts, etc.
M2
Non liquid assets in the money supply- investments, assets, etc.
Absolute Advantage
The ability for one nation to produce a good or service more efficiently than another nation
Comparative Advantage
The ability for one nation to produce a good or service with a lower opportunity cost than another nation
Balance of Trade
The balance of imports to exports for a given nation- can be positive or negative
Tariff
Tax on imports designed to protect domestic industries
Quota
A limit on the number of goods or services permitted to enter a county- designed to product domestic industries
Free Trade
A elimination of barriers for trade (no tariffs or quotas)
Currency Exchange
The rate at which currencies are exchanged between countries- can make money worth more or less.
Subsidy
Prices that are artificially lowered by the government.
Protectionism
Implementation of tariffs and quotas in order to promote domestic consumption of goods and services.
Lorenz Curve
Graphic representation of income inequality
Trade-Off
A good or service that is given up in order to get something else.