Final Exam Test Review Power Point - Economics

Four Economic Resources or Factors of Production Resources required to produce the things we would like to have, are land, capital, labor, and entrepreneurs.  Four Economic Resources or Factors of Production

The value of the next best alternative given up. Opportunity Cost

Free Good: A good that has no monetary cost and its use by one person doesn’t limit its use by someone else. Examples: Air and Sunshine.

Production Possibilities Curve A diagram that represents various combinations of goods and services an economy can produce when all its resources are in use. If the economy is at a point on the curve, the unemployment rate is 5%. Production Possibilities Curve

What are the three ways to “push out the PPC” to the right or “grow” the economy?

What are the three basic economic systems?

Economic system in which individuals own the factors of production and answer the three basic questions.

The economic system in which the basic economic questions are answered by government planners.

The economic system in which the basic economic questions are answered by tradition, habit, and custom.

An economic and political system where the government owns some, but not all of the factors of production (land, labor, capital, and entrepreneurship). Socialism

GDP It is Gross Domestic Product: The final value of all goods and services produced and sold in a nation at their market prices.

When demand increases: The demand curve shifts_____. rightward Equilibrium price and quantity ______ increase

When demand decreases: The demand curve shifts_____. leftward Equilibrium price and quantity ______ decrease

When things are expensive money buys less When things are cheap money buys more Income Effect

Rule stating that more quantity will be demanded at lower prices and less quantity at higher prices. Law of Demand

Change in Quantity Demand Movement along the demand curve showing that a different quantity is purchased in response to a change in price. Change in Quantity Demand

Consumer demand for different accounts at every price, causing the demand curve to shift to the left or to the right. Change in Demand

The portion of a change in quantity demanded caused by a change in price that makes other products less costly. Substitution Effect

The portion of a change in quantity demanded that is caused by a change in a consumer’s income when the price of a product changes. Income Effect

Products that increase the use of other products; products related in such a way that an increase in the price of one reduces the demand for the other product. Complements

Competing products that can be used in place of one another; products related in such a way that an increase in the price of one increases the demand for the other. Substitutes

More quantity will be offered for sale at high prices while less quantity will be offered at lower prices. Law of Supply

Change in Quantity Supplied. Which one of these involves movement along a stable supply curve caused by a change in price only? Change in Supply or Change in Quantity Supplied? Change in Quantity Supplied.

Which one of these involves a shift of the supply curve caused by a non-price factor (remember NICEPP)? Change in Supply or Change in Quantity Supplied? Change in Supply.

When supply increases: The supply curve shifts_____. rightward Equilibrium price ______ decreases Equilibrium quantity ______ increases

Situation where quantity supplied is less than quantity demanded at a given price. Shortage

The lowest legal price by law that can be paid for a product. Price Floor

Situation where quantity supplied equals quantity demanded. Equilibrium

The price where quantity supplied equals quantity demanded. Equilibrium Price

The highest legal price by law that can be charged for a product. Price Ceiling

Situation where quantity supplied is greater than quantity demanded at a given price. Surplus

The quantity of output supplied that is equal to the quantity demanded at the equilibrium price. Equilibrium Quantity

Disequilibrium If price occurs at some point where supply and demand are not =, then disequilibrium exists. If the price is higher than the equilibrium price, then a surplus (Quantity Supplied >Q Demanded) occurs. If the price is lower than the equilibrium price, then a shortage occurs (Quantity Supplied < Quantity Demanded)

Market Disequilibrium (Price, px, above Equilibrium Price, pe) qd qe qs If price is px, then qd < qs .: surplus exists (surplus = qs – qd)

Market Disequilibrium (Price, px, below Equilibrium Price, pe) qs qe qd Q If price is px, then qs < qd .: shortage exists (shortage = qd – qs)

The extent to which a change in price caused a change in the quantity demanded. Demand Elasticity

Increase in Demand P S p1 p D1 D Q q q1 D  .: P ↑ & Q ↑

Decrease in Demand P S p p1 D D1 Q q1 q D  .: P↓ & Q↓

Increase in Supply P S S1 p p1 D Q q q1 S  .: P ↓ & Q ↑

Decrease in Supply S1 P S p1 p D Q q1 q S  .: P↑ & Q↓

A theoretical market structure with three necessary conditions: 1)Very Large Numbers, 2) Identical Products, 3) Freedom of Entry and Exit. Pure Competition

A market structure in which a few very large sellers dominate the industry. Oligopoly

A market structure with only one seller of a particular product. Monopoly The Standard Oil Trust under John D. Rockefeller

A government payment to a producer (supplier of products) to encourage or protect certain economic activity. Subsidy

What is inflation? An overall increase in a nation’s price level from one year to next. It is not a change in the price of one product, but involves over 300 commonly bought products by city households as measured by the CPI or Consumer Price Index.

This type of inflation is caused by excessive AD. Demand-Pull

This type of inflation is caused by Negative Supply Shocks (like high energy costs) which raise per-unit production costs. Cost-Push

This type of inflation is caused by the government printing too much money. Quantity Theory

How does inflation affect wages and incomes? Inflation reduces the buying power of peoples wages and incomes. They cannot purchase the same amount of products as before.

Frictional Unemployment is characterized by leaving a job to pursue other employment. Structural Unemployment -– is a result of a lack of skills in demand by employers or where technology has replaced workers. Cyclical unemployment -characterized by losing your job due to a recession. Seasonal Unemployment due to the time of year (Sea World, lifeguards, Mall Santas, etc.

The Labor Force = unemployed + Employed To be Employed: You must be looking for a job. The Unemployment Rate = Unemployed/Labor Force x 100.

The Business Cycle Illustrated

Fiscal Policy: Management of the nations’ budget by Congress and the President to achieve economic stabilization (fight recession or inflation).

Tools of Fiscal Policy: 1. Changing Taxes Tools of Fiscal Policy: 1. Changing Taxes. You reduce taxes to fight recession. With more money from their paychecks, people will spend more money. You increase taxes to fight inflation. With less money in their paychecks, people will spend less money.

Tools of Fiscal Policy (continued): 2. Changing Government Spending Tools of Fiscal Policy (continued): 2. Changing Government Spending. You increase government spending to fight recession. More spending on roads, bridges, dams, and other projects provide more jobs and income for people. You decrease government spending to fight inflation. Less spending means less jobs and income from government projects. Less spending lowers inflation (prices).

Monetary Policy: Management of the nations’ money supply by the Federal Reserve to achieve economic stabilization (fight recession or inflation).

Tools of Monetary Policy: Reserve Requirement – This determines how much cash a bank can lend from someone’s checking account. To fight recession, the Federal Reserve lowers it so more loans can be made. To fight inflation, the Federal Reserve increases it so fewer loans can be made.

Tools of Monetary Policy - Continued: Discount Rate – This is the interest rate charged by the Federal Reserve when banks borrow from them. To fight recession, the Federal Reserve lowers it so more it is cheaper for banks to get extra money to make loans. More loans are made. To fight inflation, the Federal Reserve increases it so it is more expensive for banks to to get extra money to make loans. Fewer loans are made.

Tools of Monetary Policy – Continued: 3 Tools of Monetary Policy – Continued: 3. Open Market Operations – This is the buying or selling of government securities (mainly bonds) by the Federal Reserve to increase or decrease the money supply and change interest rates for loans. To fight recession, the Federal Reserve buys government securities from the public and increases the money supply. A larger money supply means that interest rates for loans are lower, so more loans will be made. To fight inflation, the Federal Reserve sells government securities to the public and increases the money supply. A smaller money supply means that interest rates for loans are lower, so more loans will be made.