EOCT – What I know, you need to know! Pay Attention!

Scarcity Productive resources: land, labor & capital Factors of Production are limited Needs & wants are unlimited Result is Scarcity

Trade offs & Opportunity Cost Rational Decisions are made by considering the Costs & Benefits of the decision. Decision have trade-offs. The BEST alternative given up when you make a decision is the opportunity cost.

Specialization & Division of Labor Individuals, Businesses & Societies cannot satisfy all their needs & wants. Result is specialization: to maximize productive resources Specialization creates interdependence & the need to trade & exchange. Focus on what you do best & trade for what someone else does well: Both sides benefit!!

Production Possibilities We can analyze the opportunity cost of decisions by using a PPC – two products X & Y – can be produce in varying amounts. More of x = less of y, more of y = less of x

Economic Systems Systems have developed to answer economic questions: what to produce, how to produce, & allocating what is produced. Command systems (Socialism, Communism) – govt. officials plan all economic activities. Market systems (Capitalism, Free Enterprise) – individuals (producers & consumers) make decisions free* of govt. interference.

Microeconomics – study of individual markets. Circular flow illustrates our economy; the flow of money, products & resources. Demand – the desire to own & pay for a good. Law of Demand – as price goes up, the quantity of the product demanded by consumers goes down. Supply – the amount of goods in a given market (new cars, homes, shoes, etc. Law of Supply- as prices in a particular market increase, the quantity supplied of the product increases (more profit potential)

Elasticity & Shifts in Demand & Supply Price changes affects the supply & demand of products differently. Big changes in supply & demand when prices change = ELASTIC products. Little changes = inelastic products. Factors other than price can affect Supply & Demand. Demand can change at every price offered if: population changes, tastes change, advertising, price of related products, subs, future price exp. Supply can change at every price if: costs rise of fall (gas, wages), more competition, govt reg, tax, subsidies, number of sellers, future profit exp, etc.

Equilibrium: Ceilings & Floors When supply & demand intersect on a graph, market is in equilibrium. Surpluses occur when supply exceeds demand. Shortages occur when demand exceeds supply. Ceilings are prices set BELOW equilibrium (rent control- consumers benefit) Floors are set ABOVE equilibrium (minimum wage- producers benefit)

Market Structures Markets in which Businesses compete can be identified based on a number of factors: number of firms, barrier to entry, etc. 4 structures: Perfect Competition – large # of firms selling the same exact product / very easy to enter the market (wheat, corn) Monopolistic Competition – many firms selling similar but not identical products / relatively easy to enter (fast food, nail salon, jeans,etc) Oligopoly – a few large firms dominate. Very difficult to enter, just a few choices for consumers (Soft Drinks, Breakfast Cereals, Satellite TV, etc) Monopoly – one firm in the market/ extreme barriers to entry. Total control over price, no choice for consumers (local electric co.)

Business Organization Sole Proprietorship – - Advantages – total control or business & profits - Disadvantages – hard to raise money & expand. Short lived. Partnerships - Advan. – allows for specialization, less* liability - Disadvan- disagreements, less profits, less control. Corporations - Advan – raise lots of money fast, no personal liability for owners. - Disadvan- lose of control, profits are split among all stock owners.

Macro – study of entire economic system Economist use data to compare economies & measure economic health. Most significant of these is GDP: measure of all products and services produced in an economy in a given year. Expenditures used are: C + I + G + (X-M) Used products, intermediate products, underground & non markets activities are excluded. Measures Final product & services made in the U.S. only!!!

Macro problems: Recession – 2 or more quarters of slow or negative GDP growth. Unemployment: Cyclical, structural, seasonal, & frictional Underemployment & discouraged workers. Labor force = those 16 & older working or looking for work Inflation – rising prices through an economy. Quantity, Cost Push, & Demand Pull CPI – measures a “market” basket of goods & compares the current price with prices from previous years. CPI = This years prices X 100 Previous years prices

Solving Macro Problems The FED – conducts monetary policy. 3 Fed tools to affect aggregate Demand & supply 1.Open market operation – increase or decrease money supply via the buying and selling of govt. bonds 2.Open market committee – changing the DISCOUNT RATE, the interest the FED charges to banks. 3.Reserve Requirement – adjusting the money banks must keep on hand (in reserve) The Govt. uses FISCAL POLICY tools: 2 Govt Tools 1.Taxing 2.Spending -Progressive Taxes affect wealthy people (income tax) -Regressive Taxes affect lower income people (sales tax) Govt. Spending – Discretionary (change from year to year) & Mandatory Spending (already budgeted by law) Taxing – affects consumer demand, lower taxes more aggregate demand. Govt. Spending impacts the GDP.

International trade Specialization among nations creates the need for TRADE. Both sides benefit by trade & trade creates more efficient economic systems. Nations analyze the comparative advantages they to determine what they need to produce (export) vs. what they should trade for (import) Case Study: Corn Wheat US Canada U.S. has an absolute advantage producing both corn & wheat. Our opportunity cost of producing 75 tons of corn = 100 tons of wheat The opp. Cost of producing 100 tons of wheat = 75 tons of corn. Canada’s opp cost of producing 60 tons of corn = 40 tons of wheat Canada’s opp cost of producing 40 tons of wheat = 60 tons of corn. We give up more by producing corn compared to Canada, so we need to import corn & specialize on wheat production – Canada & the U.S. both benefit with more production.

Trade Barriers/ Protectionism Trade Barriers – usually intended to protect industries or firms of the country using them. Tariffs, quotas, VER’s, standards, etc. Trade agreements & treaties have been established to eliminate barriers & create free trade zones & partnerships. - NAFTA, ASEAN, & the European Union are regions with very limited trade barriers.

Exchange Rates When International Trade occurs nations exchange their currency for goods from another country. The value of a nation’s currency in relation to another’s is known as the exchange rate. Ex. One U.S. Dollar can be exchanges for (.70 Euro), and I Euro can be exchange for ($1.42) COSTS & Benefits Strong Dollar = cheap imports & cheap expensive exports / travel is cheaper & trade deficits increase. Weak Dollar = expensive imports & cheap American exports / travel is more expensive / trade surpluses may occur.

Personal Finance Savings – money put aside for later use, may earn a little return with small interests (Savings Account) Investments – money that are paid to businesses with risk involved but potentially larger returns (Stocks) Banks offers services ranging from savings & checking accounts, to credit & other loans (mortgages) & investments (money market accounts). Accounts are insured by the FDIC. Credit Simple interest is interest charged on just the principle of the loan ( Borrow 10,000 at.05% annually = $10,500 Compound interest is charged on the principle & any interest already charged. (1000 X 10% = $1,100- Don’t pay and next month you are charged 1,100 X 10% = $1,110. And so on ….

Investments Stocks = ownership Stocks Pay dividends & may increase in value for a CAPITAL GAIN Bonds represent a loan to the issurer of the BOND & pay back the principle & periodic interest to the bond holder. Investors are encouraged to DIVERSIFY their investments to lessen risk – spreading money over many types of investments (Stocks & Bonds) - Mutual Funds allow investors to buy share of the fund, & pool money together with many investors to reduce risk. These funds are managed by professionals & offer many differing returns.

Insurance For the “what ifs” in life deductible- the amount owed out of pocket before insurance will pick up the tab in case of accident Premium- the amount owed each month to the insurance company in order to sustain coverage Remember, higher premium=lower deductible