Download Learning Goal 4

ANSWERS
LEARNING THE LANGUAGE
1. National debt
2. Deflation
3. Unemployment rate
4. Free market economies
5. Brain drain
6. Invisible hand
7. Monetary policy
8. Oligopoly
9. Resource development
10. Depression
11. Microeconomics
12. Communism
13. Inflation
14. Business cycle
15. Producer Price Index (PPI)
16. Monopolistic competition
17. Fiscal policy
18. Supply
19. Gross Domestic Product (GDP)
20. Command economies
21. Stagflation
22. Macroeconomics
23. Recovery
24. Consumer Price Index (CPI)
25. Demand
26. Economics
27. Hyperinflation
28. Socialism
29. Recession
30. Price Indexes
31. Monopoly
32. Gross National Product (GNP)
33. Free market
34. Mixed economies
35. Perfect competition
ASSESSMENT CHECK
Learning Goal 1
Understanding Economics
1.
The five factors of production are:
a.
land
d.
b.
labor
e.
c.
capital
entrepreneurship
knowledge
2.
Macroeconomics looks at the operation of a nation’s economy as a whole, and microeconomics
looks at the behavior of people and organizations in particular markets. For example while
macroeconomics looks at how many jobs exist in the whole economy, microeconomics examines
how many people will be hired in a particular industry or in a certain region of the country.
3
Businesses contribute to an economic system and resource development by inventing products
that increase available resources. Businesses may discover new energy sources or new ways of
growing food or new ways of creating needed goods and services. For example, a recent
solution to the challenge of scared food resources as been the development of seeds that require
less water and produce larger crops on smaller pieces of land. These seeds and the food they
produce are called genetically modified foods – GMF.
4.
Followers of Thomas Malthus believe that there are too many people in the world and that the
solution to poverty is birth control. However, statistics show that populations in some countries
are growing so slowly that there may be too many old people and too few young people to care
for them.
5.
The challenge today for macroeconomists is to determine what makes some countries relatively
wealth and other countries relatively poor, and then to implement policies and programs that
lead to increased prosperity for everyone in all countries.
6.
Adam Smith believed that freedom was vital to the survival of any economy, especially the
freedom to own land or property and the freedom to keep the profits from working the land or
1
running a business. He believed people will work hard if they have the incentive to do so.
People have a desire to improve their “condition in life”, and as long as workers can see
economic reward for their efforts they will work long hours and work hard. As a result of those
efforts the economy would prosper.
7.
The “invisible hand” is how Smith believed an economy grows and prospers, through the
production of needed goods and services. The idea is that people working for their own benefit,
to improve their own conditions in life will provide goods and services which are needed by
others. To become wealthy business owners have to hire workers to produce those goods and
services. As a consequence, an area has plenty of goods and services, and many people have
jobs. Further, as some people end up with more wealth than they can spend, they begin to use
that wealth to help others, like Bill and Melinda Gates have done.
Learning Goal 2
Supply and Demand
8.
Supply refers to the quantity of products that manufacturers or owners are willing to
sell at different prices at a specific time. In general, as price goes up, the quantity supplied will
go up because sellers can make more money with a higher price.
9.
Demand refers to the quantity of products that people are willing to buy at different
prices at a specific time. In general, as price goes up, quantity demanded will go down.
10.
The key factor in determining the quantity supplied and the quantity demanded is price.
11.
A.
B.
C.
12.
The equilibrium point, or equilibrium price, is the point on a graph where the quantity supplied
is equal to the quantity demanded. In the long run, that price becomes the market price.
Price
Quantity
Supply curve
D.
E.
Equilibrium point
Demand curve
Learning Goal 3
13. The “business cycle” is a common pattern in business where there is a period of rapid growth,
or a period of recovery and prosperity, in the economy. In this situation, supply and demand
stimulate each other. This period of prosperity alternates with a period of decline, called
contraction or even recession, in which we experience diminishing demand and supply. The
business cycle is also called the “economic cycle”.
Learning Goal 4
14. In a free market system decisions about what to produce and in what quantities are made by the
market, through buyers and sellers negotiating prices. Consumers in free market systems send
signals to producers by choosing to buy or not to buy products and services. So, ultimately,
consumers decide what products should be produced and how much they should sell for.
Learning Goal 5
15. a.
Perfect competition exists when there are many sellers in a market and no one producer is
big enough to dictate the price of a product. Sellers produce products that appear to be
identical. An example would be agricultural products.
2
b.
c.
d.
Monopolistic competition exists when a large number of sellers produce products that appear
similar, but are perceived as being different by the buyers. Product differentiation is the
key to success in this type of competitive situation. An example is the fast food industry.
In an oligopoly, just a few sellers dominate the market, as is the case in the cereal and soft
drink markets for example. The initial investment to enter an oligopoly is very high, and
prices are similar and intense competition would lower prices for all competitors. Product
differentiation is usually the main factor in market success. Some examples are breakfast
cereal, tobacco, and soft drinks.
A monopoly exists where there is only one seller for a product or service. One seller controls
supply, and so could raise prices dramatically. For this reason laws in the United States
prohibit monopolies, except for approved monopolies such as public utility service.
Learning Goal 6
Socialism and Communism
16.
The basic premise of a socialist system is that most basic businesses, such as steel mills, coal
mines, and utilities, should be owned by the government so that profits can be evenly
distributed among the people. This distribution of profits may come through the government
providing education, health care and retirement benefits, unemployment benefits, and other
social services. Private businesses and individuals are taxed steeply to pay for social programs.
Socialists believe that wealth should be more evenly distributed than what occurs in free market
capitalism.
17.
The major benefit of socialism is social equality, because income is taken from the wealthier
people through taxes and redistributed to the poorer members of the population. Other benefits
are free education through college, free health care, free childcare, longer vacations, shorter
workweeks, and more generous employee benefits.
18.
One of the negative consequences of socialism is brain drain. Brain drain is the term used to
describe the trend for professionals like doctors and lawyers, and business people and others
with high incomes, to leave socialist countries for more capitalistic countries with lower tax
rates. Socialism also results in fewer inventions and less innovation because those who come up
with the ideas usually don’t receive as much reward as they would in a capitalist system.
19.
Unlike socialism, capitalism’s lower tax rates allow workers to keep more of what they earn
which creates incentives to work hard. However, capitalism results in an unequal distribution of
resources. Socialist systems tend to discourage the best from working as hard as they can, but
allows for more social equality.
20.
In a communist system all economic decisions are made by the “state”, or the government, and
the government owns all the major factors of production. It intrudes further into the lives of
people than socialism.
21. One problem with a communist system is that a government doesn’t always know the right
amount to produce because prices don’t reflect supply and demand. The government has to
guess about the economic needs of the people. As a result, there can be shortages of many goods,
even basics such as food.
Another problem with communism is that it doesn’t inspire businesspeople to work hard because
the government takes most of their earnings.
3
Communism is slowly disappearing as an economic form. Communist countries today are
suffering severe economic depression and people are suffering from shortages of food as well as
other goods and services readily available in most other countries. The trend toward free market
systems is appearing in some communist countries.
Learning Goal 7
The Trend Toward Mixed Economies
22. a. Free market economies exist when the marketplace largely determines what
goods and services get produced, who gets them and how the economy grows.
The popular term for this system is capitalism.
b. Command economies exist when the government largely decides what goods
and services to produce, who will get them and how the economy will grow.
Socialism and communism are terms used to describe variations of this of system .
23. a. Many believe that a free market system is not responsive enough to the needs of the old, the
disabled, the elderly and the environment.
b. Socialism and communism have not created enough jobs or wealth to keep economies
growing fast enough.
c. The result of these problems has been a trend for free market economies, such as the United
States, to adopt many social and environmental programs. Communist governments are
disappearing and socialist countries are cutting back on social programs and lowering taxes.
The trend has been for traditionally capitalist countries to move toward a more socialist
system, while some of the socialist and communist countries have adopted elements of
capitalism. This blend is called a mixed economy.
24.
Mixed economies exist where some allocation of resources is made by the market and some by
the government. Most countries with mixed economies don’t refer to themselves as mixed, but
rather by the type of system that most closely characterizes their system.
25.
The United States is a mixed economy because of government involvement in the economy. The
government is now the largest employer in the United States.
26.
Generally the government’s ideal goal should be to grow the economy while maintaining some
measure of social equality.
Learning Goal 8
Economic Indicators
27.
Three major indicators of economic conditions are:
a.
the gross domestic product
b.
the unemployment rate
c.
the price indexes
28.
Production values from foreign manufacturers are included in the U.S. GDP as long as the
company is located within the country’s boundaries.
29.
GNP refers to Gross national Product, and refers to the value of goods and services produced in
the United States by Americans only.
4
30.
A major influence on the growth of GDP is the productivity of the workforce.
Unemployment
31.
a. frictional unemployment refers to those people who are “between jobs.”
b. Structural unemployment refers to unemployment caused by changes in an industry which
results in unemployment.
c. Cyclical unemployment refers to unemployment caused by political or economic forces.
d. Seasonal unemployment occurs where demand for labor varies over the year.
32.
Inflation is a general rise in prices over time Hyperinflation is a condition where the cost of
goods is rising so quickly that it makes a country’s currency virtually worthless.
33.
During a period of stagflation both inflation and unemployment are high.
34.
Inflation is a rise in prices of goods and services over time, and deflation is a situation where
prices are actually declining.
35.
Two measures of prices changes over time are:
a.
consumer price index
b.
producer price index
36.
The CPI is an important figure because some government benefits, wages and salaries, rents and
leases, tax brackets, and interest rates are all based on the CPI.
Fiscal and Monetary Policy
37.
Two areas addressed by fiscal policy are:
a. taxes
b. government spending
38.
Theoretically, high tax rates could slow the economy because they draw money away from the
private sector and put it into the government. High tax rates also may discourage smallbusiness ownership because they decrease the profits businesses can make.
39.
The national deficit is the amount of money that the federal government spends over and above
the amount it gathers in taxes. The national debt is the sum of the deficits over time.
40.
One way to reduce annual deficits is to cut government spending.
41.
Some people believe that spending by the government helps the economy to grow. Others
believe that the money the government spends comes out of the pockets of consumers and
business people and thus slows growth.
42.
When a recession occurs
a. prices fall
b. people purchase fewer products
c. more businesses fail
43.
The Federal Reserve Bank, or the Fed, is a semi-private organization that is not under the direct
5
control of the government. However the Fed has members who are appointed by the President.
The major roles of the Fed are to raise and lower interest rates, and to control the money supply.
44.
The Fed raises interest rates when the economy is booming to make money more expensive to
borrow. Businesses borrow less, and the economy slows as business people spend less money
on what they need to grow, including labor and machinery.
45.
In theory when the Fed lowers interest rates businesses tend to borrow more and the economy
takes off.
46.
The more money the Fed makes available to businesses and individuals, the faster the economy
grows. If the government printed more money, it would cost much more to buy the things we
need, because there is more money available. This relates to supply and demand, in that if there
is more of something, in this case money, it is worth less.
CRITICAL THINKING EXERCISES
Learning Goal 1
1.
The factors of production will be used differently by different firms. If, for example, you choose
to examine a tool and die shop, Land = the land where the shop is located; Labor = the various
workers and the positions they hold; Capital = the various pieces of equipment that are used in
the processes; Entrepreneurship = the owner of the business may have started this business
recently, or the company may have been in the family for generations; Knowledge = the various
backgrounds each of the workers has.
Be specific in your answers. For example: What specific resources are used in production? Is the
building rented or owned by the company? What specialized knowledge do the workers have?
Learning Goal 2
2.
125
.
100
75
Price
50
25
100
200
300
400
500
Quantity
a. The equilibrium price is $75.
b. 300 units will be supplied at that price.
Learning Goals 2,3
3.
a. up
d. up
6
b. down
c. up
4.
e. down
f. down
a. perfect competition
b. monopoly
c. monopolistic competition
d. oligopoly
Learning Goals 4,6
5.
In her discussions with Jean-Paul, Julie might defend capitalism by saying that one benefit of the
free-market system is that it allows open competition among companies. Businesses must
provide customers with quality goods and services at fair prices with good service or they will
lose customers to other companies that do just that. She might also say that in the U.S. there is a
benefit to working hard because we have the incentive of being able to keep the rewards of our
work – i.e. profits.
Julie might say further that the drawback of living in a socialist system is that the tax rate is so
high that there is little incentive to work hard, be innovative and create new products because
the government takes away so much of what you earn. Consequently, there are fewer
inventions and less innovation because those who come up with new ideas usually don’t receive
as much reward as they would in a capitalist system.
Jean-Paul may respond that a major limitation of capitalism is the inequality of wealth
distribution in a capitalist system. Business owners make more money than the workers, and
some people who are old, disabled or don’t have the talent to run a business can’t create wealth
for themselves. A major benefit of socialism is social equality. There is more equality because
income is taken from the richer people in the form of taxes and redistributed to the poorer
members of the population through various government programs such as free education, free
health care, and free child care. Workers in these countries get longer vacations and tend to
work fewer hours per week and have more employee benefits than workers in capitalist
countries.
Learning Goal 8
6.
These figures will change from semester to semester. There is an abundance of information on
these websites! You may find it interesting just to take a look at different topics of interest to you
on each of these sites.
PRACTICE TEST
MULTIPLE CHOICE
TRUE-FALSE
1. d
1.
2.
3.
4.
5.
6.
7.
8.
2.
3.
4.
5.
6.
7.
8.
b
b
a
d
a
c
d
T
T
F
F
T
T
F
F
7
9.
10.
11.
12.
c
b
c
c
9. T
10. F
11. F
12. T
8