Download ECONOMICS REVIEW ANSWERS

ECONOMICS REVIEW
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What is the difference between a need and a want? Needs are things you must have for survival; Wants are things
you would like to have, but are not required in order to live. (Needs include food, water, clothing, shelter; Wants
include TVs, cars, BIG houses, expensive meals, etc.) .
Do we have enough resources to satisfy all of our needs and wants? Why or why not? NO because we have
SCARCITY…we have unlimited needs and wants, but we have LIMITED resources.
What is the difference between SCARCITY and a SHORTAGE? SCARCITY always exists…it is the general situation in
which we have a limited resources to satisfy our unlimited needs and wants; a SHORTAGE is something that may
occur unexpectedly due to a natural disaster, war, disease, accident, or other uncontrollable situations.
What is a TRADE OFF? When or how do they happen? These are any things you give up when you make any
decision. These exist all the time. When you make a decision, you could have MANY trade offs.
What is OPPORTUNITY COST? When you make a decision, how do you determine it? Your OPPORTUNITY COST is
the HIGHEST VALUED COST/TRADE OFF you give up when you make a decision. So, you may have had several
trade offs with a certain economic decision, but the one that has the “highest value” is the opportunity cost.
List and define the FACTORS OF PRODUCTION. Make sure you can identify examples of each. Land (all the things
that come from nature…not man made…trees, water, fish, cows, sand, etc.)…Labor (all the things that people do
to produce things, extract raw materials, etc.)…Capital (the things made by humans to make production,
transporting, and storing of products easier…machines, fishing nets, boats, trucks, tractors, etc.)
What is a PRODUCTION POSSIBILITIES CURVE? It is a graphical representation of the maximum amount of
production that is possible for various products if all resources are being used.
Draw and label a “production possibilities curve”. Make sure you know what areas on the curve are “efficient”,
“underutilized”, and not possible with the current level of resources for an economy. On each axis is a product or
service, the line of the graph shows what the maximum amount is at every combination with the given amount of
resources…Efficient is any production combination / level that is on the line; If the production level is “below” the
line, then resources are being underutilized; If the production level you seek is outside the line then it is not
possible with the current amount of resources.
What are the three questions that every economy/society must answer? (a) WHAT to produce; (b) HOW to produce
it, and (c) WHO will get the stuff that you produce.
Know the characteristics of the different types of economic systems (command, socialist, free market, mixed). What
type of economy does the US have (in reality, not in theory)? Command systems are those where the government
answers the three economic questions for you; In a socialist system, there is a goal of more equal distribution of
wealth and the government controls the key industries, but there is some private ownership; Free market systems
are those in which what is produced, and how things are produced are determined based on supply, demand, and
pricing. A mixed system in one that combines different features of each of these. The United States is a MIXED
ECONOMY in reality.
What is the difference between SOCIALISM and COMMUNISM? SOCIALISM is an economic system in which the
people / government attempt so spread the wealth more equally (think Bernie Sanders in a way since he says he is
one)…In these types of systems, there is an effort to take resources away from the wealthy and provide things to
the poor and others that need it. Socialism is usually not the result of a violent revolution, but is in fact something
that a lot of people believe they want and can be achieved through peaceful democratic elections; COMMUNISM
is a more strictly controlled system in which the government controls virtually everything and it is all about the
worker. Most of the time, communism is the result of a revolution which can be violent.
What are INCENTIVES? These are the things that motivate us to do something. In the US, what are the incentives
of the consumer and producer? Consumers have the incentive to make money last longer, so they want lower
prices; Producers have the incentive to make profits so they want higher prices.
What is happening with respect to the “gap” between the rich and the poor in our society? According to some
experts, the gap between the rich and poor is getting wider (rich getting richer, poor getting poorer). What are
some things that can be done to reduce the wealth gap between the rich and poor? The main thing that gets
proposed all the time to “shrink the gap” is to tax the rich MORE than they do now, and spread this around and
pay for more “programs” to assist those in need.
Why do we have to have rules/laws telling businesses what they can and cannot do? Over time, consumers want
good information, safe products, a protected environment, etc. In other words…the PEOPLE want it that way and
they VOTE for the things they want.
What are ENTREPRENEURS and why are they important in our economy? Entrepreneurs are the risk-taking
individuals that combine land, labor, and capital to come up with new products that society may want. They are
important because if they are successful, they will create more/better products for consumers, more jobs for
workers, and more potential tax money for society.
Are most entrepreneurs successful? No, MOST FAIL.
17. Who has the most power in a free market economy when it comes to what companies make and sell? Consumers; in
our economy, in theory, the government does not know what is best for us, WE do. Companies will only make
what we, the consumer, want. It makes no sense to produce what consumers may not buy because your business
would fail.
18. How do consumers BEST make their opinions known to businesses? Making purchases…dollars spent are like votes
cast in an election. People can complain all they want, but if you want McDonalds to have healthier options, stop
going there…eat “fresh” and go buy your food at Subway.
19. What are the main roles that the government has in our economy? To protect the consumer from unfair business
practices, To consume some goods in order to do its job as our government, to provide support to individuals and
some industries in the event of some sort of unexpected adversity, etc.
20. What happens if we are inefficient in the use of our limited resources? In the short term, we may not have enough
of the things we need and/or want; we may have shortages of key goods and services; and, we may not have
enough resources to support the production of goods and the satisfaction of the needs and wants of future
generations.
21. What are the arguments FOR and AGAINST raising the minimum wage? The people that FAVOR an increase in the
minimum wage say that it is NECESSARY for the working-poor to support their families, even it if costs a business
more; people that argue AGAINST an increase say that it will result in an increased cost for a business to operate
and also that many minimum wage jobs are low-skilled anyway. In addition, opponents have an issue with the
idea of increasing the amount workers are paid when they are not increasing their productivity.
22. What is INFLATION? A general increase in average prices in an economy. What is a FIXED INCOME? A fixed income
is when you make the same amount each year…it is not increasing over time. Why is it bad if there is inflation
when you are on a fixed income? If prices are going up on the goods/services you purchase every day, but your
income is NOT going up, that means you have less and less left over to save, or to spend on other things. It makes
life tougher.
23. If we reduce the imports of certain products from certain countries, why is that bad for consumers here? Reductions
of imports result in less variety of goods in our country and ultimately higher prices for products we make here.
24. What is the LAW OF DEMAND? If prices are going up, the “demand” for a product will go down…if prices are going
down, then the “demand” for products should go up.
25. Be able to look at a “graph” of demand and identify the difference between a “change in demand” and a “change in
quantity demanded”. A change of demand is if the entire demand curve moves to the right or left; a change in
QUANTITY demanded is when you move ALONG the demand curve because price changes... but the curve does not
move. By the way…why does demand change? Consumer tastes, utility (like if people don’t find something useful
anymore)…the media, incomes, etc….also, see the next few questions.
26. What is the difference between the INCOME effect and the SUBSTITUTION effect with respect to demand? The
INCOME effect is when prices for something are going up or down, and as a result, the amount of money you have
“left over” after you purchase goods changes (if the price goes up, you will have less money left over so you may
not purchase it)…in other words, the amount you purchase of it changes as a result of the impact it has in your
income….the SUBSTITUTION effect is a little different. If prices for one product go up, and there are other products
available that satisfy that need/want, you will buy less of the more expensive product, and you will purchase more
of the “substitute”. It works the other way too…if prices for a product go down, then people will buy more of it,
and less of a product they were purchasing before that served the same purpose.
27. What is the difference between a COMPLEMENT and a SUBSTITUTE good? A complement is a good that you need
when you purchase ANOTHER product…if you purchase snow skis, you will need to buy ski boots (complement)..if
you purchase an older camera you will need film (the complement)…etc. If the sales for cell phones were to drop
dramatically, you would see a drop in sales for things like phones cases and selfie sticks (complements);
Substitutes are those things you can purchase INSTEAD of the product you are looking for…for example, you can
purchase chicken instead of beef for protein; you can purchase apples instead of oranges; etc.
28. What is ELASTICITY? How responsive demand is to a change in price of a product. If a change in price causes a
relatively large change in demand, then that means the product is price sensitive, and is more ELASTIC…if prices
change, but the demand for the product does not change much, it means that price is not the main determinant in
purchasing the product, so people will buy it anyway. This is INELASTIC. What does it mean if demand (or supply)
is “elastic” or “inelastic”? see above…think of the rubber band example in class. If relatively little energy causes a
big change in the rubber band, it is ELASTIC…it changes easily…if you have one of those real thick rubber bands,
the same amount of energy may not move it much…in other words, it is resistant to change…INELASTIC. Make
sure you understand scenarios that impact how elastic or inelastic the demand for a product would be.
29. What is the LAW OF SUPPLY? If prices (that people can/will pay) for a product are going up, then the supply will go
up; if the prices are going down, then supply will go down.
30. What do companies do with production if they are making less profit when they sell products? (up or down) If they
are making less profit, they make less product. Of course, if they are making more profit, they make more of it.
31. What are SUBSIDIES? These are payments made by the government to encourage or protect certain economic
activities. How do they impact supply? In theory, subsidies increase supply
32. What are the main variables that impact “how elastic” the supply of a product will be? Elasticity of supply is
typically related to how easily you can change production. If you can change production quickly, it will normally
be MORE elastic, but if you can’t really change production levels real quick, it will be more INELASTIC. Example, if
you are a farmer, and you just planted your crop, and suddenly the price for your crop drops, you can’t just change
it over night…this is inelastic.
33. Who has the “advantage” (suppliers or consumers) in a free market system? In a free market economy, in theory,
neither side has the advantage…prices end up changing as needed.
34. Is a system based on “price” a “perfect system”? Why or why not? Not perfect (no system is)…There will be winners
and losers in any system.
35. What is RATIONING? This is a system of allocating goods and services without using prices. Why have we
rationed? Usually in times of war or natural disaster in order to ensure that key necessities get to the people that
need it. What are some problems with it? Fraud, abuse, counterfeiting, violence, etc.
36. How do “expectations of the future” impact the supply, demand, or price of a product? On the supply side, if you
expect prices to go up, you will try to increase your production now to take advantage of future profit
opportunities (and of course if you expect prices to drop, you are likely to cut back on production)…on the demand
side, if you expect prices for certain things to increase in the future, you may demand/buy more of it NOW and
store it for when prices are higher…if you are expecting prices in the future to drop for certain items, you may
purchase less of it now so you can save money later.
37. Are prices permanent, or do they change? Not permanent…they change ALL THE TIME!!!!!!
38. Understand the difference between a SHORTAGE and a SURPLUS, why they happen, and what will happen to prices?
SHORTAGES can occur when, for some reason, you don’t have enough product to satisfy everyone’s needs and
wants...shortages occur because of poor growing conditions (drought, disease, flooding), cutbacks in product /
processing facilities, unexpected natural disasters, war, etc. In a shortage situation, you will see prices increase.
SURPLUSES occur when, for some reason, you have too much of something available…this situation can occur if
you discovered new deposits of resources, if companies over-produced, if it was a great growing season for
farmers, etc. When you have a surplus of something, you will end up seeing prices drop.
39. Why would our government attempt to “fix” prices during war? To ensure that everyone has the ability to afford
the basic necessities, such as food or gas.
40. What are price FLOORS and CEILINGS? Why do we have these? Any examples????? Price floors are set so that
prices do not go below a certain amount (like for agriculture) to help protect certain businesses. Price ceilings are
in place to establish a maximum amount you can charge for something (like for rent) to ensure that consumers
will have an affordable option. Remember, if you are a landlord and rent out properties, and there is a rent
control in place, you are less likely to build more apartments and the ones you do have are likely to be in poor
shape since the “rent control” price is usually lower that what “equilibrium” price would be.
41. How predictable is our economy? It is very unpredictable.
42. Make sure you understand a “picture” of our business cycle, and be able to identify the phases of it. Over time, our
economy moves in fairly regular “ups and downs” in what is known as the business cycle. While we know they will
happen, the length of time and “size” of the upturn or downturn are not always as predictable. Expansion is when
overall GDP is going up…after a while, it begins to level out (Peak) and then eventually it begins to slow down and
decrease…so for awhile, GDP is dropping (Contraction)…of course, after a period of time, the slowdown starts to
“slow down” and you then see it level out (trough) and pick back up again.
43. What are EXTERNAL SHOCKS? Make sure you understand good and bad examples. These are sudden and
unexpected things (good or bad) that occur to cause the economy to either pick up or slow down. Good examples
include the discovery of oil in the Middle East and even Texas…also, the discovery of gold in California, which led
to the Gold Rush….Bad examples include hurricanes or earth quakes a drought or flood, etc. that kills crops or
displaces people and resources.
44. What happened during the Great Depression? GDP dropped a LOT, many people lost their jobs, wages decreased
to nearly 5-cents per hour of work, and banks failed…after the Great Depression, we did a lot of “reforming” …
such as protecting people’s retirement savings (Social Security), establishing a legal minimum pay for hourly work
(minimum wage laws), protection of people’s money in banks (FDIC), unemployment insurance to help people
when out of work…etc.
45. What is INFLATION? When prices are going up (they look at a market basket of about 300 goods) over time. Make
sure you can identify examples of COST PUSH and DEMAND PULL. Cost Push inflation is when the case of increasing
prices is the increased cost of producing (wages going up, raw materials going up, energy prices going up,
etc.)…this is usually never good for the consumer. Demand Pull is when the cause of increasing prices is an
increase in demand for products (remember, if demand goes up, price goes up). This can be a good thing.
46. What has happened to the purchasing power of the US currency in past years? What does that mean? Dropping…It
means you can’t purchase as much with the same amount of money as you could in the past (example…if you have
$100 today, and water costs $1 per bottle, you can purchase 100 bottles…but, you save your $100 bill…a year
later, you take that SAME $100 bill to the SAME store and see that bottled water is now $2.00 per bottle…you are
only able to purchase 50 bottles with the SAME MONEY….get it???)
47. What is GDP? What are some things that are and are not calculated as part of it? Gross Domestic Product…the total
value of all finished goods produced during a year. Thinks like underground activities (farmers markets or illegal
gun sales for example)…non-market activities (like when you mow your own yard or do your own cooking)….and
intermediate products (like the nails that go into making the final house…the tires that go into the making of the
final car, etc.).
48. Why do economists care about population trends? What has been happening with respect to the movement of our
population here in the US? You care because population servers as our labor, our entrepreneurs, our farmers, and
our consumers. In general, the trend of our population is moving to the south and west.
49. If population grows too quickly, what is the problem? If the population shrinks, why is it bad? If it grows too quickly,
you may see shortages of food and water, you may see overcrowding in cities due to a lack of housing, you may
see power outages or a lack of clean water due to a lack of sufficient infrastructure, etc. If the population is
growing too slowly (or actually shrinking), that is bad because you have fewer people to farm, fewer people to
work in industrial jobs or services, and you have fewer consumers to purchase things.
50. What has been going on with respect to the NET IMMIGRATION here in the US? More people coming in than
leaving so it is a net positive.