Download EOCT – What I know, you need to know!

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
----------------------------------------Previous years prices
X 100
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:
US
Canada
Corn
Wheat
75
100
60
40
•
•
•
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