Download 1 - OnCourse

FREE ENTERPRISE—GEE REVIEW
1.
GOODS and SERVICES are things CONSUMERS purchase. How much we buy of each is
determined by PRICE, according to the LAW of DEMAND.
2.
Some goods and services are NEEDS, you have to have them for survival. Some goods and
services are WANTS, they are not needed for survival but we buy them anyway.
3.
SCARCITY is when there aren’t enough resources to supply the wants and needs of consumers. In
other words, there is only a limited amount of gold in the world. The more scarce a good or service is,
the higher the price will be.
4.
SHORTAGE occurs when there is TEMPORARILY not enough of a resource to supply the wants and
needs of consumers. SCARCITY is permanent.
5.
FACTORS OF PRODUCTION are used to produces goods and services. These include
capital resources
machines, buildings, cash
human resources (labor)
factory worker, minister
land and natural resources
land: earth, space, ocean
natural resources: trees, animals, minerals
entrepreneurship
business owners, business managers
technology
computers, robotics
6.
We can’t always buy everything we want, even when we have the money. Sometimes we have to
make a TRADEOFF, that is to give up one thing to get something else. Tradeoffs are often necessary
because of scarcity.
7.
OPPORTUNITY COST is the dollar value of the tradeoff we make. For instance, if I could only
purchase either a pair of shoes or a purse, and I choose the purse, the opportunity cost is the cost of
the shoes (they were the tradeoff, or the thing I gave up).
8.
Given the number of choices consumers face, it is not reasonable to assume that trade-off means
entirely sacrificing one choice for another. Rather, we will make limited trade offs—give up part of one
thing to get part of another. The combinations of goods and services that are chosen are known as
production possibilities.
9.
The government also has to make choices and tradeoffs. A choice the government must make often is
whether to spend more on social programs (welfare, health care, education) or spend more on defense
(military spending). This debate is known as GUNS V. BUTTER.
10.
Different countries have different types of economic systems or economies. The four main types of
economies are
Traditional--looks to the past for the answers. Often based on customs or religious beliefs.
Command--factors of production completely controlled by the government. (COMMUNISM)
Pure Market-- individuals completely control the factors of production with no government interference.
Mixed--combines elements of both market and command. The U.S. has a mixed economy.
11.
Developing nations are nations that are so poor they do not have strong economic systems of any kind.
12.
STANDARD OF LIVING--a term which refers to the economic, material well-being of people. It is
measured by the average value of goods and services used by the average citizen during a given
period of time, usually 1 year.
13.
ADAM SMITH was a well known economist who believed in the “Invisible Hand Theory.” This theory
states that the government must NOT interfere in the economy. It should take a hands-off approach
(also known as LAISSEZ-FAIRE) and let the economy take care of itself.
14.
Medicaid is the government funded medical care program for the poor. Medicare is the government
funded medical care program for the elderly. Social Security is a government funded program which
provides monthly payments to people who are retired or who are disabled and unable to work.
15.
The law of demand states that an increase in price causes a decrease in quantity demanded. In other
words, the more something costs, the few of them we will buy.
16.
Several reasons determine what we buy and how much.
PRICE—the more something costs, the fewer of them we buy
INCOME EFFECT—the more money we earn, the more we will spend.
SUBSTITUTION EFFECT—when the price of one good goes up, we will buy a substitute good if it is
cheaper, as long as the two satisfy the same desire.
DIMINISHING MARGINAL UTILITY—the more we buy of a good, the less of it we want.
(UTILITY is the amount of enjoyment we get from consuming a product)
17.
ELASTIC DEMAND—a small change in the price of a good will drastically change demand for that
good.
INELASTIC DEMAND—no matter how the price changes, our demand for a particular good stays the
same.
18.
Other NON-PRICE factors that determine demand are known as DETERMINANTS OF DEMAND:
These include:
Consumer tastes and preferences—If you don’t like a product you won’t buy it at ANY price.
Market size—The larger the community the more goods they demand.
Income—The more you make the more you demand, regardless of the price of the goods you buy.
Consumer Expectations—We sometimes buy or don’t buy products because of what we EXPECT to
happen.
Substitute Goods—When you buy one good in place of another (Coke instead of Pepsi)
Complementary Goods—When you buy one good to go along with another (Camera and Film)
19.
A demand schedule shows the INVERSE (opposite) relationship between price and demand. In other
words, the more one goes up, the more the other one goes down.
Demand for Whoppers
20.
Demand for Dr. Pepper
The information from the DEMAND SCHEDULE is plotted on a graph called a DEMAND CURVE.
21.
The LAW OF SUPPLY states that the producers will produce and sell more when the price of a good is
higher and less when the price is lower.
22.
Just as with demand, supply can be shown on a SUPPLY SCHEDULE and a SUPPLY CURVE.
Supply of Whoppers
23.
PROFIT—Amount of money a company makes after all production expenses are paid.
24.
FIXED COSTS—Costs to produce a good that do not change no matter how many of them you
produce.
VARIABLE COSTS—Costs to produce a good which goes up or down depending on how many units of
the good you produce.
25.
When there is more supply of a good than the demand for the good it causes a SURPLUS.
Where is more demand for a good and not enough supply to satisfy it, it causes a SHORTAGE.
When there is just enough supply to satisfy the demand, it is called EQUILIBRIUM
26.
A SUBSIDY is money or other benefits the government gives to private businesses.
27.
PRICE FLOOR—a government regulation that prevents prices from falling below a certain level
(ex. minimum wage)
PRICE CEILING—government regulation that prevents prices from rising above a certain level.
(ex. postage stamps)
28.
Businesses in a free enterprise system are commonly organized in three ways:
1) Sole Proprietorship—a business owned and controlled by one person.
2) Partnership—a business owned and controlled by two or more persons.
3) Corporation—a business owned and controlled by stockholders.
29.
Small Business Administration—a government agency that helps people get a business started or
assists small businesses in other ways. The SBA is particularly helpful in assisting women, minorities,
the handicapped, and non-profit organizations.
30.
A corporation is owned by stockholders. These are individuals who invest in a corporation by buying
shares of stock. When an investor purchases stock in a corporation, the investor is buying part
ownership in that company. The part he owns is sometimes called a SHARE.
31.
STOCKS are traded (bought and sold) on an exchange. The three primary U.S. exchanges are
located on Wall Street in New York City. The largest is the New York Stock Exchange.
32.
Investors cannot buy or sell directly on the exchange, but must go through a stockbroker. Many
brokerage houses are now accessible through the Internet. In exchange for handling the transaction,
the broker charges a fee.
33.
Stocks earn money for stockholders in two ways:
a)
selling stock for more than its purchase price
b)
dividends
Dividends are payments made to the stockholder by the company in which she invested.
The money generally comes from the company’s profits.
34.
A corporation is run by a BOARD OF DIRECTORS. The leader of the board of directors is
the CEO or Chief Executive Officer. For instance, at one time Bill Gates was the CEO of
Microsoft Corp.
35.
Corporations sell stock to raise money to expand their companies. Corporations can also
borrow money from the public. They do this by selling bonds. You loan a company money
and they pay you back with interest.
36.
Dow Jones Industrial Average--an indexed average of 100 well known companies, used to judge the
direction of the overall market.
Insider Trading
--illegally using information about a company, information that is not
available to the public, to trade stocks. (Martha Stewart)
37.
MERGER--when one company joins with another to become one big company.
38.
Economies of Scale—when companies consolidate their operations or buy out other companies so that
the new, larger company can operate more cheaply and efficiently.
38.
Horizontal Merger—When two companies with similar products merge (ex. Coke & Pepsi)
This is when a company buys out its competition.
Vertical Merger—When a company buys another company and the two companies made
different products, but the products they both make end up in the same final good.
(ex. When Ford buys Goodyear Tires) This is when a company buys out its suppliers.
39.
SUBSIDIARY—when one company buys another company, but the two companies maintain separate
identities. (ex. Eckerds is owned by J.C. Penney, but keeps the name Eckerds)
40.
FRANCHISE—when a company agrees to let other people use their name to sell goods and services
(Burger King and Blockbuster)
41.
NON-PROFIT corporation provides goods or services without seeking profits from which to
pay dividends to investors.
42.
PURE MONOPOLY-- exists when a single company controls the total production or sale of a good or
service. Nearest example is the electric company.
43.
Four legal types of monopolies (and examples of each) that exist in the U.S. are:
TYPE
EXAMPLE
1) Natural
public utility (AT&T until 1984)
2) Technological
General Dynamics (Trident submarine)
3) Government
US Post Office
4) Geographic
General store in a remote area
44.
OLIGOPOLY—when only a FEW producers dominate the production of an identical or similar
product. Examples of this are oil companies, cereal companies, car manufacturers and
airlines.
45.
Collusion-- when leaders of competing firms get together and set production
levels or prices for their products. This is illegal. When collusion
takes place on an international level, it is known as a cartel.
46.
A TRUST is a huge monopoly created through a merger and cutthroat competition. These first
occurred after the Civil War in 1865. Standard Oil, headed by John D. Rockefeller was the first trust
formed in the U.S. The U.S. passed anti-trust legislation in the 1880’s and 1890’s (many during Teddy
Roosevelt’s administration, which is how Teddy got the nickname “Trustbuster”) to regulate big
business and prevent monopolies from forming. The first of these was the Sherman Anti-Trust Act of
1890, followed by the Clayton Anti-trust Act of 1914.
47.
PATENT—permission from the government giving exclusive right to produce an invention.
COPYRIGHT—permission from the government giving exclusive rights to publish, duplicate,
perform, display, or sell their creative works. (Songs, books, painting)
48.
Regulatory Agencies run by the government include:
Federal Trade Commission (FTC)—regulates unfair competition in interstate commerce
and advertising fraud.
Food and Drug Administration (FDA)—regulates purity and safety of foods, drugs, and
cosmetics.
Federal Communication Commission (FCC)—regulates TV, radio, and telephone.
49.
Wholesalers are businesses that purchase large quantities of goods from producers for resale to other
businesses. Retailers sell consumer goods directly to the public.
50.
CIVILIAN LABOR FORCE--all people who are at least 16 years old and who are working or
actively looking for work.
51.
Blue-collar workers: Workers in factories or other jobs outside an office.
White-collar workers: Workers who work in an office or in a retail business.
52.
Industrialization--process by which a nation’s economy is transformed from one based on
agriculture to one based on manufacturing. An economy that produces its goods through
animal and human power is said to be labor intensive. An economy that produces its goods
with the help of machine power is said to be capital intensive.
53.
Equal Pay Act--states that females who do the same job as males get equal pay.
Civil Rights Act --states that one’s sex, race, religion, or country of national origin may not be used to
discriminate against someone in the workplace or when being considered for employment.
Age Discrimination Act--states that workers age 40-65 are protected against age discrimination
(no forced retirement).
54.
The Equal Employment Opportunity Commission_, often referred to as the EEOC was established to
enforce all of the provisions of the above acts.
55.
Affirmative action is a government program which is designed to eliminate racial and sexual bias in the
workplace by establishing hiring quotas. Recent trends show that affirmative action is on the decline,
because some argue it has outlived its usefulness and sometimes may lead to reverse discrimination.
56.
Minimum wage is the lowest wage that employers can legally pay workers.
57.
LABOR UNION is an organized group of workers that negotiates with employers for better
wages, job security, and improved working conditions. CRAFT UNION is composed only of
specially skilled workers such as plumbers, electricians, or carpenters. INDUATRIAL UNION
includes all workers whether skilled, semiskilled, or unskilled.
58.
KNIGHTS OF LABO—an early labor union that did not succeed due to disorganization and
radical ideas.
59.
SAMUEL GOMPERS started the first modern day union, the AFL or AMERICAN
FEDERATION OF LABOR.
60.
Six major issues that have traditionally been or are currently a part of labor movement in U.S. are:
1) wages
--including COLAs (Cost of Living Adjustments) to keep up with inflation
2) fringe benefits--including insurance, paid vacations, sick leave, retirement plans, paid holidays
3) working hours--trend is fewer days per week; 4 ten hr. days instead of 5 eight hr. days.
4) grievance procedure--set procedure employee can follow to have his complaint heard by boss.
5) job security--seniority system established; “last hired, first fired” concept
61.
COLLECTIVE BARGAINING--process by which a union representative speaks for all union members
in an effort to negotiate a contract between management and labor.
MEDIATION--when collective bargaining ends in a deadlock, management and labor hire a neutral third
party to listen to both sides of the argument and offer suggestions on how to resolve the
disagreement.
ARBITRATION--when mediation does not work, management and labor submit their demands to a
neutral third party, each agreeing that they will allow the third party to decide on the binding terms of
settlement.
62.
STRIKE--a halt in production
Two main tactics used to carry out strikes are:
1)picketing --public protest held by workers at entrance of the plant. Protesters carry signs.
2)boycotting --organized effort to get public to stop buying a firm’s products until strike is settled.
Sometimes both of these are used simultaneously. Cesar Chavez, a well-known labor leader led
several strikes and boycotts during the 1960s and 1970s as a representative of the United Farm
Workers Union.
63.
64.
Main reasons that strikers picket are to inform the public, to embarass the company, gain public
support, and discourage scabs (non-strikers) from crossing the picket line and entering the premises.
65. Two ways companies resist the demands of labor:
1) lockout--employer closes plant’s doors until contract agreement is reached.
2) injunction--employer gets government to issue a court order to end the strike and force workers to
return to work.
66.
Union members are sometimes called the RANK AND FILE.
67.
Right-to-work laws allow workers to continue working in a particular job without being forced to join a
union. Each state can decide if it wishes to be a RIGHT TO WORK state. The Taft-Hartley Act gave
states the power to establish this law. The states with right-to-work laws are primarily located in the south and
the west where wages are typically lower than the national average and where migrant workers are common.
68.
Unemployment is divided into four categories:
frictional
--when workers are temporarily out of work
structural
--when a worker’s specific skills become obsolete
cyclical
--a depressed economy lowers demand for workers
seasonal
69.
--workers are out of work part of year due to changes in seasons
The BUSINESS CYCLE is the series of rising and falling of the economy.
expansion
contraction
peak
trough
--a period of growth in the economy
--a period of slowdown in the economy
--the highest point of expansion (prosperity or boom)
--the lowest point of contraction (recession)
70.
fiscal policy—Taxing and spending policies created by Congress; used to stabilize the economy
monetary policy—Changing the money supply policies created by The Federal Reserve Bank;
used to stabilize the economy.
71.
LEADING ECONOMIC INDICATORS—signals in the economy which predict which direction the
economy is going. They include things such as interest rates, inflation rates, unemployment rates, etc.
72.
Gross Domestic Product (GDP)--the dollar amount of all final goods and services produced within our
nation’s borders in a single year. GDP is a measure of how our nation is doing economically from one
year to the next. The U.S. usually has the highest GDP in the world.
73.
INFLATION is an increase in the average price level of all goods and services. The opposite of that is
DEFLATION, or a decline in the average price level of all goods and services. Inflation can be caused
by: 1) an increase in production costs, 2) in increase in the price of resources, 3) an increase in wages,
4) consumers spending too much money. Retired persons living on a fixed income are the one’s
most hurt by inflation—prices go up but their income stays the same.
74.
CONSUMER PRICE INDEX—Economists use the CP to measure the rate of inflation. This index
shows the change in the average price of goods from one time period to the next.
75.
The GOVERNMENT is the largest business and largest employer in the U.S.
76.
The government provides citizens with PUBLIC GOODS AND SERVICES, goods and services
available to all qualifying citizens. Public goods and services include retirement benefits, health care
benefits, schools, roads, bridges, hospitals, water systems, etc. The government collects TAXES to
pay for these goods and services.
77.
Government has gotten bigger for several reasons:
1) A growing population in the U.S.
2) More national emergencies (tornadoes, hurricanes, Sept. 11)
3) Increase in the number of disadvantaged people
4) More government programs to help the citizens
78.
The worst economic time experienced by the U.S. occurred in the 1930’s known as THE GREAT
DEPRESSION. During this period, poverty and unemployment were at an all time high.
President Franklin Roosevelt proposed a legislation known as THE NEW DEAL to provide quick relief
to the American people suffering during this economic crisis. The New Deal included such acts as:
79.
National Recovery Act (NRA), Works Projects Administration (WPA), Civilian Conservation Corps
(CCC), Tennessee Valley Authority (TVA). All of these programs created jobs which put unemployed
people back to work and helped to get the economy moving again.
80.
Taxes are mandatory payments that both individuals and businesses must make to the government to
cover the costs of public goods and services. Income taxes are deducted from your paycheck as are
Social Security and Medicare.
81.
The three broad categories of taxes in the U.S. and examples of each are:
a)
Progressive --takes a larger percentage of income from high-income people than
from low-income people—For example, federal income tax
b)
Regressive
--takes a larger percentage of income from low-income people than
from high-income people—For example, sales tax
c)
Proportional --take the same amount of tax from all people—For example some state income
tax. Proportional tax is also known as a flat tax.
82.
Social Security tax provides for retirement benefits and benefits for the disabled and for young children
of a deceased parent. This type of tax is also known as FICA.
83.
Once the government has collected in taxes and other revenues, it must make a plan for the spending
of these revenues. This plan is known as the FEDERAL BUDGET, and it is prepared by the Office of
Management and Budget, a part of the executive branch of government. Once the budget is written, it
must be presented to Congress for their approval.
84.
The greatest portion of federal spending is on Social Security and then on Health Care and Medicare.
When government spending is greater than the revenues (income) it receives, a BUDGET DEFICIT
occurs. When government revenues are greater than spending, a BUDGET SURPLUS occurs.
85.
When the government has a deficit, it must borrow money to pay its obligations. The total amount of
money the federal government owes to its creditors is known as the NATIONAL DEBT. When the
government is in debt, it is said to be “in the red.” When the government has a surplus, it is said to be
“in the black.”
86.
There are only two ways to balance the budget and avoid federal deficits: raise taxes or spend less.
87.
It is the job of the government to provide for the public’s well being. So, the government assists specific
groups such as the elderly, the sick and the poor. American’s want everyone in this nation to be
provided with a certain minimum level of income. This is accomplished through INCOME
REDISTRIBUTION, which is using taxpayer dollars from those who can afford it to help out those who
need assistance. Payments are made to these individuals through ENTITLEMENT programs. Two
examples of entitlement programs include:
Social Security/Medicare  retirement and health care for the elderly
Food Stamps/Medicaid  welfare and health care for the poor
88.
Three types of money used in the U.S. today are CURRENCY (refers to both coins and paper bills),
CHECKS (also known as demand deposits), and NEAR MONEY (savings accounts and time deposits).
Near money cannot be used directly to buy goods and pay debts, but it can be easily converted to
cash.
89.
U.S. currency is printed at the Bureau of Engraving. Coins are produced at the U.S. Mint.
90.
Three functions of money are:
medium of exchange --a tangible way to pay for things.
standard of value
--a way to measure the worth of what is bought and sold.
store of value
--can be saved or stored for later use.
91.
Secret Service is in charge of combatting counterfeiting, or the printing of fake money.
92.
Three categories of money are:
commodity money--has value of its own AND is also used as money EX: coin collection
representative money--has value only because it can be exchanged for something valuable.
EX: checks, money orders, gift certificates
FIAT MONEY --has value only because the government says it does. EX: U.S. dollars
At one time U.S. dollars were backed by gold and/or silver. That is no longer true.
93.
In 1913, Congress created the FEDERAL RESERVE SYSTEM, commonly referred to as THE FED.
This system serves as the nation’s central bank. It serves as a central bank for both the federal
government and for member banks. It is the job of The Fed to provide a number of major services that
strengthen the nation’s monetary and banking systems. The Fed issues paper currency, check up on
banks, process checks and make loans to banks. Their most important function is to REGULATE THE
MONEY SUPPLY.
94.
MONETARY POLICY is used by the Fed to control the amount of money in circulation. The Fed uses
either a LOOSE money policy or a TIGHT money policy. If the use LOOSE, it means they are putting
more money into the money supply which increases spending and promotes economic growth. If they
use TIGHT, it means they take money out of the money supply which slows down spending and slows
economic growth. This is used when inflation is too high.
95.
The FED controls the money supply in three possible ways:
RESERVE REQUIREMENT--percentage of money banks must keep on hand and not lend out.
DISCOUNT RATE--interest rate the Fed charges member banks for the use of its money.
OPEN MARKET OPERATIONS--the buying and selling of government securities (savings bonds)
96.
When the Fed lowers the reserve requirement, it means banks have more money to lend. When the
Fed lowers the discount rate, it means banks make more loans, because more borrowers qualify at
lower interest rates. When the Fed wants to pump more money into the economy using its most
important tool, open market operations, it buys back government securities which increases the
amount of money deposited into bank accounts.
97.
People tend to use the interest rate as a measure of the overall health of the economy. In particular,
they think the economy is healthy when interest rates are lower.
98.
Banks fulfill two needs in a community:
a)
Provide a safe place for people to deposit their money
b)
Lend money individuals and businesses to buy goods and services
99.
During the Great Depression, many banks failed and lost their money. This caused widespread panic
and caused a rush by depositors to withdraw their funds from a bank before it failed. This was known
as a BANK RUN. Thousands of people lost their life savings as a result of the economic crisis, and
confidence in the banking system was destroyed.
100.
To restore public confidence in the banks, Franklin Roosevelt, the president at that time, declared a
BANK HOLIDAY, closing all of the nation’s banks until further notice. This “holiday” gave federal
auditors time to see which banks were healthy enough to reopen. Sound banks were reopened within a
few weeks. Congress then Federal Deposit Insurance Corporation or FDIC which insured bank
accounts. Today, bank accounts are insured up to $100,000 against such a loss.
101.
The three most common types of financial institutions in the U.S. today are commercial banks,
savings & loans, and credit unions. The main functions of commercial banks are to lend money and to
accept checking and savings deposits. Savings and loans also lend money and accept deposits, but
they mainly make loans to buy homes. Credit unions do the same things as commercial banks, but
credit unions are owned and controlled by their depositors.
International trade takes place whenever any goods or services move across national borders.
Imports are the goods we buy from other nations. Exports are the goods and services that we sell to
102.
other nations. International trade is a two-way street; we cannot sell anything to other nations unless
we also buy from them.
103.
Before you can buy something from another nation, you have to buy that nation’s currency first.
The cost of foreign money is called the foreign exchange rate.
104.
International Monetary Fund (IMF) is a global organization that was established to promote stable trade
and communication between countries and a stable system of buying and selling their __currencies.
105.
A primary reason that nations trade is that one nation can make a product better or cheaper than
another one. When one country specializes in producing a particular good or service, it is said to have
a COMPARATIVE ADVANTAGE. When a country not only specializes in the production of a good,
but also has the resources (natural, capital, human) to out produce others in the production of that item,
it is said to have an ABSOLUTE ADVANTAGE.
106.
The U.S. exports more foods, especially wheat and corn than it imports. However, it has an absolute
advantage (specializes in)capital goods, such as agricultural machinery, aircraft, oil drilling and
construction equipment.
107.
The U.S. imports far more goods than it exports, resulting in a TRADE DEFICIT. When a country
exports more than it imports it is said to have a TRADE SURPLUS.
108.
Cutting back on the number of imports coming into a country is known as TRADE BARRIERS. These
include TARIFFS (taxes on imports) and, IMPORT QUOTAS (only allowing a certain amount of a
goods or services to be imported.)
109.
In the past decade, several nations have come together in free trade associations, which are groups of
two or more countries who formally agree to eliminate trade barriers among themselves. The most
famous is the European Economic Community, popularly known as the EUROPEAN UNION or the EC.
110.
In the Western Hemisphere, Canada, the U.S., and _Mexico have formed the North American Free
Trade Alliance, commonly known as NAFTA. These countries have eliminated trade barriers
with each other and formed a free trade zone
111.
For over 40 years, most of the nations of the world have been formally trying to eliminate trade barriers
through an organization called General Agreement on Tariffs and Trade or GATT. This organization
promotes multi-national efforts to reduce or eliminate trade barriers.
112.
Some nations strive for MOST FAVORED NATION STATUS from their trading partners. When one
nation grants most-favored-nation status to their trading partner, it means that it promises to charge that
nation its lowest possible tariff.
113.
The top four trading partners with the U.S. include Canada, Mexico, Japan, and China. We have a
trade deficit with all four.
114.
Louisiana also plays a key role in the global economy. Louisiana sold over $4_billion in exports to
more than one hundred countries in 2001. 3/4 of the exports were manufactured items such as
machinery, processed foods, petroleum and coal. The number of Louisiana companies that export to
other countries increased by 110 % between 1992 and 2001. An estimated 85,000 Louisiana jobs
depend on manufactured exports. The top agricultural products exported from Louisiana include rice,
cotton and soybeans. A major reason that Louisiana exports have increased is the NAFTA agreement
with Mexico and Canada. Exports are up 110% since the signing of that agreement.