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ECON SUN #2 Student Contact Info (Copy from SUN #1) Student Contact #1 Name:______________ Student Contact #1 Phone:______________ Student Contact #1 Email:______________ Student Contact #2…. McDermott Contact Email: [email protected] Class Website: www.mcdermotthistory.net Table of Contents Page Assignment 1. Student Contact and Table of Contents 2. Table of Contents (Con’t) 3. My Grade/Due Dates 4. Process: Competition and Market Structures * 5. Notes: Competition and Market Structures 6. Process: Taxation * 7. Notes: Taxation 8. Process: Economics of Gov’t Spending * 9. Notes: Economics of Gov’t Spending 10. Film: IOUSA */ 11. Film: 30 Days */ 12. Process: Deficits and National Debt * 13. Notes: Deficits and National Debt 14. Process: Savings * 15. Notes: Savings 16. Investment Assignment ** 17. Investment Assignment Directions 18. Process: Investment Strategies * 19. Notes: Investment Strategies 20. Study Guide Test #3 **/ 21. Study Guide Test #3 22. Study Guide 23. Study Guide 24. Process: Business Cycle * 25. Notes: Business Cycle 26. Process: Unemployment * 27. Notes: Unemployment 28. Project: Budget */ 29. Directions: Budget Project 30. Advertising Project */ 31. Advertising Project Directions 32. Process: Advertising Techniques * 33. Advertising Techniques 34. Final Study Guide **/ 35. 36. 37. Final Study Guide 38. Process: Inflation * 39. Notes: Inflation 39 Notes: Inflation I. Inflation in the United States 34 Final Study Guide Production Possibilities Frontier (know the graphing of this too)* Sole Proprietorship Corporation Partnership Gross Domestic Product Paradox of Value Wealth Value Opportunity Cost Developing Countries Obstacles to Economic Development ** World Bank International Monetary Fund Inflation Expansion Depression Supply Demand Business Cycle Unemployment Types of Unemployment *** Hyperinflation Capitalism Economics Merger Perfect Competition Monopolistic Competition Oligopoly Monopoly Types of Taxes *** Public Sector Private Sector Social Security Medicare Factors of Production Surplus Shortage Market Equilibrium Elasticity (Supply and Demand – know how to graph) ** Mutual Fund Roth IRA/IRA 401(k) Capital Gains Tax Return IRS Incidence of a tax Sin Tax Inflation Rate (calculate) Be aware of the following: Films we have seen (IOUSA, 12 Angry Men, Tucker, and 30 Days episodes) 29 Directions: Budget Project You are now in your mid to late 20s. You are earning an income and will need to budget your finances. The income that you earn will be “after taxes.” You need to account for the following things per month: 1. Room (where you will live and the cost of that) 2. Food 3. Utilities (water, gas, electrical, garbage, phone, internet, cable) 4. Transportation 5. Entertainment 6. Investment (savings) 7. Emergencies – repairs, doctor bills, etc. 8. Health Care 9. Insurance 10. Any debts – school loans, credit cards? 11. Misc. On page 28 you will write out the budget for one month. Mr. McDermott will give you your annual earnings and your outstanding debt. 31 Advertising Project Directions You will be coming up with an advertisement for a product (good/service) that you make up. You will do this project on page 30, and turn in a separate part to Mr. McD on its own as well. Follow the criteria below to do this project: 1. Answer the couple of questions on page 30, you might want to review page 33 in your notes on advertising strategies. 2. You will need to do a rough draft on page 30, or an outline of info regarding your ad, and then do a separate final draft to be turned in on its own. 3. Student Choice: You can do one of the following: A print ad (newspaper, magazine), a TV ad (you will write the script, including what the viewer will see), or a Radio ad (just a script). 4. The ad must be either a full page magazine or half page newspaper, a TV ad that would last about a minute, or a radio ad that would last about a minute. 5. Separate turn in due Thursday June 16, 2011. 30 Advertising Project 1. What is the name of your product, and define what it does? 2. What advertising strategies will you be using? Why? 3. Who is your target audience for the product and what is the estimated sale price of the product? (Use the rest of page 30 for a rough draft and/or outline for you advertisement) 33 Advertising Techniques 1. Avante Garde – Ahead of their time with a new product. 2. Facts and Figures – Using statistics to sell a product. 3. Weasel Words – Using terms that would not actually make any guarantee. 4. Magic Ingredients – Suggestion that some miraculous discovery makes the product amazing. 5. Patriotism – Showing pride in your country/nation. 6. Diversion – Draws away from the ill effects of the product. 7. Transfer – Using placement of products to suggest positive qualities in which the product itself cannot promise. 8. Plain Folks – Suggesting the product is practical and used by common people like you. 9. Snob Appeal – Product will make you into a super star and put you into an elite status. 10. Bribery – Buy one get one free. 11. Testimonial – Person endorses the product (usually someone famous). 12. Wit and Humor – Customers are attracted to the entertainment value of the advertisement and can attach that to the product. 13. Simple Solutions – The product can solve a nagging problems simply. 14. Card Stacking – List all of the good aspects of the product and ignore all negative ones. (very common in many other techniques). 15. Bandwagon – Exploits the desire of most people to join what everyone else is doing. 32 Process: Advertising Techniques 1. How much do you pay attention to how advertisers influence you buying certain products? Have you ever bought a product solely due to a commercial? Why? (10) 2. Of the different advertising techniques, which four do you think are the most interesting? 27 Notes: Unemployment I. Measuring Unemployment A. The Unemployment Rate – The number of unemployed individuals divided by the total number of persons in the civilian labor force. This is done by a survey that the Bureau of Census does. B. Limitations of the Unemployment Rate – 1. Does not count people that have stopped looking for work in the last month. 2. Counts people that are severely underemployed (worked 1 hour in month then you are employed). II. Kinds of Unemployment A. Frictional Unemployment – Caused by workers who are between jobs. This is considered the good unemployment and will usually always exist on some level. B. Structural Unemployment – Occurs when there are fundamental changes in the operations of the economy. For example a reduction in demand or supply because of different factors. This type of unemployment can most likely cause recessions or expansion if it is low. C. Cyclical Unemployment – A direct relationship to the business cycle. In a recession there is more of this unemployment. During an expansion period there is less of this unemployment. D. Seasonal Unemployment – E. Technological Unemployment – III. The Concept of Full Employment – Does not truly exist, however an unemployment rate of about 4% or lower is considered great for the economy in the U.S. 26 Process: Unemployment Rate 1. What do you think about how the unemployment rate is figured out and determined in the U.S.? Do you think this should be changed? Why? (10) 2. Of the different types of unemployment which two do you find the most interesting? Why? How is 4% unemployment “good?” 25 Notes: Business Cycle I. Business Cycle in the United States – Business cycle: largely systematic ups and downs of real GDP. Business Fluctuations: The rise and fall of real GDP over time in a nonsystematic manner. A. Phases of the Business Cycle – Recession: A period during which real GDP declines for two quarters in a row (6 consecutive months). Peak: Point where real GDP stops going up. Trough: The turnaround point where real GDP stops going down. Expansion: A period of recovery from a recession. A Depression is a state where there are large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants. B. The Great Depression – Began with the stock market crash of 1929. Lasted throughout the 1930s. Marked by high unemployment (over 20% some times), bank closures, and a failing overall economy. C. Causes of the Great Depression – 1. Disparity between rich and poor was huge. 2. Easy credit allowed people to borrow a lot. 3. Global economy relied heavily on the U.S. 4. High U.S. tariffs discouraged trade and economic growth by other countries (and cheaper goods). D. Business Cycles Since WWII – Average 11 month recession, and 43 month expansions. II. Causes of the Business Cycle A. Capital Expenditures – When the economy is expanded usually businesses are buying factories/machinery, etc. B. Inventory Adjustments – When businesses believe that the economy will retract, they usually begin making their inventory smaller. C. Innovation and Imitation – When a new product comes out it can have an expansionary effect on the economy less innovation means a greater chance of recession. D. Monetary Factors – The Federal Reserve sets the interest rate, if the rate is high then people will borrow less, which might cause recession. If the interest rate is low then people will borrow more which can cause expansion. E. External Shocks – Natural disasters or unforeseen major changes in the world can affect the Business cycle (expansion or recession). Index of Leading Indicators – Monthly statistical series that usually turns down or up before real GDP. 24 Process: Business Cycles 1. How would you describe the business cycle to a 6th grader? What would you think would be the most difficult thing for them to understand about it? Why? (11) 2. What do you think were the greatest causes of the Great Depression? Why? Why is it so difficult to predict recessions or expansions? 19 Notes: Investment Strategies I. Basic Investment Considerations A. The Risk-Return Relationship – Risk: A situation in which the outcome is not certain, but probabilities for each possible outcome can be estimated. The higher the risk the greater the possible return or loss. Lower risk usually has lower return and a lower chance of loss. B. Investment Objectives – The time that you are investing for, the amount that you can invest, and the type of investment can determine what type of choices you should or could make with your money. C. Simplicity – When things are “too good to be true” they usually are. If an investment is too complex it is either illegal, or might need a lawyer to look at it before you make the investment. Most investments should be made with a short understandable contract. D. Consistency – Constantly investing over time is the best way to do things. Monthly, annually, or semi-annually contributing to an investment makes that investment grow. E. 401(k) Plans - A tax-deferred investment and savings plan that acts as a personal pension fund for employees. In many cases the employer will match the funds contributed (cents on the dollar). II. Bonds as Financial Assets A. Bond Components – Coupon: Stated interest on the debt. Maturity: Life of the bond. Par Value: The principal or the total amount initially borrowed that must be repaid to the lender at maturity. B. Bond Prices – Vary, and the interest amount will vary as well. C. Bond yields – Annual interest divided by the purchase price. III. Bond Ratings – Investors have a way to check the availability that a bond will be paid back. Two major bond ratings systems are Standard & Poor and Moody. The higher the bond rating the more likely the business can pay you back. However, lower rated bonds usually have higher interest. IV. Financial Assets and Their Characteristics A. Certificates of Deposit – CDs usually have higher interest than a savings account, but they must stay in as deposited for a certain amount of time. B. Corporate Bonds – Usually above $1,000 par value, and they vary based upon rating and yield. C. Municipal Bonds – Tax-exempt (don’t have to pay taxes on gains) and usually are very risk-free. Municipal refers to a local/state government. D. Government Savings Bonds – Issued through U.S. Government payroll-savings plans. E. Treasury Notes and Bonds – Treasury Notes – 2-10 year maturity. Bonds are 10-30 years. F. Treasury Bills – short term maturity (less than a year) and $1,000 minimum. G. IRAs – IRA is tax-deferred at deposit, but you pay taxes when you take money out of account. Roth IRA is not tax-deferred at deposit, but you don’t pay taxes when you take money out. V. Markets for Financial Assets A. Capital Markets – Assets for more than a year. B. Money Markets – Assets for less than a year. C. Primary Markets – Market where only the original owner can cash it in (no resale of asset). D. Secondary Markets – Assets can be resold. 18. Process: Investments 1. How would you invest for the future based upon what you have learned about investments? Why? (10) 2. Why would bonds have different ratings? Explain. What are drawbacks to bonds with governments (local and federal)? 20 Study Guide Test #3 Sin Tax Incidence of a Tax Tax loopholes Individual Income Tax Sales Tax Benefit Principal of Taxation Ability-to-Pay Principal of Taxation Proportional Tax Progressive Tax Regressive Tax Payroll Withholding System Internal Revenue Service Tax Return FICA Payroll Taxes Excise Tax Public Sector Private Sector Transfer Payment Impacts of Government Spending *** Deficit Debt Balanced Budget Trust Fund Gramm-Rudman Hollings * Budget Enforcement Act of 1990 * Omnibus Budget Reconciliation Act of 1993 * Balanced Budget Agreement of 1997 * Line-Item Veto Entitlements Savings Financial System Financial Intermediaries Financial Assets Nonbank Financial Institutions Bill Consolidation Loans Premium Mutual Fund Pension Fund Risk 401(k) Bond Components ** Current Yield Certificate of Deposit Tax-exempt Treasury Notes Treasury Bills Individual Retirement Account Roth IRA Money Market Primary Market Secondary Market 15 Notes: Savings I. Saving and Capital Formation – Saving: Savings: When people save it opens up the ability for others that can then borrow money (to grow or make new businesses). II. Financial Assets and the Financial System – Financial System: A. Financial Assets – Certificate of Deposit: A receipt showing that an investor has made an interest-bearing loan to a bank. B. Financial Intermediaries – C. The Circular Flow of Funds – When people save then others can borrow, the jobs and economic growth that occurs from that borrowing allows for people to get more money, which they can then save, and it keeps going in a circle. III. Nonbank Financial Intermediaries – Non-depository institutions that channel savings to borrowers (for example: life insurance companies, pension funds, finance companies, etc.) A. Finance Companies – Bill Consolidation Loans: Getting a loan to pay off a number of other loans helps consolidate (bring together) the debt to make one easier and usually lower interest rate payment. B. Life Insurance Companies – These offer a payout upon a death but charge a premium (an amount the insured pays for the policy usually monthly). C. Mutual Funds – Net Asset Value (NAV) – The value of all the shares that the mutual fund owns divided by the total number of shares that they are selling on the market. D. Pension Fund – 14 Process: Savings 1. Why is savings good for the economy? Explain the circular flow of funds with regards to savings. (10) 2. Why are financial intermediaries important? Which type of nonbank financial intermediaries do you think are the best? Why? 13 Notes: Deficits and National Debt I. From Deficit to the Debt – Deficit Spending: Spending in excess of revenues collected in a given budget year. A. Deficits Add to the Debt – The Federal Debt: The total amount borrowed from investors to finance the government’s deficit spending. Balanced Budget: An annual budget in which expenditures (spending) equals revenues (collected money – like taxes). B. How Big is the Debt – Right now about 14.3 trillion dollars is our total debt. Some of the money that is owed beyond this year and is considered part of our projected debt is held in trust funds (like Social Security). Trust Funds – Special accounts used to fund specific types of spending programs. C. Public vs. Private Debt – There are a couple of differences between public debt (U.S. government owes itself) and private debt (what an individual or firm would owe to someone else). First, there is usually a time requirement placed on almost all private debts. Also, purchasing power is a difference. Private debt takes away purchasing power from the individual, Public debt does not affect purchasing power because the money is just transferred (rich to poor, or from taxes to programs). II. Impact of the National Debt – Can affect the distribution of incomes (taxes). The larger the debt the more it affects the economy and inflation. Heavier reliance on the purchasing power of the federal government. Work incentives decline due to higher taxes to bring down debt. Crowding-out-effect: Higher than normal interest rates that heavy government borrowing causes can “crowd-out” the ability of the private sector to purchase goods/services. III. Taming the Deficit – There have been many attempts to bring down the deficit. A. GRH (Gramm-Rudman-Hollings) – Legislation passed to set deficit targets to bring down the deficit. However, there were many ways around this that Congress used, and it was ineffective. B. Budget Enforcement Act of 1990 – Included “pay-asyou-go” provision – where spending increases or tax cuts would have to be accounted for in reductions in other parts of the budget. However, it only applied to discretionary (optional) spending. C. Omnibus Budget Reconciliation Act of 1993 – President Clinton passed this to reduce the rate of growth of the deficit (not to reduce the deficit itself). D. Balanced Budget Agreement of 1997 – Gave the president line-item veto (found to be unconstitutional later), but it featured spending caps (limits on spending) so that Congress could balance the budget by 2002. They did better than that by 1998, and saw budget surpluses (extra money over the spending) for a couple of years. E. Success – Then Failure: There were a couple of years of surpluses, but then recession, wars, and tax cuts heavily increased our deficits. 12 Process: Deficits and National Debt 1. Explain in your own words what the National Debt and deficits mean to the U.S. Economy. Are they bad or good? Why? What do you think should be done about the deficits/debt? (12) 2. Look at the different “fixes” that they tried to implement to fix the deficit and debt. Why were these unsuccessful primarily? What do you think of the idea of line-item veto? 9 Notes: Economics of Gov’t Spending I. Government Spending in Perspective: Per capita (per person) spending in the United States is about $10,000.00. The public sector makes up all the economic activity of the Federal, State, and Local governments. The Private sector is all economic activity handled by all privately owned firms/businesses. Government spending has increased due to – 1. Great Depression: Massive social welfare programs to recover from this. 2. War spending – WWII, Korea, Vietnam, Cold War, Iraq, Afghanistan. 3. Some government programs have seen success like the TVA. II. Two Kinds of Spending A. Goods and Services – The Government spends money on the items they purchase (buildings, tanks, bombs, schools, etc.) and the services that are provided by people who work for the government (military personnel, post office employees, law enforcement officers, etc.) B. Transfer Payments – These are payments for services that the government does not see an immediate return on (and it is debatable what return there is). These payments are for things like unemployment, welfare, social security, etc. III. Impact of Government Spending A. Affecting Resource Allocation – When government makes the decision to do something it can have wide and effective results on the economy. B. Redistributing Income – Government spending can affect families, and locations where government services are going to be provided or bought. C. Competing With the Private Sector - Tax dollars subsidize programs/services/goods that private industries could provide (education, delivery of goods, technological discovery) and therefore the government is competing with those private firms for private sector dollars. 8 Process: Economics Gov’t Spending 1. What do you think about the level of government spending in this country? Why? Of the kinds of government spending which do you feel is more important? Why? (11) 2. Explain in your own words what impacts government spending has. List 5 things that you have participated in that have required some government spending on some level in the last day(s). 10 Film: I.O.U.S.A. Section 1 |Section 2 | | | Section 3 |Section 4 | | 7 Notes: Taxation I. Economic Impact of Taxes A. Resource Allocation – When taxes are added to a firm, industry, or product the resources that have to be used in the creation or purchasing of those products have to be reexamined. B. Behavior Adjustment – Sin Tax: A relatively high tax designed to raise revenue and reduce consumption of a socially undesirable product such as liquor or tobacco. C. Productivity and Growth – Taxes can affect how much growth and productivity someone (or a firm) will have. The higher the tax the harder it is for firms to grow, and the harder it is to create incentives for harder work. D. The Incidence of a Tax: The final burden of the tax. This determines who pays the most for the tax, it can be the workers, the owners, the consumers, or the suppliers (factories). II. Criteria for Effective Taxes A. Equity – How fair is a tax? Taxes are considered fairer if they tax people accordingly and they limit the amount of “tax loopholes” (exceptions or oversights in the tax law that allow people and businesses to avoid paying taxes). B. Simplicity – Keeping taxes simple to figure out is effective. The Individual Income Tax is very confusing, and an entire government agency (IRS) is devoted to figuring out the taxes. The sales tax is an example of a simple tax as it can easily be figured out by anyone. C. Efficiency – A tax should be relatively easy to administer and reasonably successful at generating revenue. Once again as an example the Individual Income Tax is reasonable efficient because of the federal withholding. III. Two Principles of Taxation – Two principles of taxation are used in the United States to justify and create taxes. A. Benefit Principle: Those who benefit from government goods and services should pay in proportion to the amount of benefits they receive. Examples include – Gasoline tax, and Truck Tire Tax. Two limitations – 1. Many government services are provided to those who can least afford to pay for them. 2. Benefits are hard to measure in totality. B. Ability to Pay Principle: Those who can afford taxes pay more of them because they can. They would pay these taxes in large portion even if they are not benefiting from the programs those taxes pay for. IV. Types of Taxes: There are three major types of taxes in the United States – 1. Proportional Tax: Imposes the same percentage rate of taxation on everyone, regardless of income. This would be a “flat tax” where everyone would pay the same proportion (sometimes called the average tax rate). 2. Progressive Tax: Tax that imposes a higher rate of taxation on higher incomes. The Individual Income tax is a progressive tax. 3. Regressive Tax: A tax that imposes a higher percentage rate of taxation on lower incomes than on higher incomes. The California state sales tax is an example of this. 6 Process: Economics of Taxes 1. Explain the economic impact of taxes in your own words. Which criteria do you believe is the most important? Why? Which type of tax do you feel is the best? Why? (12) 2. How would you end the story of the ant and the grasshopper? Why? How does that relate to the types of taxes that you would support? 3 My Grade and Due Dates Grade: Assignment Pts. Earned SUN #1 Transfer Grade Test #2 SUN #1 Score Assignment Test #2 SUN #1 C.E. #3 Pts. Possible Due Dates Pts. Possible Date Due 4-29 (Fri) 5-3 (Tue) 20 5-20 (Fri) 5 Notes: Competition Market Structures I. Perfect Competition – Laissez-faire: “Allow them to do” refers to the ability to have business do what it can in the free market without government interference. Market Structure: The nature and degree of competition among firms operating in the same industry. Perfect Competition: A large number of wellinformed independent buyers and sellers who exchange identical products. A. Necessary Conditions (for Perfect Competition): 1. Large # of buyers/sellers. 2. Identical products. 3. Buyers and sellers act independently. 4. Buyers/Sellers reasonable informed about products/prices. 5. Buyers/sellers free to enter into and out of the market. B. Theoretical Situation – Imperfect competition: Name given to market structures that lack one or more of the necessary conditions for perfect competition. II. Monopolistic Competition: The market structure that has all the conditions of perfect competition except for identical products. A. Product Differentiation: Real or imagined differences between competing products in the same industry. B. Non-price Competition: The use of advertising, giveaways, and other promotional campaigns to convince buyers that their product is somehow better than another brand (similar product within the industry). This often takes the place of price competition. III. Oligopoly: Market structure in which a few very large sellers dominate the industry. (American Automobiles, Soft Drinks, Sports Shoes, Hamburger Fast-food Places) A. Interdependent Behavior – Collusion: Formal agreement to set prices to otherwise behave in a cooperative manner. Price-fixing: Agreeing to change the same or similar prices for a product between competing firms. (Both are usually illegal, but do in essence happen more often). B. Pricing Behavior – When one firm lowers their price usually the other firm must follow, and the same for rising prices. Usually this results in relief for consumers as prices are usually kept relatively low. IV. Monopoly – Market Structure with only one seller of a particular product. (pg. 170) A. Types of Monopolies – 1. Natural monopoly 2. Geographic monopoly 3. Technological monopoly 4. Government monopoly 4 Process: Competition Market Structure 1. What do you think about the different types of competition? Which type do you think is the most important type? Why? (10) 2. Of the four different monopolies which do you think would be the most beneficial? Why are most monopolies not beneficial in economics? Social Justice Artifact #4 Due: 6-15-11 For this Artifact you will be doing the following: 1. Identify a problem, issue, or inequality that you have found or seen locally or globally. Describe that issue in a short paragraph. 2. In your next paragraph explain how you would start a charity or an organization to solve the problem. 3. Describe what your charity or organization would do exactly in the next paragraph. Give clear details with regards to the organizations goals, outcomes, and specific purpose. 4. Finally in your last paragraph, explain how you would get others to be a part of your organization. What motivated you to address this issue in this way, and how could you convince others to join you in this idea? LAUSD building new schools Billboards in Spanish Sight impaired crosswalks Tagging (vandalism) Theft School Uniforms Open Campus Curfews Bullying Wounded Vets (physical/emotional) Child Labor Drugs “Free” Money Fast Food/Obesity Pet abandonment/Animal Cruelty Abortion