Economics Notes

Document Sample
Economics Notes Powered By Docstoc
					                               Economics Unit 1
             Economics                       Economics is the study of how
                                             individuals, groups and nations
                                             make choices about how to use
                                             resources to fulfill wants and needs

               Needs                                       Wants
Goods or services needed to survive        Something that is desired but not
                                           needed to survive
Ex. Food, water, shelter                   Ex. Car, phone, electronics

Scarcity – All goods and services are scarce (possibly run out)
Demands are unlimited                    Supply of goods and services is
Shortages are temporary                  Scarcity always exists

               Trade offs                              Opportunity costs
    Every economic decision                     The most desirable thing you
      involves exchanging one good                give up.
      for another.                               It is the next best thing or use of
    It is the alternative if you decide          time when you chose to do one
      to do one thing rather than the             thing over another.
Ex. Study – trade off is time              Ex. If you study for two hours you
    Buy DVD –trade off is money            cannot go to the mall. The mall is your
                                           opportunity cost
                                           Ex. Cereal – I buy Capt. Crunch. My
                                           second choice is Fruity Pebbles. Fruity
                                           Pebbles is my 2nd choice/my
                                           opportunity Cost

4 Factors of Production
Resources necessary to produce goods and services
Land              Labor               Capital                    Entrepreneurs
Any natural       Any effort for      Human made                 People that start
resource          which a person is   resources used to          businesses
                  paid to do for the  create other goods         providing goods
                  production of       or services                or services
                         goods or services
Ex. Trees, water,        Ex. Teaching,       Ex. Tools,             Ex. Business
electricity, oil, fuel   landscaping         supplies, buildings,   owner

4 Costs Businesses Face
   Fixed Costs    Variable Costs             Total Costs       Marginal Costs
A costs that does Costs that do              Fixed Costs +     The amount to
not change if     change based on            Variable Costs    produce one more
production goes   production                                   good
Ex. rent          Ex. Supplies /                               Ex. 100 computers
                  materials                                    costs $3500 to
                                                               101 computers costs
                                                               $3850 to produce.

3 Key Economic Questions
1. What to produce?
2. How to produce it
3. Who will consume the good or service?

4 Types of Economic Systems
System                 Facts                    Examples
 Traditional Economy       Based on habits,       Eskimos
                             rituals & customs     Tribal societies
Market Economy             Individual makes       The USA is a
                             economic                version of the
                             decisions               Market System
                           No gov’t control
                             over the economy
Command Economy            Complete gov’t         Old Soviet Union
(Centrally Planned)          control over the
                           The gov’t answers
                             the 3 key economic
Mixed Economy              A mixture of the       Every system in
                             Market &                the world is a
                             Command                 mixed system
                             Systems               Every nation has a
                                                     Mixed Economy
       Socialism            Social and political philosophy
                            advocating equal distribution of wealth
                            throughout a society.
      Communism             Economic system in which the central
                            government directs all economic
     Guns or Butter              The trade-off that nations face
                                   when choosing whether to
                                   produce more or less military or
                                   consumer goods
                                 Deciding how much to spend on
                                   the military and how much to
                                   spend on everything else
      Adam Smith                 Created the Market System
                                 Wrote “The Wealth of Nations”
                                 People should own/control the
                                   resources (Factors of
                                   Production) & make economic
“Laissez Faire” Economics        “To let alone”
                                 Government has no control over
                                   the economy
             Unit 2: Fundamentals of the U.S. Economy

American Free                  Based on Adam Smith’s Market System
Enterprise                     The US Economy is guided by “The Invisible
                                Hand” (consumer demand) – People’s wants &
                                needs guide the economy

                        Basic Principles of the Free Market
Profit Motive                       Goal to make money & improve your well-being.
                                    Largely responsible for the growth of a free-
                                      enterprise system based on capitalism.
Competition (open opportunity) Everyone can compete in the market place.
Private Property               People own most of the resources & can do what they
                               want with them.
Voluntary Exchange             People can decide what to buy & when to buy it.

The Government Regulates the Economy for:
   1. Health
   2. Safety
   3. Well being
Ex. The FDA – Food & Drug Administration

               Ways the Government helps the US Economy
Incentives        The govt. offers incentives to different groups
                      Ex. Farm subsidies (money to farmers), college
                      scholarships, financial aid
Patents           The govt. gives patents to inventors to encourage the
                  creation of new products
Copyrights        The govt. offers copyrights on written materials
Specialization    The govt. promotes specialization in industry –
                  concentrating on one or a few tasks to encourage efficiency
Full Employment The govt. promotes the goal of full employment – everyone
                  who wants a job has a job.
                     Circular Flow of a Market Economy
Product Market         People give businesses money.
                       The business gives a good or service.
                      Ex. I give Target my money - in return I get a CD.
Factor Market          People give resources (land, labor, capital) to a
                       The business gives money for the resource.
                      Ex. I give Target my labor – in return I get $ (a paycheck).

                   How Businesses Grow (promote growth)
All businesses invest in new resources to make money
Capital Goods Ex. Equipment, machines, supplies
Human Capital Ex. Labor, training
     The Goal is to have a favorable balance of Output (what you get out of
       your business) vs. Input (what you put into you business).
     You want more out of your business than you put into it – so you can
       make money.

        In What Ways Does the Government Track the Economy?
Prices           The govt. uses the Consumer Price Index (CPI) to track the
                 prices of consumer goods.
Poverty               The govt. tracks the level of poverty in America
                      The # of families that fall below the Poverty Threshold.
Unemployment The govt. tracks the % of people without a job who are
                 looking for one.
Keynesian Theory          An economist came up with this idea in the 1930’s
                          If the economy is struggling (a problem in the
                             economy) in a specific area then the govt. can
                             step in and help fix the problem.
                            Unit 3: Supply & Demand

                          The Law of Demand
When price goes up – demand goes down Price  - Demand 
When price goes down – demand goes up Price  - Demand 

Things that cause changes in demand
    Number of       Consumers -  Demand
    consumers       Consumers -  Demand
    Changes in     Product popular -  Demand
 consumer tastes Popularity fades -  Demand
    Consumer       Way people think about the future. Ex. If you think it will
   expectations    snow – demand for milk & bread goes , or If you know
                   new technology for TV’s is coming out -  in demand for
                   TV’s (waiting for new ones to come out)
  Income effect    When prices rise, people spend less money, but when
                   prices fall, people spend more because they feel like they
                   have more money.
                   Ex. The price of oranges goes up, you buy less oranges.
   Substitution    When the price of a good rises, consumers buy less of that
      effect       item & substitute a cheaper one in its place.
                   Ex. The Gap clothes are too expensive, so you buy Old
  Compliments      The demand for a good can increase because it
                   compliments a product that is in high demand.
                   Ex. The price of cereal goes down, the price of milk goes

Diminishing Marginal Utility
Utility Every good / product has utility – the pleasure, usefulness or
          satisfaction we get from using that product
Almost every good / product experiences Diminishing Marginal Utility – Our
satisfaction usually goes down as more units of a good are consumed.
Ex. Roller coaster ride – first few times you’d rate it a 10 but after the 4th time
you’d rate it a 7.
There are certain things that do not experience diminishing marginal utility.
Ex. Health care, medication (insulin), oxygen
Elasticity of Demand
    Elastic      This means a change in price causes a greater change in
    demand       demand
                 Ex. Cars (when the price of cars change, there is a large
                 change in the demand for cars)
Reasons why a It’s a want (If it becomes too expensive, I don’t have to have it);
product would    many choices (If it becomes too expensive, I can choose a
have elastic     different product; seasonal (winter coats, pumpkins); climate /
demand           location; not scarce
Inelastic        This means a change in price has little effect on the demand of
demand           a good
                 Ex. Gas (when the price of gas changes, there is little change
                 in demand
Reasons why a It’s a need; not many choices; scarce
product would    Other examples: water, medication
have inelastic

Law of Supply           The principle that suppliers will normally offer more for
                         sale at higher prices and less for sale at lower prices
                        The higher the price the more you sell
                        The lower the price the less will be sold
                        Price  Supply 
                        Price  Supply 

Things that cause changes in supply
 Cost of resources      Resource price  supply of products 
                        Resource price  supply of products 
Productivity        The more efficient workers are, the greater the supply
Technology          New technology increases productivity & cut costs
Government              Regulations
Policies                Minimum wage
Taxes & subsidies        Taxes  supply
                         Taxes  supply
                        Subsidies - increase supply always

Elasticity of Supply
 Elastic supply (Change easily) Products that can be made quickly without
                 huge amounts of capital & resources. Ex. candy
Inelastic        Products that cannot be made quickly & take large amounts of
supply           capital & resources. Ex. oil
     Surplus             The supply is greater than the demand (too much)
                         Tells (signals) producers that the price is too high
Shortage                 The demand is greater than the supply (not enough)
                         Tells (signals) producers that the price is too low
Equilibrium price        Achieving balance between supply & demand
                         Tells how much to produce & where to set my price

Government control over price
Price ceiling Govt. sets maximum prices
              Ex. Rent for low income housing
Price floor   Govt. set minimum prices
              Ex. Minimum wage

4 Advantages of Prices
   Neutral price     They don’t favor producers or consumers
Flexible price       Can change easily
Freedom of choice Variety of goods; buy what you chose to buy
Familiar price       Everyone knows prices

            Prices answer the 3 economic questions in America
What to produce
How to produce it
Who will consume it
  Unit 4: Business Organizations and Labor

                               Levels of Competition
Monopoly              One firm controls the entire market (no competition)
                           Complete barriers to entry
                           Complete control over prices
                           No variety of goods
                           One seller
Govt. Monopoly        Govt. created. It owns it, runs it, & has complete control over it.
                      Ex. Post office
Natural Monopoly      Runs the best when only one company provides the good or
                      service. Privately owned company that the govt. allows to exist.
                      Ex. Cable TV, water, electricity
Oligopoly             Market dominated by a few large firms.
                      Ex. Pepsi & Coke, top automakers (Ford, Honda, Saturn)
                           A few firms
                           Some control over price
                           Some variety of goods (produces 70-80% of output
                           High barrier to entry
Perfect Competition   Many firms making identical products at the same price (no
                      variety). Selling the same thing at the same price.
                      Ex. Produce (tomatoes)
                           Many buyers & sellers
                           No variety (identical products)
                           Buyers & sellers are well informed about products
                           Sellers can enter & exit freely
Competitive Market    Monopolistic. Market structure in which many companies sell
                      products. Ex. Pizza restaurants
                           Many firms
                           Some variety
                           Low barrier to entry
                           Little control over price
                                Business Organizations
Sole                   Business owned by one person
Proprietorship         Easiest business to start up
                       Most common type of business in the USA (73%)
                    Advantages                  Disadvantages
Sole                   Owner makes all the          Owners have all the liability
Proprietorship           profits                     High risk of failure
                       Owner makes all the          Employees are hard to find/keep
                         decisions                   Limited capital
                       Easy to start

Partnerships            Businesses with 2 or more owners
                        Least common type of business in the USA (7%)
                    Advantages                  Disadvantages
Partnerships            Share responsibilities      Possible conflicts
                        Share cost                  Liability
                        Share talents
                    An Article of Partnership must be drawn up to create a legal document

Corporations            It’s a business recognized by law; it has many of the rights &
                         responsibilities of the individual. Ex. A corporation can own
                       To become a corporation, the govt. must grant a charter to
                         organize it.
                       The charter also specifies the amount of stock that will be issued.
                       Corporations make up about 20% of the US businesses, but they
                         produce about 90% of all goods that Americans purchase.
                    Advantages                     Disadvantages
Corporations           Easy to raise money             Complex & expensive
                       Easy to transfer                More govt. regulations
                         ownership                      Double taxation
                       Room to grow                    Loss of control
                       Limited liability

Conglomerates       Some corporations become conglomerates. It is a corporation that
                    controls several companies in different industries.
                    Ex. Time Warner (owns Cable TV division, Television stations,
                    professional hockey & baseball teams, a publishing company)

                             Other Organizations
Non Profits      Operate to provide a service and do not intend to make money
                 Ex. Charities, churches, hospitals
Cooperatives     Association of people or businesses that carry on business
                  activities that benefit its members
                  Ex. Triad Farmers Market
Franchises        Ex. McDonalds

                               Types of Mergers
Vertical       Combination of 2 or more firms in different stages of production.
               Ex. Car company merges with a steel company (buying your
Horizontal     Combination of 2 or more firms in the same stage of production
               Ex. A steel company merges with another steels company (its
               Ex. Nextel & Sprint

Who Qualifies for the Labor Force?     16 y/o & worked at least 1 hr. within
                                         past week
                                       Worked 15 or more hrs. in a family
                                         owned business
                                       Workers on sick leave or vacation
Who is not included?                   Full time students
                                       Retirees
                                       Stay @ home parents
                                       Military
Changing Labor Trends:                 More college graduates
                                       People have multiple careers
                                       More temporary or part time jobs
                                       More high tech. Jobs
                                       More women in the work force
                                       More minorities in the work force
                                       Less manufacturing jobs
                                       More service jobs (banking, teaching)

                                    Labor Unions
Labor Unions      Labor unions are groups of workers that band together to try to obtain
                  higher pay and better working conditions.
                  There are two types:
Craft Unions      Unions where all members of a specific trade belong to the same union.
                  Ex. All carpenters belong to the same union
Industrial Unions Are unions where all workers in the same industry belong to the same
                  union, regardless of skill. (not real common any more).
                  Ex. All steel workers at different skill levels belong to the same union
    Only 14% of American workers belong to unions
Closed Shop A company that required a worker to belong to a union in order to be hired.
The Taft-Harley Act 1947 – allows individual states to keep unions from forcing workers to
                    join a union when they are hired (Right to Work Laws).
                          Closed Shops became illegal.
    22 States have Right to Work Laws, including N.C.
    Unions only work if all or most workers belong to a union
Union Shop            Companies can hire nonunion people, but those workers must join
                      the union once they begin working
Modified Union Shop Workers do not have to join the union after they are hired but they
                      can choose to do so.

Collective Bargaining    Unions & owners negotiate wages, benefits & working
                             They sit down & discuss the next labor contract
                             They discuss holidays, vacations, work rules,
Mediation                A 3 party tries to help end a labor dispute (do not
                         make decisions)
Arbitration              A 3rd party tries to help end a labor dispute & decide
                         how to settle the disagreement (they make a decision)
    If an agreement can not be reached, 1 or 2 results will occur:
          1. Strike - Where workers walk out on their jobs
          2. Lock-out – Where the company owners keep workers from going
             to work

     Every company has to decide how many workers they need to maximize
Diminishing Marginal Return This is a level where production decreases as
                              more worker are added
                              ***remember the tennis ball exercise in class
                  U.S. Government Roles in the Economy

                  3 ways the govt.’s power to tax is limited
   1. Federal taxes must be the same in every state (US govt.)
   2. Congress tax powers are limited in who & what they tax.
      Ex. Can not tax churches, non-profits or exports
   3. Taxes must be for the common good of the country / benefit the entire

                               Tax Structures
 Progressive     The more you earn, the higher percentage in taxes you pay
                 Ex. Income tax
Regressive       The more you earn, the lower percent in taxes you pay
                 Ex. Sales tax
Proportional     Everyone is taxed the same percentage – called flat tax
                 Ex. Social Security

Federal Income Tax     #1 revenue source for the Federal govt. – It is a
                       progressive tax
Federal Taxes - Types
Pay as you earn    You pay so much income tax each time you earn money
                   (This is mandatory)
Tax Withholding When your employer withholds tax money from your
                   paycheck (This is optional)
Tax return         Filed each year to determine how much is owed in income

Social Security Taxes Funds old age, survivors and disability insurance
Medicare Taxes        A national health care insurance program that helps
                      pay for health care for people over 65 or with certain
Unemployment Taxes Paid by employers – pays for an insurance policy for
                      workers – can collect benefits for a fixed # of weeks

Tax incentives The use of taxation to encourage or discourage certain
               Ex. Of discourage – tobacco products & alcoholic beverages
               Ex. Of encourage – purchase fuel efficient vehicles
What the govt. spends your taxes on
Mandatory Spending         Programs the govt. must spend money on by law
Ex. Social Security, Medicare, Medicaid, Interest on the deficit
Discretionary              Spending on things the govt. chooses to
Ex. Defense spending (14 -16%), education, law enforcement, student loans,
technology, transportation (roads), housing, scientific research, national parks &
Federal Budget             Budget put together each year to determine how much
                           money will be spent on federal programs

State and local taxes
State taxes spent on:           Education, public safety, highways &
                                transportation, public welfare, arts & recreation,
Different types of state        Sales tax, State Income Tax, Corporate taxes
Local taxes spent on:           Public schools (most $ spent on), law
                                enforcement, fire protection, public facilities
                                (hospitals, libraries), parks & recreation, public
                                transportation, elections,
                                Record keeping (deeds/marriage licenses), social
                                services (food stamps), child care
Different types of local        **property tax, income tax (not in NC), sales tax

The Business Cycle          The economy is constantly changing. The Business
                            Cycle tracks how the economy is doing overall
Phases                      Contributing Factors       Cycle indicators
Expansion                   Business investments       Stock market
Peak                        Interest rates & credit    Interest rates
Contraction                 Consumer expectations      New orders of capital
Trough                      External shocks

How the govt. measures growth
Gross domestic product       The total dollar amount of all goods & services
(GDP)                        produced within a country’s borders in a given
Per capita GDP               The dollar amount each citizens contributes to
                             the economy
Real GDP                     GDP at current prices calculated
The govt. and fiscal policy
Fiscal Policy             Is the govt.’s policy on taxes and spending
Automatic Stabilizers     Govt. programs that kick in automatically in times of need /
                          when economic problems occur
                              1. Welfare (ex. Medicaid)
                              2. Unemployment insurance
                              3. Social security
                              4. Medicare
          Automatic stabilizers are in place to avoid long economic contractions
Recession An economic contraction when the economy contracts for 6 straight months
Depression A severe & prolonged recession

Government changes in Fiscal Policy
    The govt. will sometimes cut taxes to increase consumer spending & to fight inflation
    This will give you more money to spend in the economy
Trickle down Theory         Give the wealthiest portion of America the biggest tax cuts
                            The money saved by cutting that groups taxes will then be
                              spent and trickle down throughout the economy

Consumer Price Index          Typical goods & services that the average
(CPI)                         consumer purchases
Inflation                     A general increase in prices
Deflation                     A sustained drop in prices
                             The Global Economy

                   Economic Development & Transition
Levels of Development
Developed Nations          Stable govt., high tech., strong economy, strong
                           education, govt. programs, abundant resources,
                           basic needs met, transportation
Less Developed             Inadequate medical care, low gross domestic
Countries (LDC)            product (GDP), no/low tech., lack of education /
                           illiteracy, basic needs not met, lower life
                           expectancy, lack of money & resources. Lack of
                           clean water & irrigation

Issues in Development
Problems in Less Developed Countries (LDC)
             Cause                                   Effect
Rapid Population Growth           Standard of living goes down.
                                  Can't meet Educational needs.
Uneven Global Distribution of Become dependent on other nations.
Lack of Physical Capital          Lack tools, machinery & factories needed
                                  to industrialize.
                                  Behind in technology.
                                  Low levels of production.
                                  Dependent on other nations.
                                  Agricultural society.
Lack of Human Capital             Lack education & training.
                                  Won't be able to advance.
Colonial Dependency               Still dependent on other countries (former
                                  mother country)
Govt. Corruption                  Leaders make major decisions for their
                                  best interest and not that of the people.
Political Instability             Economy cannot be stable when country is
                                  struggling politically (at civil war)
                    How do you help these countries?
Foreign Aid              Provides money, training & other things needed to
                         help developing nations.
United nations           World wide organization that helps provide aid to
                         foreign nations.
                         Tries to help these developing countries with
                         foreign aid.
International Monetary International organization created to stabilize
Fund (IMF)             exchange rates and aids development.
World Bank               Provides poor nations with money from developed
                         nations. Ex. needs money to help industrialize

                          Why do nations trade?
1. To get goods & services they do not have / cannot produce
2. To get a Comparative Advantage - Ability of a nation to produce a good
at a better cost. Sometimes another country can produce a product more
3. To create jobs - Creates more jobs by increasing production. More trade
creates a need for more workers

                 International Trade - Why nations trade
Resources that are major               1. Natural resources
influences on a country's or           2. Physical capital (factories)
region's economy:                      3. Human capital (education/training)
Reasons why specializing nations       Nations need to obtain goods they
need world trade:                      cannot produce themselves.
Advantages of producing goods & A nation can use the money they
services that a nation has a    make to buy other goods they need.
comparative advantage in:
How does international                 Increases efficiency (very efficient
specialization affect workers:         workforce).
                                       Limits job opportunities.
                     Current World Trade Situations
Effects of trade barriers           Manufacturers must buy American
                                    products & materials.
                                    Increased prices for foreign goods.
                                    Trade wars.
Advantage of U.S. protection        Protects jobs.
                                    Protects new or infant industry.
                                    Safeguards national security.
Trade progress under GATT           Lowered global tariffs.
(General Agreement on Tariffs &     U.S. tariffs dropped from 59% to 5%
Trade) & WTO (World Trade           from 1930-1995.
Affects of NAFTA on the U.S.        Some jobs have been created; but
                                    some have been eliminated.
                                    Trade between Canada, Mexico, & the
                                    U.S. has increased significantly.
Advantages of multinational         Corporations avoid tariffs & shipping
corporations                        fees.
                                    Benefit from cheaper labor.
                                    Host country gains jobs & tax revenue.

                            Trade Agreements
World Trade Organization (WTO)      A world wide organization whose goal
                                    is freer global trade & lower tariffs.
North American Free Trade           Agreement that will eliminate all tariffs
Agreement (NAFTA)                   and other trade barriers between
                                    Canada, Mexico & U.S.
General Agreement on Tariffs &      Established to reduce tariffs &
Trade (GATT)                        expand world trade.
European Union (EU)                 Custom unions - agreements that
                                    abolish tariffs & trade restrictions
                                    among union members & adopt
                                    uniform tariffs for non-member
                                    Has a Parliament & a Council in
Trade Agreements
        which all member nations are
        Have own flag, anthem & celebrates
        Europe Day on May 9th.
        In 2002, 11 member nations went to a
        single currency - The Euro.
Player/Team                                Salary
1.            3B Alex Rodriguez, NYY                $ 33,000,000
2.            SP/LH CC Sabathia, NYY                $ 24,285,714
3.            SS Derek Jeter, NYY                   $ 22,600,000
4.            1B Mark Teixeira, NYY                 $ 20,625,000
5.            SP/LH Johan Santana, NYM              $ 20,144,708
6.            1B Miguel Cabrera, DET                $ 20,000,000
7.            OF Carlos Beltran, NYM                $ 19,401,571
8.            1B Ryan Howard, PHI                   $ 19,000,000
(tie)         OF Carlos Lee, HOU                    $ 19,000,000
(tie)         OF Alfonso Soriano, CHC               $ 19,000,000
11.           SP/RH Carlos Zambrano, CHC            $ 18,750,000
12            SP/RH John Lackey, BOS                $ 18,700,000
13.           OF Manny Ramirez, LA                  $ 18,695,507
14.           OF Torii Hunter, LAA                  $ 18,500,000
(tie).        SP/LH Barry Zito, SF                  $ 18,500,000
16.           OF Ichiro Suzuki, SEA                 $ 18,000,000
17.           OF Magglio Ordonez, DET               $ 17,825,976
18.           1B Todd Helton, COL                   $ 17,775,000
19.           3B Aramis Ramirez, CHC                $ 17,000,000
20.           SP/RH A.J. Burnett, NYY               $ 16,500,000
21.           OF Matt Holliday, STL                 $ 16,333,328
22.           OF Vernon Wells, TOR                  $ 16,142,857
23.           SP/RH Chris Carpenter, STL            $ 15,840,971
24.           SP/RH Roy Halladay, PHI               $ 15,750,000
25.           SP/RH Hiroki Kuroda, LA               $ 15,433,333

Shared By: