Economics Semester Exam Review -For Mr. Jautakis classesStudy Tip: Go to the Text Website and take the online quizzes available. Study Tip: Note the balance of questions as you prepare to study.
Unit 1: Principles of Economics Text: Chapters 1 and 2
Economics: Alfred Marshall: “Economics is the study of mankind in the ordinary business of life.”
Ten Principles of Economics 1. People face tradeoffs
2. The cost of something is what you give up to get it 3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity 7. Governments can sometimes improve market outcomes
8. A country’s standard of living depends on its ability to produce goods and services 9. Prices rise when the government prints too much money
10. Society faces a short-run tradeoff between inflation and unemployment
Adam Smith-Wealth of Nations-”The Invisible Hand” Microeconomics /Macroeconomics
-Positive and Normative Statements Real vs Nominal statements
Three Basic Economic Questions: What to Produce? How to Produce? For Whom to
Different societies answer the three basic questions differently.
Four factors of production (FOP) are land, labor, capital and entrepreneurship (CELL). These are also known as inputs and resources.
Three productive resources: Human Resources, Natural Resources, and Capital Resources
TINSTAAFL (There is no such thing as a free lunch) **
Economic Theory and Economic Models
Circular Flow of Economic Activity, be able to Graph Production Possibilities Curve PPC (Frontier /PPF) Decision Making Grid
Law of Increasing Opportunity Cost Division of Labor
Different economic systems:
Traditional, Market, Command
with the U.S. economy described as “Mixed.”
Unit 2--American Free Enterprise Profit-vs Maximum Profit
Free Enterprise System Free Riders
“Safety Net” -Social security Public transfer payments Infrastructure
Unit 3: Demand --Text: Chapter 4 Demand Schedule
Law of Demand Marginal Utility
Law of Diminishing Marginal utility Elasticity vs Inelasticity
Demand Curve (must be able to read a demand curve) Non-price Determinants of demand.
Change in the Quantity Demanded due to changes in price
Difference between a change in demand due to non-price determinants and a change in the quantity demanded due to changes in price
Unit 4: Supply and Pricing /Equilibrium--Text: Chapters 5-6 Supply Schedule
Law of Supply Supply Curve (must be able to read a supply curve) Non-price determinants of supply
Change in the quantity supplied due to changes in price
Difference between a change in supply due to non-price determinants and a change in the quantity supplied due to changes in price
Movement along supply curve due the changes in prices vs. Shifts of supply curve due to the non-price determinants of supply
(Chapter 6) Equilibrium /Surplus/ Shortage Unit 5: Market Failure
Movement along curve vs. shift of a demand curve Individual Demand
Normal Goods and Inferior Goods Elasticity of Demand
Inelasticity of Demand Determinants of Elasticity: Total Revenue Test
(P x Q) used to determine elasticity Total Product
Marginal Product Law of Diminishing (Marginal) Returns Fixed cost
Variable cost Total Cost Marginal Cost Marginal Revenue Economies of Scale Profit Maximizing Quantity of Output
The Production Function-- including the three stages of production (increasing returns, diminishing marginal returns, and negative returns) Effects on pricing/quantity when demand/supply curves shift
Price Floor /Price Ceiling
Adam Smith believed that the market between buyers (demand) and sellers (supply) would always self-correct itself and move toward equilibrium without government intervention. But what happens if the market fails?
This unit will identify the three major sources of market failure and what the government does to correct for the failure.
What causes failure in the marketplace? --Market Power, Public Goods, Common Resources, and Externalities.
What tries to correct for the market failure? --Government does through stricter regulation and new public policies.
Market Power -Chapter 7
Good Markets: Perfect (Pure Competition) and Monopolistic Competition.
Two are “bad” markets meaning that these are sources of market failure that need government intervention.
Bad Markets: Monopolies and Oligopolies.
Four types of monopolies: Geographic, Technical, Natural, and Governmental.
Two types of government monopolies: Patents and Copyrights Monopolistic Competitive markets practice product differentiation and seek to make customers “brand loyal.” Oligopolies collude and form cartels. Both are illegal. Most famous cartel: OPEC. Monopolies seek to avoid deadweight loss by practicing price discrimination. Mergers
Public Goods and Common Resources
Goods can be placed in one of four categories. The first two categories are not the source of market failures. These are private goods and natural monopolies.
The last two categories, public goods and common resources, are sources of market failure and do require government intervention.
To categorize the goods, you have to know the terms rival and excludable. Rival and excludable goods
Externalities --These are also known as “spillovers” because an internal decision made by a person or corporation may spillover and affect others: internal decisions leading to external outcomes. These can be both positive and negative.
Government will intervene to create positive benefits and dispose of negative externalities. Positive Consumption Externalities (through positive government programs the demand curve shifts to the right). Example: Vaccinations, education
Negative Consumption Externalities (through government programs the demand curve shifts to the left). Example: Consumption of alcohol.
Positive Production Externalities (through government programs the supply curve shifts to the right) .
Negative Externalities (through government programs the supply curve shifts to the left). Example: Pollution
Chapter 8 –Business Types
Sole Proprietorships- KnowAdvantages and Disadvantages of each type of business Partnerships
Bill Gates/Steve Jobs/Henry Ford/ Richard DeVos/Warren Buffett/
Gross Domestic Product (Why is this an indicator of economic performance?)
Aggregate Expenditure Approach is C + I + G + (X-M) =GDP (Be prepared to determine how spending by these components of GDP is categorized by the BEA as well as determining those spending items that are “Not Counted” in determining GDP
Recession/Depression/Slow Growth in GDP occurs if C + I + G +/- Xn < GDP Inflation occurs if C + I + G +/- Xn > GDP
Real GDP Nominal GDP
Consumer Price Index
Business Cycle: Expansion, Recession, Trough, and Peak
The Great Depression-- John Maynard Keynes --Laissez-Faire Doctrine Economic Growth
Standard of living
Productivity vs. Labor Productivity Human Capital vs. Physical Capital Full employment (4-5%)
Natural Rate of Unemployment- Labor Force -Not in the Labor Force- Unemployment Rate Labor Force Participation Rate
Four types of unemployment: seasonal, structural, frictional, and cyclical.
Structural and Frictional unemployment are “Naturally occurring in an economy” and therefore comprise the Natural Rate of Unemployment. This is also considered “Full employment.” Cyclical unemployment occurs because of fluctuations in the business cycle.
An unemployment rate in excess of 4-5% is due to people losing their jobs due to a recession or a depression. Thus an unemployment rate of 10%- means that 5% of the workforce is cyclically unemployed and this is not natural.
Quantity Theory of Money
(Equation of Exchange)- M (money supply) x V (velocity) = P (price) x Q (supply of goods) Changing different dollar amounts in different times: The formula is (Amount in question) x (CPI Updated Year) / CPI of the old year
Henry Ford’s $5.00 a day wage in 1914 would therefore be equivalent to approx. $ 85-$90 today INFLATION
Demand Pull Inflation (be able to graph this concept) / Cost Push Inflation (be able to graph this concept) Stagflation
Nominal interest rate --Real interest rate
Conducted by the President and Congress Tools-Government spending and tax policy John Maynard Keynes -Multiplier effect Classical Economic Model
Functions of Money include --Medium of Exchange, Unit of Account and Store of Value Origins of Money
Discretionary Fiscal Policy
Lags associated with fiscal policy Difference between debt and deficit
Crowding Out Effect (interest rates rise as government borrows to finance the debt) National Debt Clock
Origins of Federal Reserve --Why did Congress create the Federal Reserve? Who owns the Fed?
Responsibilities of the Fed's Fractional Reserve Banking System
Structure of the Fed: Board of Governors, FOMC, 12 Federal Reserve Banks Chairman of the Fed
--Tools of the Federal Reserve include --1) Discount Rate, 2) Reserve Requirement 3) Open-Market Operations 4) Federal Funds –Know what each is and does—
Expansionary v. Contractionary monetary policy--Fed use of the tools) Easy (Expansionary) Monetary Policy
Tight (Contractionary) Monetary Policy Monetary Policy Lags
Be able to “conduct” or apply the correct monetary policy tools with the economic ailment presented to you
Unit 8 International Economics NAFTA, CAFTA, GATT
Absolute Advantage vs. Comparative Advantage Who benefits the most from ?
Weak Dollar (Depreciated) Strong Dollar (Appreciated) Capital Flight /Capital Inflow Globalization
Trade Deficit and Trade Surplus Imports
Net Exports (Exports minus Imports)
Unit 9: Personal Finance Stock Market
How to read a stock quote (you will be asked questions that you must answer by reading a stock quote)
Price (Last) Dividend Volume (Sales Hundreds) Daily Hi/Lo Fixed Expenses
FICA (Federal Insurance Corporation of America...Social Security) Investing for your future
52 Week Hi/Lo PE Ratio Type of business that issues stock (corporation). IPO (Initial Public Offering)
Dow Jones Industrial Average--NYSE, AMEX, VIX and NASDAQ Rule of 72
Dollar cost averaging Roth IRA
Money Market vs Mutual Funds