Key Words, Key Connections: - White Plains Middle School



Key Words, Key Connections:

A Review of Economics

A Document Created by Elizabeth Napp

1)

2)

3)

4)

E. Napp 2

5)

6)

7)

8)

9)

E. Napp 3

10)

11)

[pic]

12)

[pic]

13)

14)

E. Napp 4

15)

16)

17)

18)

E. Napp 5

19)

20)

21)

22)

E. Napp 6

23)

24)

25)

26)

E. Napp 7

27)

28)

29)

30)

E. Napp 8

31)

32)

33)

34)

35)

E. Napp 9

36)

37)

38)

39)

E. Napp 10

40)

41)

42)

43)

E. Napp 11

44)

45)

46)

E. Napp 12

47)

48)

49)

50)

51)

E. Napp 13

52)

53)

54)

55)

E. Napp 14

56)

57)

58)

E. Napp 15

59)

60)

61)

E. Napp 16

62)

63)

64)

E. Napp 17

65)

66)

67)

68)

E. Napp 18

69)

70)

71)

72)

E. Napp 19

73)

74)

75)

76)

E. Napp 20

77)

78)

79)

80)

E. Napp 21

81)

82)

83)

84)

85)

E. Napp 22

86)

87)

88)

89)

E. Napp 23

90)

91)

92)

93)

94)

E. Napp 24

95)

96)

97)

98)

E. Napp 25

99)

100)

101)

102)

103)

104)

E. Napp 26

105)

106)

107)

108)

109)

E. Napp 27

110)

111)

112)

E. Napp 28

113)

114)

115)

E. Napp 29

116)

117)

118)

E. Napp 30

119)

120)

121)

122)

E. Napp 31

123)

124)

125)

126)

E. Napp 32

127)

128)

129)

E. Napp 33

130)

131)

132)

E. Napp 34

133)

134)

135)

136)

E. Napp 35

137)

138)

139)

140)

E. Napp 36

141)

142)

143)

144)

E. Napp 37

145)

146)

147)

148)

E. Napp 38

149)

150)

151)

E. Napp 39

152)

153)

154)

E. Napp 40

155)

156)

157)

-----------------------

Scarcity

1) It is the realization that resources are limited but our wants are unlimited.

2) We always want more than we have.

3) It is the reason that Economics exist. Ultimately, Economics is the study of how people satisfy their needs and wants by making choices.

The Factors of Production

1) Land, labor, and capital are the factors or production.

2) In order to make a good or service, it is necessary to have the factors of production.

3) Land refers to natural resources.

4) Labor refers to paid workers.

5) Capital is any human-made resource that is used to create other goods and services. Capital can be physical or human.

Physical Capital

1- Physical capital refers to all human-made goods that are used to produce other goods and services.

2- Tools, buildings, and machines are physical capital.

3- Money is physical capital.

Human Capital

1) When people acquire skills and knowledge through experience and education, they acquire human capital.

2) The need for human capital increases as technology becomes more sophisticated.

3) Companies are increasingly looking for educated employees.

Entrepreneurs

1) An entrepreneur is an ambitious leader who combines land, labor, and capital to create and market new goods and services.

2) The entrepreneur combines the factors of production to create new businesses.

Shortage

1) While every good and service is scarce because all resources are scarce, a shortage refers to a situation where a good or service that is normally available is suddenly unavailable.

2) Scarcity is permanent but shortages are temporary.

3) Wars or droughts can lead to shortages.

4) Shortages can lead to high prices due to insufficient supplies.

Need

1) A need is something like air, food, or shelter.

2) It is something that is necessary for survival.

Want

1) A want is an item that we desire.

2) A want is not essential for survival.

3) A want is not necessary for survival

Goods and Services

1) Goods are physical objects such as clothes or shoes.

2) Services are actions or activities that one person performs for another person.

3) Some businesses sell goods or actual objects for purchase.

4) Some businesses sell services. They perform an action that hopefully improves the quality of our lives.

5) People can purchase goods and/or services.

Trade-offs

1) A trade-off is an alternative that we sacrifice when we make a decision.

2) A farmer who plants tomatoes cannot use the same land to plant corn.

3) Scarcity leads to trade-offs.

4) Since we cannot have everything, whenever we make a decision, a trade-off occurs.

Guns or Butter

1) Guns or Butter is a phrase. It refers to the trade-offs that nations face when choosing whether to produce more or less military or consumer goods.

2) A nation that increases military spending has less money for consumer goods.

Opportunity Costs

1) An opportunity cost is the most desirable alternative given up as a result of the decision.

2) Every time a person makes a decision, he gives many other choices up. The best choice of those he did not get is the opportunity cost.

3) Here is a simple way to remember it: I have ten dollars. I buy a book. I could have used the ten dollars to buy a Compact Disc, a pizza, or a movie ticket. I bought the book. The next item I would have wanted was the pizza. Therefore, the pizza is the opportunity cost of the decision.

Efficiency

1) Efficiency means using resources in such a way as to maximize the production of goods and services.

2) Efficiency increases profits.

Thinking at the Margins

1) Thinking at the margins is deciding whether to add or subtract one additional unit of some resource.

2) The famous economist, Alfred Marshall, used the example of a boy eating blackberries. When the boy begins to feel full, he is at the margins. Should he eat another blackberry or stop!

3) Deciding when it is the best time to stop is important.

Underutilization

1) It is the opposite of efficient.

2) Underutilization is using fewer resources than an economy is capable of using.

3) Underutilization leads to decreased profits.

Production Possibilities Graph

1) A Production Possibilities Graph is a graph that shows alternative ways to use an economy’s resources.

2) When using the factors of production to make one product, there will be fewer resources left to make something else.

3) The line on the Production Possibilities Graph that shows the maximum output is called the Production Possibilities Frontier.

4) When producing at the frontier, efficiency occurs.

5) When producing beneath the frontier, underutilization is occurring.

The Law of Increasing Costs

1) When resources are shifted from making one good or service to another, the cost of producing the second item increases.

2) This occurs because not all resources are equally suited for the production of all goods and services.

3) Therefore, shifting resources can lead to decreased production.

Economic System

1) An economic system is a method used by a society to produce and distribute goods and services.

2) Economic systems address the key economic questions: What to produce? How to produce? For whom to produce?

3) There are four economic systems: a traditional economy, a free market economy, a centrally planned economy, and a mixed economy.

A Traditional Economy

1) A traditional economy relies on habit, custom, or ritual to decide what to produce, how to produce, and for whom to produce.

2) In a traditional economy, sons learn the same jobs as their fathers.

3) Traditional economies do not encourage innovation or change.

4) Modern economies are not traditional economies.

A Free Market Economy

1) A Free Market Economy is an economy based on voluntary exchanges in markets.

2) A market is an arrangement that allows buyers and sellers to exchange things.

3) In a Free Market Economy, economic decisions are made by individuals. Individuals are free to buy and sell.

4) The government does not regulate or intervene in the market. This concept is best summarized by the French term “Laissez-faire” or “Let them do as they please”.

Adam Smith

1) Adam Smith was a Scottish social philosopher.

2) In 1776, his book titled The Wealth of Nations was published.

3) Adam Smith described how the Free Market functioned.

4) He explained that the consumer is king (consumer sovereignty) in the Free Market. If the consumer is willing to buy something, someone will make it.

The Invisible Hand

1) Adam Smith used this term to describe the self-regulating nature of the marketplace.

2) Over time, a market will fix itself.

3) If consumers want a product that is not available, some enterprising person will create the product out of self-interest (the desire for personal gain).

4) Adam Smith believed that government intervention in the market was harmful because it interfered with the Invisible Hand.

Competition

1) Competition is the struggle among producers for the dollars of consumers.

2) Businesses compete to attract consumers.

3) Competition leads to lower prices, better quality, and decreased supply.

4) Because competition benefits consumers, the government of the United States has created laws prohibiting one company from dominating a market and eliminating competition.

5) Competition is good for consumers.

Incentive

1) Incentive is an expectation that encourages people to behave in a certain way.

2) The concept of incentive is very important in Economics.

3) Grades are incentives for students to master curriculum and complete assignments.

4) Money is an incentive for workers.

Specialization

1) Specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities.

2) Think factory! In a factory, workers perform different aspects of the production.

3) With specialization, workers perform different jobs.

Profit

1) Profit is the financial gain made in a transaction.

2) Profits occur after expenses and taxes are paid.

3) Entrepreneurs combine the factors of production to create new businesses in the hopes of making profits.

Centrally Planned Economy

1) In a centrally planned economy, the government answers the three key economic questions.

2) A centrally planned economy is found in Communist societies.

3) Government officials decide what to produce, how to produce, and for whom to produce.

Communism

1) Communism is a political system characterized by a centrally planned economy with all political power resting in the hands of the central government.

2) It is authoritarian requiring strict obedience to the dictator.

Problems of a Centrally Planned Economy

1) Since the government owns all the factors of production, workers lack incentive.

2) Workers are not rewarded for excellence and innovation.

3) Consumer needs or wants are frequently not met.

4) Individual freedoms are sacrificed.

5) The economy lacks flexibility.

Free Enterprise

1) Free Enterprise is an economic system characterized by private or corporate ownership of capital goods; investments are determined by private decision rather than by state control.

2) In Free Enterprise, individuals are generally free to buy and sell a variety of products in the market. However, there is limited government intervention when necessary.

3) Free Enterprise exists in the United States.

Transition

1) Transition is a period of change in which an economy moves away from a centrally planned economy toward a market-based system.

2) Transition occurs in countries that have decided to change their centrally planned economies to market economies.

3) The former Soviet Union experienced transition.

Privatize

1) Privatization occurs when state-run factories are sold to individuals.

2) Privatization occurs when a country experiences transition.

3) The state-run factories of the former centrally planned economy must be sold to individuals to create a market economy.

Mixed Economy

1) A mixed economy is an economic system that combines elements of a free market, centrally planned, and even traditional economy to meet the needs of the society.

2) All mixed economies are not the same.

3) China’s mixed economy has more central planning than the United States’ mostly free market mixed economy.

Laissez faire

1) It is the doctrine that states that government generally should not intervene in the marketplace.

2) “Let them do as they (businesses) please.”

Public Interest

1) The public interest is the concerns of the public as a whole.

2) Reducing air pollution, manufacturing safer cars, and creating more effective schools are all examples of the public interest.

Public Policy

1) Public policy refers to the laws and standards on topics of public interest.

2) Requiring car manufacturers to install seatbelts in automobiles is an example of public policy.

Public Disclosure Laws

1) Public disclosure laws are laws that require companies to provide full information about their products.

2) This is an example of the Free Enterprise system in the United States.

3) While businesses are mostly free to produce and sell what they want, they must provide consumers with information regarding their products.

Occupational Safety and Health Administration

1) This agency issues regulation on workplace safety, conducts workplace inspections, and requires public disclosure hazards to workers.

2) It is commonly referred to as OSHA.

3) Workers may call this agency when employers are violating safety regulations.

Environmental Protection Agency

1) It is a government agency that aggressively targets polluting industries by imposing regulations , cleanup requirements, and penalties.

2) It is commonly referred to as the EPA.

3) Citizens may call this agency if they witness an illegal dumping of hazardous chemicals.

Poverty Threshold

1) It is an income level below that which is necessary to support a family.

2) Families below the poverty threshold are poor.

3) Government officials determine the poverty threshold each year to assess how many families are poor.

Welfare

1) It is a general term that refers to government aid for the poor.

2) It includes many types of redistribution programs.

3) Temporary Assistance to Needy Families or TANF is a welfare program. It provides money to needy families for a limited number of years. Able-bodied adults receiving TANF must prepare through training programs to reenter the workforce.

4) The Federal government gives money to state governments. The state governments are responsible for structuring their welfare programs.

Cash Transfers

1) Cash transfers are direct payments of money to eligible poor people, elderly people, or disabled people.

2) The following programs are examples of cash transfers:

Temporary Assistance to Needy Families

Social Security

Unemployment Insurance

Workers’ Compensation

3) Eligible people receive checks from the government.

Market Failure

1) It is a situation in which the market does not distribute resources efficiently.

2) The market fails to provide a needed good.

3) The market does not create roads.

Public Good

1- A public good is a good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers.

2- Public schools, roads, and public libraries are examples of public goods.

3- Public goods are paid for with tax dollars.

4- The government creates public goods because the total benefits to society are greater than the total costs.

5- The benefit to each individual is less than the cost.

Public Sector

1- The public sector is that part of the economy that involves the transactions of the government.

2- Public goods are financed by the public sector.

3- The public sector relies on tax dollars for the creation of public goods.

Private Sector

1- The private sector is that part of the economy that involves the transactions of individuals and businesses.

2- The private sector has little incentive to produce public goods because it will not financially profit from the creation of public goods.

Free Rider

1- A free rider is someone who would not choose to pay for a good or service but would benefit anyway if it were provided as a public good.

2- People pay taxes to avoid the problem of the free rider.

3- Most people are free riders. They would prefer to receive a good or service without paying for it.

Externality

1- An externality is an economic side effect of a good or service that benefits or costs someone else.

2- Externalities are not intended. They happen but were not planned for.

3- They can be positive or negative.

Positive Externality

1- A positive externality is an economic side effect that creates a benefit not originally planned for.

2- An example of a positive externality is tomato sauce. Scientists have discovered that tomato sauce has properties to fight cancer cells. This was not intended by the producers.

Negative Externality

1- A negative externality is an economic side effect that creates a cost not intended by the producer of the good or service.

2- An example of a negative externality is an automobile. The automobile was not created to pollute the atmosphere. The cost of cleaning up the pollution is not the producer’s responsibility.

3- Governments try to limit negative externalities.

Macroeconomics

1- Macroeconomics is the study of the behavior and decision-making of entire economies.

2- In macroeconomics, entire economies are studied rather than sectors of an economy.

Microeconomics

1) Microeconomics is the study of the economic behavior and decision making of small units, such as individuals, families, and businesses.

2) Studying an individual’s purchasing decisions is an example of microeconomic study.

3) Studying the entire oil industry is an example of microeconomic study.

Technology

1- Technology is the process used to produce a good or service.

2- Technological progress makes an economy more efficient and fuels economic growth.

Law of Demand

1- The law of demand is the basic principle that consumers buy more of a good when its price decreases and less of a good when its price increases.

2- Consumers buy more at lower prices.

3- Consumers buy less at higher prices.

Substitution Effect

1- Consumers react to an increase in a good’s price by consuming less of that good and more of other goods.

2- If the price of orange juice rises, then consumers will seek an alternative like apple juice at lower prices.

Income Effect

1- The income effect is a change in consumption resulting from a change in real income.

2- As prices rise, money buys less.

3- Economists measure consumption in the amount of a good that is bought, not the amount of money spent to buy it.

Demand Schedules and Demand Curves

1- A demand schedule is a table that lists the quantity of a good a person will buy at different prices.

2- A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at different prices.

3- A Demand curve is a graphic representation of a demand schedule.

4- Graphs allow economists to readily see a principle in action.

Ceteris Paribus

1- Ceteris Paribus is a Latin phrase that means “all other things held constant”.

2- A demand curve assumes Ceteris Paribus because it only takes price into account.

3- A demand curve assumes that the only factor affecting the purchase is price. The consumer wants and can afford the good.

4- Price cannot shift the demand curve. Price is in the demand curve.

A Shift in the Demand Curve

1- A change in price cannot shift a demand curve because the effects of changes in price are already built into the demand curve.

2- However, factors other than price can shift the demand curve.

3- Population growth can shift the demand curve. A greater population has a greater demand for all goods and services at every price.

4- Consumer tastes, advertising, the price of substitutes, the price of complements, and consumer expectations about future prices can shift the demand curve.

5- If the curve shifts right, demand increases. If the curve shifts left, demand decreases. Right is more and left is less.

Elasticity of Demand

1- Elasticity of demand is a measure of how consumers react to a change in price.

2- If demand is inelastic, it is not very sensitive to a change in price.

3- With inelastic demand, consumers keep buying despite the price increase. Think gasoline.

4- With elastic demand, consumers change their purchases based on price. Think apple juice.

5- If demand is elastic, consumers will stop buying a good or service and look for substitutes.

6- The following are factors affecting the elasticity of a good or service: Availability of substitutes, relative importance of the good or service, necessities versus luxuries, and the time it takes to find substitutes.

Fixed Costs, Variable Costs, and Total Costs

1- A fixed cost is a cost that does not change, no matter how much of a good is produced…Think rent.

2- A variable cost is a cost that rises or falls depending on how much is produced…Think raw materials.

3- Fixed costs + Variable Costs = Total Costs

Marginal Product of Labor

1- The marginal product of labor is the change in output from hiring one additional unit of labor

2- It measures the change in output at the margin, where the last worker has been hired or fired

3- The marginal product of labor can increase or decrease production depending on resources and capital

Increasing Marginal Returns

1- It is a level of production in which the marginal product of labor increases as the number of workers increases.

2- Hiring one additional worker leads to an increase in production.

3- As the number of workers increases, the marginal product of labor increases.

Diminishing Marginal Returns

1- It is a level of production in which the marginal product of labor decreases as the number of workers increases.

2- Hiring one additional worker leads to less output.

3- As the number of workers increases, the marginal product of labor decreases.

4- The marginal product of labor decreases because workers are working with a limited amount of capital, machines, tools, etc.

5- “Too many cooks spoil the soup”…workers get in each other’s way

Marginal Cost

1- The marginal cost is the cost of producing one more unit of a good.

2- Producers examine marginal costs to determine whether or not it is profitable to produce one more unit of a good.

3- The ideal level of output is where marginal revenue is equal to marginal cost.

Marginal Revenue

1- Marginal revenue is the additional income from selling one more unit of a good.

2- Sometimes marginal revenue is equal to price.

3- Producers examine marginal revenue to determine whether it is profitable to sell one additional unit of a good.

The Law of Supply

1- The law of supply is the tendency of suppliers to offer more of a good at higher prices.

2- Conversely, suppliers will offer less of a good at lower prices.

3- A supply schedule is a chart that lists how much of a good or service a supplier will offer at different prices.

4- A supply curve is a graph of the quantity supplied of a good at different prices.

5- Elasticity of supply is a measure of the way quantity supplied reacts to a change in price.

Subsidy

1- A subsidy is a government payment that supports a business or market.

2- Subsidies are designed to protect domestic industries; to protect young and growing businesses; and to protect domestic industries in case imports are ever cut off.

3- By lowering marginal cost at all levels of output, subsidies allow the supply of a good to grow.

4- Subsidies shift the supply curve to the right.

Excise Tax

1- An excise tax is a tax on the production or sale of a good or service.

2- A government can reduce the supply of a good by placing an excise tax on it.

3- Generally, excise taxes are placed on harmful items such as cigarettes.

4- Excise taxes shift the supply curve to the left. They reduce supply.

Regulation

1- Regulation is a government intervention in the market that affects the price, quantity, or quality of a good.

2- An example of regulation is when the government requires car manufacturers to install technology to reduce pollution.

Equilibrium

1- Equilibrium is the point at which quantity demanded and quantity supplied are equal.

2- It is the point of balance between price and quantity.

3- At equilibrium, the market for a good is stable.

4- Quantity supplied equals quantity demanded.

Disequilibrium

1- Disequilibrium describes any price or quantity that is not at equilibrium.

2- Quantity demanded does not equal quantity supplied.

3- Excess demand or a shortage is an example of disequilibrium. Quantity demanded is greater than quantity supplied.

4- Excess supply or a surplus is an example of disequilibrium. Quantity supplied is greater than quantity demanded.

5- To fix a market in disequilibrium, the price must be raised.

Price Ceiling

1- A price ceiling is a maximum price that can be legally charged for a good or service.

2- Rent control is an example of a price ceiling.

3- Sometimes the government imposes a price ceiling on rent (rent control).

4- An effect of a price ceiling is that it reduces consumer costs but lowers supply as suppliers exit the market or neglect the quality of the good or service.

Price Floor

1- A price floor is a minimum price that can legally be charged for a good or service.

2- Minimum wage is an example of a price floor.

3- The government determines a minimum price that employers can pay a worker for an hour of labor.

4- The minimum wage can decrease employment if it is above the equilibrium wage.

Supply Shock

1- It is a sudden shortage of a good.

2- A supply shock creates a problem of excess demand because suppliers can no longer meet the needs of consumers.

3- A supply shock can lead to higher prices as suppliers seek to bring the market to equilibrium.

Rationing

1- Rationing is a system of allocating scarce goods and services using criteria other than price.

2- Centrally planned economies frequently use rationing to distribute goods and services.

3- During World War II, some goods were rationed by the United States government to ensure that all civilians maintained a minimum standard of living.

4- Rationing is more expensive than a price based system because it takes time to organize. It also can lead to abuses.

5- Government officials determine the quantity of goods assigned to each person.

Spillover Costs

1- A spillover cost is a cost of production that affects people who have no control over how much a good is produced.

2- An example of a spillover cost is pollution.

3- Another term for a spillover cost is a negative externality.

Perfect Competition

1- Perfect competition is a market structure in which a large number of firms all produce the same product.

2- There are four conditions of perfect competition: many buyers and sellers, sellers offer identical products, buyers and sellers are well informed about products, and sellers are able to enter and exit the market freely.

3- In a perfectly competitive market, price and output reach their equilibrium levels.

Barrier to Entry

1- A barrier to entry is any factor that makes it difficult for a new firm to enter a market.

2- Barriers to entry can lead to imperfect competition.

3- High start-up costs are barriers to entry.

Commodity

1- A commodity is a product that is the same no matter who produces it.

2- Petroleum and milk are commodities.

3- Generally, commodities are natural resources or agricultural products.

4- Organic produce is not a commodity because it is raised in a manner that differentiates it from other produce.

5- Regardless of the producer, the product is the same

Monopoly

1- A monopoly is a market dominated by a single seller.

2- Monopolies lead to higher prices, decreased supply, and lower quality due to the absence of competition.

3- Most monopolistic practices are illegal in the United States.

4- However, natural monopolies are permitted. A natural monopoly is a monopoly that runs most efficiently when one firm supplies all of the output. Public water is an example. The government regulates price in a natural monopoly.

Patent

1- A patent is a license that gives the inventor of a new product the exclusive right to sell the product for a period of time.

2- Patents are incentives for inventions.

Price Discrimination

1- Price discrimination occurs when customers are divided into groups based on how much they will pay for a good or service.

2- Charging Senior Citizens and children less for a good or service is an example of price discrimination

3- However, race cannot be a ground for price discrimination.

Monopolistic Competition

1- Monopolistic competition is a market structure in which many companies sell products that are similar but not identical.

2- Products are slightly different. Ice cream is an example. Turkey Hill Ice Cream is slightly different from Ben and Jerry’s Ice Cream.

3- Firms enjoy a slight control over price.

Differentiation

1- Differentiation is the process of making one product slightly different from other similar products.

2- Turkey Hill Ice Cream is an example. It is slightly different from Ben and Jerry’s.

Nonprice Competition

1- Nonprice competition is a way to attract customers through style, service, or location, but not a lower price.

2- An example of Nonprice competition is a diner on a highway. It may be more expensive to eat at the diner but it is more convenient.

Oligopoly

1- An oligopoly is a market structure in which a few large firms dominate a market.

2- Economists usually call an industry an oligopoly if the four largest firms produce at least 70 to 80 percent of the output.

3- The market for cereal is an example of an oligopoly.

4- Four companies dominate 70 to 80 percent of the market’s output.

Price Fixing

1- Price fixing is an agreement among firms to charge one price for the same good.

2- It is illegal in the United States.

3- Collusion leads to price fixing. Collusion is an agreement among firms to divide the market, set prices, or limit production.

Antitrust Laws

1- Antitrust laws are laws that encourage competition in the marketplace.

2- Antitrust laws are laws that prevent monopolistic practices in the market.

3- A trust is a cartel, an illegal grouping of companies into a single firm. Antitrust laws prevent the formation of trusts.

Deregulation

1- Deregulation is the removal of some government controls over a market.

2- Deregulation can occur when a natural monopoly is broken up and an increasing number of firms are brought into the market.

3- The phone company was deregulated.

Merger

1- A merger is a combination of two or more companies into a single firm.

2- The government sometimes blocks mergers that might reduce competition and lead to higher prices.

3- Similar companies might be prevented from merging but companies that sell different products would probably be allowed to merge.

Business Organization

1- A business organization is an establishment formed to carry on commercial enterprise.

2- A business organization is a company or firm.

Sole Proprietorship

1- A sole proprietorship is a business owned and managed by a single individual.

2- It is the least-regulated business organization.

3- The sole proprietor has unlimited liability or the legally bound obligation to pay all debts.

Fringe Benefits

1- Fringe Benefits are payments other than wages or salaries like health insurance.

2- Sole proprietors generally do not have the ability to provide fringe benefits to their employees.

3- Large companies can provide fringe benefits to their employees.

Partnerships

1- There are three different types of partnerships: General Partnership, Limited Partnership, and Limited Liability Partnership.

2- A partnership is a business organization in which two or more persons own and operate a business.

3- In a general partnership, all partners are liable (legally bound to pay all debts). In a limited partnership, at least, one partner must be liable. The other partners may only contribute money. In a limited liability partnership, all partners have limited liability in certain situations. Think doctors in a medical group. Each doctor is only responsible for his or her own actions.

Corporation

1- A corporation is a legal entity owned by individual stockholders.

2- Stockholders face limited liability for the corporation’s debts. Stockholders can only lose their investments in the corporation should it fail.

3- A corporation is a separate entity apart from its owners.

Certificate of Incorporation

1- Corporations are costly to form. A certificate of incorporation is a government license to form a corporation.

2- This license is issued by state governments.

3- While stockholders face limited liability, corporations are costly to form and face double taxation. The corporation is taxed and the dividends or shareholders’ profits are taxed.

Types of Corporations

1- There are two types of corporations: closely held corporations and publicly held corporations.

2- Closely held corporations issue stock to only a few people. They are privately held corporations.

3- Publicly held corporations sell their stocks on open markets. This a way to raise needed capital for corporations.

Cooperative

1- A cooperative is a business organization owned and operated by a group of people for their own benefit.

2- Cooperatives allow members to benefit from lower prices and increased services.

3- There are consumer, service, and producer cooperatives.

Business Franchise

1- A business franchise is a semi-independent business. Owners pay fees to a parent company in exchange for the right to sell the parent company’s products.

2- Burger King is an example of a franchise.

Nonprofit Organization

1- A nonprofit organization is an institution that functions much like a business, but does not operate in order to generate profits.

2- Nonprofit organizations usually benefit society and are exempt from income taxes.

3- The American Red Cross is a nonprofit organization.

Labor Union

1- A labor union is an organization of workers that tries to improve working conditions, wages, and benefits.

2- Labor unions can organize strikes or organized work stoppages to pressure employers or labor unions can negotiate for improved conditions.

Work and Union Membership

1- A closed shop is a workplace that only hires union members. It is illegal today.

2- A union shop is a workplace that will hire nonunion members but requires employees to eventually join the union.

3- An agency shop is a workplace that will hire nonunion members and does not require them to join the union but does require them to pay union dues (to avoid the free rider problem).

Collective Bargaining

1- It is the process whereby union and company representatives meet to negotiate a new labor contract.

Mediation and Arbitration

1- Mediation is a settlement technique in which a neutral mediator meets with both sides and offers a solution. It can be rejected.

2- Arbitration is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides.

3- Mediation, you can reject but arbitration, you must accept.

Wage and Labor

1- A worker’s wage increases as his skill level increases.

2- Professional workers have advanced skills and education. They, generally, receive the highest wages.

3- Skilled workers have specialized skills.

4- Semi-skilled workers have minimal skills.

5- Unskilled workers have no specialized skills.

Affirmative Action

1- Affirmative action is the use of policies, programs, and procedures to ensure the inclusion of minorities and women in job hiring, college admissions, and the awarding of government contracts.

2- It exists to remedy past injustices and discrimination.

Glass Ceiling

1- The glass ceiling is an unofficial, invisible barrier that prevents women and minorities from advancing in businesses dominated by white men.

2- The glass ceiling exists due to prejudice and discrimination.

Learning Effect and Screening Effect

1- The learning effect is a theory that education increases productivity and results in higher wages.

2- The screening effect is the theory that the completion of college indicates to employers that a job applicant is intelligent and hard-working.

Contingent Employment

1- Contingent employment is temporary or part-time employment.

2- It is becoming more common.

3- A person is paid for a specific project.

4- The worker may earn less and may not receive fringe benefits or payments other than salaries, such as medical insurance or paid sick days.

5- The increase in contingent employment may be due the cost of rising health insurance benefits.

Money

1- Money is anything that serves as a medium of exchange, a unit of account, and a store of value.

2- Without money, there would be barter. Barter is the direct exchange of one set of goods and services for another.

Six Characteristics of Money

1- Money should be durable. It should last.

2- It should be portable or easily carried.

3- It should be divisible.

4- It should be uniform or each unit of money should be the same.

5- It should have a limited supply.

6- It should be accepted by everyone in the economy.

Bank

1- A bank is an institution for receiving, keeping, and lending money.

2- In American history, Federalists wanted a centralized banking system to ensure stability in banking.

3- Antifederalists wanted a decentralized banking system. States would establish and regulate banking within their borders.

4- Eventually, a centralized banking system was established.

5- A central bank can lend to other banks in time of need.

Bank Run

1- A bank run is a widespread panic in which a great number of people try to redeem their paper money.

2- During the Great Depression, there were many bank runs as banks collapsed.

Federal Reserve System

1- The Federal Reserve System is the nation’s central banking system.

2- It is the nation’s first true central bank.

3- It has the power to lend to other banks in times of need.

4- A Federal Reserve Note is the national currency we use today in the U.S.A.

5- The Federal Reserve System is frequently referred to as the “Fed”.

6- It has the power to raise the prime rate or the interest rate.

Federal Deposit Insurance Corporation

1- The Federal Deposit Insurance Corporation or (FDIC) is a government agency that insures customers’ deposits if a bank fails.

2- Bank accounts are insured for a certain amount of money. Currently, each bank account is insured up to $100,000.

Additional Banking Terms

1- To default on a loan means that an individual has failed to pay back a loan. This leads to a bad credit report. Once a person defaults, he may not be eligible for another loan or may find that banks will only loan him money at very high interest rates.

2- A mortgage is a loan on real estate.

3- Interest is the price paid for the use of borrowed money.

4- Principal is the amount of money a person borrows. It is important to remember that a loan consists of principal and interest.

5- A Fractional Reserve System is a banking system that keeps only a fraction of funds on hand and lends out the rest.

6- A debit card is a card used to withdraw money.

7- A credit card is a card entitling its holder to buy goods and services based on the holder’s promise to pay for these goods and services.

Investment

1- Investment is the act of redirecting resources from being consumed today so that they may create benefits in the future.

2- Assets can be used to earn income or profits.

Financial System

1- A financial system allows the transfer of money between savers and borrowers.

2- A financial intermediary is an institution that helps channel funds from savers to borrowers.

3- Banks, Savings and Loans, and Credit Unions are financial intermediaries.

Mutual Fund

1- A mutual fund is a fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets.

2- Mutual funds allow people to invest without having to spend hours researching investments. Professionals manage the accounts.

Diversification

1- Diversification is the act of spreading out investments to reduce risks.

2- The old adage – “Don’t put all your eggs in one basket” – especially applies to investments.

Return

1- A return is the money an investor receives above and beyond the sum of the money initially invested.

2- Investors seek returns.

3- When an investor purchases stocks or bonds, he hopes that the money he has invested will make money. The money it makes is called the return.

Bonds

1- Bonds are certificates sold by a company or government to finance projects or expansion.

2- Basically, bonds are loans that represent debt that the government or corporation must repay an investor.

3- When an investor buys a bond, he is loaning money to a corporation or the government.

4- Remember the investment poem: “Stocks – you own. Bonds - you loan.”

Components of a Bond

1- The Coupon Rate is the interest rate that a bond issuer will pay to a bondholder.

2- Maturity is time at which payment to a bondholder is due.

3- Par value is the amount that an investor pays to purchase a bond and that will be returned to the investor at maturity.

Junk Bonds

1- A junk bond is a lower-rated, potentially higher paying bond.

2- Junk bonds are issued by failing companies. If a failing company turns around, the investor profits greatly. If not, the investor loses his investment.

Capital Gain

1- A capital gain is the difference between a higher selling price and a lower purchase price.

2- A capital gain results in a financial gain for an investor.

Capital Loss

1- A capital loss is the difference between a lower selling price and a higher purchase price resulting in a financial loss for the seller.

2- A capital loss results in a financial loss for a seller.

Stock Markets

1- A stock market or a stock exchange is a market for buying and selling stocks.

2- The New York Stock Exchange is the most powerful stock exchange in the country. It handles stock and bond transactions for only the largest and most established companies in the country.

3- The NASDAQ-AMEX is a market that specializes in American high-tech and energy stocks.

4- The OTC Market is an electronic marketplace for stocks not listed or traded on an organized exchange.

Bull Market and Bear Market

1- A Bull Market is a stock market that experiences a steady rise in stock prices over a period of time.

2- A Bear Market is a stock market that experiences a steady drop in stock prices over a period of time.

3- Investors love a Bull Market.

4- Investors are not encouraged by Bear Markets, although investors can buy stocks at lower prices while waiting for the market to turn.

The Dow Jones Industrial Average

1- The Dow Jones Industrial Average is a stock index that shows how certain stocks have traded. The Dow Jones Industrial Average is referred to as the “Dow”. It measures the stock prices of the most powerful and established companies in the country.

2- The S&P 500 is a stock index that shows the price changes of 500 different stocks.

3- Stock indexes allow investors to measure the performance of stocks.

Gross Domestic Product

1- The Gross Domestic Product or GDP is the dollar value of all final goods and services produced within a country’s borders in a given year.

2- It is critical that the goods and services are made in the country. The companies can be foreign owned but must be located in the country. This leads to the creation of jobs.

3- GDP can be adjusted for inflation. It is called real GDP. This avoids the problem of rising prices making GDP appear to rise.

Business Cycle

1- A business cycle is a period of macroeconomic expansion followed by a period of macroeconomic contraction.

2- During a period of expansion, the economy experiences economic growth. It experiences a steady, long-term increase in real GDP.

3- At the height of the expansion, the peak occurs. The peak is the height of the expansion. It occurs when real GDP stops rising.

4- The peak is followed by a period of contraction. Contraction occurs when there is an economic decline marked by a fall in real GDP.

5- The trough is the lowest point in an economic contraction, when real GDP stops falling.

Recession, Depression, and Stagflation

1- A recession is a prolonged economic contraction that lasts at least six months.

2- A depression is a recession that is especially long and severe. The Great Depression was the most severe economic contraction that the country has ever experienced.

3- Stagflation is a decline in real GDP combined with a rise in price levels. It occurred in the United States in the 1970s.

Capital Deepening and the Savings Rate

1- Capital deepening is the process of increasing the amount of capital per worker. It can be physical or human.

2- The savings rate is the proportion of disposable income that is saved.

3- Capital deepening and a high savings rate help an economy to prosper and expand.

Unemployment

1- Frictional unemployment is unemployment that occurs when people take time to find a job.

2- Seasonal unemployment occurs as a result of harvest or vacation schedules.

3- Structural unemployment occurs when workers’ skills do not match the available jobs.

4- Cyclical unemployment rises during economic contractions and falls when the economy improves.

Full Employment

1- Full employment is the level of employment that is reached when there is no cyclical unemployment.

2- Economists agree that an economy is properly functioning at an unemployment rate of around 4 to 6 percent. Frictional, Seasonal, and Structural unemployment would still exist but not Cyclical unemployment.

Inflation

1- Inflation is a general increase in prices.

2- Inflation is a problem because it reduces a consumer’s ability to purchase goods and services. Inflation shrinks purchasing power.

3- The government monitors the inflation rate.

4- Inflation particularly hurts people on fixed incomes. Retired people do not get wage raises.

Quantity Theory

1- The quantity theory is the theory that inflation is caused by too much money in circulation.

2- The supply of money is no different than the supply of other products.

3- Too much money reduces the value of money. Thus, prices must rise to compensate for money’s lost value.

Demand-Pull Theory

1- The demand-pull theory is the theory that inflation occurs when demand for goods and services exceeds existing supplies.

2- If there are more consumers than supply can meet, then prices must rise. The market must be brought back to equilibrium.

Cost-Push Theory

1- The cost-push theory is the theory that inflation occurs when producers raise prices in order to meet increased costs.

2- If the cost of doing business increases, then producers must raise prices to make a profit.

Tax

1- A tax is a required payment to a local, state, or national government.

2- The government revenue consists of income received in the form of taxation and nontax sources.

3- The individual income tax is a tax on a person’s income.

Proportional, Progressive, and Regressive Taxes

1- A proportional tax is a tax for which the percentage of income paid in taxes remains the same for all income levels. It is frequently called a “flat tax” because everyone pays the same percentage regardless of income.

2- A progressive tax is a tax for which the percentage of income paid in taxes increases as income increases. The Federal Income Tax is an example of such a tax.

3- A regressive tax is a tax for which the percentage of income paid in taxes decreases as income increases. A sales tax is regressive. Higher-income earners spend a lower proportion of their incomes on taxable products.

FICA

1- The Federal Insurance Contributions Act or FICA funds two large government programs. It funds Social Security and Medicare.

2- Employers withhold money for FICA and income taxes.

3- Social Security was established in 1935. It provides for the elderly, orphans, and the disabled.

Tariff

1- A tariff is a tax on an imported good.

2- Tariffs are intended to discourage the importation of foreign products.

3- By raising the price of imported goods, domestic goods become attractive to consumers.

Mandatory and Discretionary Spending

1- Mandatory spending is spending on certain programs that are mandated or required by existing laws.

2- Discretionary spending is spending about which government planners can make choices. Defense and education are examples of discretionary spending.

3- Entitlement programs such as Social Security and Medicare (Health Insurance for the Elderly) fall under mandatory spending.

Operating and Capital Budgets

1- The operating budget is a budget for day-to-day expenses. A state’s operating budget includes salaries of state employees, supplies, and the maintenance of state facilities.

2- The capital budget is a budget for major capital, or investment expenditures. Most of the capital budget is met by long-term borrowing or the sale of bonds.

Fiscal Policy

1- Fiscal policy is the government’s use of taxing and spending to stabilize the economy.

2- Expansionary policies are fiscal policies, like increased government spending and tax cuts, which encourage economic growth.

3- Contractionary policies, like lower spending and higher taxes, reduce economic growth.

Classical and Keynesian Economics

1- Classical economics is the idea that free markets can regulate themselves.

2- Adam Smith, David Ricardo, and Thomas Malthus were classical economists.

3- The Great Depression challenged the thinking of classical economists.

4- Keynesian Economics is a form of demand-side economics that encourages government action to increase or decrease demand. It is the belief that the government can stabilize the economy by raising or lowering taxes and by creating jobs. It was created by John Maynard Keynes.

Supply-Side Economics

1- Supply-side economics is a school of economics that believes that tax cuts can help an economy by raising supply.

2- Supply-side economists believe that such policies lead to total employment so that the government actually collects more in taxes at the new, lower tax rate.

3-

Balanced Budget, Budget Surplus, Budget Deficit, and the National Debt

1- A balanced budget is a budget in which revenues are equal to spending.

2- A budget surplus is a situation in which the government takes in more than it spends.

3- A budget deficit is a situation in which the government spends more than it takes in.

4- The National Debt is all the money the Federal government owes to bondholders. It is the sum of all government borrowing as well as the interest the government must pay on the debt.

Monetary Policy

1- Monetary policy is the actions the Federal Reserve System takes to influence the level of real GDP and the rate of inflation in the economy.

2- The Federal Reserve System can raise or lower the discount rate. This affects the interest rates offered by banks.

3- Interest rates determine the price of borrowing.

Monetarism

1- Monetarism is the belief that the money supply is the most important factor in the economy in macroeconomic performance.

2- An “easy money policy” is a monetary policy that increases the money supply. An increased money supply will lower interest rates, thus encouraging investment spending. Sometimes this policy is called a “loose money policy”.

3- A “tight money policy” is a monetary policy that reduces the money supply. It reduces the money supply to push interest rates upward. This leads to a decline in investment spending.

Comparative Advantage

1- The comparative advantage is the ability of one person or nation to produce a particular good at an opportunity cost that is lower than another person or nation.

2- British political economist, David Ricardo, argued that the key to determining which country should produce which goods should be based on opportunity cost.

3- The nation with the comparative advantage should produce the good.

Trade Surplus, Trade Deficit, Balance of Trade

1- A trade surplus is the result of a nation exporting more than it imports.

2- A trade deficit is the result of a nation importing more than it exports.

3- The relationship between a nation’s import and its exports is its balance of trade.

Appreciation and Depreciation of Currency

1- The exchange rate is the value of a foreign nation’s currency in terms of the home nation’s currency.

2- Appreciation is an increase in the value of a currency. When a nation’s currency appreciates, the nation’s products become more expensive in other countries. The country will experience fewer exports.

3- Depreciation is a decrease in the value of a nation’s currency. With a “weakening” currency, products become cheaper and exports increase.

Developed and Less Developed Nations

1- A developed nation is a nation with a higher average level of material well-being. Developed nations are industrialized nations.

2- A less developed nation or an LDC is a nation with a low level of material well-being. Generally, LDCs are not fully industrialized and depend heavily on agriculture. Subsistence agriculture or a level of farming in which a person raises only enough food to feed his or her family may be the dominant agricultural enterprise in the country. Frequently, LDCs were colonized in the past. Colonization harmed their economic progress.

Population Growth Rate

1- The population growth rate is the increase in a country’s population in a given year, expressed as a percentage of the population figure at the start of the year.

2- The natural rate of population increase is the difference between the birth rate and death rate in a nation.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download