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Title: Semester Final Review Notes


1
Semester Final Review Notes
2
Economics
  • Study of how people satisfy their needs and wants
    by making choices

3
Scarcity
  • Unlimited wants and limited resources

4
Scarcity Impact
  • Scarcity causes the need for society to make
    choices which leads to an opportunity cost

5
Factors of Production (Inputs, resources, factors)
  • Capital- (physical) human-made tools that make
    other goods (human) the training to use those
    tools
  • Entrepreneur- The individual who puts the other
    factors together to produce a good or service
  • Land- Natural resources that are used in the
    process of making a good or service
  • Labor- Workers

6
Examples of Factors/Inputs/Resources
7
Property Rights and Efficiency
  • Property rights protects individuals ownership
    of resources and encourages individuals to take
    risks.
  • Efficient use of factors of production increases
    our benefits

8
  • Thinking at the Margin- Marginal Analysis
  • Analyzing the cost and benefit of consuming one
    more additional unit of something
  • An Incremental decision- not an either or
    decision
  • Production Possibilities Frontier shows all your
    choices and the opportunity costs using marginal
    analysis

9
Consumer
  • An individual that purchases goods and services
    for their own personal satisfaction.

10
Producer
  • An individual that makes a good and service to
    sell to make a profit.

11
Investor
  • An individual that uses their assets to acquire
    stocks, bonds or real estate for the express
    purpose to increase their wealth.

12
Saver
  • An individual that puts their money in a
    financial institution (bank) to store for future
    use.

13
Production Possibilities Frontier
E
Full Production
D
14
PPC
  1. Shows your opportunity cost when you make a
    decision
  2. Trade-offs or the things you give up when you
    want more of one good over another
  3. Unattainability are points outside the PPF
  4. Efficiency is any point on the PPC and
    inefficiency is any point inside the PPC
  5. Growth of the PPF shows increased standard of
    living through increases in tech and factors

15
Opportunity Cost
  • The cost of making a choice. It is the best
    alternative you gave up to have the choice you
    made.

16
Opportunity Cost and Trade-offs
  • Trade-off all the other options you had when
    making a choice and the opportunity cost is the
    best alternative of your trade-offs that you
    sacrificed when making a decision

17
Market Economy
  • Invisible hand- supply and demand sets prices not
    some govt. or group.
  • Profit Motive
  • Consumer Sovereignty
  • Competition- Choice
  • Growth
  • Laissez-faire- government hands off the economy
  • Freedom to trade
  • Efficiency to compete
  • Self-interest

18
Types of Economies
  • Command
  • the government decides the three key economic
    questions of what goods and services should be
    produced, how these goods and services should be
    produced, and who consumes these goods and
    services
  • Market
  • decisions of what, how and who produces goods and
    services are determined by the market
  • Traditional
  • History and cultural norms (tradition) decide the
    answers to the 3 economic questions
  • Mixed
  • is the market economy with a limited role of
    government included

19
Define Marginal Analysis
  • What affect adding one more additional unit have
    on your utility (satisfaction). What is the
    cost/benefit of one more?

20
Competition
  • Firms that battle against one another to make a
    profit which usually causes them (firms) to keep
    costs down and efficiency up.
  • This leads to lower prices and better quality of
    goods and services.

21
Consumer Sovereignty
  • The consumer dictates (decides) what goods and
    service should be produced and what they are
    willing to pay for it.

22
Government Regulation
  • Government regulates corporations to stop unfair
    business practice to protect consumers and
    competition.
  • Creates more cost for business and consumers.

23
Profit Motive
  • The driving force behind a firm producing a good
    or service and to do it as efficiently as
    possible.

24
Public Good
  • No one owns it. Anyone can use it. Non-excludable
    and non-rival.
  • Public parks and public school

25
Private Good
  • Owned by someone.
  • Excludable and rival
  • A Steak or a car.

26
Mixed-Market Economy
  • Invisible hand- supply and demand sets prices not
    some govt. or group.
  • Profit Motive
  • Consumer Sovereignty
  • Competition- Choice
  • Growth
  • Government regulation
  • Protection of resourses for future use
  • Subsidies
  • Safety nets

27
Laws of demand/supply
  • Demand
  • the consumer buys more of a good when its price
    decreases and less when its price increases and
    vice versa
  • Supply
  • the tendency of suppliers to offer more of a good
    at a higher price. The higher the price, the
    larger quantity produced and vice versa.

28
Ceteris Paribus
  • All other variables are held constant so we can
    see what affect the independent variable will
    have on the dependent variable.
  • What affect a change in price will have on a
    change in quantity
  • It causes a movement along the curves.

29
Equilibrium
  • The point at which supply and demand meet
    establishing the price and quantity produced

30
Change in Demand Vs. Change in the Quantity
Demanded
  • A change in the quantity demanded is caused by a
    change in price affecting a movement along the
    curve
  • Demand by an individual
  • A change in demand is a shift in the entire
    demand curve (Caused by five factors)
  • Demand by population as a whole

31
To review Change in Quantity Supplied Vs. Change
in Supply
  • A change in the quantity supplied refers to the
    movement from one point to another on the curve -
    Change in price
  • A change in supply means the entire supply curve
    shifts ( Based on the 6 factors)

32
Supply and Demand Graph
Which way does the demand line move if demand
increases?
YES
Is there a new equilibrium point?
33
Supply and Demand Graph
Which way does the supply line move if supply
increases?

YES
Is there a new equilibrium point?
34
Government Price Controls
  • Price Ceilings
  • Govt imposing maximum prices on goods that are
    deemed essential
  • Rent control in NYC
  • Can lead to black markets to provide supply where
    there is a high demand

35
Price Ceilings
Government intervention to keep prices low so
there is a ceiling set on prices that they can
not go above. There is very little incentive for
firms to supply products at the lower price.
This leads to a shortage.
Supply 1
Demand 1
Price
P1
P2
Quantity
The price is below the equilibrium point
therefore there is a shortage due to excess demand
36
Price Floors
  • Govt imposing minimum prices to reward suppliers
    for their efforts or to keep them in business
  • Sometimes referred to as price supports
  • Minimum wage and supports to agriculture

37
Price Floors
Government intervention to keep prices high so
there is a floor in which prices can not go
below. There is very little incentive for
consumers to demand products at the higher price.
Supply 1
Demand 1
Price
Quantity
The price is above the equilibrium point
therefore there is a surplus due to excess supply
38
Supply and demand schedule
Price of Widgets Number of Widgets People Want to Buy Number of Widgets
1.00 100 10
2.00 90 40
3.00 70 70
4.00 40 140
Equilibrium is where supply and demand equal
39
Market definition
  • Any place where voluntary exchange occurs between
    a buyer and a seller and a good or service is
    bought and sold.

40
Circular Flow
Factor Market
Mixed Economy
Factors

Butter
Butter
Firms
Household
Government
Taxes
Taxes
G S

Product Market
41
Resource (Factor or Input) Market
  • Households sell factors of production (CELL)
  • Businesses buy factors to make goods/services

42
Product Market
  • Households demand/buy a vast array of goods and
    services
  • Businesses supply/sellers (of) these products

43
Voluntary Exchange
  • Individuals are free to buy and sell what they
    wish without any coercion.

44
  • Firms and households rely on each other for the
    flow to work properly.
  • Government steps in when the flow is either too
    slow or too fast.

45
Rule of Law and Contracts
  • Protects property rights and ensures agreements
    which provides trust and security for investors
    that helps promote economic development

46
Four Market Structures
  • Perfect Competition
  • A market structure in which a large number of
    firms all produce the same product
  • Low barriers, homogeneous product, perfect
    knowledge and price taker
  • ex. The market for gasoline comes close to
    perfect competition because a large number of gas
    stations sell gasoline and one gallon of gas is
    very much like another
  • Monopoly
  • A market dominated by a single seller
  • ex. One company, Debeers of South Africa, has
    almost total control over the worlds diamonds.

47
Four Market Structures cont.
  • Monopolistic Competition
  • A market structure in which many companies sell
    products that are similar but not identical
  • Differentiated product, low barriers and a price
    searcher
  • ex. The market for denim jeans is
    monopolistically competitive because jeans can
    vary by size, color, style, and designer.
  • Oligopoly
  • A market structure where a few large firms
    dominate a market
  • ex. Airlines, breakfast foods, and household
    appliances

48
Different Types of Monopolies
  • Natural monopoly occurs where only one firm would
    survive like a gas station in a small town
  • Vertical monopoly is where two firms merge that
    are from different stages of production of a
    good.
  • Andrew Carnegie when he merged a railroad and
    iron ore mine.
  • Horizontal monopoly is owning all companies in
    the same industry
  • John Rockefeller and Standard Oil

49
Costs to a Firm
  • Total Cost Fixed costs Variable costs
  • Fixed Cost Cost that does not change no matter
    how much of something is being produced. EX.
    (Rent will be that same regardless of how much
    product is being produced.)
  • Variable Cost A cost that changes depending on
    how much of something is produced. The more
    product being produced, the more the variable
    cost. (Labor)
  • Marginal Cost The cost of producing one more of
    something.

50
Golden rule of profit maximization
  • MRMC
  • A firm should increase its output as long as the
    marginal revenue earned from the additional
    product is more than or equal to the marginal
    cost of the product.

51
3 Major types of taxes
  • 1. Regressive tax - a tax for which the
    percentage of income paid in taxes decreases as
    income increases. ex sales tax
  • 2. Progressive tax a tax for which the
    percentage of income paid in taxes increase as
    income increases. ex graduated income tax
  • 3. Flat/Proportional tax a tax for which the
    percentage of income paid in taxes remains the
    same for all income levels. ex 6 tax on 30,000
    and 6 tax on 500,000.

52
Marginal Vs. Average Tax Rate
  • A marginal tax rate is the tax paid on additional
    or incremental income.
  • An average tax rate is the total tax paid divided
    by total taxable income
  • 10,000 in taxes divided by 100,000 income
    10 average tax rate

53
FICA Tax
  • Regressive because they apply to only a fixed
    absolute amount of your income
  • FICA taxes were 7.65,
  • 6.2 Social Security
  • but that only applies to first 115,500 of
    income. So if you made 231,000, only 3.825
    would be taxed
  • 1.45 Medicare
  • Individuals over 200,000 pay an additional .9
  • 250,000 for married couples
  • Employers also pay 7.65 for you into FICA for a
    total 15.30.

54
Inflation
  • Inflation- General increase in price level caused
    by
  • cost push (supply shock) or demand pull (too many
    dollars chasing too few goods).
  • The dollar cannot buy as much as it did before.
  • Three types chronic, hyper, and creeping.

55
Deflation
  • Deflation- General decrease in price level making
    money have more value. You can buy more with the
    same amount of money

56
Hyperinflation
  • Hyperinflation- extreme rapid inflation
  • Countries like Germany in 1922-3 and Zimbabwe
    today.
  • Money is worthless

57
Tax vs. Subsidy
  • Tax is money paid to the government.
  • Subsidy is money received from the government to
    encourage you or a firm to do something.
  • A rebate on solar panels
  • City funding the building of the new Cubs stadium.

58
Peak/Prosperity
Recession
Expansion
Peak
Recovery
Contraction Recession
Trough
59
Commerce Department
  • Supervises and regulates business in the US. It
    also collects business data and is charged with
    promoting economic growth.

60
Bureau of Labor Statistics
  • Under the labor department
  • Measures inflation and unemployment

61
Demand Side Economics
  • The idea that if you stimulate aggregate demand
    by reducing taxes or government spending that the
    economy will return to full production.
  • Ideas of John Maynard Keynes

62
Supply Side Economics
  • The idea that the government stimulate aggregate
    supply by reducing government regulation,
    reducing taxes especially on business and a
    stable money supply
  • Says Law
  • Supply creates its own demand.

63
Borrower
  • Individual that takes out a loan for either a
    purchase or an investment

64
Lender
  • An individual or institution that loans money in
    return for interest

65
Fixed Income
  • Income that is set for a period of time like a
    year. Salary
  • Is negatively impacted by inflation

66
Cost of Living
  • The price for purchase basic necessities like
    housing, food and clothing.
  • Inflation causes the cost of living to rise

67
Measuring Price
  • CPI (Consumer Price Index)
  • Major price index to measure the price level of
    goods and services purchased by households.
  • Calculated by the Bureau of Labor Statistics
  • Establishes Cost of Living Adjustments (COLA)
  • Increases as inflation rises
  • Allows you to continue to buy the same goods

68
  • CPI (Consumer Price Index)-
  • Index determined by measuring the price of a
    standard group of goods meant to represent the
    typical market basket of a typical urban
    consumer. It is used to measure inflation.,

69
Unemployment
  • Unemployment-
  • An individual who is part of the labor force who
    is willing and able to work but cannot find
    employment. Full employment is between 4-6
    unemployment.

70
GDP (Gross Domestic Product)-
  • GDP (Gross Domestic Product)-
  • The dollar value of all final goods and services
    produced within a countrys borders in a given
    year. Anyone who lives within the boundaries of
    the US is counted in our GDP, including
    foreigners.

71
Determining the Labor Force
  • Labor force includes employed and unemployed
    individuals who wish to work
  • All people who are over 16 years of age, not
    institutionalized, and are looking for employment
    want to be employed
  • Not in L.F. Housewives/husbands, students,
    slackers, military, retirees not included
  • About 50 of total pop. is labor force
  • Unemployment Rate (those unemployed) / (labor
    force) X 100
  • Bureau of Labor Statistics takes survey of 60,000
    households each month

72
Full Employment
  • The condition that exists when the unemployment
    rate is equal to the natural unemployment rate.
  • It does not equal zero unemployment.
  • Full employment is usually considered 4-6
    unemployment

73
Unemployment
  • Natural Unemployment
  • Frictional Unemployment - Search unemployment
    I.e. In between jobs caused by natural frictions
    in supply and demand. High school and college
    graduates seeking 1st full-time employment are
    included
  • Structural - Change in the structure of consumer
    demand and change in technology. Example
  • Change from typewriters to computers, automation
    in auto industry caused by long-lasting shift in
    demand
  • Unnatural Unemployment
  • Cyclical - Caused by recession part of cycle
  • Seasonal - Orange picker, but it is winter
  • Unemployment Nat. unemployment Cyclical
  • Discouraged worker is one who has quit looking
    no longer part of the labor force
  • Underemployed - working at a job you are
    overqualified for

74
Impact of Unemployment
  • High unemployment reduces a nations output and
    standard of living
  • It negatively impacts wages because the supply of
    workers is greater than the demand
  • High unemployment usually reduces inflation
    because wages tend to fall which is a cost of
    production. Reduced cost of wages increases
    supply reducing prices
  • Economic growth is negatively affected by
    unemployment because of the reduced production.

75
Fiscal policy
  • Government (President and Congress) involvement
    in the economy is to either stimulate the economy
    out of a recession or slow the economy during a
    period of inflation.
  • The two tools of fiscal policy are
  • Changes in taxes
  • Changes in spending on government
    projects/programs

76
Two tools to affect the economy
  • Expansionary Fiscal Policy- to fight a recession-
    decreasing taxes and/or increasing spending to
    stimulate the economy.
  • Contractionary Fiscal Policy- to fight inflation-
    increasing taxes and/or decrease spending to slow
    the economy down

77
Crowding Out
  • Government spending pushes up interest rates and
    eliminates opportunities for business crowding
    the businesses out of the marketplace
  • Public education crowded out private education.

78
WHAT IS THE FEDERAL RESERVE SYSTEM?
  • The Fed is an Independent Regulatory Agency in
    control of our money supply
  • This gives it the ability to make politically
    sensitive decisions without the fear of political
    interference or pressure.
  • Not all banks are members of the Fed. All
    national banks (banks that have branches in more
    than one state) must be a member. Just over
    one-third of all banks are members.

79
6 Responsibilities of the FED
  1. Regulating the Money Supply
  2. Maintaining the reserve requirement
  3. Clearing Checks
  4. Replacing and Supplying Paper Currency
  5. Financial agent (banker) for the U.S. Government
  6. Supervises member banks

80
Affects of Monetary Policy
  • Regulating the Money Supply.
  • Business cycles travel through inherent patterns
    of expansion and recession. The Fed steps in to
    adjust the money supply to smooth out these
    shifts.

81
3 functions of money
  • 1. Medium of Exchange replaced barter system,
    anything used to determine value in the exchange
    of goods and services.
  • 2. Unit of Account means for comparing the
    values of goods and services, makes price
    shopping and comparisons possible.
  • 3. Store of Value keeps its value over time, can
    be stored rather than used. Inflation can be a
    challenge to this function.

82
6 characteristics of money
  • 1. Durability can withstand physical wear and
    tear, will not spoil like wheat or olive oil.
    There are still Roman coins around that are over
    2,000 years old, durability.
  • 2. Portability needs to be portable, easy to
    carry with people as they travel and go about
    their business. Gold bars are not very portable.
  • 3. Uniformity any two units of money must be
    uniform, or the same in what they will buy. This
    is why dried fish wouldnt work well they are
    different sizes and you wouldnt get as much for
    a small fish as you would get a large fish. They
    are not uniform.

83
Federal Open Market Committee
  • Structure (cont.)
  • Made up of the 7 Board of Governors and 5 of the
    12 Federal Reserve banks with the NY Fed always
    voting
  • The Federal Open Market Committee (FOMC)
  • the FOMC makes key decisions about interest rate
    and the growth of the U.S. money supply. It
    decides when and how much government securities
    to buy or sell

84
FED short responses (cont.)
  • Structure (cont.)
  • Member banks
  • All nationally chartered banks must be a member
    of the Federal Reserve System, the remaining
    member banks are state chartered and join
    voluntarily. About one third of all banks are
    members of the Federal Reserve System.
  • The Federal Open Market Committee (FOMC)
  • the FOMC makes key decisions about interest rate
    and the growth of the U.S. money supply.

85
Fiat vs. Representative money
  • Fiat money is also called legal tender and it
    has value because the government says it has
    valueIt may not have any intrinsic value, but
    has value because of faith in government
  • Representative money objects that have value
    because the holder can exchange them for
    something else of value. Examples would be an
    I.O.U., or a receipt that allows the holder to
    exchange it for gold or silver. U.S. silver
    certificates

86
MONEY SUPPLY - M1
  • Liquid money- easy to use immediately to buy
  • Currency (Cash) in circulation
  • checking accounts (demand deposits)
  • travelers checks
  • currently about 1.1 trillion

87
M2
  • Broader measure of amount of money in economy
  • Near Money
  • All M1 money
  • savings accounts
  • money-market funds
  • small deposits (less than 100,000) CDs

88
Three tools of the Federal Reserve/How they
expand and contract the economy
  • Open-market operations-buying and selling of
    government securities
  • Expansionary- Buy bonds which increases the money
    supply lowering interest rates and stimulating
    aggregate demand
  • Contractionary- Sell bonds which decreases the
    money supply raising interest rates and slowing
    aggregate demand

89
Three tools of the Federal Reserve/How they
expand and contract the economy
  • Discount Rate raising or lowering the interest
    rate to banks
  • Expansionary-
  • Lower the discount rate to banks, this enables
    banks to lower interest rates to consumers which
    encourages consumers to borrow money for
    purchases which expands the economy.
  • Contractionary-
  • Raise the discount rate to banks which makes
    interest rates higher for consumers. This slows
    borrowing and spending and causes the economy to
    contract.

90
Three tools of the Federal Reserve/How they
expand and contract the economy
  • Reserve Requirements the percentage of deposits
    a bank must hold in reserve for customer
    withdrawal needs
  • Expansionary
  • lower the reserve requirement. This makes more
    money available in excess reserves for loans
    which increases the money supply and expands the
    economy.
  • Contractionary
  • increase the reserve requirement . This makes
    less money available in excess reserves for loans
    which reduces the money supply which causes the
    economy to contract.

91
Standard of Living and Investment
  • The level of quality of life that individuals
    expect. House, spouse, 2 cars and happy life.
  • We expect our standard of living to improve with
    age.
  • Standard of living improves with increase in
    investment of capital. Output increases and
    productivity increases which improves our
    standard of living.

92
Specialization and Trade
  • Becoming very good and efficient at producing one
    good or service so that you are competitive and
    resources are not wasted.
  • Countries specialize and then trade when they
    have a comparative advantage.
  • Trade is exchanging goods and services with other
    countrys citizens

93
International Trade
  • Why trade
  • Increases our standard of living and allows us to
    have more than what we can produce
  • Through specialization we can have more

94
Trade Quotas
  • Import quotas limit the amount of a good that
    can be imported.
  • Import quotas reduce foreign competition, protect
    jobs, and punish countries.

95
Trade Barriers
  • Any restriction on trade that limits goods and
    services being exchanged between countries
  • Used to
  • protect domestic firms and workers from foreign
    competition
  • Raise tax revenue
  • Punish other countries

96
Tariffs
  • Tariff (custom duties) tax on imports also
    called protectionism.
  • Tariffs are used to raise tax revenue, reduce
    foreign competition, protect jobs and punish
    countries.
  • Protectionism can reduce a countrys standard of
    living by denying citizens in that country cheap
    foreign goods
  • Embargos- stop trade

97
Countrys Economic Development
  • Developed country such as the US, most of western
    Europe or Japan, are grouped under the term newly
    industrialized countries.
  • Per capita GDP Greater than 10,000
  • Developing Nations countries with more advanced
    economies than other countries, but which have no
    yet fully demonstrated the signs of a developed
    country
  • have maintained sustained economic growth other
    the years and exhibit good economic potential are
    termed as emerging markets.
  • The Big Emerging Market (BEM) economies are
    Argentina, Brazil, Chile, China, Egypt, India,
    Indonesia, Mexico, Philippines, Poland, Russia,
    South Africa, and South Korea.
  • Per capita GDP btween 3,000-10,000
  • Less Developed such Sub-Saharan Africa, most of
    Asia and Central America
  • Per capita GDP less than 3,000

98
2 free trade agreements
  • NAFTA (North American Free Trade Agreement)
    eliminate all tariffs and other trade barriers
    between Canada, Mexico and the United States by
    2009
  • European Union
  • APEC (Asian-Pacific Economic Corporation)
    nonbinding agreement to reduce trade barriers
    along the Pacific Rim including the United
    Stated, Mexico, and Canada.
  • MERCOSUR The Southern Common Market is similar
    to the European Union that includes Brazil,
    Argentina, Paraguay and Uruguay.
  • CARICOM The Caribbean Community and Common
    Market from South America and the Caribbean.

99
Compare investment options
  • Savings
  • retaining some of ones income rather than
    spending all of it.
  • Spending
  • Using your income to satisfy wants

100
SHORT VS. LONG TERM SAVINGS PROS AND CONS
  • Short goals
  • Emergency funds/Rainy day
  • High liquidity
  • Achieve short-term goals like a car or prom dress
  • Save for special occasion
  • Personal safety net
  • Long goals
  • Retirement (Early)
  • Larger purchases like a house
  • Reduce S.S. dependency
  • Comfortable retirement/ with toys

101
Want vs. Need
  • Need is something you can not live without
  • Food, water, clothing, medicine and shelter
  • Want is something you wished you had but may not
    be able to afford it after you have satisfied
    your needs.
  • Vacation trips, going out to dinner and
    entertainment

102
Rule of 72- Affects of Compound Interest
  • Rule of 72- invest early and your grows larger
  • 72/ (interest x 100 ) time it takes for your
    investment to double
  • Example - 10,000 investment at 9 .09
  • 72/(.09 x 100) 8 years
  • Practice
  • 10 with a 10,000 investment how long will it
    take to double?
  • 3 with a 10,000 investment- how long will it
    take to double?
  • 10,000 will double to 20,000 in 6 years what
    is the interest rate?
  • 10,000 will double to 20,000 in 12 years what
    is the interest rate?
  • 20,000 initial investment has grown to 80,000
    in 16 years- what is the interest rate?
  • 20,000 initial investment has grown to 320,000
    in 24 years- what is the interest rate?

103
Key consumer terms defined
  • Return
  • The money you earn from an investment
  • Liquidity
  • How quickly you can convert an asset into cash
    and how quickly money changes hands
  • Risk/Return (Reward) Relationship
  • The higher the risk the greater the return
  • The lower the risk the lower the return
  • Risk/Return (Reward) with Liquidity Relationship
  • The higher the risk the greater the return the
    lower liquidity
  • The lower the risk the lower the return the
    higher the liquidity

104
Short-term Vs. Long-term Investment Vehicles
  • Savings Account
  • Money Market
  • Short-term CDs
  • Saving is storing for the immediate future
    consumption
  • Mutual Funds
  • Long-term CDs
  • IRAs
  • Roth IRAs
  • Real Estate
  • Collectables
  • Bonds
  • Investing is putting money into the stock, bond
    markets or other investments for the purpose of
    making money

105
Federal Deposit Insurance Corporation
  • Insures deposits up to 250,000 per person per
    institution in case a bank goes bankrupt.

106
Compare investment options (cont.)
  • Stocks A certificate of ownership in a
    corporation. The purchase of corporate stock may
    result in dividends from the company or capital
    gain if the stock is sold at a higher price than
    it was purchased at.

107
Compare investment options (cont.)
  • Bonds A loan to a govt or business. Treasury
    bills, T-notes, and T-bonds are all bonds issued
    by the federal government (actually, the FED) to
    creditors.
  • Also corporate bonds and municipal bonds

108
Diversification
  • Spreading money out over a variety of different
    investments to reduce the risk if one of the
    investments does poorly.

109
Portfolio
  • Is the entirety of your investments and other
    assets.

110
Mutual Funds
  • Mutual Funds A purchase of a mutual fund is
    actually the purchase of a stock in a company
    that purchases stocks, bonds and savings from
    other companies. A mutual fund is a more
    diversified investment than that of buying
    corporate stocks or bonds.

111
Maturity
  • When bonds become due and the principle to be
    repaid.

112
Yield
  • The return on an investment. How much money your
    money made after taxes and fees.

113
Return
  • What your investment earned in a year before
    taxes and fees.

114
TYPES OF STOCK
  • Common Stock
  • Voting rights- one vote per share
  • Paid dividends but receive them after preferred
    stockholders
  • Most common stock
  • Preferred Stock
  • Have first rights after bankruptcy of all
    stockholders
  • Get dividends first
  • Have no voting rights
  • Usually are special shareholders

115
Stock Measurements
  • Bull vs. the Bear Market
  • Bull - market is rising steadily- brokers and
    investors are buying
  • Bear- market is declining steadily- brokers and
    investors are selling
  • Dow Jones Industrial Average
  • 30 companies stock prices on NYSE
  • S P 500
  • 500 companies that combine NYSE, NASDAQ-AMEX and
    OTC stocks

116
TYPES OF BONDS
  • Savings Bonds
  • Issued by the federal govt.
  • Very safe but low yield
  • Interest payments each year are not sent to the
    bondholder
  • Purchaser buys the bond below the par value and
    at maturity is given the par value
  • 100 savings bond bought at 50 for 20 years pays
    100 _at_ maturity
  • Treasury Bonds-10to 30 yrs. Maturity( T
    Bills-3-12 mon. or T Notes-1-10 yrs)
  • Issued by the Treasury Dept. of the federal govt
  • Safe but low yield
  • Exempt from all taxes but federal taxes
  • Municipal Bonds ( Munis)
  • State and local bonds that cities or counties
    sell to raise funds
  • Usually safe (but rated) and tax exempt from
    state and federal

117
Types of Bonds Continued
  • Corporate Bonds
  • Sold by corporations to expand business
  • Taxable like income
  • Moderate risk depending on the stability of the
    corp.
  • Watched By the Securities and Exchange Comm.
    (SEC)
  • independent govt. agency that regulates the
    financial markets
  • Junk Bonds
  • High risk, low rated and high yield bonds
  • Allows high risk companies to find funding that
    are in financial trouble

118
BOND RATINGS
  • Why should you care about a bonds rating?
  • Rated by two companies
  • Moodys
  • Standard Poor
  • AAA rated bond is a very little risk investment
    but also yields a low return.
  • D rated bonds have a high risk of you losing your
    investment but also has a high rate of return.

119
INVESTMENTS FOR RETIREMENT
  • Risk vs. Reward
  • Usually a direct relationship
  • as return rises usually risk rises as well
  • Liquidity- how quickly I can get my money or move
    my money (inverse relationship with risk)
  • the more liquid the lower the return
  • Affects on Investments
  • Taxes- income vs. capital gains
  • Loss of investment
  • Inflation is your enemy if your return on your
    investment is less than the inflation rate
  • Your money is eaten by inflation
  • Fees of brokers

120
Compare profit types for investors
  • Interest the price paid for the use of borrowed
    money. ALSO Money earned by deposited funds.
  • Dividends the portion of corporate profits paid
    out to stockholders.
  • Capital gains the difference a higher selling
    price and a lower purchase price resulting in a
    financial gain for the seller. OFTEN The profit
    made from selling shares of stock at higher than
    the purchase price.

121
Key consumer terms defined
  • Mortgage a specific type of loan that is used to
    buy real estate
  • Credit rating an evaluation made by credit
    bureaus of a borrowers (debtors) overall credit
    history. Humans with good credit rating can more
    easily borrow money and command lower interest
    rates.
  • Collateral property used to secure a loan. If
    the borrower (debtor) defaults on the loans, the
    lender (creditor) takes ownership of the
    collateral. Ex car, home.
  • Budget a plan for saving and spending. The goal
    is to live WITHIN your budget

122
Imports and Exports
  • Exports are goods that are sent to another
    country for sale.
  • Imports are goods that are brought in from
    another country for sale.
  • Exports imports our trade balance.
  • A favorable balance occurs when exports exceed
    imports.
  • An unfavorable balance of trade occurs when
    imports exceed exports.

123
Continued
  • Voluntary export restraints self-imposed
    limitation on the number of products that are
    shopped to a particular country. A country will
    impose these restrictions on themselves to avoid
    the importing country from establishing harsh
    import quotas.
  • Product standards
  • Government license
  • Trade barriers lower trade between countries and
    lead to higher prices in each country for those
    goods being restricted. The term protectionism
    refers to the belief that barriers protect
    domestic industries from foreign business
    competition.

124
Issues related to Globalization
  • Cultural Imperialism is the practice of
    promoting or artificially injecting the culture
    or language of one culture into another.
  • Music, food, work ethic, religion clothing or
    lifestyle for example through economics
  • Fast food instead of traditional meals
  • gender equality promoted

125
Issues related to Globalization
  • Outsourcing is subcontracting a process, such as
    product design or manufacturing, to a third-party
    company or country.
  • The decision to outsource is often made in the
    interest of lowering a firms costs or making
    better use if time and energy costs, or to make
    more efficient use of land, labor, capital,
    (information) technology and resources.
  • Outsourcing became part of the business language
    during the 1980s.

126
2 fiscal policy tools
  • Increasing taxes and/or cutting spending to slow
    the economy down --- decreasing taxes and/or
    increasing spending to stimulate the economy.
    Expansionary fiscal policy would involve tax cuts
    on either or both businesses and individuals and
    increasing discretionary spending on such things
    as roads or bridges. Contractionary policy would
    be the opposite.

127
National Debt
  • National debt- All the money the federal
    government owes to bondholders.
  • numerous years of budget deficits
  • 15 trillion dollars-

128
  • Budget deficit- Government spends more than it
    takes in in tax revenue in a year which adds to
    the national debt.

129
  • Budget surplus- Government takes in more tax
    revenue than it spends in a year which reduces
    the debt. The last surplus was in 1997.

130
SEC
  • SEC (Securities Exchange Commission)
  • Regulates the stock and bond markets

131
Contd
  • 4. Divisibility must be easily divides into
    smaller units or denominations. This is why a cow
    would be difficult.
  • 5. Limited supply gives it value. This is why
    gravel rocks would not be a good source of
    currency. They are too common, and anyone could
    go out and scoop up a handful. If diamonds were
    as common as gravel, they too would have little
    value. This is why it is important for the
    government to limit the supply of currency if
    they print too much it has little value just like
    in post WWII Germany when they printed too much.
  • 6. Acceptability it has to be widely accepted in
    your economy. Everyone in an economy must be able
    to exchange the objects that serve as money for
    goods and services.

132
Work theories of (cont.)
  • John Maynard Keynes
  • supported a form of demand-side economics that
    encourages government action to increase or
    decrease demand and output.

133
Work theories of
  • Adam Smith (Father of Capitalism)
  • believed that in a market economy, where the
    people were free to pursue their own interests,
    restricting the role of government
    (laissez-faire), was best for an economy. The
    invisible hand and self interest could guide a
    nations resources to their most productive use.
  • Karl Marx (Father of Communism)
  • He believed that wealth should be spread evenly
    throughout society. He thought that if the owners
    of the capital, or capitalists, would get
    richer by profits produced by the workers, or
    proletariats they would get poorer and would
    revolt.

134
Advantages/Disadvantages of Sole Proprietorships
Advantages Disadvantages
simple to establish/ease to start up unlimited personal liability
relatively few regulations limited access to resources
sole receiver of profit lack of permanence
full control
easy to discontinue
135
Advantages/Disadvantages of Partnerships
Advantages Disadvantages
ease of start up potential conflict
shared decision making and specialization unlimited liability
larger pool of capital
taxation
136
Advantages/Disadvantages of Corporations
Advantages Disadvantages
as owners, stockholders have limited liability difficulty and expense of start up
corporation can sell stocks to raise money double taxation
corporation can borrow money by selling bonds loss of control
corporations can continue doing business after death of founders or owners more regulations than other kinds of business
137
Types of Partnerships
  • General- All partners share liability and risk
  • Limited- General partner carries all liability
    risk but limited partners do not
  • Silent
  • provide only financial resources but have no
    input
  • Nominal
  • Provide name only

138
Role of stockholders
  • By selling their stocks on the stock market (to
    shareholders, a corporation can raise money to
    purchase resources (C.E.L.L.).
  • Stockholders are the owners of a corporation and
    elect its leadership

139
FED short response
  • History
  • Federalists wanting a strong national government
    favored a national bank, central banking began in
    1790 with the establishment of a first national
    bank which printed a single currency, reviewed
    banking practices and helped the federal
    government carry out its duties and powers.
  • Anti-federalist favoring states rights and
    fearing a strong federal government prevented the
    national bank charter from being renewed in 1811
    and a period of banking chaos occurred until
    federalists pushed through another national bank
    charter in 1816 to restore order.

140
FED short response (cont.)
  • History (cont.)
  • Anti-federalists again toppled the national bank
    in 1836 and a period of chaos, fraud, and Free
    Banking lasted until congress passed the Federal
    Reserve Act of 1913.

141
FED short response (cont.)
  • Purpose
  • The Federal Reserve functions as the governments
    banker by maintaining the treasurys checking
    account, issuing and distributing currency that
    the treasury prints and processing government
    payments like social security checks, purchases
    and tax refunds. It serves as a bankers bank by
    clearing checks, supervising lending practices
    and being a lender of last resort. It regulates
    the nations banking system and also uses monetary
    policy to regulate the nations money supply.

142
FED short response (cont.)
  • Structure
  • The Fed consists of
  • A board of 7 governors appointed for staggered 14
    year terms. These governors are appointed by the
    President and confirmed by the Senate. The
    President also appoints one of the 7 governors to
    act as the chairman of the board of governors to
    head the board for a 4 year term. The Senate also
    confirms this appointment.
  • 12 District Reserve Banks
  • The country is divided into 12 federal districts
    with one Federal Reserve Bank in each district.
    Each Federal Reserve Bank has a board of 9
    directors regulated by congress.

143
FED short response (cont.)
  • Structure (cont.)
  • FOMC (cont.)
  • This committee is made up of the 7 governors from
    the Feds board and 5 District bank presidents.
    The president of the New York District bank is a
    permanent member and the 4 other district
    presidents serve one0year terms on a rotating
    basis. The 7 Governors hold a majority vote.
    Decisions of the FOMC are announced by the
    chairman of the board of governors.

144
Three types of business or organization
  • Sole Proprietorships
  • a business owned and managed by a single
    individual. The individual earns all the firms
    profits
  • Partnerships
  • is a business owned by two or more individuals
    who agree on a specific division of
    responsibilities and profits. Three types
    general, limited, and limited liability.
  • Corporation
  • a legal entity owned by individual stockholders

145
CORPORATION STRUCTURE
  • Stockholders own the business and elect a Board
    of Directors
  • Board makes major decisions of corp.
  • Board elects a Chairman of the Board
  • Board selects a President and/or Chief Executive
    Officer (CEO) , who hires the other leaders of
    the company
  • President and/or Chief Executive Officer (CEO)
    make day to day decisions of production and sales
    with their corporate officers

146
Corporation Hierarchy
147
Elasticity of demand
  • a measure of how consumers react to a change in
    price, how buyers will cut back or increase their
    demand for a good when the price rises or falls
  • effected by
  • availability of viable substitutes
  • time to find substitutes
  • portion of the budget

148
Elastic, inelastic, and unitary demand
  • Elastic
  • a demand for a good that is very responsive to
    price changes- change in quantity demanded is
    greater than change in price
  • Inelastic
  • a demand for a good that you will keep buying
    despite a price increase- change in quantity
    demanded is less than change in price
  • Unitary
  • the percentage change in quantity demanded is
    exactly equal to the percentage change in price
    (1)

149
Elasticity of demand Formula
  • Elasticity Percentage change in quantity
    demanded
  • Percentage change in price
  • to find the percentage change in quantity
    demanded or price, use the following formula
    subtract the new number from the original number,
    and divide the result by the original number.
    Ignore any negative sign, and multiply by 100 to
    convert this number to a percentage
  • Percentage Change Original number New number
    x 100
  • Original number
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