1. The fact that limited amounts of goods and services are available to meet unlimited wants is called scarcity. 2. Economics is the study of how people

ECONOMICS MUST KNOWS #1

1. The fact that limited amounts of goods and services are available to meet unlimited wants is called scarcity.

2. Economics is the study of how people seek to satisfy their needs and wants by making choices.

3. Entrepreneurs are people who decide how to combine resources to create new goods and services. To make a profit, they are willing to take risks, develop new ideas, start businesses, and fuel growth.


4. The 3 main factors of production are land, labor, and capital.5. The most desirable alternative

somebody gives up as a result of a decision is the opportunity cost.6. A trade –off is the act of giving up one benefit in order to gain another, greater benefit.


7. Efficiency is the use of resources in such a way as to maximize the output of goods and services.

8. Needs and wants are unlimited.

9. Resources, goods, and services are scarce.


10. Because resources are scarce everywhere, every society must answer 3 key economic questions: 1) what to produce? 2) how to produce it? 3) who can consume what is produced?

11. The way a society answers these 3 questions defines its economic system.


12. Each society must decide what to produce based on the resources that are readily available.13. A traditional economy relies on habit, custom, or ritual to answer the 3 key questions. There is little room for innovation or change.14. Supply and demand determine price in a free market system. Profit directs the choices businesses make about how to use their resources.


15. A factor market is where firms purchase factors of production from households. (buy or rent land, hire workers)16. A product market is where households buy the goods and services the firms produce.17. When households sell resources, they receive income in return.


18. In a free enterprise economy, the consumers determine the products that will be produced.19. According to Adam Smith: the buyer and seller consider only self-interest, or an individual’s own personal gain in a market. 20. The invisible hand is a term coined by Adam Smith to describe the self-regulating nature of the marketplace. (no planning or govt. intervention needed)


21. The free enterprise system is also known as capitalism. Scarcity occurs everywhere, not only in poor countries.22. Characteristics of capitalism: private property and profit.23. A centrally planned economy is also known as a command economy- govt. makes all the decisions.


24. Socialism is a belief that wealth should be distributed evenly throughout society.25. Communism is a system in which the govt. owns and controls everything.26. Karl Marx was a Communist who believed that under capitalism, workers were exploited and there was an unfair distribution of wealth.


27. Laissez faire is the doctrine that govt. should not intervene in the marketplace. 28. A mixed economy is a system in which the govt. is involved to some extent. (U.S.)29. A free enterprise system is an economic system in which the decisions are made by private individuals and firms.


30. The Federal Trade Commission enacts and enforces antitrust laws to protect consumers. (false advertising, price gouging)31. Macroeconomics is the study of a nation’s whole economy.32. Microeconomics is the study of economic behavior in small units (households & firms)


33. A business cycle is a period of macroeconomic expansion, or growth, followed by one of contraction, or decline.34. Gross Domestic Product (GDP) is the total value of all final goods and services produced in an economy in a given year.35. Increasing GDP is a sign of economic growth.


36. Law of Demand says that when a good’s price is lower, consumers will buy more of it.37. Complements are 2 goods that are bought and used together (ink and printer)38. Substitutes are goods that are used in place of one another (hamburger instead of steak)39. Inelastic- demand not sensitive to price change ( medicine, gas)40. Elastic- demand is sensitive to price change ( name brands etc.)


41. The Law of Supply says that producers offer more of a good as its price increases and less as its price falls.42. Demand has nothing to do with supply or market supply curve- all of supply has to do with price.43. If a seller has a shortage of a product , the selling price will increase.


44. Equilibrium is the point of balance at which quantity demanded equals the quantity supplied. 45. A monopoly forms when barriers prevent firms form entering the market that has a single supplier.46. A natural monopoly is a market that runs most efficiently when 1 large firm provides all the output. ( public water)


47. Pure competition has many companies selling products that are similar but not identical- they have to compete for business. (shampoo, toothpaste etc.)48. An oligopoly is a market dominated by a few large, profitable firms- makes prices more stable. (cars, airlines)49. Deregulation is most associated with supply side economics.


50. A corporation is the type of business that generates the greatest share of revenue in the U.S.51. A major advantage of establishing a corporation instead of a partnership is that the owners have limited liability for debt.52. Dividends are the portion of corporate profits paid out to stockholders.


53. Unskilled labor- no special skills (dishwashers, janitors etc.)54. Semi- skilled labor- minimal skills- usually earn an hourly wage- (lifeguards, short order cook, construction)55. Skilled labor- specialized training –may use complicated equipment- (auto mechanics, bank tellers, plumbers)56. Professional labor- advanced skills and education- white collar – salary- (managers, teachers, doctors)


57. A union is an organization of workers that tries to improve working conditions, wages, and benefits for its members.58. Unions can use strikes, pickets, and boycotts to get what they want during negotiations.59. During negotiations, the strike is the union’s most powerful weapon.60. Collective bargaining is the process in which union and company management meet to negotiate a new labor contract.


61. Money is anything that serves as a medium of exchange, a unit of account, and a store of value.62. Paper money has value because it is backed by the government.63. Money serves as a measure of value.64. The amount of money that banks must keep on hand is called the reserve requirement.


65. M1: money that people can gain access to easily and immediately pay for goods and services. 66. M2: all assets in M1 plus several additional assets. ( not immediately available, has to be converted to cash. )67. Bonds are a safer investment than stocks because the interest must always be paid.


68. Economic growth is a steady, long-term increase in real GDP.69. A recession is a prolonged economic contraction.70. A depression is a recession that is especially long and severe.71. Stagflation is a decline in real GDP (output)combined with a rise in the price level.(inflation)


72. Inflation is a general increase in prices across the economy. ( you can afford less!)74. People often hoard goods during times of inflation because they are worth more than money.75. Fiscal policy during unemployment would be to lower taxes in order to put more money in the hands of the people.


76. FICA (Federal Insurance Contributions Act) funds Social Security and Medicare.77. The government’s main source of revenue comes from the federal tax on individuals’ taxable income.78. Society must pay taxes to support an government.79. The national debt is the total of all the annual deficits.


80. Federal Budget is created by the executive office (president) then sent to Congress for debate and approval then back to the president.81. A budget deficit is created when the govt. spends more than it receives.82. When there is a downswing in the economy, cyclical unemployment occurs.


83. The Federal Reserve System’s control of the nation’s money supply is called monetary policy.84. The money supply increases when reserve requirements increase.85. An export is a good or service sent to another country for sale.86. An import is a good or service brought from another country for sale.


87. A tariff is a tax on imported goods.88.Comparative advantage is the ability to produce a product most efficiently given all the other products that could be produced. (specialize in producing that good)89. If the value of another nation’s currency drops, the goods of that nation become less expensive here.


90. A nation has a favorable balance of trade when the value of its exports is greater than the value of its imports.91. A major goal of the International Monetary Fund is to encourage industrialized nations to provide financing to developing countries.92. The most important single factor leading to the global economy has been improvements in telecommunications.

ECONOMIC MUST KNOWS # 29

93. The 3 most common characteristics of developing nations are population growth, low literacy rates, and poor health conditions.95.If a person receives dividends, he owns stock in a corporation.96. In the U.S. economy, the money supply increases when banks make loans.97. Raising the discount interest rate and the reserve rate are 2 things the FED can do the help a troubled economy.


98.Businesses needing money for major expansion (long term) can use stocks and bonds to finance it. 99.IRA plans charge a penalty to withdraw money early.100.A variable expense is an expense that changes in amount from month to month- (electricity)101.A warranty is a promise to repair or replace a faulty product within a certain amount of time.


102.The difference between the cost of making a product and the price at which it sells is called profit.103.The payment for borrowing or loaning money is called interest.104.Bank services include paying interest, making loans, and provide a safe place for money.105.Credit card companies find impulse buyers the most appealing.


106.The higher the rate of return on an investment, the higher the risk.

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1. The fact that limited amounts of goods and services are available to meet unlimited wants is called scarcity. 2. Economics is the study of how people