Econ EDUC Study Guide 03 24 2014 I Basic economic problem scarcity caused by unlimited wants but limited resources Not enough supply to go around and satisfy infinite demand II Factors of production factors of input Provide the means for satisfying wants Resources are employed to produce goods and services 4 categories a natural land physical inputs that occur naturally in the world ex land coal oil water gold iron resources provided by the people who work in an b human labor economy etc includes physical and intellectual contributions of workers ex assembly line workers teachers computer programmers gardeners etc c capital capital and intermediate goods which are then used to produce a final good or service goods produced by people can be used over and over to produce output ex factories machinery computers tractors tools etc intermediate goods used up in the production of another good they become part of the finished good NOT factories goods that have been produced and are then ex denim in blue jeans flour in bagels plastic in sandwich bags etc d entrepreneurial involves entrepreneurs people who control the production process of businesses make business policy decisions attempt to be innovative in new products of methods of production and invest their time effort and money into businesses II Fundamental economic questions Which and how many goods and services will the economy decide to What produce How How will the goods and services be produced For Whom III Opportunity cost For whom will the goods and services be distributed to the value of the highest forgone alternative Ex the opportunity cost of going to class at 8 am is sleeping IV Production possibilities schedule curve choices facing an economy economic model describing the production Assumes the economy produces only 2 goods Examines what can be produced with a fixed amount of resources the way society organizes the production and distribution of goods V Economic system and services 3 types tradition a decisions based on past behavior produce the goods and services their predecessors produced using similar methods and distributing the output according to past procedures most likely to be found in an underdeveloped society b command central planning unit such as the government decisions about production and distribution are made by a government decides what public goods and services will be produced and how much of them will be produced c market price consumers producers and resource owners markets coordinate economic activities among coordinates the production and distribution of goods services and resources through markets buy and sell goods services and resources a set of conditions under which consumers and producers market VI Circular flow of the economy Circular flow model goods and services and resources in the marketplace an economic model that presents an overview of the flow of a no beginning or end to the cycle VII Law of demand Demand indicates price and quantity demanded are inversely related relationship between the price of a product and the quantity demanded by consumers during some period of time Increase decrease in demand a Change in income b Taste and preferences c Price of substitute d Price of compliment e Number of buyers VIII Elasticity as the price of a product changes consumer purchases will change elasticity measures how much consumers change the quantity demanded E percentage change in quantity demanded percentage change in price Elastic demand when small price change results in large change in quantity a ex goods which there are close substitutes when large price change results in small change in quantity demanded Inelastic demand demanded a ex necessities no close substitutes IX Law of supply indicates that price and quantity supplied are directly related Increase decrease in supply a Change in cost of factors of production b Improvement in production process technology X Market clearing price the price where quantity demanded equals quantity supplied Price floor minimum price above equilibrium price Price ceiling maximum price below equilibrium price a Results in surpluses a Results in shortages XI 3 types of business organizations 1 Sole proprietorship a advantages easy formation and dissolution typically low start up costs ownership of all profits no corporate income taxes fewer regulations b disadvantages unlimited liability business dies with the owner difficult for an individual to raise capital 2 Partnership a advantages synergy strengths of two parties relatively easy to form subject to fewer regulations that corporations stronger potential of access to capital no corporate income taxes b disadvantages unlimited liability business dies with owner s possibility of conflicts between partners 3 Corporation a advantages unlimited commercial life greater flexibility in raising capital through sale of stock limited liability b disadvantages regulatory restrictions higher organizational and operational costs possibilities of double taxes corporate income tax and taxes to shareholders XII Barter system method of exchange problems of barter a requires coincidence of wants b value of many goods not divisible can t have half a cow c many goods do not retain any value d no standard of value XIII Functions of money medium of exchange store of value standard of value for unit of account Fiat money Federal Reserve System money that lacks intrinsic value but is accepted in payment of debts regulates the economy by controlling the money supply a Board of Governors 7 members 14 year staggered terms appointed by president and confirmed by Senate XIV 3 economic goals economic growth full employment control inflation stable prices unemployment rate today 6 7 XV Gross Domestic Product GDP within a year or another given period of time market value of all final goods and services produced Fractional reserve system banking multiplier 1 reserve requirement expressed as a fraction a Multiplier gets applied to bank deposit XVI Tools of the Fed Open market operations bonds on the open market activity by a central bank to buy or sell government a Aim to manipulate the short term interest rate and the supply of base money in an economy b Reduce unemployment stimulate economic growth reduce inflation Discount rates Federal funds rate interest rate at which depository institutions actively trade balances held at the Federal Reserve called federal funds with each other institutions on loans they receive from their