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Unit #1 Study Guide  
Introduction to Economics & Economic Goals 
  
Words to know: 
  
Economics​
­ study of how people satisfy seemingly unlimited and competing wants with careful 
use of scarce resources 
 
Scarcity​
­ fundamental economic problem of meeting people’s virtually unlimited wants with 
scarce resources 
 
Opportunity Costs​
­ cost of the next best alternative use of resources when making a choice 
Resources​
­ aka factors of production (land, capital, labor, entrepreneurship) 
 
Wants­ ​
something we would like to have but is not necessary for survival   
 
 
Needs​
­ basic requirement for survival, including food, clothing, and shelter 
Entrepreneurship​
­ risk taking in search for profits; making a new business out of old resources   
Division of Labor­ ​
 specialization; division of work into a number of separate tasks to be 
performed by different workers 
 
Productivity​
­ measure of the amount of output produced with a given amount of productive 
factors 
Capital​
­ tools, equipment, and factories used in the production of goods and services 
 
Land­ ​
natural resources that make up the four categories of land, capital, labor, and 
entrepreneurs  
 
Labor​
­ people with all their efforts, abilities, and skills 
 
Good­ ​
tangible economic product that is useful, relatively scarce, and transferable to others 
Service­ ​
work or labor performed for someone 
Economic Model­ ​
simplified version of a complex concept or behavior expressed in the form of 
an equation, graph, or illustration 
Utility­ ​
ability or capacity of a good or service to be useful and give satisfaction to someone 
Factor Market​
­ market where the factors of production are bought and sold 
Product Market­ ​
market where goods and services are bought and sold 
Economic Growth­ ​
increase in a nation’s total output of goods and services over time 
Trade off­ ​
an alternative choice 
Idle resources­ ​
a resource that is not fully employed and is therefore inefficient   
Specialization­ ​
assignment of a task to the workers, factories, regions, or nations that can 
perform them more efficiently 
Division of Labor­ ​
division of work into a number of separate tasks to be performed by different 
workers 

 

Economic Interdependence­ ​
mutual dependency of one person’s, firm’s, or region’s economic 
activities on another’s 
  
Review Questions: 
1
...
 6) 
a
...
food, clothing shelter 
b
...
I can give examples that fit the 4 categories of factors of production (pg
...
land (includes land and livestock) 
b
...
capital (technology/tools) 
d
...
I know the four key elements for the study of economics (pg
...
Description  
b
...
Prediction 
d
...
I can describe the paradox of value & use the diamond­water paradox as an example
...
things that are necessary for our survival, like water, are relatively low in cost, 
while luxuries like diamonds are quite expensive 
i
...
I can follow the circular flow of Economic Activity & describe / label the pathways (pg
...
Resources from households > Factor market > Businesses/Firms (create goods 
and services) > Goods and Services sold in the Product Market > Back to 
households 
b
...
I can describe what the opportunity costs are & show trade­offs on a production 
possibility curve ­ PPC
...
 21­22) 
a
...
there is always a trade offs or alternative choices 
c
...
can be expanded with an increase in resources, but cannot decrease with 
a lower unemployment rate or lower income 
7
...
 (pg
...
bowed: increasing opportunity cost (resources necessary for each product are 
different so there is an increasing opportunity cost) 
i
...
straight: constant opportunity cost (resources necessary for each product are 
similar and therefore can yield these two products on a constant slope of 
opportunity costs) 
8
...
 24) 
a
...
do the pros outweigh the cons? 
c
...
Choose the option that gives the highest return per dollar spent/best 
cost­benefit ratio 
 
 

 

Unit 2 study guide 
Economic Systems, Economists, & Money 
  
Sources: Economic Systems (Ch
...
 14
...
Be able to explain what the three basic economic questions are and how they are answered 
within the different types of economic systems 
● What to produce? 
○ traditional economy: little uncertainty exists on what to produce (if you are 
born into a hunting family, you hunt) 
○ command economy: central authority (like the government) decides what to 
produce 
○ market economy: citizens spend their money on what they want, telling 
producers what they should produce to earn a profit 
● How to produce it? 
○ traditional economy: little uncertainty exists over how to produce because 
you do things much the same way your parents and ancestors did 
○ command economy: central authority decides how to produce products 
○ market economy: businesses are free to find the best production methods 
when deciding how to produce (ex
...
 
○ market economy: the income that consumers earn and spend in the market 
determines for whom to produce 
2
...
Be able to give examples of how each of these work 
i
...
ex
...
free market: people make decisions in their own best interest; market can 
exist as long as a mechanism is in place for buyers and sellers to meet 
1
...
private ownership of resources; often described as being based on 
capitalism 
3
...
 US, Japan, South Korea, Singapore, Australia, Great Britain, and 
parts of Western Europe 

iii
...
government makes all economic decisions 
2
...
government officials tend to favor themselves when making economic 
decisions; some of the country’s money often goes to luxury goods like 
houses, cars, and extravagant vacations for these officials 
4
...
 North Korea, Cuba, former Soviet Union 
iv
...
economic system that has some combination of traditional, command, 
and market economies 
2
...
 socialism is a 
mixed economic and political system) 
3
...
if the government interferes too much, a mixed economy can turn into 
a command economy 
5
...
 China 
2
...
traditional: 
1
...
 sets forth certain economic roles for all members of the 
community  
b
...
weaknesses:  
a
...
stagnation and lack of progress 
c
...
free market: 
1
...
able to adjust to change gradually 
b
...
decentralized decision making 
d
...
high degree of consumer satisfaction 
2
...
rewards only productive resources; does not provide for 
people too young, too old, or too sick to work 
b
...
workers and businesses fare uncertainty as a result of 
competition and change 
iii
...
strengths:  
a
...
many basic education, health, and other public services 
available at little to no cost 
2
...
does not meet wants and needs of consumers 
b
...
requires large bureaucracy, which consumes resources 
d
...
lacks room for individual initiative 
iv
...
strengths: 
a
...
if a society has a democracy, voters can use their electoral 
power to affect the what, how, and for whom decisions  
i
...
weaknesses: 
a
...
availability of services may be limited or the quality may 
deteriorate over time 
c
...
Explain why pure command & traditional economic systems are rare to find in the 
world and why almost all economies are mixed
...
modern economies are neither completely free market nor planned; there is a 
spectrum of government involvement 
ii
...
 
3
...
Economic Freedom: freedom to make their own economic decisions; choosing 
occupations, employers, uses for their money, what to produce, how to produce it, 
etc
...
Economic Efficiency: not wasting resources, but using them wisely; if resources are 
wasted, fewer goods and services can be produced and fewer wants and needs can be 
satisfied 
3
...
 lemon laws) 

4
...
Full Employment: most people want their economic system to provide as many jobs as 
possible (ex
...
Price Stability: no inflation or deflation, which can discourage business activity; adds a 
degree of certainty to the future for businesses and consumers alike  
7
...
 better job, newer car, your own home, etc
...
Be able to explain how some of America’s economic goals may contradict one another ex
...
 Freedom) 
1
...
 Freedom­ Businesses cannot make every free decision that they would like; 
they must follow certain guidelines set by the government, such as minimum wage 
and following “lemon laws” 
2
...
 Security­ People are not completely free to make all economic decisions, 
but must adhere to government guidelines like Social Security and insurance; must 
limit freedom at times to ensure security 
3
...
 Growth­ if everyone becomes employed, the economy will grow, 
but only for an extent, since once everyone is employed, the government will not be 
able to continue to grow after that point 
4
...
 Growth­ As the government grows and more people are employed, 
prices for certain items may rise, and thus may cause inflation; prices will not remain 
stable as the economy grows 
5
...
the economics strengths and weaknesses of America, Hong Kong, & India
...
America: we have arguably the world’s biggest economy; $27,000 is the 
average income; takes week to become an entrepreneur in NYC; when INdians 
immigrated to America, they often make more than the average American 
within one generation; lots of resources and an open society (open to change, 
new ideas, entrepreneurship, immigrants); if you want it, you can get it; ½ of 
the world’s Nobel Prizes; poverty in America is nothing compared to that in 
India and Africa; those countries with fewer rules are the best to live in; 
America sometimes neglects the poor or underprivileged and prejudices may 
make it harder for minority groups to succeed financially 
ii
...
India: much of the population lives in the slums; 300 million have no running 
water; overpopulation leads to decreased standard of living; Indian democracy 
is similar to ours; fill out copious amounts of forms and WAIT a very long time 
to establish a business (getting permission for thing takes a very long time); 

government interferes with society; government has to plan the economy 
(trying to protect their citizens from everything, but has proven to be an 
impossible task) 
2
...
France has made many different goods for its citizens, such as computers, but 
this has prevented people from creating new businesses; not as many 
opportunities to create new things 
ii
...
35 hour work week, 6 weeks paid vacation, 2 years must pass before you can 
fire someone 
3
...
more opportunities for success and entrepreneurship in the US; easier to 
create a new business 
ii
...
The ultimate reason that the video concludes that the US “is #1” 
i
...
countries that have provided the most for its citizens are the worst countries 
to live in 
iii
...
open society 
v
...
Be able to describe the characteristics that all items must have in order to be considered 
money 
1
...
fungible 
3
...
divisible 
5
...
universal need/use 
7
...
limited in supply 
9
...
 know whether or not a sample item (given to you on the test) could qualify as money 
1
...
tobacco 
3
...
gold 
5
...
shark’s teeth 
7
...
sea shells 
9
...
salt 
 

 

 
8
...
medium of exchange: money or other substance generally accepted as payment for 
goods and services 
2
...
store of value: a function of money that allows people to preserve value for future use 
9
...
Thomas Jefferson standardized the US monetary system in 1776 (Revolutionary War) 
10
...
polymer ribbon in the middle of dollars 
2
...
microscript of the words “United States of America” (so small they cannot be copied 
on a copier) 
Terms & Definitions 
Capitalism​
­ economic system in which private citizens own and use the factors of production in order 
to generate profits 
Free Enterprise­ ​arket economy in which privately owned businesses have the freedom to operate 
m
for profit with limited government intervention 
Freedom of Choice­ ​
the choice of one’s desired occupation, employers, and uses for their money; 
businesses choice on where and how they produce 
Private Property­ ​
fundamental feature of capitalism, which allows individuals to own and control their 
possessions as they wish; includes both tangible and intangible property 
Mixed economy­​
 economic system that has some combination of traditional, command, and market 
economies; also see modified free enterprise economy 
Market Economy­ ​
economic system in which supply, demand, and the price system help people make 
decisions and allocate resources; same as free enterprise economy 
Socialism­ ​
economic system in which government owns some factors of production and has a role in 
determining what and how goods are produced 
Invisible Hand­ ​etaphor used by Adam Smith to describe unintended social benefits resulting from 
m
individual actions
...
 
Wealth of Nations­​ook written in 1776 by Adam Smith describing his ideal view of economics; 
 ​
b
includes the terms Invisible Hand and​
 laissez faire​
 economics 
 
Profit­ ​
extent to which persons or organizations are better off at the end of a period than they were 
at the beginning; usually measured in dollars 
Economic Efficiency­ ​
using as many resources as possible and in the most wise way to avoid waste; 
ensures that more wants and needs are met 
Equity­ ​
idea that the economy is just, impartial and fair; ex
...
 Social Security 
Economic Growth­ ​
overall growth in a nation’s economy; enables more people to have goods and 
services 
Stability­​
 lack of inflation; adds a degree of certainty to the future for businesses and individuals 

Economic Freedom­ ​
freedom to make choices about what to buy, what occupation to have, etc; see 
Freedom of Choice 
Standard of Living­ ​
quality of life based on ownership of necessities and luxuries that make life easier 
Laissez Faire­ ​
philosophy that government should not interfere with business activity; “hands off” 
barter­ ​oneyless economy that relies on trade or barter 
m
unit of accounting­ ​
nominal monetary unit of measure or currency used to value/cost goods, services, 
assets, liabilities, income, expenses; i
...
, any economic item
...
 
Fungible­ ​utually interchangeable; able to be exchanged even if altered in a slight way (ex
...
 In 
A
this sense it may be called “commodity­backed money
...
 
Fiat Money­ ​oney by government decree; has no alternative value or use as a commodity (based on 
m
faith) 
 

 
 

 

Self Check Quiz Notes:
1
...
Which of the following terms is defined correctly?
a
...
Which of the following is sound advice for a prospective investor?
a
...
Be consistent
c
...
CDs are attractive to investors because the certificates cost as little as $500
​
5
...
Investors call a market where money is loaned for periods of less than one year a
​
money market
7
...
An investor offsets unexpected declines in his or her stock portfolio by ​
holding a large
number of different stocks (Diversification)
9
...
A futures contract is an agreement to buy or sell at a specific date in the future at a
​
predetermined price

Unit 3 study guide
Budgeting, Saving, Investing & Consumer awareness
Financial Institutions, Banks & Investment “vehicles”
Credit Union​
- nonprofit service cooperative that accepts deposits, makes loans, and provides
other financial services
Bank​ bank is a financial institution licensed as a receiver of deposits
...
In most countries, banks are regulated
by the national government or central bank
​
Finance Company​
- firm that makes loans directly to consumers and specializes in buying
installment contracts from merchants who sell on credit
Consumer Finance Co
...
Money held in a checking account is very
​
liquid, and can be withdrawn using checks, automated cash machines and electronic debits,
​
​
among other methods; differs from other bank accounts in that it often allows for numerous
withdrawals and unlimited deposits, whereas savings accounts​
​
sometimes limit both
...
The broker carries out the transactions on the investor's behalf for a
fee called a “commission”
Index fund-​n index fund is a type of mutual fund with a portfolio constructed to match or
A
​
track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500)
...

Money market account- ​
account in which an investor can loan or borrow money for one year
or less
Debit card- ​card issued by a bank allowing the holder to transfer money electronically to
a
another bank account when making a purchase
...
Credit cards charge interest and are primarily used for
short-term ​
financing​

...


Stocks & Bonds & other investments
Savings bond- ​
safe, government backed, and some electronic versions available for as little as
$25; terms vary, but after a waiting period, bonds can be redeemed before maturity; not taxed
until redeemed; most types offer interest higher than savings accounts; ​
​oan
l
Stock- ​
certificate of ​
ownership​ a corporation; common or preferred stock
in
Aggressive growth stock​ debt (usually), buying assets, increasing market share, very
- in
volatile
Growth stock​
- growth slows, profits may be present, still pursuing new assets, less volatile,
standing in market
Income stock- ​
higher profits, large relative size in market, still expanding but debt ratio is
shrinking, dividends
corporate bond- ​
important source of corporate funds; $1000-$10,000; actual prices of bonds
are usually different than par values; investors usually purchase corporate bonds as long term
investments, but they can be quickly sold if needed
Stock market- ​
physical place where buyers and sellers meet to exchange securities; stocks are
traded in markets and investors follow the markets daily bc performance of market is likely to
affect their stocks
stockbroker- ​
person who buys or sells securities for investors; works for commission
diversification- ​
investing in many different kinds of stocks in order to reduce volatility
401K- ​
tax-deferred investment and savings plan that acts as a personal pension fund for
employees; employees authorize regular payroll deductions that is pooled and invested in
mutual funds or other investments approved by company and company typically matches a
portion of an employee's contributions​
(better if you die later)
​
Pension fund- ​
fund that collects and invests income until payments are made to eligible
recipients
Individual Retirement Account- ​ your own money; retirement account in the form of a long
all
term time deposit with annual contributions not taxed until withdrawn during retirement
(better if you die sooner)

Option (call/put)- ​ option is an agreement that gives an investor the right but not the
call
obligation to buy a stock, bond, commodity, or other instrument at a specified price within a
specific time period
● call option-​
option to BUY stock, bond, commodity, etc
● put option-​
option to SELL stock, bond, commodity, etc
...

Scams and Schemes
Ponzi scheme- ​
promises of easy money gets you into investment; new investors come on
board often at the urging of early investors who struck it rich; original investors often “re-up;”
con artist is just taking money from new investors and paying early investors until he/she can
leave town
Pyramid scheme- ​
primary or sole source of income is through recruiting new members;
recruiters are pressured to get more people or be kicked out of organization; “lower level”
members make money only if they recruit; typically wrought with fraud; guaranteed that
70-88% lose money; ILLEGAL
Multi level marketing- ​ network or matrix marketing, you sell goods for distributor with
aka
over-promises and under deliveries on profit estimates; market saturation ruins most income;
members make money by recruiting new members; be very skeptical of seminars and other
sales training products; LEGAL if more than 70% of revenue is from outside customers
door to door sales- ​
promises low prices; usually pay more for subscription than other deals
and automatic subscription renewal attached; “poor students” wanting to earn points to go to
Europe; pressure sales techniques; “bonus points” for cash; often won’t get product; some
salespeople are thieves and most are not students, but people that travel the country in a van
Modeling & Talent Scams- ​
flattery lures you in (you have “the look”); charges begin from the
start; promises of money and fame are followed by close misses; different programs, services,
and products are sold to you at inflated prices the dream fades and promises are broken
Nigerian 419 scam- ​
almost always perpetrated via email; a Nigerian prince or exiled political
figure needs your help; scammer exchanges emails with victim getting to know them; they
then ask for money in order for them to escape Nigeria and in exchange, they will give you
millions; many variations are done for smaller accounts using variation of excuses
E-mail phishing- ​
request for financial info from a website that pretends to be your
bank/business partner; alarming warnings of problems with your account; threats of closing
your account if you don’t “verify your account info;” the info you give is used to take your
money
Craigslist scams- ​
seller contacts you outside of the system to offer you a great deal or
discount and wants you to send him or her a check (never get product); buyer is leaving the
country and wants you to send the product overseas; buyers pay using a money order for
more than the full amount (money order is a fraud)
Bait and Switch- ​
spectacular offer is publicized; customer shows up to buy product and it is
“sold out” or limited in size or color; salespeople may require buyers to be “qualified” in order

to buy item; “normal” accessories are missing and require extra payment; illegal according to
federal law; salespeople degrade value of deal and upsell customer to substitute

Concepts & Terms
1
...
See Scheme and Scams Vocab
2
...
MLM-you sell goods for distributor (over promises and under delivers on profit
estimates); market saturation ruins most income; members make money by
recruiting new members; be skeptical of seminars; LEGAL if more than 70%
revenue is from outside customers (make most of your money by actually
selling items)
2
...
Be able to explain the difference between Pyramid scheme and a Ponzi scheme
1
...
Ponzi Scheme- promises of easy money for this great new investment; each
investor is “paid off” by the money from another investor; con artist is just taking
money from new investors and paying early investors until he can leave town
4
...
As risk increases, so does potential return (ex
...
With low risk, there is likely low return (ex
...
Know the difference between bonds and stocks – from notes
1
...
Stocks- owning part of a company and the money you make depends on the
success of the company and its stock
3
...
bonds have a lower risk but a lower return expectation; “loaning is safer
than owning”; better for short term goals
ii
...
know which one you own and the one that represents a loan
i
...
own=stock
6
...
the elderly or retired investor
1
...
WalMart, Coca Cola, Johnson & Johnson)
2
...
Be able to explain why diversification is recommended by investment professionals
over investing in one company or a few companies
1
...


9
...


11
...


2
...
Diversification limits volatility; if one of your stocks is killed, you still have the
rest of your diverse portfolio to rely on
Be able to differentiate between Treasury Bonds, Bills & Notes
1
...
Bills- Short term US government obligation with a maturity of one year or less in
denominations of $100 (4, 13, 26, or 52 week periods); sold on discount basis
3
...

1
...
If you invest, a high interest rate can be good since you will get more money
than you started with; if you owe money, however, then interest can be bad,
since you will have to pay back more money than you originally loaned
Explain why futures markets exist and why not every item is bought on the spot market
1
...
Spot market- commodities or securities market in which goods are sold for cash
and delivered immediately effective; a future transaction for which
commodities can be reasonably expected to be delivered in one month or less
3
...
you may
agree to buy gold at $580 an ounce in six months, hoping that the actual price
will be higher when the date arrives
i
...
Bull Market- Market is going up; period during which stock market prices move
up for several months or years in a row; “strong” market
2
...
Members pay a fee to join and can exchange on the floor
2
...
chance to increase the amount of money you have (long term)

Unit 4 Study guide
Supply & Demand

Definitions
1
...
Law of demand: Buyers of a good will purchase more of the good if its price is lower (and vice
versa) assuming other relevant variables remain constant (ceteris paribus)
3
...
Change in buyers income and wealth (known as Real income effect)
b
...
Buyer's tastes and preferences (90% of it)
d
...

Substitute goods and services (price and demand are directly related)
ii
...
Buyer’s expectations of future price
4
...
Complementary item: product that increases the use of other products; products related in
such a way that an increase in the price of one reduces the demand for both
6
...
“Shifting” the curve: entire curve shifts to the left or the right; changes demand/supply ​ a
​
as
whole
8
...
Demand elasticity: a measure that shows how a change in quantity demanded responds
to a change in price
9
...
#1 cause is a lack of a substitute
10
...
Supply: amount of a product offered for sale at all possible prices
12
...
elastic supply: a measure of how the quantity supplied responds to a change in price; when the
change in quantity supplied due to a change in price is more than proportional, supply is elastic
14
...
Determinants of supply (5 of these):
a
...
The time horizon
c
...
Geographic scope of market (narrower, the more elastic)
e
...
Toothpicks vs
...
Equilibrium (Price & Quantity): the price at which quantity supplied is equal to the quantity
demanded; if supply or demand forces change, then equilibrium is ruined; this is what most
businesses are shooting for
17
...
Shortage: situation where quantity supplied is less than quantity demanded at a given price
19
...
revenue (of a company): total amount of money a company makes before deductions

21
...
Marginal product: extra output due to the addition of more unit of input
23
...
Fixed costs: costs of production that do not change when output changes
25
...
Marginal costs: extra cost producing one additional unit of production

Concepts to understand
1
...
given information on changes in one of the determinants of Supply or Demand – be
able to show changes in Price & Quantity on a graph that occur in a market

2
...
Shift
right /left, move along the curve)
1
...
There is a decrease in the price of inputs, as producers will become more
willing to produce more
ii
...
There is a decrease in taxes, as production costs would decrease as well
iv
...
Supply curve will move LEFT if:
i
...
There is a decrease in the number of firms, as fewer goods would be produced
at every price possible
iii
...
Demand curve will move RIGHT if:
i
...
The number of consumers increases
iii
...
If income increases, demand curve for normal goods will move right
v
...
Demand curve will move LEFT if:
i
...
The number of consumers decreases

3
...


5
...


7
...
Price of complementary goods increases or the price of substitute goods
decrease
iv
...
If expectations that a product’s price will decrease in the future, the demand
for the product right now will decrease, only to increase upon the price change
Given a description of the relationship between a change in price and a change in the revenue
– explain whether demand for the product is inelastic, elastic, or unit elastic
1
...
Elastic demand: change in price causes a relatively larger change in quantity
demanded; huge response to a small change; luxury items, more substitutes, less time
urgency, “large purchase”; THINK: new car (many other cars you could buy, luxury
item, big purchase, little time urgency, willing to drive far away to get a better deal on
a car); YOU ARE WILLING TO STRETCH YOURSELF MORE TO SAVE A BUCK ON AN ELASTIC
PRODUCT; elasticity coefficient greater than 1
i
...
Unit Elastic: type of elasticity where a change in price causes a proportional change in
quantity demanded; elastic demand coefficient is equal to 1
Understand the mathematical formula to determine demand elasticity and what number
coefficient represents inelastic, elastic, or unit elastic market conditions
...
Elasticity of Demand Coefficient= % change in quantity/% change in price
2
...
Inelastic=0‐1
4
...
Long Run‐production period long enough to change amount of variable and fixed inputs
used in production
i
...
a firm that reduces its labor force today may also have to close down some
factories later on
2
...
Ex
...

1
...
Stage I‐phase in which the marginal product of each additional worker increases; as
more workers are added, they can cooperate with each other to make better use of
their equipment
3
...
Stage III‐If the firm hires too many workers, they will get in each other’s way, causing
output to fall; where marginal products of additional workers are negative; ex
...


1
...
Profit maximizing quantity of output‐level of production where marginal cost is equal
to marginal revenue
8
...
Break even point only refers to TOTAL REVENUE AND COST while profit maximizing
refers to MARGINAL OR EXTRA COST
2
...
Demand: combination of desire, ability, and willingness to buy a product
2
...
Determinants of demand (5 of these)
a
...
Increase in population of buyers
c
...
Prices of related goods and services
i
...

Complementary goods and services (price and demand inversely related)
e
...
Substitute item: competing products that can be used in place of one another; products related
in such a way that an increase in the price of one increases the demand for the other
5
...
“Moving along” the curve: moving from one point to the next on the curve (not shifting the
whole curve); changes quantity ​
demanded/supplied 
7
...
elastic demand: a demand is elastic when a given change in price causes a relatively larger
change in quantity demanded
a
...
Inelastic demand: demand may be inelastic when a given change in price causes a relatively
smaller change in quantity demanded
a
...
unit elastic demand: demand is unit elastic when a given change in price causes a proportional
change in quantity demanded; when demand is unit elastic, the percentage change in quantity
equals the percentage change in price
11
...
Law of Supply: principle that more will be offered for sale at higher prices than at lower prices
13
...
inelastic supply: supply is inelastic when a change in quantity supplied due to a change in price
is less than proportional
15
...
Change in per unit costs with increased production
b
...
Whether the good in question is a small or big demander in input markets (industry’s
share of demand for its input)
d
...
Able to be made quickly (ex
...
Picasso painting)
16
...
Profits: extent to which persons or organizations are better off at the end of a period than they
were at the beginning; usually measured in dollars; Total Revenue‐Total Output and Overhead
18
...
Surplus: situation where quantity supplied is greater than quantity demanded at a given price
20
...
Production function: ​ economics, a production function relates physical output of a
In
production process to physical inputs or factors of production
22
...
Marginal revenue: extra revenue from the sale of one additional unit of output
24
...
Total cost: variable plus fixed cost; all costs associated with production
26
...
Be able to create a Supply and Demand graph of your own – with labels
1
...
Given a description of a change in a Supply or Demand determinant, explain what will happen
to equilibrium price and quantity and what will happen to the Supply/Demand curves (ie
...
Supply curve will move RIGHT if:
i
...
There is an increase in the number of firms in the industry, as more output
would be produced at every price
iii
...
Technology improves, as it would affect supply by lowering the cost of
production or increasing productivity
2
...
There is an increase in the price of outputs, as producers will be less willing to
produce more
ii
...
There is an increase in taxes, as the more taxes, the more the cost of
production goes up
3
...
Consumers’ taste preferences match that of a specific good
ii
...
Price of complementary goods drops or price of substitute goods increases
iv
...
If expectations that a product’s price will increase in the future, the demand
for the product right now will increased
4
...
Consumer taste preferences change or do not match a specific good

3
...


5
...


ii
...
Price of complementary goods increases or the price of substitute goods
decrease
iv
...
If expectations that a product’s price will decrease in the future, the demand
for the product right now will decrease, only to increase upon the price change
Given a description of the relationship between a change in price and a change in the revenue
– explain whether demand for the product is inelastic, elastic, or unit elastic
1
...
Elastic demand: change in price causes a relatively larger change in quantity
demanded; huge response to a small change; luxury items, more substitutes, less time
urgency, “large purchase”; THINK: new car (many other cars you could buy, luxury
item, big purchase, little time urgency, willing to drive far away to get a better deal on
a car); YOU ARE WILLING TO STRETCH YOURSELF MORE TO SAVE A BUCK ON AN ELASTIC
PRODUCT; elasticity coefficient greater than 1
i
...
Unit Elastic: type of elasticity where a change in price causes a proportional change in
quantity demanded; elastic demand coefficient is equal to 1
Understand the mathematical formula to determine demand elasticity and what number
coefficient represents inelastic, elastic, or unit elastic market conditions
...
Elasticity of Demand Coefficient= % change in quantity/% change in price
2
...
Inelastic=0‐1
4
...
Long Run‐production period long enough to change amount of variable and fixed inputs
used in production
i
...
a firm that reduces its labor force today may also have to close down some
factories later on
2
...
Ex
...

1
...
Stage I‐phase in which the marginal product of each additional worker increases; as
more workers are added, they can cooperate with each other to make better use of
their equipment
3
...
Stage III‐If the firm hires too many workers, they will get in each other’s way, causing
output to fall; where marginal products of additional workers are negative; ex
...
Describe what is meant by the “Break‐even” point & “Profit Maximizing” point with regards to
business operations
...
Break even point‐production level where total cost equals total revenue (almost like an
equilibrium of these)
2
...
Understand why a company at profit maximizing point may not be able to “break even”
1
...
Marginal costs and revenues can be the same even when total costs exceed total
revenue (too expensive to expand leads to less profit, but a smaller scale business may
lead to larger profit)

 

 
 

 

Study Guide - Unit #6
Macroeconomics, Inflation, Unemployment & the Fed
Ch
...
1, 13
...
3
Words to Know​
: 
Macroeconomics­ ​
branch of economic theory dealing with the economy as a whole and 
decision making by large units such as governments and unions 
 
GDP­ ​
Gross Domestic Product; dollar value of all final goods, services, and structures produced 
within a country’s national borders during a one year period; most important measure of a 
country’s overall economic performance  
 
Net Domestic Product­ ​
equals the gross domestic product (GDP) minus depreciation on a 
country's capital goods
...
 
 
The Great Depression­ ​
worst period of economic decline in US history, lasting from 1929 to 
1939 
 
The Federal Reserve­ ​
privately owned, publicly controlled central bank of US 
 
Consumer Price Index (CPI)­ ​
index used to measure price changes for a market basket of 
frequently used consumer items 
 
Inflation­ ​
rise in the general level of prices; destabilizes the economy in all of the following ways 
EXCEPT that borrowers are hurt bc they must repay old loans with higher rates 
 
Loose money policy­ ​
monetary policy resulting in lower interest rates and greater access to 
credit; associated with an expansion of the money supply; aka easy or expansionary money 
policy 
 
Creeping Inflation­ ​
relatively low rate of inflation, usually 1­3% annually 
 
Prime rate­ ​
best or lowest interest rate commercial banks charge their customers 
 
Open Market Operations­ ​
monetary policy in the form of US treasury bills or bond sales and 
purchases, or both 
 
Misery Index­ ​
unofficial statistic that is the sum of monthly inflation and the unemployment rate; 
same as discomfort index 
 
“REAL” GDP Growth­ ​
gross domestic product after adjustments for inflation; same as GDP in 
constant dollars 
 
Implicit GDP price deflator­ ​
index used to measure price changes in GDP 
Equilibrium level of output­ E=C+I+G+NX [Aggregate demand is the total of consumption, 
​
investment, government purchases, and net exports
...
] Calculate the equilibrium level of GDP for this economy 
(Y*) 
 
Peak­ ​
point in time when real GDP stops expanding and begins to decline 
 
Contraction/recession­ ​
decline in real GDP lasting at least two quarters or more 
 
Business fluctuations­ ​
changes in real GDP marked by alternating period of expansion and 
contraction that occur on an irregular basis 
 
Stagflation­ ​
combination of stagnant economic growth and inflation 
 
Tight Money Policy­ ​
monetary policy resulting in higher interest rates and restricted access to 
credit; associated with a contraction of the money supply 
 
Janet Yellen­ ​
director of the Federal Reserve 
 
Fiscal Policy­ ​
use of government spending and revenue collection measures to influence the 
economy 
 
FDIC­ ​
Federal Deposit Insurance Corporation; reserves public confidence in the banking system 
​
by insuring deposits
...
 
 
Personal disposable income­ ​
total amount of income going to the consumer sector before 
individual income taxes are paid 
 
Trough­ ​
point in time when real GDP stops declining and begins to expand 
 
Expansion/recovery­ ​
period of uninterrupted growth of real GDP; recovery from recession 
 
Producer price index (PPI)­ ​
index used to measure prices received by domestic producers; 
formerly called the wholesale price index 
 
Deflation­ ​
decrease in general level of the prices of goods and services 
 
Hyperinflation­ ​
abnormal inflation in excess of 500% per year; last stage of monetary collapse 
 
FOMC­ ​
The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve 
Board that determines the direction of monetary policy
...
 
 
Reserve Requirements­ ​
formula used to compute the amount of depository institution’s 
required reserves 

 
Discount Rate­ ​
interest rate that the Federal Reserves System charges on loans to the nation’s 
financial institutions  
 
GNP­ ​
gross national product; total dollar value of all final goods, services, and structures 
produced in one year with labor and property supplied by a country’s residents, regardless of 
where the production takes place; largest measure of a nation's income  
 
The Debt­ ​
accumulation of budget deficits (% of GDP) 
 
The Deficit­​
 when a country spends more than it takes in  
Review Points​
:
1
...

a
...
More government spending can raise overall output by putting idle resources
back to work
c
...
Explain why using Fiscal Policy is rarely used to slow down the economy
a
...
Multiplier effect; hard to manage a policy’s impact bc it can multiply to
influence so many different people
c
...
Explain what the ​
NEGATIVE effect​
normally occurs on the budget​
​
when
expansionary fiscal policy is used
...
Excessive debt could crowd out borrowing and people don’t always get money
back, which hurts individuals and businesses
b
...

Debt‐accumulation of budget deficits (% of GDP)
ii
...
Know why the word ​
FINAL ​important in the definition of GDP… as in “final goods
is
& services”
a
...
FINAL‐not intermediate; intermediate goods are products that are components
of other final products included in GDP
i
...

Intermediate Product‐The car’s tires or radio
5
...
12
...
Intermediate products‐products that are components of other final products
included in GDP
b
...
Buying/selling a used car)

6
...


8
...


c
...

Homemakers, home repairs done by the owner of the house)
d
...
Recreational
drugs)
Know which type of economic spending is most important (almost 2/3 of activity)
to our economy
a
...
Other important economic spending strategies include business spending,
government spending, and net exports
Be able to list the 4 economic spending categories that make‐up GDP and explain
what the letters in the equation C + G + I + (X‐M) = GDP refer to
...
​
Output expenditure model‐macroeconomic model describing aggregate
demand by consumer (C), investment (I), government (G), and Foreign sectors
(X‐M)
i
...

Groceries, rent, almost anything else people buy)
ii
...
Total value of capital goods created in the
economy during the year)
iii
...

X‐M: foreign sector also buys US goods; reflects difference between
exports and imports
b
...
Used to explain and analyze the economy’s performance
Explain how Cost push inflation and Demand pull inflation are different from one
another
a
...
Demand Pull inflation‐too much money chasing too few goods; buying more
than can be supplied; explanation that prices rise bc all sectors of economy try
to buy more goods and services than economy can produce
Explain the 4 phases of the business cycle as shown on a diagram (pg
...
Business cycle‐series of largely systematic ups and downs of real GDP
(nonsystematic=business fluctuations)
b
...
Peak‐point in time when real GDP stops expanding and begins to decline
d
...
Expansion‐period of uninterrupted growth of real GDP
f
...
Depression‐state of economy with larger numbers of unemployed people,
declining real incomes, overcapacity in manufacturing plants, and general
economic hardship
h
...
Differentiate between the causes of unemployment – Frictional, Structural,
Cyclical, Technological & Seasonal
...
Frictional unemployment‐unemployment caused by workers changing jobs or
waiting to go to new ones
b
...
Auto workers lose
jobs due to increased demand for foreign cars)
c
...
Technological unemployment‐unemployment caused by technological
developments or automation that make some workers’ skill obsolete
e
...
Explain what the CPI is, how it is calculated (market basket) and why it is
important to track this statistic in measuring economic performance of a country
...
362‐63)
a
...

Market basket‐representative selection of goods and services used to
compile a price index
ii
...

Divide cost of market basket by base year price and percentage is the
price index/index number
iv
...
Know who the chairman of the Federal Reserve Board is, how many members are
on the board of governors & how long each member serves & how many Fed Banks
there are
...
400‐01)
a
...
Board of governors is directed by 7 members appointed by the president for a
14 year term; supervise and regulate the fed
c
...
Explain how open market operations work
...
Who performs them & how they
affect banks and the money supply
...
Open market operations‐sales or purchases of US government securities by the
Fed; most popular tool and allows the Fed to influence short term interest
rates
b
...

In the short term, expanding money supply decreases interest rates

c
...
FOMC (Federal Open Market Committee) operates open market operations
i
...
Explain how changing interest rates, the reserve requirements & the amount of
government securities held by banks affect the economy & and available loans to
borrowers
...
Lower Reserve Requirement‐frees excess reserves bc fewer are needed to back
existing deposits in the system (expands money supply)
b
...
In the long run, the money supply also affects the general price level; if money
supply were to expand for a prolonged period of time, we would have too many
dollars chasing too few goods (demand pull econ)
i
...
As the money supply grows, demand decreases and loans are cheaper
e
...
List the ​functions of the Fed and the 3 goals they have for the economy​
3

...
3 Goals:
i
...

Moderate growth (3‐4%); GDP
iii
...
3 Functions:
i
...

Conduct monetary policy (can raise or decrease money supply to speed
up or slow down overall economy)
iii
...
The Fed Can:
i
...

“Create” more money
iii
...
Other responsibilities:
i
...

Maintaining payments system (covers money supply, electronic transfer
of funds, and checks)
iii
...

Preparing Consumer Legislation (Regulation Z‐provision extending truth
in lending disclosures to consumers; DOES NOT disclose the portion of
their income needed for payments)
v
...
16
  
Words to Know​
: 

Exports: ​
the goods and 

Tariffs: tax placed on 
​

Foreign Exchange Rate: 

services a nation produces 

imported goods 

price of one country’s currency 

and then sells to other 

Quota: ​
limit to the amount 

in terms of another currency 

nations 

of a good that is allowed in 

Imports: ​
the goods and 

Fixed Exchange Rate: system 
​

a country 

under which the values of 

services that a nation buys 

Protective Tariff: tax on an  currencies are fixed in relation 
​

from other nations 

imported product designed 

to one another; the exchange 

Absolute Advantage: ​
a 

to protect less efficient 

rate system in effect until 1971 

country’s ability to produce 

domestic producers 

Flexible Exchange Rate: 

more of a given product than 

Revenue Tariff: tax placed 
​

system that relies on supply 

can another country 

on imported goods to raise 

and demand to determine the 

Comparative Advantage: 

revenue 

value of one currency in terms 

country’s ability to produce a 

Protectionists: person who  of another; exchange rate 
​

given product relatively more 

wants to protect domestic 

system in effect since 1971, 

efficiently than another 

producers against foreign 

same as floating exchange 

country; production at a lower  competition with tariffs, 

rate 

opportunity cost  

quotas, and other trade 

Floating Exchange Rate: see 
​

barriers 

flexible exchange rates 

Free Traders: people who 
​

Trade deficit: ​
balance of 

favor fewer or no trade 

payments outcome when 

restrictions 

spending on imports exceeds 

Balance of Payments: 

revenues received from 

difference between money 

exports 

paid to, and received from, 

Trade Surplus: situation 
​

other nations in trade; 

occurring when the value of a 

balance on current account 

nation’s exports exceeds the 

includes goods and 

value of its imports 

services, merchandise 

  

trade balance counts only 
goods 
World Trade Org
...
Identify the basic assumption supporting the theory of comparative advantage:
a
...
Based on the assumption that everyone will be better off specializing in the
products they produce best
c
...
Explain how comparative advantage helps nations acquire goods, services and the
resources they otherwise lack
...
By trading goods they are good at making for goods they can’t make as
efficiently, countries are more efficient and can easily obtain things they may
need
3
...


5
...


7
...
International trade is important in today’s economy bc we are a global
community and what one country does, influences the rest of the world
...

b
...

a
...

Taxing Chinese steel to protect US Steel)
b
...
Taxing coffee to make more money off of it)
Understand the current trends in today’s world with respect to trade policies and
how the WTO helps promote those goals
...
WTO‐international agency that administers trade agreements, settles trade
disputes between governments, organizes trade negotiations, and provides
technical assistance and training for developing countries
i
...

Tariffs are dropping altogether, so stores are able to offer a wide
variety of industrial and consumer goods from all over the world
b
...

Free trade is beneficial in general, but NAFTA was controversial bc
people thought some high paying American jobs would be lost to Mexico
ii
...

a
...
A strong currency generally leads to a
deficit in the balance of goods and services and a subsequent decline in the
value of currency; a weak currency tends to cause a trade surplus, which
eventually pulls up the value of the currency
Be able to pick the “winners” and “losers” in a society that occur when the Dollar
Appreciates in value and when it Depreciates in value relative to a foreign
currency
...
When the dollar depreciates, the winner is foreign currency and the loser is US
currency
b

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