Domain 5: Principles of Economics
Distinguish between short- and long-term interest rates and explain their relative significance.
= A short-term interest rate, or money market rate, applies to an investment or loan with a maturity of less than a year. == Short-term rates apply to financial instruments including Treasury bills, bank certificates of deposit and commercial paper. == The Federal Reserve influences the reserves market and the federal funds rate, which has some effect on short-term interest rates. = A long-term interest rate applies to a financial asset with a maturity of one year or longer. == Consequently, long-term interest rates apply to bonds, real estate and notes payable. == According to the Federal Reserve, the relationship between the Fed's monetary policy actions and long-term rates is weak and variable. = When you borrow money or lend money for the short term, your interest rate will be lower than if you borrow or lend money for the long term. == The difference between the short- and long-term interest rates is partially attributable to the risk of a short-term investment versus that of a long-term investment. == An increase in uncertainty -- risk -- comes with the passage of time.
Assess the trade off between efficiency and equality in modern mixed economies, using social policies as an example.
= An efficient economy does not result in an equal or equitable distribution of income - this is a fact of capitalism = A role of government then is to implement certain kinds of social policies to try to correct for the income inequality resulting from a market economy = These polices basically effect a redistribution of income to lower income brackets = One way of redistributing income is through the federal income tax system (e.g. progressive, regressive, and proportional tax systems) = Another example would be social programs (I.e. food stamps, welfare, Medicaid) = Agricultural price support programs also is an example - by legally mandating prices higher than the market, so farmers can survive and provide food for the nation.
Describe the effects of changes in supply and/or demand on the relative scarcity, price, and quantity of particular products.
= Changes in supply causes: == Manufacturing cost == Efficiencies in manufacturing == New technologies (i.e. machines or processes) == Number of sellers in the market == Taxes/Subsidies == Government regulations/deregulation = The scarcity principle is an economic theory in which a limited supply of a good, coupled with a high demand for that good, results in a mismatch between the desired supply and demand equilibrium. In pricing theory, the scarcity principle suggests that the price for a scarce good should rise until an equilibrium is reached between supply and demand. However, this would result in the restricted exclusion of the good only to those who can afford it. = Price affects the ebb and flow between consumers and manufacturers. When consumer preferences change or the cost of production changes, the change in price appears in the marketplace and prompts adjustment to both consumers and producers. = While supply and demand works to determine the price and quantity supplied, producers themselves can adjust. If the price for a product goes down so much it is no longer profitable, producers will stop producing it. If prices go up, a producer may put more of the product on the market to increase profit.
Use the concept of comparative advantage to identify the cost of and gains from international trade.
= Comparative advantage refers to the ability of a country to produce something efficiently and at a lower opportunity cost. = This is based on the idea that everyone is better off if nations produce products that they are more efficient at producing. = If they do this, the world output for those products increases.
Describe the functions of the financial markets.
= Financial markets, sometimes called money markets, allow households to buy equities or stock in a company. = With the expectation of earning extra income through dividends, households supply money to the market; they also demand money from the market in the form of loans. = Companies borrow from the financial markets to improve to increase production, thereby increasing profitability. = By issuing bonds, the government also borrows from financial markets. = The activities of these participants in the financial market are coordinated by financial institution such as banks and insurance companies; they take deposits from one sector and lend it to another. = When one of these sectors borrows money from a financial market, it issues a promissory note agreeing to repayment with interest; the federal government issues Treasury Bonds and corporations issue Corporate Bonds. = Corporations can offer shares of stock instead of issuing corporate bonds. == A share of stock gives the holder partial ownership in the corporation and a right to a share of its profits. == These profits may be in the form of an increase in the value of the stock (a capital gain), or direct payments of dividends.
Describe the economic and social effects of government fiscal policies.
= Fiscal policy refers to changes in the level of government spending and taxation. == At the state and local levels, the purpose of government spending and taxes is to run the state and local government. == The purpose of fiscal policy at the national level is to affect the level of aggregate spending in the economy, in order to promote economic stabilization. === This means to correct for inflation and unemployment. == The way they do this is through changing the level of government spending and/or the level of taxation. = Inflation occurs when there is too high a level of aggregate spending. == Producers can't keep up with the demand and the result is rising prices. == In this situation the government implements contractionary fiscal policy which consists of a decrease in government spending and/or an increase in taxes. == The purpose is to slow down the economy that is expanding too quickly by enacting policies that result in people having less money to spend. = Unemployment occurs due to a lack of aggregate spending in the economy to fully employ the labor force. == Here the role of government is to stimulate spending == Expansionary fiscal policy consists of increasing government spending and/or lowering taxes == If government increases spending and/or lowers taxes, producers will increase their output and hire more resources, including labor, thus lowering unemployment.
Analyze the effects of federal, state, and local policies on the distribution of resources and economic decision-making
= Government has a direct role when it controls the factors of production to provide citizens with needed goods and services (public schools, police, fire). = Government also has an indirect role when it regulates a market economy to ensure that it is functioning properly (Public-utilities). = Government operates as a protector in the market place when it enforces laws that protect property rights, protects against abuses of individual freedoms, ensures labor agreements are carries out, and protects against discrimination = While government is a provider in terms of national defense, public education, and local transportation, it is also a consumer of the factors of production in the process of providing these goods and services. = The government operates as a regulator of the free market by regulating commerce, insurance rates, communications, banking and energy. = The government also effects the economy by promoting national goals. = When a government controls certain aspects of an economy (like the United States), it is said to have a mixed economy or modified private enterprise economy.
Describe how measures of economic output are adjusted using indexes.
= Gross Domestic Product (GDP) is the total amount of goods produced and the total amount of payments to land, labor, capital, and entrepreneurship. == It also includes the production of foreign-owned goods within the US and income from US-owned resources outside the US = GDP figures can be distorted by inflation; to reduce these distortions, economist use a price index. == The price index is a statistical measure of how prices have changed over time. = Basic indices include the: Consumer Price Index (CPI), the Producer Price Index (PPI), and the Implicit GPD Price Deflator == Because the GDP encompasses many more items than other indicators, economist still think it is the best tool to analyze price changes in the market Price Index = Price in any year / Price in base year * 100 or Nominal GDP / Real GDP Real GDP = Nominal GDP / Price Index
Analyze the effects of international mobility of capital, labor, and trade on the US economy.
= International mobility of factors means that the factors will go where they earn the highest rate of return, whether the factor is capital or labor. = These events are happening today with foreign outsourcing and relocating plants overseas in response to lower costs. = International trade allows the US to not only obtain exotic goods, but also essential products and natural resources. = Several trade agreements between the US and other nations have facilitated the mobility of capital, labor, and trade across boarders. == Some of these include the General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA).
Describe the circumstances surrounding the establishment of principal American labor unions, procedures that unions use to gain benefits for their members, and the effects of unionization, the minimum wage, and unemployment insurance.
= Labor unions in America arose in response to deplorable working conditions. = Employees had no say in their working conditions and began to join forces to try to obtain some input. = Unions first begin with negotiating with management, if that fails, they may strike, picket, and/or boycott. = Employers may "lockout" employees - which prohibits workers from coming back to work until dispute is settled. = Advantages of unionization include: employee solidarity, strength to negotiate, benefits and privileges through collective bargaining, binding agreements regarding work conditions and pay, and recourse review of dismissal or company discipline. = Disadvantages include adhering to decisions that an employee many not agree with, reinstatement that is not automatic following a strike, loss of addressing individual concerns in favor of those affecting the majority of workers, sometimes high union membership dues, being fined or disciplined by the union for inappropriate conduct.
Describe the effect of price controls on buyers and sellers.
= Price contorts are established by the government to regulate the price that is charged for a particular good or service. = Price controls interfere with he market's ability to arrive at an equilibrium price that equates supply and demand. = The government may establish a ceiling price, or a maximum price that cannot be exceeded (prices may be negotiated below the ceiling). = Ceiling prices affect the allocation of resources. = While ceiling prices ultimately increase demand, it may also cause the producers of those goods and services to cut back on quality or leave the market all together. = The government may establish a floor price, or a minimum price. = Prices cannot go below this floor but prices above a floor price may be negotiated = The minimum wage is an example of a floor price.
Explain and analyze how prices reflect the relative scarcity of goods and services and preform the function of allocation in a market economy.
= Prices are determined by the interaction of demand and supply in the marketplace. Resource prices are determined by the supply and demand for that resource. Relatively speaking, the scarcer the supply is, the higher the price is for that resource. = In a market, resources are allocated based on the demand/supply in which prices plays an signalling function as it allocates resources to the production of different types of goods. It also acts as signalling mechanism between buyers and sellers; telling them how much and what to produce.
Explain and analyze the role of property rights, competition, and profit in a market economy.
= Property rights, competition, and profit are all factors involved in the efficient allocation of resources in a market economy. = The assignment of property rights prevents waste and inefficient use of resources. = Markets function on the basis of competition and competition leads to efficiency in the use of resources. == Resource owners want to get the best price for their resource. == Producers want to get the best price for their output. == Buyers want to get the best deal for the product they are purchasing. = All of these factors combine to result in resources that are being used in accordance with the preferences of society. = Inefficiency is eliminated by competition in the market place and the inefficient firm goes out of business due to lack of profit.
Explain the process by which competition among buyers and sellers determines a market price.
= Pure competition involves well-informed buyers and sellers acting independently of each other; it requires that there are large numbers of buyers and sellers in the market, that they are comparing identical products, that sellers are competing against each other for the buyer's dollars, that buyers are seeking to purchase products at the best price. Pure competition is theoretical. = The main difference between pure and monopolistic competition is product differentiation. Each product on the market is similar but not identical. In place of competition, nonprice competition occurs in which sellers try to sway consumers into thinking their unique product is better than the others on the market. Advertising is used extensively to accomplish this. Price is established in such a way to maximize profits but not increase the cost so much that consumers will put aside the differences between products and switch brands. = An oligopoly is a market system in which a few major companies control the majority of the market. In this system, one company can significantly change the output of products, the number of sales and the prices of products. A major change by one manufacture can significantly influence the behavior of others. A decrease in price or an increase in features causes the others to follow suit. = A monopoly occurs when there is only one seller of a product and no competitive equal.
Define, calculate, and analyze the significance of the changes in rates of unemployment, inflation, and real GDP
= Real GDP, the unemployment rate and the inflation rate are economic indicators. = Inflation refers to a rise in the general level of prices which causes a decrease in the purchasing power of the dollar. == Information on inflation is needed because it calls for contractionary policies to combat it. Inflation Rate = (this year's index # - last years index #) / last years index # Unemployment Rate = # of unemployed / # of people in labor force * 100 = GDP is a measure of the economy's current output GDP = Consumption + investments + government spending + net exports = GDP figures can be distorted by inflation, so real GDP is a better figure to analyze Real GDP = Nominal GDP / Price Index = Economists and policy makers work with these figures and determine appropriate monetary and fiscal policy. == They also watch these figures to determine if their policies are working and make the appropriate adjustments.
Describe the aims and tools of monetary policy and its economic and social effect.
= The Federal Reserve implements monetary policy through the banking system and it is a tool used to promote economic stability at the macro level of the economy. == There are three components of monetary policy: the reserve ratio, the discount rate, and open market operations. = The reserve ratio refers to the portion of deposits that banks are required to hold as vault cash or on deposit with the Fed. == When the Fed wants to expand the money supply it lowers the reserve ratio, leaving banks more money to loan. == When the reserve ratio is increased, this results in banks having less money to make loans with, which leads to lower spending in the economy = When banks have a temporary cash shortages, they can borrow from the Fed; the interest rate on the funds they borrow is called a discount rate == Lowering the discount rate encourages banks to borrow from the Fed, instead of restricting their lending to deal with the temporary cash shortage. == The Fed can discouraging bank lending by raising the discount rate. = Open market operations consists of the Fed buying and selling government securities with the public or with the banking system. == When the Fed sells bonds, the public and the banks pay for the bonds, thus resulting in fewer dollars in the economy and a lower level of spending. == The Fed is expanding the money supply when it buys bonds from the public or the banking system, which increases the level of spending in the economy,
Analyze the current US economy and the global labor market that helps support it, including the types of goods and services produced, the types of skills in demand, the effect of rapid technological change, inter- and intra-regional shifts in employment, and the impact of international competition.
= The US is a well endowed economy with a diversified resource base, yet it still dependent on the global economy to supply goods and labor that it cannot supply itself or to preform tasks that it cannot preform at the same level of costs = The US can be best characterized as a capital-technology intensive economy == This means that its strength is in the production of goods requiring capital and technology = There is more of a demand for capital intensive workers or technology workers or tech oriented providers of services. = Rapid technological changes: == firms try to keep up == cost money to implement == firms ask: should we innovate, is it profitable, do they have the labor capability, if not, how do they attract the labor they need Inter- and intra-regional shifts in employment are not uncommon as workers train for new jobs and move around to take employment. International competition brings about a restructuring of the labor market as firms leave the high-wage countries like the US and locate their operations in low-wage countries to keep their costs low.
Analyze how domestic and international competition in a market economy affects the quality, quantity, and price of goods and services produced.
= The introduction of international competition results in greater efficiency in the allocation of resources. = International trade that takes place on the basis of comparative advantage results in lower output prices and higher resource prices. = In general, consumers have a wider variety of products, usually of better quality at a lower price than they had before. = The long run results is increased benefits for both of the trading partners. = Note that when a country's currency depreciates, its import prices go up and its export prices go down. == When US currency prices depreciate, it can actually make American goods more competitive on the world market. == It also makes foreign products more expensive, or less competitive. == Consequently, foreign consumers will buy more American products and American consumers will buy more American products as well. == This depletes inventory and real GDP increases, thereby stimulating the economy.
Explain the role of profit as the incentive to entrepreneurs in a market economy.
= The main incentive behind the law of supply and demand is profit. = Entrepreneurs in a market economy organize and manage land, labor, and capital; the goal is to achieve profit. = In addition to the entrepreneur's profit == gainful employment is provided for workers == better products are produced == and the government receives a higher amount of taxes which, in turn, are returned to society through government expenditures. = Profits also attract competitors in the industry in an attempt to gain a share in the market. == Entrepreneurs then must adjust quality, output and price to maintain old and attract new customers. = Profits are the market signal that indicates the proper allocation of resources in accordance with consumer preference. = Excess profits, or an above normal rate of return, signal an expansion as resources are attracted into the industry.
Apply the principles of economic decision-making to a current or historical social problem in America
= The price system's effect in irrigation = Deregulation's effect on natural gas = The price system's effect on oil = Incentives and pollutions
Analyze wage differences between jobs and professions, using the laws of supply and demand and the concept of productivity.
= The traditional theory of wage determination states that workers in certain fields are more scarce, and therefore demand a higher wage because their value to their employer is high. = There are three factors that determine overall cost of a function: the wage rate, the productivity level, and how often something must be preformed. = Decreasing labor costs, increasing productivity and decreasing the amount of the workload all should have positive impact on overall cost.
Compare and contrast the argument for and against trade restrictions during the Great Depression with those among labor, business, and political leaders today.
= Trade theory tells us that free unrestricted trade, without any barriers is best. = During the Great Depression, the US enacted the Smoot-Hawley Tariff Act, which raised tariffs to their highest level in US history = The purpose was to protect domestic jobs at the expense of the trading partners = These actions contributed to the severity and duration of the Depression Arguments for and against trade restrictions = Trade restrictions bolster national defense == Free traders believe that if domestic resources are available or an industry is not crucial to national defense, the argument does not have merit. = Infant industries should be protected from foreign competition so they can establish themselves == Free traders believe that protection must ultimately be removed = Trade restrictions protect domestic jobs == Free traders believe that if they are protected, prices rise, buying falls, and the economy is hurt. = Trade restrictions keep American money in America == Free traders believe that the money invested abroad ultimately comes back to the US through trade agreements. = Restrictions help with trade deficit == Free traders believe that American dollars return to bolster employment in other industries.
Describe the casual relationship between scarcity and choices, and explain opportunity cost and marginal benefit and marginal cost.
Economics = the study of how individuals and society make decisions about how to use scarce resources to satisfy unlimited material wants. Scarcity = the condition that exist when there are not enough resources to satisfy all the wants of individuals or society. Choices = the decisons individuals and society make about the use of scarce resources. Opportuniy Costs = the next highest valued alternative that is given up when a choice is made. Marginal Benefit = is a small, but measurable, change in a consumer's advantage if they use an additional unit of a good or service. A marginal benefit usually declines as a consumer decides to consume more of a single good. Marginal Cost = Producers consider marginal cost, which is the small but measurable change in the expense to the business if it produces one additional unit.
Identify the difference between monetary and monetary incentives and how changes in incentives cause changes in behavior.
Monetary incentives directly involve money to motivate a person to choose a specific course of action, whereas non-monetary incentives do not involve direct money. A change and either monetary or non-monetary incentives bring about a change in behavior where decisions and actions change accordingly.
Debate the role of private property as an incentive in conserving and improving scarce resources, including renewable and non-renewable natural resources.
Private property rights play an important role in the conservation of resources and the improvement in the allocation of scarce resources. We have problems in our society that result from the lack of ownership of resources, whether they are renewable or nonrenewable. It is the lack of ownership of resources, like air, that leads to its use as a free good and it's waste. Since nobody owns resources like air, and property rights can't be assigned, there is inefficiency and a misallocation of resources associated with the pollution. This is where government steps in and somehow correct for the misallocation and inefficiency caused by lack of ownership rights (e.g. fines for pollution, pollution permits, requiring installation of new technology). Without private ownership of resources there is no incentive to be efficient and to conserve scarce resources.
Describe and analyze the relationship of the concepts of incentives and substitutes to the law of supply and demand.
Supply = is defined as the number of goods or services that someone is willing to sell at various prices. The quantity supplied and the price for that item are directly related; as one rises, so does the other, and vice versa. Demand = is defined as the number of goods or services that someone is willing to buy at a various prices. In this case, price and quantity are inversely related; as one rises , the other declines, and vice versa. Equilibrium Point = is where the supply and demand curve meet. Incentives = Incentives for consumers are things like sales, coupons, rebates, etc. The incentive results in increased sales for the firm, even though there is a cost to the incentives. Also note that there is a change in the market equilibrium. On the production side, incentives to innovate results in increased output at lower costs, or more profit and greater market share. Substitutes = are products that can be used in place of other products. A product's demand increases if the price of the substitute goes up and decreases if it goes down. Complements = are products that are used in conjunction with another product. When the demand of a product goes up, so does the demand of its complement, and vice versa.
Describe and analyze the debate concerning the role of a market economy versus a planned economy in establishing and preserving political and personal liberty.
The difference between a market economy and a planned economy is the role of incentives. A market economy functions on the basis of financial incentives. Firms use society's scarce resources to produce the goods and services that consumers want. In a planned economy, particular ones based on public ownership of the means of production, a planning entity substitutes for the market, to varying degrees. When the economy needs resources for a particular area, the labor force is directed into that area by assignment, for the most part, not by financial incentives. The lack of freedom of choice in a planned economy carries over to the political area. Most planned economies are usually headed by dictators whereas market economies have elected officials. For the most part, a market economy allows for more political and personal freedoms than a planned economy does.
