Economics: Final Exam Review

junk bonds

"Junk" bonds--exceptionally risky bonds with a Standard & Poor's rating of BB or lower, or a Moody's rating of Ba or lower--carry a high rate of return as compensation for the possibility of default.

market failures

A competitive free enterprise economy works best when four conditions are met. Adequate competition must exist in all markets. Buyers and sellers must be reasonably well-informed about conditions and opportunities in these markets. Resources must be free to move from one industry to another. Finally, prices must reasonably reflect the costs of production, including the rewards to entrepreneurs. Accordingly, a market failure can occur when any of these four conditions are significantly altered. The most common market failures involve cases of inadequate competition, inadequate information, resource immobility, external economies, and public goods. These failures occur on both the demand and supply sides of the market.

conglomerates

A corporation may become so large through mergers and acquisitions that it becomes a conglomerate. A conglomerate is a firm that has at least four businesses, each making unrelated products, none of which is responsible for a majority of its sales. Diversification is one of the main reasons for conglomerate mergers. Some firms believe that if they do not "put all their eggs in one basket," their overall sales and profits will be protected. Isolated economic happenings, such as bad weather or the sudden change of consumer tastes, may affect some product lines at some point, but not all at one time. During the 1970s and early 1980s, conglomerate mergers were popular in the United States. The cigarette and tobacco firm of R.J. Reynolds became a leading conglomerate, at one time owning the largest containerized shipping firm in the country (Sea-Land), the nation's second largest fast-food chain (Kentucky Fried Chicken), the nation's largest fruit and vegetable processor (Del Monte), and the second largest producer of wine and distilled spirits (Heublein). Since the lats 1980s, the number of conglomerates in the United States has declined. Ine Asia, however, conglomerates remain strong. Samsung, Gold Star, and Daewoo are still very dominant in Korea, as are Mitsubishi, Panasonic, and Sony in Japan.

absolute advantage

A country has an absolute advantage when it can produce a product more efficiently then another country. - Example: If "A" country and "B" country both devote all their efforts to making coffee and "A" can make more, "A" has an absolute advantage.

needs

A need is a basic requirement for survival and includes food, clothing, and shelter. Food, for example, is a basic need related to survival.

non-profits

A nonprofit organization operates in a businesslike way to promote the collective interests of its members rather than to seek financial gain for its owners. Examples of nonprofit institutions include organizations such as schools, churches, hospitals, welfare groups, and adoption agencies. Most of these organizations are legally incorporated to take advantage of unlimited life and limited liability. They are similar to profit-seeking businesses, but do not issue stock, pay dividends, or pay income taxes. These organizations often provide goods and services to their members while they pursue other rewards such as improving educational standards, seeing the sick become well, and helping those in need. Their activities often produce revenues in excess of expenses, but they use the surplus to further the work of their institutions.

organized stock exchanges

A number of organized securities exchanges exist--places where buyers and sellers meet to trade securities. An organized exchange gets its name from the way it conducts business. Members pay a fee to join, and trades can only take place on the floor of the exchange. The oldest, largest, and most prestigious of the organized stock exchanges in the United States is the New York Stock Exchange (NYSE), located on Wall Street in New York City. Stock exchanges can be found throughout the world. Exchanges operate in such cities as Sydney, Tokyo, Hong Kong, Singapore, Johannesburg, and Frankfurt. Developments in computer technology and electronic trading have linked these markets so that most major stocks can be traded around the clock, somewhere in the world.

partnerships

A partnership is a business jointly owned by two or more persons. It shares many of the same strengths and weaknesses of a sole proprietorship. Partnerships are the least numerous form of business organization, accounting for the second smallest proportion of sales and net income. The most common form of partnership is a general partnership, one in which all partners are responsible for the management and financial obligations of the business. In a limited partnership, at least one partner is not active in the daily running of the business, although he or she may have contributed funds to finance the operation. Like a proprietorship, a partnership is relatively easy to start. Because more than one owner is involved, formal legal papers called articles of partnership are usually drawn up to specify arrangements between partners. Although not always required, these papers state ahead of time how profits (or losses) will be divided. The articles of partnership may specify that the profits be divided equally or by any other arrangement suitable to the partners. They also may state the way future partners can be taken into the business and the way the property of the business will be distributed if the partnership ends. Individuals who join as partners must be very careful because they are financially responsible for personal as well as business debts of their partners (except for those debts specifically exempted in the partnership contract).

shortage

A shortage is a situation in which the quantity demanded is greater than the quantity supplied at a given price. When a shortage happens, producers have no more CDs to sell, and they end the day wishing that they had charged higher prices for their products. As a result, both the price and the quantity supplied will go up in the next trading period.

surplus

A surplus is a situation in which the quantity supplied is greater than the quantity demanded at a given price. The 10 unit surplus at the end of Day 1 is shown as the difference between the quantity supplied and the quantity demanded at the $25 price. This surplus shows up as unsold products on suppliers' warehouses. Sellers now know that $25 is too high, and they know that they have to lower their price if they want to attract more buyers and dispose of the surplus. Therefore, the price tends to go down as a result of the surplus. The model cannot tell us how far the price will go down, but we can reasonably assume that the price will go down only a little if the surplus is small, and much more if the surplus is larger.

unfair trade practices

A trade crisis emerged in mid-1997 when charges of dumping, or selling products abroad at less than it cost to produce them at home, were levied against Japan and Russia. Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand. A subsidy is a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive. A kickback is a payment made to someone who has facilitated a transaction or appointment, especially illicitly. A discount is a deduction from the usual cost of something, typically given for prompt or advance payment or to a special category of buyers. A loan where the borrower does not have to pay interest for a particular period of time. a sum of money or other inducement offered or given to bribe someone

wants

A wants is a way of expressing a need. To satisfy the need for food, a person may "want" a pizza or other favorite meal. Because any number of foods will satisfy the need for nourishment, the range of things represented by the term "want" is much broader than that represented by the term "need."

elasticity of demand

An understanding of demand elasticity--the extent to which a change in price causes a change in the quantity demanded--will help analyze these issues. The demand for most products is such that consumers do care about changes in prices--and the concept of elasticity tells us just how sensitive consumers are to these changes. Economists say that demand is elastic when a given change in price causes a relatively larger change in quantity demanded. For other products, demand may be largely inelastic, which means that a given change in price causes a relatively smaller change in the quantity demanded.

variable costs

Another kind of cost is variable cost, a cost that changes when the business rate of operation or output changes. While fixed costs generally are associated with machines and other capital goods, variable costs generally are associated with labor and raw materials. For example, wage-earning workers may be laid off or worked overtime as output changes. Other examples of variable costs include electric power to run the machines and freight charges to ship the final product.

paradox of value

At first, early economists were puzzled by a contradiction between necessities and value called the paradox of value. The paradox of value is the situation where some necessities, such as water, have little monetary value, whereas some non-necessities, such as diamonds, have a much higher value.

monopoly

At the opposite end of the spectrum from perfect competition is the monopoly. A monopoly is a market structure with only one seller of a particular product. This situation--like that of perfect competition--is an extreme case. In fact, the American economy has very few, if any, cases of pure monopoly--although the local telephone company or cable TV operator may come close. One reason we have so few monopolies is that Americans traditionally have disliked and tried to outlaw them. Another reason is that new technologies often introduce products that compete with existing monopolies. The development of the fax machine allowed businesses to send electronic letters that compete with the United States Postal Service. Later, E-mail became even more popular than the fax.

law of supply

Because the producer is receiving payment for his or her products, it should come as no surprise that more will be offered at higher prices. This forms the basis for the Law of Supply, the principle that suppliers will normally offer more for sale at higher prices and less at lower prices.

determinants of elasticity

Can the purchase be delayed? - A consumer's need for a product is sometimes urgent and cannot be put off. Whenever this happens, demand tends to be inelastic, meaning that the quantity of the product demanded is not especially sensitive to changes in price. Are adequate substitutes available? - The fewer substitutes available for a product, the more inelastic the demand. Does the purchase use a large portion of income? - Demands tends to be inelastic whenever the answer to this question is no.

certificates of deposit

Certificates of deposit (CDs) are one of the most common forms of investments available. Many people think of them as just another type of account with a depository institution, but they are really loans investors make to financial institutions. Because banks and others count on the use of these funds for a certain time period, they usually impose penalties when people try to cash in their CDs early.

common stock

Common stock represents basic ownership of a corporation. The owner of common stock usually receives one vote for each share of stock. This vote is used to elect a board of directors whose duty is to direct the corporation's business by setting broad policies and goals. The board also hires a professional management team to run the business on a daily basis.

comparative advantage

Comparative advantage is the ability of a country to produce a product relatively more efficiently, or at a lower opportunity cost. - Example: "A" can produce 40 pounds of coffee OR 8 pounds of nuts. The opportunity cost of producing 1 pound of nuts is 5 pounds of coffee (40/8 = 5). If "B"s opportunity cost is higher, then "A" has a comparative advantage.

corporations

Corporations account for approximately one-fifth of the firms in the United States and about 90 percent of all sales. A corporation is a form of business organization recognized by law as a separate legal entity having all the rights of an individual. This status gives the corporation the right to buy and sell property, enter into legal contracts, and to sue and be sued. People who would like to incorporate, or form a corporation, must file for permission from the national government or the state where the business will have its headquarters. If approved, a charter--a government document that gives permission to create a corporation--is granted. The charter states the name of the company, address, purpose of business, and other features of the business. The charter also specifies the number of shares of stock, or ownership certificates in the firm. These shares are sold to investors, called stockholders or shareholders. The money is then used to set up the corporation. If the corporation is profitable, it may eventually issue a dividend--a check representing a portion of the corporate earnings--to each stockholder.

market buying

Despite the importance of the organized exchanges, the majority of stocks in the United States are not traded on exchanges. Instead, they are traded on an over-the-counter market (OTC)--and electronic marketplace for securities that are not traded on an organized exchange.

horizontal mergers

Economists generally recognize two types of mergers. The first is a horizontal merger, which takes place when two or more firms that produce the same kind of product join forces. The merger of the two banks, Chase National and the Bank of Manhattan, is one suck example.

management negotiating tactics

Employers fought unions in a number of ways. Sometimes the owners called for a lockout, a refusal to let the employees work until management demands were met. Often violence erupted during lockouts, and troops were sometimes brought in to keep peace. At other times, management responded to a strike, or the threat of a strike, by hiring all new workers. Some owners even set up a company union--a union organized, supported, or run by employers--to head off efforts by others to organize workers.

regulatory agencies

Food and Drug Administration (1906) - enforces laws to ensure purity, effectiveness, and truthful labeling of food, drugs, and cosmetics; inspects production and shipment of these products Federal Trade Commission (1914) - administers antitrust laws forbidding unfair competition, price fixing, and other deceptive practices Federal Communications Commission (1934) - licenses and regulates radio and television stations and regulates interstate telephone, telegraph rates and services Securities and Exchange Commission (1934) - regulates and supervises the sale of listed and unlisted securities and the brokers, dealers, and bankers who sell them National Labor Relations Board (1935) - administers federal labor-management relations laws; settles labor disputes; prevents unfair labor practices Federal Aviation Administration (1958) - oversees the airline industry Equal Employment Opportunity Commission (1964) - investigates and rules on charges of discrimination by employers and labor unions Environmental Protection Agency (1970) - protects and enhances the environment Occupational Safety and Health Administration (1970) - investigates accidents at the workplace; enforces regulations to protect employees at work Consumer Product Safety Commission (1972) - develops standards of safety for consumer goods Nuclear Regulatory Commission (1974) - regulates civilian use of nuclear materials and facilities Federal Energy Regulatory Commission (1977) - supervises transmission of the various forms of energy

law of demand

For practically every product or service, higher prices are associated with a smaller amount demanded. Conversely, lower prices are associated with larger amounts demanded. This known as the Law of Demand, which states that the quantity demanded of a good or service varies inversely with its price. In other words, when the price goes up, quantity demanded goes down. Likewise, when the price goes down, quantity demanded goes up.

bond ratings

Fortunately, investors have a way to check the quality of bonds. Two major corporations, Standard & Poor's and Moody's, publish bond ratings. They rate bonds on a number of factors, including the basic financial health of the issuer, the ability to make the future coupon and principal payments, and the issuer's past credit history. The bond ratings use letters scaled from AAA, which represents the highest investment grade, to D, which generally stands for default. If a bond is in default, the issuer has not kept up with the interest or the par value payments. These ratings are widely publicized, and investors can find the rating of any bond they plan to purchase.

free trade

Free traders favor fewer or even no trade restrictions. - Free traders admit that national security is a compelling argument for trade barriers. They believe, however, that the advantages of having a reliable source of domestic supply must be weighed against the disadvantages that the supply will be smaller and possibly less efficient than it would be with free trade. - Many people are willing to accept the infant industries argument, but only if protection will eventually be removed so that the industry is forced to compete on its own. The problem is that industries used to having some protection are normally unwilling to give it up. - (protecting domestic jobs) Most free traders believe that it is best not to interfere, and thereby keep pressure on threatened industries to modernize and improve. If prices get too high, substitute products will be found and protected jobs will still be lost. Free traders argue that the profit-and-loss system is one of the major features in the American economy. Profits reward the efficient and hard working, while losses eliminate the inefficient and weak.

modified free enterprise system

Government takes part in economic affairs for several reasons. One is to promote and to encourage competition for the benefit of society. Another is to prevent monopolies and reduce the costs of imperfect competition wherever possible. A third is to regulate industries in which a monopoly is clearly in the best interest of the public. A fourth is to fulfill the need for public goods. As a result, today's modified private enterprise economy is a mixture of different market structures, different kinds of business organizations, and varying degrees of government regulation.

role of government

Government--whether national, state, or local--has an economic role to play that reflects the desires, goals, and aspirations of its citizens. Government has become involved in the economy because Americans want its involvement. Consequently, it has become a protector, provider of goods and services, consumer, regulator, and promoter of national goals. The role of government is normally justified whenever its benefits outweigh its costs. The government protects property rights, enforces contracts, and generally tries to make sure that everyone follows the "rules of the game" to ensure an efficient and fair economy. In the process of providing, government consumes factors of production just like any other form of business. In recent years the government has grown so large that it is now the second largest consuming unit in the economy, trailing only the consumer sector. The regulatory role of government is often controversial. Most businesses do not like to be told how to run their affairs, and they argue that consumers can always sue in court if there are problems. On the other hand, many consumers feel that they do not always know when they are at risk-as in the case of potential food poisoning from unsafe food preparation practices.

dividends

If a corporation is profitable, it may eventually issue a dividend--a check representing a portion of the corporate earnings--to each stockholder, starting with preferred stockholders.

market equilibrium

In a competitive market, the adjustment process moves toward market equilibrium--a solution in which prices are relatively stable, and the quantity of goods and services supplied is equal to the quantity demanded. In a figure, equilibrium is reached when the price is $15 and the quantity supplied is six units. How does the market find this equilibrium on its own? Why did the market settle at $15, rather than $20, or $10, or at some other price? To answer these questions, we have to examine the reactions of buyers and sellers to market prices. In addition, we assume that neither knows the full price, so we'll have to find it using trial and error.

market economy

In a market economy, people and firms act in their own best interests to answer the WHAT, HOW, and FOR WHOM questions. In economic terms, a market is an arrangement that allows buyers and sellers to come together in order to exchange goods and services. A market might be in a specific location, such as a farmers' market or a flea market. A list of phone numbers for lawn-mowing services posted on a local bulletin board also acts as a market. As long as a mechanism exists for buyers and sellers to get together, a market can exist. In a market economy, people's decisions act as votes. When consumers buy a particular product, they are casting their dollar "votes" for that product. After the "votes" are counted, producers know what people want. Because producers are always looking for goods and services that consumers will buy, the consumer plays a key role in determining WHAT to produce.

traditional economy

In a society with a traditional economy, the allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom. Habit and custom also dictate most social behavior. Individuals are not free to make decisions based on what they want or would like to have. Instead, their roles are defined by the customs of their elders and ancestors.

value

In economics, value refers to a worth that can be expressed in dollars and cents. For something to have value, economists decided, it must be scarce and have utility. This is the solution to the paradox of value. Diamonds are scare and have utility--and therefore they possess a value that can be stated in monetary terms. Water has utility, but is not scarce enough in most places to give it much value. Therefore, water is less expensive, or has less value, than diamonds.

bond yields

In order to compare bonds, investors usually compute the bond;s current yield, the annual interest divided by the purchase price. If an investor paid $950 for a bond, the current yield would be $60 divided by $950, or 6.32 percent. If the investor paid $1,100 for the bond, the current yield would be $60 divided by $1,100, or 5.45 percent. Although it may appear as if the issuer fixes the return on a bond when the bond is first issued, the interest received and the price paid determine the actual yield on the bond.

foreign exchange

In the field of international finance, foreign exchange-foreign currencies used to facilitate international trade-are bought and sold in the foreign exchange market. This market includes banks that help secure foreign currencies for importers, as well as banks that accept foreign currencies from exporters. - Example: Suppose that one pound sterling, L1, is equal to $1.58. If the business suits are valued at L1,000 in London, the American importer can go to an American bank and buy a L1,000 check for $1,580 plus a small service charge. The American firm then pays the British merchant, and the suits are imported.

utility

It turned out that for something to have value, it must also have utility, or the capacity to be useful and provide satisfaction. Utility is not something that is fixed or measurable, like weight or height. Instead, the utility of a good or service may vary from one person to the next. A good or service does not have to have utility for everyone, only utility for some.

price

It turns out that something as simple as a price--the monetary value of a product as established by supply and demand--is a signal that helps us make our economic decisions. Prices communicate information and provide incentives to buyer and sellers. High prices are signals for producers to produce more and for buyers to buy less. Low prices are signals for producers to produce less and for buyers to buy more.

elasticity of supply

Just as demand has elasticity, there is elasticity of supply. Supply elasticity is a measure of the way in which quantity supplied responds to a change in price. If a small increase in price leads to a relatively larger increase in output, supply is elastic. If the quantity supplied changes very little, supply is inelastic. What is the difference between supply elasticity and demand elasticity? Actually, there is very little difference. If quantities are being purchased, the concept is demand elasticity. If quantities are being brought to market for sale, the concept is supply elasticity. Keep in mind that elasticity is simply a measure of the way quantity adjusts to a change in price.

market efficiency

Many things influence the price of equities. Some companies may have relatively few outstanding shares to be traded, while others have a large number. Some companies are profitable; others are not. Expectations are especially important. For example, two companies may be equal in all respects, but one may have far better prospects for growth. As a result, stock prices can vary considerably from one company to the next. The difficulty facing the investor, then, is to decide which to buy--and which to avoid.

marginal utility

Marginal utility--the extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product--is an important extension of this concept because it explains so much about demand. The reason we buy something in the first place is because we feel the product is useful and that it will give us satisfaction. However, as we use more and more of a product, we encounter the principle of diminishing marginal utility, which states that the extra satisfaction we get from using additional quantities of the product begins to diminish.

monopolistic competition

Monopolistic competition is the market structure that has all the conditions of perfect competition except for identical products. By making its product a little different, the monopolistic competitor tries to attract more customers and monopolize a small portion of the market. In contrast to perfect competition, monopolistic competition utilizes product differentiation--real or imagined differences between competing products in the same industry. Most items produces today--from the many brands of athletic footwear to personal computers--are differentiated. The differentiation may even be extended to store location, store design, manner of payment, etc. Under monopolistic competition, similar products generally sell within a narrow price range. The monopolistic aspect is the seller's ability to raise the price within this narrow range. The competitive aspect is that if sellers raise of lower the price enough, customers will forget minor differences and change brands.

oligopoly

Oligopoly is a market structure in which a few very large sellers dominate the industry. The product of an oligopolist may be differentiated--as in the auto industry. The exact number of firms in the industry is less important then the ability of any single firm to cause a change in output, sales, and prices in the industry as a whole. Because of these characteristics, oligopoly is further from perfect competition than is monopolistic competition. In the United States, many markets are already oligopolistic, and many more are becoming so. Pepsi and Coke dominate the soft drink market. McDonald's, Burger King, and Wendy's dominate the fast-food industry. A few large corporations dominate other industries, such as the domestic airline, automobile, and long-distance telephone service industries.

multinationals

Other large corporations have become international in scope. A multinational is a corporation that has manufacturing or service operations in a number of different countries. It is, in effect, a citizen of several countries at one time. As such, a multinational is subject to the laws of, and is likely to pay taxes in, each country where it has operations. General Motors, Nabisco, British Petroleum, Royal Dutch Shell, Mitsubishi, and Sony are examples of global corporations that have attained worldwide economic importance. Multinationals are important because they have the ability to move resources, goods, services, and financial capital across national borders. A multinational with its headquarters in Canada, for example, is likely to sell bonds in France. The proceeds may then be used to expand a plant in Mexico that makes products for sale in the United States. Multinationals may also be conglomerates if they make a number of unrelated products, but when they conduct their operations in several different countries they are more likely to be called a multinational. Most economists, however, welcome the low cost production and quality that competition in the global economy brings. They also believe a greater use of research and technology will raise the standard of living for all people. On balance, the advantages of multinationals far outweigh the disadvantages.

price floors

Other prices often are considered too low and so steps are taken to keep them higher. The minimum wage, the lowest legal wage that can be paid to most workers, is a case in point. The minimum wage is actually a price floor, or lowest legal price that can be paid for a good or service. Is the minimum wage good or bad for the economy? Certainly the minimum wage is not as efficient as a wage set by supply and demand, but not all decisions in our economy are made on the basis of efficiency. The basic argument in favor of the minimum wage is that it raises poor people's incomes. A federal minimum wage is evidence that the small measure of equity provided by the minimum wage--with equity being one of our seven major economic and social goals--is preferred to the loss of efficiency.

command economy

Other societies have a command economy, one in which a central authority makes most of the WHAT, HOW, and FOR WHOM decisions. Economic decisions are made by the government: these people have little, if any, influence over how the basic economic questions are answered.

opportunity cost

People often think of cost in terms of dollars and cents. To an economist, however, cost often means more than the price tag placed on a good or service. Instead, economists think broadly in terms of opportunity cost--the cost of the next best alternative use of money, time, or resources when one choice is made rather than another. Even time has an opportunity cost, although you cannot always put a monetary value on it. The opportunity cost of taking an economics class, for example, is the history or math class that you could not take at the same time. Thus, part of making economic decisions involves recognizing and evaluating the cost of alternatives as well as making choices from among the alternatives.

demand

People sometimes think of demand as the desire to have or to own a certain product. In this sense, anyone who would like to own a swimming pool could be said to "demand" one. In order for demand to be counted in the marketplace, however, desire is not enough; it must coincide with the ability and willingness to pay for it. Only those people with demand--the desire, ability, and willingness to buy a product--can compete with others who have similar demands.

perfect competition

Perfect competition is characterized by a large number of well-informed independent buyers and sellers who exchange identical products. It represents a theoretically ideal situation that is used to evaluate other markets structures.Five major conditions characterize perfectly competitive markets: a large number of buys and sellers, buyers and sellers deal in identical products, each buyer and seller acts independently, buyers and sellers are reasonably well-informed about products and prices, and lastly, buyers and sellers are free to enter into, conduct, or get out of business. Under perfect or pyre competition, each individual firm is too small to influence price. The firm views demand differently than the market does. In a perfectly competitive market, supply and demand set the equilibrium price. Then, each firm selects a level of output that will maximize its profits at that price.

change in quantity demanded

Point "A" on a demand curve shows that six CDs are demanded when the price is $15. When the price falls to $10, however, 10 CDs are demanded. This movement from point "A" to point "B" shows a change in quantity demanded--a movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price. We already know that the principle of diminishing marginal utility provides an intuitive explanation of why the demand curve is downward sloping.

preferred stock

Preferred stock represents nonvoting ownership shares of the corporation. These stockholders receive dividends before common stockholders receive theirs. If the corporation goes out of business, and is some property and funds remain after other debts have been paid, preferred stockholders get their investment back before common stockholders. Because the stock is nonvoting, preferred stockholders do not have the right to elect members to the board of directors.

scarcity

Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have. Scarcity affects almost every decision we make. Economics is the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources.

price ceilings

Some cities, especially New York City, have a long history of using rent controls to make housing more affordable. This is an example of a price ceiling, a maximum legal price that can be charged for a product. The price ceiling, like any other price, affects the allocation of resources--but not in the way intended. The attempt to limit rents makes some people happy, until their buildings begin to deteriorate. Others, including landlords and potential renters on waiting lists, are unhappy from the beginning. Finally, some scarce resources--those used to build and maintain apartments--are slowly shifted out of the rental market.

protectionism

Some people, known as protectionists, favor trade barriers that protect domestic industries. - Protectionists argue that without trade barriers, a country could become so specialized that it would end up becoming too dependent on other countries. - The infant industries argument-the belief that new or emerging industries should be protected from foreign competition-is also used to justify trade barriers. Protectionists claim that these industries need to gain strength and experience before they can compete against developed industries in other countries. Trade barriers would give them the time they need to develop. - A third argument-and one used most often-is that tariffs and quotas protect domestic jobs from cheap foreign labor. Protectionist measures provide temporary protection for domestic jobs. This is especially attractive to people who want to work in the communities where they grew up.

futures

Sometimes the exchange takes place later on, rather than right away. This can be arranged with a futures contract--an agreement to buy or sell at a specific date in the future at a predetermined price. For example, a buyer agrees to buy a specified amount of gold at $280 an ounce from a seller, who promises delivery in six months. When the settlement date arrives, the buyer takes possession of the gold and pays the seller $280--regardless of the market price. Futures markets are the marketplaces in which futures contracts, or "futures," are bought and sold. Many of these markets are affiliated with the grain and livestock exchanges that originated in the Midwest. Futures markets include the New York Mercantile Exchange, the Chicago Board of Trade, and the Kansas City Board of Trade.

supply

The concept of supply is based on voluntary decisions made by producers, whether they are proprietorships working out of home offices or large corporations operating out of down-town corporate headquarters. For example, a producer might decide to offer one amount for sale at one price and a different quantity at another price. Supply, then, is defined as the amount of a product that would be offered for sale at all possible prices that could prevail in the market.

non-price factors (PIT)

The demand curve can change for several reasons. When this happens, a new schedule or curve must be constructed to reflect the new demand at all possible prices. Demand can change because of changes in the price of related goods, income, and tastes. Changes in consumer income can cause a change in demand. When your income goes up, you can afford to buy more goods and services. As incomes rise, consumers are able to buy more products at each and every price. When this happens, the demand curve shifts to the right. Consumers do not always want the same things. Advertising, news reports, fashion trends, the introduction of new products, and even changes in the season can affect consumer tastes. For example, when a product is successfully advertised in the media or on the Internet, its popularity increases and people tend to buy more of it. If consumers want more of an item, they would buy more of if at each and every price. As a result, the demand curve shifts to the right.

determinants of supply elasticity

The elasticity of a business's supply curve depends on the nature of its production. If a firm can adjust to new prices quickly, then supply is likely to be elastic. If the nature of production is such that adjustments take longer, then supply is likely to inelastic. The elastic of supply is different from the elasticity of demand in several important respects. First, the number of substitutes has no bearing on the elasticity of supply. In addition, considerations such as the ability to delay the purchase of the portion of income consumed have no relevance to supply elasticity even though they are essential for demand elasticity. Instead, only production considerations determine supply elasticity. If a firm can react quickly to higher or lower prices, then supply is likely to be elastic. If the firm takes longer to react to a change in prices, then supply is likely to be inelastic.

CELL factors

The factors of production, or resources required to produce the things we would like to have, are land, capital, labor, and entrepreneurs. All four are required if goods and services are to be produced. - In economics, land refers to the "gifts of nature," or natural resources not created by humans. Because only so many natural resources are available at any given time, economists tend to think of land as being fixed, or in limited supply. - Another factor of production is capital--the tools, equipment, machinery, and factories used in the production of goods and services. Such items are also called capital goods to distinguish them from financial capital, the money used to buy the tools and equipment used in production. - A third factor of production is labor--people with all their efforts, abilities, and skills. This category includes all people except for a unique group of individuals called entrepreneurs, which we single out because of their special role in the economy. - Some people are special because they are the innovators responsible for much of the change in our economy. Such an individual is an entrepreneur, a risk-taker in search of profits who does something new with existing resources. Entrepreneurs often are thought of as being the driving force in an economy because they exhibit the ability to start new businesses or bring new products to market. They provide the initiative that combines the resources of land, labor, and capital into new products.

fixed costs

The first category is fixed cost--the cost that a business incurs even if the plant is idle and output is zero. It makes no difference whether the business produces nothing, very little, or a large amount. Total fixed cost, or overhead, remains the same.

trade-offs

The first thing we must recognize is that people face trade-offs, or alternative choices, whenever they make an economic decision. To help make the decision, constructing a grid shows one way to approach the problem. Using a decision-making grid is one way to analyze an economic problem. Among other things, it forces you to consider a number of relevant alternatives. For another, it requires you to identify the criteria used to evaluate the alternatives. Finally, it forces you to evaluate each alternative based on the criteria you selected.

goods and services

The first type of economic product is a good--an economic want, such as a book, car, or compact disk player. A consumer good is intended for final use by individuals. When manufactured goods are used to produce other goods and services, they are called capital goods. Any good that lasts three years or more when used on a regular basis is called a durable good. A nondurable good is an item that lasts for less than three years when used on a regular basis.

barriers to trade

The government can use a quota to keep foreign goods out of the country. Quotas can even be set as low as zero to keep a product from ever entering the country. More typically, quotas are used to reduce the total supply of a product to keep prices high for domestic producers. - Example: In 1981, domestic automobile producers faced intense competition from lower-priced Japanese automobiles. Rather than lower their own prices, domestic manufacturers wanted President Ronald Reagan to establish import quotas on Japanese cars, leading to a time when Americans had fewer cars from which to choose, and the prices of all cars were higher then they otherwise have been. - Many imported foods are subject to health inspections far more rigorous then those given to domestic foods. For years this tactic was used to keep beef grown in Argentina out of the United States. - Another tactics is to require a license to import. If the government is slow to grant the license, or if the license fees are too high, international trade is restricted.

sole proprietorship

The most common form of business organization in the United States is the sole proprietorship or proprietorship--a business owned and run by one person. Although relatively the most numerous and profitable of all business organizations, proprietorships are the smallest in size. They earn about one-sixth of the net income earned by all businesses, even though they make only a fraction or total sales. The sole proprietorship is the easiest form of business to start because it involves almost no requirements except for occasional business licenses and fees. Most proprietorships are ready for business as soon as they set up operations. You could start a proprietorship simply by putting up a lemonade stand in your front yard. Someone else might decide to mow lawns, do gardening, or open a restaurant. A proprietorship can be run on the Internet, out of a garage, or from an office in a professional building.

public disclosure

The purpose of public disclosure is to provide the market with enough data to prevent market failures due to inadequate information. While there is some cost involved, and while some businesses might prefer to not disclose anything, the benefits to society far outweigh the costs. One of the more potent weapons available to the government is public disclosure, or the requirement that businesses reveal information to the public. The degree of disclosure is more extensive than most people realize, going beyond the content labels that the Food and Drug Administration requires on foods and medicines. There are also disclosure regulations for businesses that lend to consumers. If you obtain a credit card or borrow money to buy a car, the lender will take considerable time to explain how the monthly interest is computed, the length of the loan, the size of the payments, and other important terms of the agreement. This is not an act of kindness on the lender's part--federal law requires that lenders make these disclosures so that consumers know what they are getting into. Finally, there are "truth-in-advertising" laws that prevent sellers from making false claims about their products.

change in quantity supplied

The quantity supplied is the amount that producers bring to market at any given price. A change in quantity supplied is the change in amount offered for sale in response to a change in price. For example, four CDs are supplied when the price is $15. If the price increases to $20, six CDs are supplied. If the price then changes to $25, seven units are supplied. These changes illustrate a change in the quantity supplied which--like the case of demand--shows as movement along the supply curve. Note that the change in quantity supplied can be an increase or a decrease, depending on whether more less of a product is offered.

revenue

The total revenue is the number of units sold multiplied by the average price per unit. If 7 units are sold at $15 each, the total revenue is $105. The second, and more important, measure of revenue is marginal revenue, the extra revenue associated with the production and sale of one additional unit of output.

union negotiating tactics

Unions tried to help workers by negotiating for higher pay, better hours and working conditions, and job security. I an agreement could not be reached, workers could strike, or refuse to work until certain demands were met. Unions also pressured employers by having the striking workers picket, or parade in front of the employer's business carrying signs about the dispute. The signs might ask other workers not to seek jobs with the company, or they might ask customers and suppliers to take their business elsewhere. If striking and picketing did not settle the dispute, a union could organize a boycott--a mass refusal to buy products from targeted employers or companies. If a boycott was effective, it hurt the company's business.

wealth

Wealth, in an economic sense, is the accumulation of those products that are tangible, scarce, useful, and transferable from one person to another. While goods are counted as wealth, services are not because they are intangible. However, this does not mean that services are not useful. Indeed, when Adam Smith wrote "The Wealth of Nations" in 1776, he was referring specifically to the ability and skills, of a nation's people as the source of its wealth. To illustrate, if a country's material possessions were taken away, its people, through their skilled efforts, could restore these possessions. On the other hand, if a country's people were taken away, its wealth would deteriorate.

vertical mergers

When firms involved in different steps of manufacturing or marketing join together, we have a vertical merger. An automaker merging with a tire company is one example of a vertical merger. Another is the US Steel Corporation. At one time, it mined its own core, shipped it across the Great Lakes, smelted it, and made steel into many different products. Vertical mergers take place when companies believe that it is important to protect themselves against the loss of suppliers.

bonds

When the government or firms need to borrow funds for long periods, they often issue bonds. Bonds are long'term obligations that pay a stated rate of interest for a specified number of years. A bond has three main components: the coupon, or the stated interest on the debt; the maturity, or the life of the bond; and the par value--the principal or the total amount initially borrowed that must be repaid to the lender at maturity.