Economics Unit 1: Fundamentals
Motivations of the Entrepreneur:
- profit motive - provide jobs - innovation - improve society
image link: https://www.usatestprep.com/modules/gallery/files/422/42252/42252.png Explain how trade could be responsible for the change in the production possibilities curve shown above.
Canada increased imports of resources used in the production of both consumer and capital goods
Production Possibilities Curve:
shows the different combinations of two goods that can be produced using full employment of resources. Any point: - on the graph represents efficiency - inside the curve= inefficient - outside the curve= impossible...however there are 3 ways to get there such as more resources, investment in human capital (training), & technology
Lottery:
resources given out completely by luck & chance, random & completely fair because the chances of acquiring these resources are the same for everyone. ex.- the draft
Personal Characteristics:
resources given to those entities that meet certain qualifications, generally not positive if you don't have these specific qualifications. ex.- jobs, scholarships, college admissions, welfare
Under which economic and social goal would unemployment payments fall?
security
Kathy, Sue, and Christina own a bakery. Each day all three women spend hours baking cakes, decorating cakes, and packaging cakes. Which economic concept would help them become more efficient?
specialization
What conclusion might be drawn from specialization for businesses?
workers who receive higher pay for specialization will be encouraged to increase productivity for increased wages
image link: https://www.usatestprep.com/modules/gallery/files/16/1640/1640.gif According to the graph...
workers with some college have a higher annual income than workers with a high school diploma
What is the desired effect of the negative incentive of the speeding ticket upon future driving?
you will be more aware of your speed when driving
Allocation Strategies:
- force - price - personal characteristics - sharing - lottery - authority - first come, first serve - majority rule - contest
Role of Government in the U.S. Economy:
- provide public goods & services that are not profitable for businesses. paid for using taxes (ex: public education, courts, national defense) - redistribute income: take tax $ from one group of individuals or firms & give it to other individuals or firms - protect property rights (copyright= intellectual property patent= physical items) - resolve market failures: externalities like air pollution. as well as monopolies, which aren't good for consumers, so the government prosecutes companies who form these. - government regulations: keep the population safe. (quality, environmental, or labor)
image link: https://www.usatestprep.com/modules/gallery/files/4/441/441.gif 1. In this production possibilities graph, what MIGHT cause the line (frontier) to move to the left? 2. On a production possibilities curve, where would a society dealing with unemployment be producing?
1. a shortage of needed raw materials 2. inside the curve
4 Factors of Production (Productive Resources):
1. land (natural resources), any resource needed to produce what comes from the earth. 2. labor (human resources & human capital), the people that produce the product along with their knowledge & skills. 3. capital (physical capital), supplies/resources that are needed to produce a product. 4. entrepreneurship, the "owner" or risk taker in the business.
A company is trying to decide how many workers to hire. They want to maximize profits. What is the maximum number of workers the company can hire to maximize profits while not having marginal costs exceed marginal revenue? Chart- # of Workers: Total Costs: Marginal Costs: Total Revenue: Marginal Revenue: Total Profit= 0: $50.00: 0: 0: 0: $(50.00) 1: $140.00: $12.86: $105.00: $15.00: $(35.00) 2: $230.00: $6.92: $300.00: $15.00: $70.00 3: $320.00: $5.00: $570.00: $15.00: $250.00 4: $410.00: $3.75: $930.00: $15.00: $520.00 5: $500.00: $3.21: $1,350.00: $15.00: $850.00 6: $590.00: $4.50: $1,650.00: $15.00: $1,060.00 7: $680.00: $4.74: $1,935.00: $15.00: $1,210.00 8: $770.00: $10.00: $2,070.00: $15.00: $1,300.00 9: $860.00: $15.00: $2,160.00: $15.00: $1,300.00 10: $950.00: $22.50: $2,220.00: $15.00: $1,270.00 11: $1,040.00: 0: $2175.00: $15.00: $1,135.00
9 workers
image link: https://www.usatestprep.com/modules/gallery/files/33/3309/3309.png According to the information from the U.S. Department of Labor, which factor has the GREATEST impact on raising labor productivity?
education & skill
Mixed Economy:
a combination of economies- both the government & private individuals make decisions. - what to produce? consumer & government preferences - how to produce? businesses seeking profits & government - for whom to produce? purchasing power & government - private ownership: law decides property disputes. some property is government owned to provide public goods & services - profit motive: entrepreneurs can freely start businesses - consumer sovereignty: produce what consumers demand. government provides certain public goods & services - competition: high levels of competition encouraged - government regulation: businesses may have to follow government labor, consumer safety & environmental laws - broad social & economic goals: freedom, security, equity, growth, efficiency, stability, full employment & sustainability (all)
Scarcity:
a condition that exists when we have unlimited wants, but limited resources. when the demand is greater than the supply. ex.- time is non-renewable. all resources in the right setting are scarce.
As a function of government in a modern market economy, how MIGHT a government respond to a market failure?
a government might intervene in the market to reestablish efficiency
Traditional Economic System:
based on ritual, habit, culture & tradition. - what to produce? based on ritual, habit, custom or tradition - how to produce? people grow & make things the same way their ancestors did - for whom to produce? distributed using the methods used by past generations - private ownership: based on historical property rights - profit motive: people provide goods & services same as their ancestors did - consumer sovereignty: change in consumer tastes would not change what is produced - competition: unlikely there is much competition - government regulation: decisions are based on culture or tradition - broad social & economic goals: security, stability, & full employment
The United States Congress passes a law requiring that all businesses, regardless of size, pay 100% of employees' healthcare costs. What is a likely result of this action?
businesses may be forced to raise their prices
Marginal Benefit:
additional positive value one receives from undertaking one more unit of an action. ex.- lower cost of toilet paper @ Costco
In economics, when discussing the factors of production, the term land refers to...
all natural resources
Command Economy:
an economy where government controls everything or most everything. - what, how & for whom to produce? government decides - private ownership: property rights are controlled by the government. little private property. - profit motive: property goes to the central government - consumer sovereignty: little to no say in what's produced or how much they can get - competition: no competition - government regulation: government makes all the decisions - broad social & economic goals: security, equity, stability & full employment
Market Economy:
an economy where private individuals make their own decisions with no government involvement. - what to produce? decisions based on supply & demand (price); firms produce what they believe consumers want - how to produce? businesses decide how to produce using methods they believe will result in selling their good or service for the most profit - for whom to produce? consumers- who are willing & able to pay for the goods and/or services - private ownership: individuals own productive resources - profit motive: owners keep most of all profit - consumer sovereignty: produce what they think consumers are willing & able to buy - competition: high levels of competition - government regulation: focus on protecting private property & consumers from harm, & ensuring competition - broad social & economic goals: freedom, growth, efficiency, & sustainability
An increase in the capital utilized in the production process leads to what?
an increase in workers' productivity
Based on the information in the table and the cost of soda is $1.00, how many sodas should you drink? Soda Consumption Table: Marginal Benefit & # of Sodas $1.25= 1 $1.10= 2 $.95= 3 $.75= 4
b. 2
Which of these would BEST satisfy a human need? A) automobile B) bread C) iPod D) newspaper
b. bread - a want is the way humans express their needs. The planet made it through millennia without iPods, Corvettes, or USA Todays...
Which example of productive resources is matched correctly? A) land and surgeon B) capital and oil rig C) labor and telephone wire D) entrepreneurship and rice field
b. capital & oil rig - since an oil rig is a machine that is used to make something else, a definition of "capital."
Which scenario is the BEST example of how the government would act in a mixed market economy? A) The government requires a factory to produce surplus goods for the use of the military. B) The government stops a factory from producing imitations of an expensive type of purse. C) The government allows only two competitors to offer goods for sale on the country's highways. D) The government imposes a limit on the number of television sets that can be exported annually.
b. the government stops a factory from producing imitations of an expensive type of purse
How do consumers exercise their power in the U.S. economy?
by deciding what to buy
What type of resource does the data in the chart represent? A) capital B) financial C) human D) natural Software Economy Chart (2007 to 2011): - Global Information Technology (IT) employment will rise by 7.1 million jobs - More than 100,000 new businesses will emerge as a result of the growing IT field - IT business will be responsible for over 25% of the new jobs throughout the world
c. human
Which statement would NOT be an option for a society trying to solve the problem of scarcity? A) Societies can stimulate economic growth. B) Societies can reduce their expectations. C) Societies can encourage population growth. D) Societies can improve the use of available resources.
c. societies can encourage population growth
background info: Over 80% of the people living in the Apac District in Uganda are farmers. However, profits are minimal due to the high costs of farming with poor tools and manual labor. Apac would benefit from a stimulation of which type of resource?
capital
- The Soviet Planning Commission (Gosplan) decides how many tons of coal should be produced. - Soviet doctors are employees of the state; any fee they charge for home treatment is regulated by the state. - Gracie and her family live in housing which the federal government provides at a reduced rent. - Norton is retired now, so he collects Social Security.
command
The profit motive is lowest in which type of economy?
command economy has the lowest
Which of these is MOST LIKELY a result of a high unemployment rate in the United States? A) increased revenues B) increased demand for consumer goods C) increased production of capital goods D) greater government expenditures for transfer payments
d. greater government expenditures for transfer payments
background info: "In 1964, Herr's® embarked on a packaging venture that helped revolutionize the company's sales. For years, Herr's® chips were sold in wax paper bags for 5, 10, and 15 cents a bag, depending on size. Herr's® also offered a twin pack (two bags inside a larger cellophane package) at 49 cents. A packaging salesman convinced Jim to try selling chips in a 20-ounce cardboard barrel. The barrels resembled the popular, wax-lined ice cream cartons and could be assembled affordably on site. The sturdy barrels would prevent chips from breaking and protect them from light, which caused them to become stale."- http://www.herrs.com/aboutherrs/history.html Which statement BEST describes how the input cost of the new packaging affects the output to the costumers? A) The costumers did not like the barrel, because it took up too much room. B) The costumers liked to barrel, because it was useful for holding other items. C) The costumers did not like the barrel, because it the market price of chips had to be increased. D) The costumers liked the barrel, because the chips were able to stay fresher longer and there were fewer broken chips.
d. the costumers liked the barrel, because the chips were able to stay fresher longer and there were fewer broken chips
Which scenario is LEAST LIKELY to occur in a market economy? A) The government pays farmers to stop planting certain crops for a period of time. B) The government stops a factory from producing imitations of an expensive type of purse. C) The government offers tax breaks to companies that meet efficiency goals in their products. D) The government allows only two competitors to offer goods for sale on the country's highways.
d. the government allows only two competitors to offer goods for sale on the country's highways
Which American socioeconomic class is impacted by scarcity? A) the poor B) the rich C) the middle class D) the poor, middle class, and the rich
d. the poor, middle class, and the rich - although the rich may be able to afford more if there is a rise in price due to the shortage created in the marketplace, they still feel the effects.
What are the advantages of a market economy?
economic freedom + efficiency
David wants to buy a pizza and go to the movies. However, he only has enough money to do one or the other. In order to decide what to spend his limited money on, what must David do?
engage in a rational decision making process
Full Employment (social economic goal):
ensuring that all those who are willing to work have jobs. (all except Market- Traditional, Command, Mixed)
How does the presence of entrepreneurs help a country's economy?
entrepreneurs help to create jobs
Equity:
fairness within the economy. equal access to jobs, goods & services. (Command & Mixed)
How might firms BEST use marginal analysis to determine price and output when there are additional costs related to hiring a new worker?
firms might maximize revenue by raising price or output.
image link: https://www.usatestprep.com/modules/gallery/files/115/11506/11506.jpg Which choice BEST describes the general trend for the countries shown, for the period 2008 - 2010?
generally rising output
From 7 PM to 10 PM, Josh can either attend a basketball game, a wrestling match or a concert. Suppose that Josh decides to attend the wrestling match and thinks to himself that if he did not go to the match he would go to the concert. Then the opportunity cost of attending the wrestling match is...
going to the concert
In a mixed economy, these functions are generally the responsibility of which group? - Provide public goods - Regulate market failures - Promote economic growth
government
Economics:
how individuals, businesses, + governments allocate (divide) resources. often called the study of choices.
background info: Europe was hurt by the financial crisis in 2008. High unemployment hit all areas of the population. However, the group that was hit the hardest were young people, ages 18-25 years of age. Many of these young people ended up leaving and moving to other areas looking for work. Many new initiatives and educational programs in the European Union are aimed at young people to give them better educational and vocational skills. What is the European Union making an investment in to help improve the lives of the young people?
human capital
Labracorp is looking to hire an unknown number of workers. Jim wants to be one of those workers. What information would Labracorp need in order to make a rational economic decision regarding Jim's employment?
if Jim's marginal revenue is greater than his marginal cost
Rational Decision Making:
if the benefit is greater than the cost.
background info: Gary is in the market for a used car and finds one in the classified ads. The seller tells him that there are no issues with the car and it has never been wrecked. He calls the seller and they negotiate a deal. Both buyer and seller shake hands, sign the papers, and Gary drives off with the car. In this passage, what would make Gary's transaction non-beneficial?
if the car had actually been in a wreck
Growth:
increasing the production of goods & services over time. (Market & Mixed)
What is the best way that a government can encourage & improve productivity of their citizens as a whole group?
investing in education & increase their skills
background info: Joe has purchased a new bike for $500. The taxes on the bike add another $30 to the total, making his final cost $530. In this situation, the taxes paid by Joe are an example of...
involuntary exchange
How does voluntary exchange promote economic progress?
it makes businesses seek lower costs through mass production
In economics, what term refers to all natural resources?
land
Although specialization increases productivity, one disadvantage is...
loss of flexibility among workers
Sustainability:
maintaining an upward trend of Real GDP over the long run. (Market & Mixed)
Why do businesses specialize labor?
make economies more efficient
"Human wants are greater than the resources that are available to satisfy them." This implies the need for...
making choices to allocate resources
Sharing:
resources are given to all parties, but difficult to do this if the resources cannot be divided or distributed. ex.- police, fire, library, public school, parks & recreation
Juan realizes that if he studies an extra hour for his test, he will score five points higher. For each extra hour spent studying, he is getting one hour less sleep. When deciding whether to spend an additional hour studying or sleeping, Juan is engaged in what economic activity?
marginal analysis
Marginal Cost:
marginal in economics ALWAYS means additional. refers to the additional amount of effort, expense, or time one incurs from undertaking one more unit of an action. ex.- buying in bulk
- Alice thinks that her community needs another discount computer store so she decides to start her own business. - Tracy refused to buy a pair of jeans because they cost too much. - Soviet doctors may treat patients at home for a fee. - Stock market prices decline in Tokyo because of large offerings of steel stocks for sale. - To increase his income, Huang Peilin raises chickens, ducks, and geese which he and his family sell at a local free market in norther China.
market
In which type of economy do consumers have the most sovereignty?
market economy - there is not government influence or regulation of consumer choices. Consumers have full sovereignty to decide what, how, and for whom to produce.
Which economic system limits private ownership in order to provide public goods (parks) and services (fire and police)?
mixed economy - the only ones that have some private ownership of property while at the same time the government steps in to provide those public goods that the community needs.
Incentives:
motivate you to do or to not do something. they can be positive or negative.
image link: https://www.usatestprep.com/modules/gallery/files/422/42249/42249.png The movement from C1 to C2 on the production possibilities curve above could be caused by...
new resources or technology used only in the production of capital goods
Why would the widespread pirating of goods be damaging to a market economy?
no voluntary exchange, so people aren't being paid for what they specialize in
"Marginal benefit" is MOST related to what economic concept? Given definition of marginal benefit: a gain from an increase or loss from a decrease in the consumption of a good or service.
opportunity cost - remember that opportunity refers to what people are willing to give up in order to do or acquire something.
What is the relationship between trade-offs and opportunity costs?
opportunity costs occur when trade-offs are made
First Come, First Served:
people receive resources if they get to them first or before they are all gone. ex.- Black Friday, limited license tests offered per day
The United States government is LEAST LIKELY involved in the nation's economy as a...
planner deciding what to produce
Stability:
price level of goods & services is predictable & protects the purchasing power of money over time. (all except Market- Traditional, Command, Mixed)
Which choice BEST expresses why widespread pirating of goods would be damaging to a market economy?
producers would be unwilling to produce new goods
Specialization of Labor:
producing everything one's self (being self-sufficient) severely limits access to goods & services. by focusing on the things we do at a lower opportunity cost than another individual(s) or countries, we can produce more & then trade our surplus to the other entity for the other good or service.
One of the BEST measures of success for businesses and their entrepreneurs is...
profit - this concept of "profit motive" is the main reason people start a business on their own in the first place.
Why does the government get involved in the U.S. economy?
protect consumers & producers
Security:
protecting individuals & businesses from risk. (all except Market- Traditional, Command, Mixed)
Price:
resources acquired by paying the most in a supply & demand setting.
Majority Rule:
resources are controlled by a group of people who vote to decide how they are to be distributed. ex.- Congress
Contest (allocation strategy):
resources are distributed to those who "win" ex.- sales employees
Authority:
resources are given out based on the decision of a power person or group. ex.- executive order as president, school principal
In what way does specialization increase productivity?
specialization reduces the cost of production
Bob picks up a sandwich from the cafeteria and pays the cashier $3.25. He ate half of it and did not want the rest. What is the cost associated with what you left on the plate?
sunk cost
A nation seeking to increase its overall productivity might be best served by investing money into which area?
technology
If a certain combination of goods and services lies inside the production possibilities curve for an economy, which of these statements must be true?
that combination is an inefficient use of resources
Freedom (social economic goal):
the ability of consumers, producers, & workers to make their own decisions. (Market & Mixed)
In a society with a market economy, property rights are generally enforced by...
the courts
As one of the factors of production/productive resources, capital can be defined as...
the equipment and factories needed to produce goods
What is the definition of capital (one of the productive resources)?
the equipment needed to produce goods. this could be something like a hammer, a computer, or even money.
What is the MOST LIKELY result of specialization in producing Products A and B? The Gains from Trade Chart on Output Before Specialization and Trade: U.S.- Japan- Total Product A: 20,000- 30,000- 50,000 Product B: 500,000- 30,000- 530,000 Chart on Output After Specialization and Trade: U.S.- Japan- Total- Net Gain Product A: 0- 60,000- 60,000- 10,000 Product B: 800,000- 0- 800,000- 270,000
the increased output means the U.S. and Japan can trade excess units of Products A and B
What is the opportunity cost of saving money to purchase a car?
the money could be used to go on vacation
When there are advances in technology, such as the personal computer, how might business productivity change?
the new technology can replace outdated, less efficient, machinery
Which economies have some level of government regulations.
the only economic system that does not have government regulation is a Market.
background info: The owner of a car wash calculates that by hiring one additional worker, the car wash can wash 50 more cars per week at an average of $5 per wash. The owner will pay the worker $9 per hour for 30 hours per week. What do you think the owner's decision will be when considering marginal costs and benefits?
the owner will not hire the worker because the marginal costs of $270 per week are greater than the marginal benefits of $250 per week
The BEST explanation of why there will always be scarcity is because...
while peoples' wants are unlimited, resources are limited
Productivity:
the ratio of (output) per units of used (input). important because personal & national standards of living are directly related to labor productivity. the greater an individual's labor productivity, the higher wage that individual can command.
Why is the entrepreneur the most important productive resource?
the risk taker who is responsible for all of the other factor of production (productive resources)
image link: https://www.usatestprep.com/modules/gallery/files/100/10088/10088.jpg These graphs show production rates for a non-specialized lamp factory and a specialized lamp factory. Which is the GREATEST difference between these factories?
the specialized factory had the largest gains in production
Force (allocation strategy):
the strongest get all the resources. ex.- Black Friday, the draft, taxes
image link: https://www.usatestprep.com/modules/gallery/files/32/3297/3297.jpg How does the activity in this image represent specialization?
this worker is completing one of many parts of a final product
- In Mexico City, business slacks off everyday for lunch at 2:30 pm and gets started again around 5:00 pm. - Every September George buys a new Chevrolet because every year he buys a new Chevrolet.
traditional
Competition may be present in this type of economic system, but it has no influence over what is produced.
traditional economy
In the mid-2000s problems with corporations such as Enron, Worldcom, and Tyco demonstrated renewed and growing public concern about...
unchecked business practices
When people in a market economy specialize, what do they depend on to make sure their needs are addressed?
voluntary exchange
background info: Joseph is a teacher. He also enjoys working on automobiles. Recently, Joseph has been so busy at his teaching job that he has had no time to work on his car. He decided to pay his friend, Larry, to do some vehicle maintenance for him. What is this type of economic transaction known as?
voluntary exchange
Three Basic Economic Questions:
what to produce? how to produce? for whom to produce?
Trade offs:
what you gain when you make a choice.
Opportunity Cost:
what you give up when you make a choice. it is your 2nd choice, or your next best alternative. it is measured in opportunity.
Efficiency:
when the factors of production are allocated to their most productive use. (Market & Mixed)
What makes an economic decision rational?
when the marginal benefit exceeds the marginal cost
Voluntary Exchange/Comparative Advantage:
when we willingly exchange goods with someone else, both parties benefit. this is why economists believe everyone benefits from free, voluntary trade.