AP Econ Sumer Reading Study Guide

National Debt

Debt taken out in taxpayers' names.

Inelastic Demand

Demand that doesn't change much when price changes. An example is food. We can't do without it when it's expensive, and we can't eat a ton when it's cheap.

What does it mean for demand to be elastic or inelastic, and how does that impact a business's decision-making?

Elastic demand means that demand for something can change, but inelastic demand cannot change because it is necessary. This can cause businesses to make lots of products with inelastic demand and charge higher prices for it. Mass production of something usually ends up lowering its price though.

How did economics contribute to rising tensions before World War II?

European countries wanted to be dominate the world economically as the world was industrializing. These tensions lead to European countries stockpiling weapons, which lead to more tension. This lead to World War I. This war left Germany in a very bad position since they expended large amounts of money to finance the war and now had to pay back war debts. They printed money in order to pay the debts, but this lead to inflation. Germans were angry with the state of their country and tensions grew as they wanted to blame who was responsible.

Deficit Spending

Government spending, in excess of revenue, of funds raised by borrowing rather than from taxation. They are spending more than they are bringing in. This was used to pump money back into the economy during the great depression.

Bargaining Power

In negotiating, capacity of one party to dominate the other due to its influence, power, size, or status, or through a combination of different persuasion tactics. The collective bargaining of workers as a unit gives them bargaining power.

Compare and contrast the recent economic rise of India and China.

IndIa: Won its independence from Britain in 1947 and set up a socialist planned economy. Eventually got rid of the permit raj system in the 1990s which followed with an economic boom. China: Once Deng Xiaoping became the leader in 1978, he started freeing the Chinese economy and opening it to the world. People started to work hard for others since they could now work for themselves. A long boom started that brought hundreds of millions of people out of poverty. The new wealth and freedom spread unevenly, and China began to develop class divisions. The West made China meet some Western standards in the late 1990s in order to trade freely. Chinese exports were cheap partly because China kept its money cheap. They were able to undersell other low-wage nations. China refused to adopt the extreme free-market ideology of the West which helped them escape the depression of the late 2000s.

Cost-Push Inflation

Inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods.

Demand-Pull Inflation

Inflation is high because employment is high. People have so much income that they try to buy more than the economy can produce. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods."

According to Adam Smith, how did the division of labor impact worker productivity?

It greatly increased the productivity of workers. The organization of specialized workers under management of one person makes production as efficient as possible. Each person works hard for their own good, not just because they want to.

What was stagflation such a challenging policy problem to solve?

It was challenging because they did not know how to deal with both issues at once. Inflation was solved by reigning in the economy, but this would increase unemployment. Unemployment was solved by pumping the economy, but this would worsen inflation. They were confused why inflation was occurring since there had to be too little supply or too much demand for inflation to happen, but neither was present.

Communism

Once a synonym for socialism, now used in reference to the revolutionary branches of socialism, especially Marxism, Leninism, and Maoism. The means of production are own by the people.

Use examples to explain the difference between a Positive Externality and a Negative Externality.

Positive externalities help everyone (not just the person making the decision). Negative externalities help certain people (usually the ones making the decision) and hurt others. An example of a positive externality is if you choose to buy a beautiful home instead of just a functioning one since it is pleasing for people in the neighborhood and for yourself. An example of negative externality is someone selling a shirt for a big profit, but having the shirt be made by a low-payed worker in a sweatshop (doesn't have to be this extreme).

How can printing money lead to inflation?

Printing more money decreases the value since there is a greater supply of it. This decline in the value of the money causes prices to inflate in order to keep profits consistent with the value of money.

Globalization

The process by which businesses or other organizations develop international influence or start operating on an international scale. The global integration of international trade, investment, information technology and cultures. Government policies (low tariffs with a high focus on lots of trade) designed to open economies domestically and internationally to boost development in poorer countries and raise standards of living for their people are what drive globalization. However, these policies have created an international free market that has mainly benefited multinational corporations in the Western world to the detriment of smaller businesses, cultures and common people.

Speculation

The purchase of something, not because a buyer wants it for itself, but because the buyer expects to sell it for a profit when the price rises.

Technology

The purposeful application of information in the design, production, and utilization of goods and services, and in the organization of human activities. Many new technologies demanded a lot of goods and even new technology. Many new technologies of the 1800s allowed factories to churn out more and more cheap, high-quality stuff.

Deregulation

The reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry. Over the years, the struggle between proponents of regulation and proponents of no government intervention have shifted market conditions. Jimmy Carter did this to Trucking, Airlines, Telecommunications, Finance, and beer. He did this to try and deal with the many troubles he inherited as president.

What are some questions addressed by Macroeconomics?

The study of an overall economy: employment, interest rates, productivity, etc.

Macroeconomics

The study of an overall economy: employment, interest rates, productivity, etc. Contrast with microeconomics.

What are some questions addressed by Microeconomics?

The study of individual markets, individual firms, how consumers get the most value for their money, etc.

Microeconomics

The study of individual markets, individual firms, how consumers get the most value for their money, etc. Contrast with macroeconomics.

Privatization

The transfer of a business, industry, or service from public to private ownership and control.

Why did Greenspan cut interest rates over and over again?

There was a round of income tax cuts for the rich, a cut in the estate tax (paid only by rich dead people), a repeal of the tax on stock dividends, and a Medicare drug benefit that forced the government to pay drug companies ludicrous prices. This emptied the treasury and increased the deficit. It did not help raise the amount of jobs any noticeable amount. Greenspan cut interest rates over and over again to try and increase borrowing, but it was impossible for many to borrow even when the interest rates reached nearly zero.

Explain the following quote from Adam Smith: "It is not from the benevolence of the butcher, the brewer, and the baker, that we expect our dinner, but from their regard to their own interest."

These workers will provide goods at a fair price not because they are good or generous people, but because it is in their own interest to do so. They keep prices and quality at a good spot so that someone else cannot undercut them or make a better product for the same price.

In economics, what did controlled experiments aim to do?

They aimed to look at how we actually act, not how theory says we should act.

Monopsony

A buyer that has no competition. Different than monopolies that are when sellers have no competition. Standard Oil was a monopsony because it bought up most the oil from people drilling for it. Standard Oil was a monopoly because it was largely the only company selling oil.

Competition

A condition where different economic firms seek to obtain a share of a limited good by varying the elements of the marketing mix: price, product, promotion and place.

Money

A current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.

Inflation

A decrease in the value of money. At any moment, some prices are going up and some are going down; inflation occurs when the overall movement is up.

Trade Barriers

A government imposed restriction on the free international exchange of goods or services. Trade barriers are generally classified as: 1. Import policies reflected in tariffs and other import charges, quotas, import licensing, and customs practices. 2. Standards, testing, labeling, and various types of certification. 3. Direct procurement by government. 4. Subsidies for local exporters. 5. Lack of copyright protection. 6. Restrictions on franchising, licensing, technology transfer. 7. Restrictions on foreign direct investment, etc.

Oligopoly

A group of sellers that are few enough, and cooperative enough, to limit (although usually not eliminate), the competition among them.

Mortgage

A legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt.

Corporation

A legally created entity that has some of the abilities of a person, for instance, the ability to sign contracts or own property. Churches, towns, small businesses, and unions can be corporations, but the summer reading book uses the term in the popular and most important sense: a big, for-profit business that is owned by stockholders and run by managers.

Comparative Advantage

A model showing that both sides can always benefit from international trade. One of the premises of this model is that capitalists won't move their operations across borders; this was a reasonable assumption in the early 19th century when the model was invented, but not so much today.

Economies of Scale

A savings in per-unit cost when more units are produced. Applies when making things in bigger batches is cheaper. They usually involve a trade-off: lower per-unit cost, but higher up-front cost. The per-unit cost of making steel in a large factory is cheap, but the up-front cost of building the factory is expensive.

What do banks do with your money when you put in into the bank?

They invest it in many different projects. The risk is much lower for banks because it is very unlikely that all the projects that are invested in will fail.

Austerity

A set of economic policies a government implements to control public sector debt. Austerity measures are the response of a government whose public debt is so large that the risk of default, or the inability to service the required payments on its debt obligations, becomes a real possibility. This happened when Greece became in debt trouble (it couldn't print the money since it shared the currency with other countries: the euro). The IMF, with France's and Germany's help, bailed out Greece in return for Greece accepting their austerity - paying back their creditors comes first.

Externality

A side effect, good or bad, of a transaction. Externalities are a problem because the people deciding whether to undertake the transaction don't get all the benefits, or pay all the costs. Thus, the decisions they make for their own good may not be the best decisions overall. It is a result of any properly functioning market in work.

Bubble

A situation in which speculative buying raises a price, thus bringing in more and more speculators until the only thing keeping the price rising is the fact that the price is rising.

Monopoly

A situation in which there's only one seller of a product or service; the term can also refer to such a seller. Similar to monopsony, when there's only one buyer.

Free Market

A system in which everyone competes to provide the best products most efficiently. Although free markets must be free from excessive government regulation, removing regulation does not automatically result in a free market.

Tariff

A tax on imports. Tariffs can be designed to raise revenue, to keep foreign competition out, or both.

Union

An alliance of workers bargaining as a unit instead of each making separate contracts with an employer.

Mixed Economy

An economy that is partly socialist and partly an unsupervised market. Most economies are mixed economies, but the specific mix varies widely.

Crowding Out

Argued by some economists to be a phenomenon that occurs when increased government involvement in a sector of the market economy substantially affects the remainder of the market, either on the supply or demand side of the market. The government would help pay for a company to hire more steel workers if they needed steel. But if full employment was reached, the government couldn't pay to hire workers for more steel (the economy is as big as it can get for the moment). New spending (Ex: the government paying double what they previously were paying) would crowd out other spending and cause inflation.

Real Wages

Wages adjusted for inflation, or, equivalently, wages in terms of the amount of goods and services that can be bought. This term is used in contrast to nominal wages or unadjusted wages.

Trade Deficit

When one country doesn't sell as much as they buy. This happened to the US when they started to buy Japanese cars. The Japanese had lots of American dollars that could not be used in Japan, but they could be used in American capital (stocks, bonds, government debt, etc.), so the flow of money balanced even though the flow of goods didn't.

Deflation

When the value of money rises tremendously. It happened during the Great Depression when there was a lot less money circulating in the economy.

Public Goods

Things like clean streets that many people want but no private entrepreneur has a reason to provide. The old distinction between public and private goods has been replaced, by a twofold distinction depending on whether goods are excludable (whether I can stop you from enjoying them) and/or rivalrous (whether my enjoying them uses them up).

Summarize the factors leading to the mortgage crisis.

Banks began to bundle mortgages so that a bunch of bad risks investments became safe-looking investments. The people who bought them didn't understand them and lenders approved almost anyone for loans since they weren't the ones who had to worry about being repaid. People buying houses created jobs and drove up housing prices. Many homeowners felt rich; they borrowed more and bought more stuff. Since all this was coming from borrowed money, it could only go so far. Wages began to fall which caused many bankruptcies. This meant that they would not pay back the loans they took out to pay for their houses, which made some of the "safe" mortgage-based investments worthless. The government tried to help Wall Street by giving money, but it wasn't enough and lending began freezing up. Panic began to spread, and the Treasury began to dump large amounts of money into Wall Street. This wasn't enough money to solve Wall Street's immediate problems, but it could never help fix the problem as a whole since the financial system depended on a flow of money from the real economy even in normal times. Everything the bailout was supposed to prevent happened anyways, and the crash took its full effect.

What was the Federal Deposit Insurance Corporation (FDIC) established to do?

Banks were investing in speculation, which offered quick and large returns, instead of real investments that payed back slowly. The FDIC insured banks so that investors could get their money back if a bank failed, but the banks had to invest soberly.

How did "bracket creep" work?

Based on how much money someone earns, they are put into a bracket. The more money someone makes, the higher the tax is. It caused people to have less money in the 1970s even if their pay kept up with inflation. This was because as people made more money to keep up with inflation, they were put into higher brackets. Although they were not really given proper raises, they still technically were getting higher salaries. The government let this happen because they needed the money, but it only ended up taxing poorer people more (since they were moving up brackets) and taking rich people the same amount (since they could not move to higher brackets).

What is the relationship between the philosophies of Marx and Ricardo?

Both David Ricardo and Karl Marx tried to quantify and embody all labor components in order to develop a theory of the real price, or natural price of a commodity. They both had a strong attachment to the labor theory of value, although Marx questioned how any profit was made if everything sells for its labor cost. He said that the profit comes from the labor. The capitalists pays the worker enough to stay alive, but the worker makes much more wealth in a day than he needs to survive. This becomes the capitalist's profit.

What are the benefits of breaking up monopolies?

Breaking up monopolies allows for more equality in the market: better goods will be produced for better prices with competition, companies will make working conditions desirable to draw in employees, and workers can be paid better wages for reasonable hours.

What are the pros/cons of a centralized vs. decentralized computer network?

Centralized computer Network Pros: Helps in reducing the cost because it will not emphasize on more hardware and machines. Provides a better data security. Processing is consistent in centralized processing systems. The data and the program on each information system are independent to other information systems. Cons: Large data storage is required at the central information system. It will reduce the local accountability. High traffic can cause input/output bottlenecks. Ability to respond to an information request in a timely manner gets reduced. Needs a high cost in transmitting transactions. Decentralized computer network Pros: Used by the US in the Cold War since it made us harder to nuke. Usually low cost. Makes the internet a level-playing field for all people. If the data centers or servers providing services to end users are geographically closer to them, there will be less network latency in communication between the end user and the data centers or servers, making them more responsive. Cheaper data transfer costs (possibly) suppose you are designing a system like Netflix to stream movies to customers around the world. An outage in one data center only affects the people using that data center. Local support in a person's time zone is easier if the computer services are in their region, than if they're on the opposite side of the world. Many cheap computers may have more computing power per unit of cost than one big computer, especially if they use mass-produced off-the shelf commodity hardware. Cons: There isn't a place for government regulation, which is potentially problematic in some circumstances. Security risks (if terrorists are using the internet, how do we shut them down if there isn't a central place through which information flows?).

How does fractional reserve banking work? (How do banks create money?)

Customers deposit their money at the bank. The banks then lend it out and make money from the interest it charges. It doesn't lend out all the money though. It keeps a fraction of it so that someone can withdraw money at any time.

What is the difference between Gross Domestic Product (GDP) and Gross National product (GNP)? (Identify some of the things that are not included in the calculation of GDP.)

Gross domestic product is the value of all the legal, new goods and services sold in an economy in a year. Gross national product is the GDP plus Americans' income from overseas, minus money sent overseas. GNP was stressed by the government until the 1990s. GDP counts only final goods and services, to avoid double-counting. GDP always goes up if you buy something unless it is illegal. GDP counts only money transactions (A forest doesn't count in GDP unless we cut it down). GDP rises if we eat at a restaurant rather than cook for ourselves since the work being done has been moved to the money economy. GDP has to be adjusted for changes in price so we know whether we're getting more stuff or paying more for the same stuff.

What were the main ideas proposed by Friedrich Engels?

He said that the conditions of the working class were bad in the boom year of 1844, and he predicted another crash in 1847. He said that the crash will cause a revolution where the proletariats (proles) would overthrow the bourgeoisie. This overthrow of an upper class would come about because the proles would be united as their numbers grew since the bourgeoisie would take all the wealth.

Explain the Keynesian rationale behind using government spending to fix the Great Depression.

He said that the idea of not spending money to fix the depression made sense on a blackboard, but not in the real world. He said that in the real world, one person's spending is another person's income. So when spending falls, income falls too. People cannot save more when they have less income. Also, nobody is investing when nobody is spending (You wouldn't build a factory if no one is buying anything). People spend and invest when we're confident, and we cling to our cash when we're worried. He said that the government should spend lots to fix the depression. Even wasteful spending would lead to workers and suppliers to re-spend the money they earned on useful things.

What problem did Thomas Malthus predict? Why have his predictions not panned out as expected?

He said that the population doubles every few decades, which also increases food production with more people making food. He said that all the good land will eventually be used up, causing starvation. He said that war and disease were good for keeping the population in balance and that we should not support charities. His predictions have not panned out as expected because he down-played birth control.

Trust-Busting

Mainly started by President Theodore Roosevelt. He was for the square deal (conservation of natural resources, control of corporations, and consumer protection (three C's)), but he knew that it couldn't happen with the rich controlling everything. He broke up some trust, protected public land from businesses, and controlled railroad rates.

Interest

Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt.

Natural Monopoly

Monopolies that come about naturally because of the circumstances around surrounding them. Railroads could charge high rates because they were natural monopolies (A railway from point A to B may make sense, but not two parallel lines. So the first railroad is the only railroad.)

Socialism

Most broadly, any economic activity that is undertaken cooperatively instead of competitively. This cooperation can be achieved by the collective action of the people involved or by government. Also the idea that cooperation of this kind is better than laissez-faire. The means of production are owned by the government.

Entrepreneur

One who organizes, manages, and assumes the risks of a business or enterprise.

Why is a Demand Curve downward sloping? Why is a Supply Curve upward sloping?

Our desire (demand) for something decreases the more we already have. This is diminishing utility: each added unit is worth less to us, so we'll pay less to get it. This makes the curve downward sloping for demand. If the price of something is high, sellers will make lots of this product. This causes demand and price to go down if the product is in abundance. If the price of something is low, sellers will make less of it. This causes more demand for the product since there is less to go around and it is at an lower price. As the supply curve goes up, the demand curve goes down.

Define and differentiate between the four different market structures. (Perfect competition, monopolistic competition, oligopoly, monopoly)

PERFECT COMPETITION: Describes a market structure where competition is at its greatest possible level. To make it more clear, a market which exhibits the following characteristics in its structure is said to show perfect competition: 1. Large number of buyers and sellers. 2. Homogenous product is produced by every firm. 3. Free entry and exit of firms. 4. Zero advertising cost. 5. Consumers have perfect knowledge about the market and are well aware of any changes in the market. Consumers indulge in rational decision making. 6. All the factors of production, viz. labour, capital, etc, have perfect mobility in the market and are not hindered by any market factors or market forces. 7. No government intervention. 8. No transportation costs. 9. Each firm earns normal profits and no firms can earn super-normal profits. 10. Every firm is a price taker. It takes the price as decided by the forces of demand and supply. No firm can influence the price of the product. MONOPOLISTIC COMPETITION: A market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term. A monopolistic competitive industry has the following features: 1. Many firms. 2. Freedom of entry and exit. 3. Firms produce differentiated products. 4. Firms have price inelastic demand; they are price makers because the good is highly differentiated. 5. Firms make normal profits in the long run but could make supernormal profits in the short term. 6. Firms are allocatively and productively inefficient. OLIGOPOLY: When a group of sellers that are few enough, and cooperative enough, to limit (although usually not eliminate), the competition among them. MONOPOLY: A situation in which there's only one seller of a product or service; the term can also refer to such a seller.

Gold Standard

Paper money could be freely cashed in for gold. Bound the supply of paper money to the supply of gold, whether or not money was needed. A universal gold standard can be beneficial because contracts can be made across borders without worrying that the exchange rate would change overnight. However, it's hard to create enough money to fuel growth on a gold standard.

Stagflation

Persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

On Pg. 230, the author makes the claim that "some inequality is ok." Consider this statement from both sides of the argument.

Pro (according to the book): If we all got the same income no matter what, we might not bother to work. Lots of modern products started as luxuries- they might never have been made in the first place if there weren't rich people to buy them. Wasteful consumption by the rich can trickle down (In the 1970s, tycoons owned 10,000-square-foot houses; by the 1990s, mid-level bureaucrats did). Against (according to the book): People can make a lot less money working just as hard as someone making lots of money. The rich wasting their money would be fine, but it's not just their wealth-it's ours (the effects companies have on parts of the environment (whether its making goods or the goods themselves) means that the product they made for profit is at the expense of us).

Explain the logic behind Reaganomics.

Reagan promised smaller government, balanced budgets, less regulation, and tax cuts. Less regulation and tax cuts would allow the rich to make more money. The larger sum of money they made would "trickle" down increasing the wages of lower workers. These lower workers would earn more money with increased salaries and less taxes.

Open-Market Operations

Refers to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Securities' purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy. The Federal Reserve (Fed) facilitates this process and uses this technique to adjust and manipulate the federal funds rate, which is the rate at which banks borrow reserves from one another. The Fed does this creating a bank account with money in it from nothing (that's where dollars come from), and get the money into circulation by buying something in an open market operation (usually government bonds).

Capitalist

Someone who lives by investing money for profit, especially someone whose main income comes from profit

Explain the "Starve the beast!" quote from Pg. 273.

Tactic by the Conservative Party to deliberately run up the deficit in order to make it impossible for the government to spend money on things they don't like.

Advertising/Branding

Tactics used by big corporations to make identical or nearly identical goods seem different. Every brand is a government protected monopoly (You can make and sell cola, but you will go to jail if you call it Coke). Corporations can charge more for their product by doing this.

Progressive Tax

Taxes that take a bigger slice the more a person makes.

What are the key assumptions of Neoclassical Economics?

The Neoclassical Economics is similar to Ricardo's classical methods. They are both logical models based on simplifying assumptions that may not hold true in the real world. Because of this inability to apply to all possibilities of the real world, Ricardo's model cannot be trusted even though many still try to use it. The assumptions of Neoclassical Economics are: 1. The economic man rationally pursues his own self-interest. 2. Supply and demand stay put unless you move them, which means: - Incomes stay the same - Tastes stay the same - Other prices stay the same 3. Everyone has the same information 4. All buyers and sellers are so small that their actions can't affect a good's price.

What were the benefits associated with Henry Ford offering relatively high wages and reasonable working hours?

The assembly line was hard work, so many employees quit for the low pay they were receiving. Higher pay kept workers on the assembly line which made the assembly line so much more efficient that the price per car fell. Ford lowered the prices instead of pocketing the extra money, which actually was more profitable with more cars being sold.

Laissez-faire

The belief that leaving economic activity alone produces better results than futzing with it. Originally a reaction to mercantilism.

Stock

The goods or merchandise kept on the premises of a business or warehouse and available for sale or distribution. The capital raised by a business or corporation through the issue and subscription of shares.

Command Economy

The government allocates resources, dictates what gets made, and rations necessities. A war economy is a command economy.

Discount Rate

The interest rate banks pay to borrow directly from the Fed. The Fed changes this less often than the funds rate (the interest rate banks charge one another for overnight loans).

Capital

The means of production. Refers to capital goods (the things we make), the things we use to make other goods, and the things that are not used up when the goods are made. Its the money we invest to make goods.