Economics Overview and Economic Systems

Economics

• Economics is the study of how people make decisions to satisfy their wants and needs.
• Scarcity always exists, while shortages can be solved.
• The factors of production are land, labor, and capital.
• Capital can be defined as a pool of money available for investment or any resource made by people that is used in production.

Economic Systems

• Countries can be ranked based on their economic systems, with Iran, Mexico, the United States, and Canada being more free market, and North Korea being more centrally planned.

• The three key questions of economics are what to produce, how to produce, and for whom to produce.

• Profit is the amount of money a business receives in excess of its expenses.

• The product market is where households purchase goods and services from firms, while the factor market is where firms purchase factors of production from households.

• Advantages of a free market economy:

  • Freedom of choice for consumers and producers
  • Variety of goods and services
  • Efficient response to changing market conditions

• Disadvantages of a free market economy:

  • The invisible hand: The self-regulating nature of the marketplace can lead to inefficiencies.

• Socialism: Allows some private property ownership, a range of economic systems, and can be part of a democracy.

• Communism: Brought about by revolutionary change, has an authoritarian government, and all production is controlled and owned by the state.

• Outcomes of fixed wages under communism: Workers have little incentive to be more productive.

• Outcomes of the goal of equity under communism: Government officials receive more pay and have access to better goods, leading to chronic shortages and low-quality goods for the masses.

Supply and Demand

• Law of demand: As prices go down, demand increases.

• The substitution effect occurs when consumers switch to a cheaper alternative good when the price of a good goes up.

• The income effect describes how changes in income affect demand for goods and services.

• Normal good: Consumers demand more when their income increases.

• Inferior good: Consumers demand less when their income increases.

• Complementary goods: Goods that are bought and used together (e.g., cars and gasoline).

• Substitute Goods: Goods that are used in place of one another (e.g., coffee and tea).

• Elastic demand: Demand is sensitive to a change in price.

• Inelastic demand: Demand is not sensitive to a change in price.

• Law of supply: Producers offer more of a good or service as its price increases and less as its price falls.

• Fixed costs: Costs that do not change, regardless of production quantity (e.g., rent).

• Variable costs: Costs that rise or fall depending on the quantity produced (e.g., hourly wages).

• Excise taxes, regulations, and subsidies: Excise taxes and regulations increase costs and lower supply, while subsidies lower costs and increase supply.

• Supply shock: A sudden shortage of a good, such as gasoline.

Competition and Market Structures

• Monopoly: A single seller dominates a market.
• Monopolistic competition: Many companies sell similar but not identical products.
• Pure competition/perfect competition: A large number of firms all produce the same product, and no single seller controls supply or prices.
• Oligopoly: A few large firms dominate a market.

Business and Labor

• Sole proprietorships: Advantages include full control but disadvantages include limited access to resources.
• In a corporation, the stockholders choose the board of directors.
• Labor unions: Began during the Industrial Revolution to advocate for workers' rights.
• Right-to-work laws: Laws that ban mandatory union membership.
• Collective bargaining: The process in which union and company management meet to negotiate a new labor contract.

Money, Banking, and Financial Markets

• Representative money: Money that is backed by gold or silver.
• Fiat money: Money that has value because a government has decreed that it is an acceptable means to pay debts.
• Federal Reserve Board: Has seven members appointed by the President and confirmed by the Senate. It supervises the regional Federal Reserve banks.
• Glass Steagall Act (1933): Established the FDIC, which insured the deposits of bank customers.
• Federal Open Market Committee: Meets eight times per year to discuss and decide monetary policy. It includes six of the twelve district bank leaders and their actions impact consumer interest rates.

Taxes and Spending

• Progressive tax: High earners pay a greater percentage of their income than low earners.
• Regressive tax: Everyone pays the same percentage, but this can disproportionately affect lower-income earners.
• Tax characteristics: Simplicity, efficiency, certainty, and equity.

Financial Literacy

• Co-pay: A fixed amount the insured pays for healthcare services.
• Deductible: The amount a policyholder must pay before insurance coverage kicks in.
• Comprehensive Coverage: Covers damage to your vehicle not caused by an accident.
• HMO medical insurance plan: Requires a referral from a primary care physician before seeing a specialist.
• Car insurance: Consider customer service in addition to premiums when evaluating car insurance.

This quiz covers the fundamental concepts of economics, including decision-making, factors of production, and the differences between economic systems. It also explores the characteristics of free market economies and the interactions between households and firms in the product and factor markets.