Principles of Economics Overview

Principles of Economics

• Economics studies how societies allocate limited resources to meet unlimited wants and needs.
• Scarcity means limited resources and unlimited desires.
• Opportunity cost is the value of the next best alternative forgone when a choice is made.
• Seven key economic principles: scarcity, costs and benefits, marginal thinking, incentives, trade, markets, and future consequences.

Types of Economies

• Traditional economies rely on customs and traditions.
• Capitalism (market economies) are characterized by private ownership and profit motives.
• Communism (command economies) are centrally planned by the government.
• Socialism combines government and private ownership.
• Traditional economies are stable but resistant to change.
• Capitalist economies are efficient but can lead to uneven wealth distribution.
• Communist economies aim for equal distribution but limit freedoms.
• Socialist economies balance safety nets with higher taxes.

The Business Cycle and GDP

• Gross Domestic Product (GDP) is the total value of goods and services produced in a country.
• GDP measures a country's economic health.
• Four components of GDP: consumer spending, investment, government spending, and net exports.
• Business cycles have stages: expansion, peak, contraction, trough, and recovery.

Macroeconomics

• Macroeconomics examines the economy as a whole.
• Fiscal policy involves government spending and taxation.
• Monetary policy involves central banks managing the money supply and interest rates.
• The Federal Reserve System comprises the Board of Governors, 12 Federal Reserve Banks, and the Federal Open Market Committee.

Supply and Demand

• Supply represents the quantity producers offer at different prices.
• Demand represents the quantity consumers are willing to buy at different prices.
• Equilibrium occurs where supply meets demand.
• A shortage occurs when demand exceeds supply.
• A surplus occurs when supply exceeds demand.

2008 Financial Crisis

• A mortgage is a loan used to purchase property.
• Mortgage-backed securities are investments formed by bundling mortgages.
• Subprime mortgages are high-risk loans to borrowers with questionable credit.
• Predatory lending is the practice of making exploitative loans.
• Collateralized debt obligations (CDOs) are complex investments formed by bundling various types of debt.
• Credit agencies sometimes rated risky investments too highly, contributing to the crisis.
• Moral hazard describes how the prospect of minimal consequences increased risky behavior.

Personal Finance

• Gross pay is the total earnings before deductions.
• Net pay is the amount received after deductions.
• The W-4 form determines tax withholding.
• The W-2 form reports annual earnings and taxes paid.
• Deductions include health insurance and retirement contributions.
• A budget is a plan for income and expenses.
• Fixed expenses are those that remain the same each period (rent, insurance).
• Variable expenses fluctuate (groceries, entertainment).
• A zero-dollar budget assigns all income to expenses or savings.

Understanding Credit

• Credit involves borrowing money and promising repayment.
• Installment credit involves fixed payments (loans).
• Revolving credit allows flexible borrowing (credit cards).
• Service credit involves utilities, etc.

Credit Reports and Scores

• Credit bureaus (Experian, TransUnion, Equifax) collect and report credit activity.
• Get a free credit report at AnnualCreditReport.com.
• Cosigning is agreeing to be responsible for someone else's debt.

Credit Cards

• Credit cards allow buying now and paying later.
• Credit card fees include interest and late charges.
• Avoid debt by paying the balance in full each month.

Student Loans

• Student loan repayment usually begins after graduation or a grace period.
• Defaulting on student loans is failing to repay.
• Plan for student loan debt by researching and budgeting.

Financial Services

• Checking accounts offer convenience, security, and record-keeping.
• Checks include a date, payee, amount, memo, and signature.