V22 Economics: Module 1 Exam Review Guide PDF

V22 Economics: Module 1 Exam Review Guide 1.01: What is Economics? Macroeconomics the study of national and global economy Basic Economic Questions What to produce? How to produce? For whom to produce? Economic Products goods and services Economist...

V22 Economics: Module 1 Exam Review Guide 1.01: What is Economics? Macroeconomics the study of national and global economy Basic Economic Questions What to produce? How to produce? For whom to produce? Economic Products goods and services Economist people who use reason to determine the cost of their choices when making decisions; also, professionals who study economics Economics the study of how people get the economic products they need and want Personal Income something you might study in microeconomics National Income Tax something you might study in macroeconomics 1.02: Scarcity & Smart Choices Scarcity You make choices because you cannot be everywhere at one time. In economics, scarcity compels us to make choices. You are unable to be in two places at once and you do not have unlimited time, so you choose how to spend the time you do have. Time is an example of a scarce resource, as are money, hairstylists, denim jeans, phones, and other goods and services. We live in a world of unlimited wants, but there are limited resources. Opportunity Cost = “Opportunity Lost” Remember that opportunity cost is the most valued trade-off; it is the next best option that you give up. Note, however, that an opportunity cost's value is not just money and time. Value also includes the experience that you give up—for example, your enjoyment of the time you spend with your friends in conversation because you chose to work on your course instead. Think of opportunity cost as your "opportunity lost." By studying, you lost the opportunity to spend several hours in mind- expanding conversation with your friends by text! Cost-Benefit Analysis A cost-benefit analysis is one way to make an informed choice. It allows you to identify the potential advantages or disadvantages of a decision. The examples below show a cost-benefit analysis in action. Also, note that there are both short-term as well as long-term costs and benefits. These are not set time periods; short- and long-term are both dependent on the situation and a bit subjective. Law of Diminishing Marginal Utility As each additional quantity of a good or service is consumed, the relative satisfaction obtained decreases. When making choices, there can be too much of a good thing. Keep this in mind when making purchases of both wants and needs. Insurance Some type of guarantee by a company or government for compensation in the event of a loss. Insurance generally requires regular payments to keep that guarantee in force. That means working it into the budget. Most people could probably think of infinite things to do with those funds instead. Consider your basic needs, which are shelter, food, water, clothing, and security. Insurance can provide security—financial security against investment loss, accidents, health problems, and death. As people age, they acquire more assets and start families. Increasing security tends to take greater priority in people’s lives. Financial stability and good health provide security for ourselves and our families. Thus insurance for many people is a need rather than a want. Types of insurance include: Property Home Car/Motorcycle/Boat Health Life Disability (short-term or long-term) When purchasing insurance of any type, there are a few factors that determine the total cost. Such factors include: Age: This can be a positive or negative. The younger you are, the less you pay for life insurance. However, those under 25 pay more for car insurance. Predisposing factors: Past and present behaviors can affect insurance costs. For example, people who smoke pay more for health insurance because of the risks associated with smoking. Financial stability: Those with high debt may have a harder time finding a company to insure them. Geography: Where people live matters. For example, those who live in coastal areas will pay more for property insurance due to risk of natural disasters like hurricanes and flooding. Item value: More expensive cars are more expensive to fix or replace. So, insurance rates are higher. The same applies to homes and other purchased goods. 1.03: Demand Demand (D) is the "whole curve"—overall demand for a good or service at all prices. Tip: Demand goes Down towards the right. Quantity demanded (QD), however, is a specific point on the curve, showing how much will be purchased at a specific price. So when price changes, only the quantity demanded changes as a result. For example, when the price of a good or service increases, the amount people will buy—the quantity demanded—will decrease. Demand Schedule: It lists the number of goods people are willing to buy at a given price. When the price changes, the number of people willing to buy it changes as well. NOTICE: As price goes up, quantity demanded goes down. Overall demand will not change due to price. Demand Curve Shifts Remember that a change in price will only change quantity demanded, not the whole demand curve. A decrease in price just moves to a new point, a higher quantity demanded, lower and to the right on the existing demand curve. As overall demand increases at every price level, the demand curve would completely shift to the right (D1). A decrease in demand would cause the curve to shift to the left (D2). A shift to the left indicates a decrease in demand. A shift to the right indicates an increase in demand. REMBER: “Left is less, Right is More”.  TRIBE - The acronym TRIBE can help you remember five different factors that can cause a shift in demand. Notice that a shift can mean either an increase or a decrease in demand. T Tastes and Explanation: Many social and cultural factors can suddenly make consumers overall buy more (or less) at preferences every price for a product. Examples: Celebrity endorsement of a product moves the demand curve for the product to the right. Accusations of fraud shift the demand for an actor's movies to the left. A stern warning from the government about heart disease shifts the demand for fast food to the left. R Related goods and Explanation: Consumers will be less willing to buy a good at any price level if its substitutes are cheaper. A services, price of substitute is a good that people may purchase and use in place of another, like hamburgers instead of hot dogs. Similarly, consumers will be more willing to buy a good at any price level if any of its complements are cheaper. A complement is a good often bought to use together with another, like hamburger buns for hamburgers. Examples: If the price for salsa decreases, then the demand for its complement chips will increase at every price level. If the price of one smartphone brand skyrockets, the demand for another popular brand will shift right. If the price of maple syrup goes way up, the demand for its complement pancake mix will decrease. If the price of butter plummets, the demand for its substitute, margarine, will shift left. I Income Explanation: For some goods, a general increase in consumer income will increase the demand for them; these are called normal goods. For other goods, an increase in consumer income will make consumers demand them less; these are called inferior goods. Examples: Widespread wage increases in a college town shift the demand for instant noodles (an inferior good) to the left, while the same wage increase causes the demand curve for a pricey coffee shop to shift to the right. (Pricey coffee is a normal good in this market.) B Buyers, number of Explanation: If there are more people to demand a good or service, the demand will shift right. If there are fewer people, it will shift left. Example: The baby boom after World War II shifted the demand for suburban housing to the right significantly. A city hosting the Super Bowl sees its demand curve for hotels shift dramatically to the right the weekend of the game. A decrease in the number of buyers, such as through a mass emigration out of a country, will shift the demand curve left. E Expectations of Explanation: If something leads consumers to believe that the price of a good or service is about to go up, price they will buy more of it now. This shifts the demand curve to the right. If they believe the price will soon go down, the demand curve will shift left, as consumers wait to purchase until they believe it will be less expensive. Example: After news that a disease has devastated the honeybee population, the demand for honey shifts right as consumers purchase before a possible price increase due to lower availability. A "Black Friday" deal shifts demand to the left for the week before the sale event, as people will wait to buy the item at the lower price. 1.04: Supply Supply (S) is the whole curve, meaning the supply for goods and services at all prices. Quantity supplied (QS) is a specific point on the curve, showing how much will be produced at a specific price. Supply Schedule: Notice what happens to the quantity supplied as the price goes up. As price rises, so does the producers want to increase the amount of goods supplied. This direct relationship between quantity supplied and price is known as the law of supply. It explains why supply curves slope upward from the origin point. REMEMBER: “sUPply goes UP”. A change in price will only change quantity supplied (a specific point on the curve), not the whole supply curve. An increase in supply would result in the curve shifting to the right (S1). As supply decreases at every price level, and so a graph of the supply curve would completely shift to the left (S2). A curve shift to the left indicates a decrease in supply. A curve shift to the right indicates an increase in supply. For both supply and demand curve shifts, we can say: Left is less. Right is more.  ROTTEN: The whole supply curve can shift for various reasons. The acronym ROTTEN can help you remember six different factors that can cause a shift in supply. PRICE WILL NOT CHANGE OVERALL SUPPLY R Resource: Explanation: If any resource necessary to produce a good becomes more expensive and/or less available, the cost and supply curve will shift to the left. Likewise, if any necessary resource becomes less expensive and/or more availability available, the supply curve will shift to the right. Example: When fracking made raw oil more accessible, the supply of gasoline shifted to the right and gasoline became less expensive. If a severe frost kills many citrus orchards, the supply curve for orange juice will shift to the left. O Other goods Explanation: If suppliers can easily switch to the production of another good that becomes much more profitable, the supply of the good they currently produce will shift left. Similarly, if suppliers cannot make as much producing that other good, the supply curve for the good they originally made will shift back right. Example: After the price of California wine increases sharply, the supply curve of avocados shifts left as California farmers replace avocado trees with vineyards. As the price of the cutting-edge generation of video game consoles far exceeds that of the older systems, the older systems' supply curves shift left. When public health concerns shuttered theaters, production companies increased, or shifted right, their supply of content intended for in-home streaming. T Taxes, Explanation: A subsidy will effectively lower the cost of production for producers, shifting the supply curve to subsidies, the right. A new government regulation or tax will increase the cost of production and shift the supply curve to and the left. government regulation Example: If the American subsidy of the oil industry was reduced, the supply curve would shift to the left and gasoline would be more expensive. Subsidies to higher education in the United States have shifted the supply curve for college and university programs to the right. T Technology Explanation: New productive technology generally has the effect of lowering resource costs, shifting supply to (productivity) the right. A loss of technology, far less common and often only temporary, can shift supply to the left. Example: Machine harvesters dramatically lowered the cost of the collection and processing of many agricultural products, shifting supply to the right. If you have an antique item, like a typewriter, the supply for repairs will be far to the left—a high price for a very small quantity. Social media sites that collect user data rather than charging a fee for their services have shifted the supply of consumer information to the right. A natural disaster that damages machinery, factories, and shipping trucks over a wide area will decrease supply for a time. E Expectation Explanation: If suppliers expect the price they can charge for their respective good or service to increase or s of the decrease, they will adjust production accordingly. producer Example: Every November the supply of candy canes shifts far to the right as candy companies expect an increase in demand. If a basketball player is forced to resign after a scandal, the supply curve of the player's jerseys will shift to the left as sports apparel companies expect demand for the jerseys to decrease. N Number of Explanation: If the number of firms in an industry increases, ceteris paribus, the supply will shift to the right. firms in the Likewise, a decrease in the number of firms will shift supply to the left. industry Example: As more automotive manufacturers decide to make their own electric car, the supply curve of electric cars shifts to the right. Many record stores are closing each year, shifting the supply curve of music on compact discs (CDs) to the left. 1.05: The Market Price Equilibrium Point - The point where the supply and demand curves meet (also known as the equilibrium point) identifies the equilibrium price. This is how much suppliers should charge for their product. You know that a change in price results in only a movement along the curve. When suppliers change a price, it will lead to only a change in quantity demanded and quantity supplied. The whole curve does not shift. If the price charged is not equilibrium, the market will suffer either a shortage or a surplus, depending on whether the price is higher or lower than equilibrium. A shortage is caused by pricing below equilibrium. A surplus is caused by pricing above equilibrium: Market Outcomes Remember, four changes can happen in a market with four different outcomes. Analyze a Market The equilibrium point indicates the equilibrium price. It is the point on the graph where the supply and demand curves intersect. It identifies a price that satisfies both suppliers and consumers. The graph below indicates the supply and demand curves for kayaks. A Shift in Demand A famous influencer announces that purchasing a kayak was their best decision in the past year. Demand increases from D to D1. A Shift in Supply A global emergency halts the production and distribution of high-density polyethylene (HDPE), a strong plastic used in a variety of products—including kayaks. Kayak manufacturers do not have enough HDPE to produce at their normal levels. Supply decreases from S to S1. 1.05 Summary In the sale of goods and services, price is determined by the interaction between supply and demand. In a graph, the point where the supply curve and demand curve intersect is called the equilibrium point. This point corresponds to the equilibrium price, the one a business should seek to charge. If suppliers charge a price higher than equilibrium, a surplus will result. If they charge less than equilibrium, a shortage will result. Supply curves and demand curves can shift as a reaction to other events in the marketplace; we can recognize the shift as an increase or decrease based on the left or right movement of the curve. When a curve shifts, the equilibrium point (price) also shifts. 1.06: Money Four Functions of Money Medium of Exchange: Money is accepted in exchange for another item. For example, when you purchase gum at the store and hand over a one dollar bill, the bill is accepted as a medium of exchange. Measure of Value: Money is used to describe the worth of an item. For example, you may estimate your used laptop as valued at five hundred dollars. Your friend might say two hundred dollars. Either way, you are both describing the value of the used laptop in terms of money. Standard: Money has a consistent numerical measurement. In other words, the one dollar bill stashed in your shoe is worth the same as the crisp one dollar bill in your wallet. Both are also equal to the 10 dimes in your couch. Store of Value: Money holds its value. So if you find that one dollar bill in your shoe a year later and it is very stinky, it is still worth a dollar just like the crisp dollar bill with the freshly inked perfume. Characteristics of Money Currency = Cash and Coins. 1. Accepted form of payment. 2. Government Guaranteed: Fiat currency like U.S. currency, is money the government declares legal for use in payment. People have confidence that fiat currency will hold its value because it was issued by the government. 3. Counterfeit Money is illegal. The government will not accept a dollar that was not created by the U.S. Treasury. 4. Printing more currency will not solve economic problems. Remember what you learned about supply and demand. Money, even currency, is subject to the same rules. If there is too much supply, the purchasing power of each dollar will decrease. People would need more currency to purchase the same amounts of goods and services. 5. Cryptocurrencies: A digital form of payment for goods and services. 1.06 Economic Terms and Descriptions 1.07: Taxes and You Gross income: Income before taxes have been taken out. Net income: Income after taxes have been taken out. Direct vs. Indirect Indirect taxes, like sales taxes, are collected when a person pays for a good or service. The seller must submit these taxes to the government. Direct taxes are paid straight to the government. Tax Category Sales tax indirect Income tax direct Corporate income tax direct Gasoline tax indirect 9-1-1 Service Fee (on cell phone bill) indirect "Death" tax (estate tax) direct Taxes on sale of property indirect Annual property tax direct The federal income tax is a direct tax, it is more complicated than other types of taxes. Since it involves such large amounts of money, especially as a person's income increases, most employers practice what is called withholding. This means you estimate how much you will owe in taxes, and your employer subtracts it from your pay and sends it to the IRS. For every year you collect income, you must submit a tax return to the IRS to report income earned in the past year. From there, the amount owed in taxes is calculated. Progressive, Regressive and Proportional Taxes Proportional Tax System (Flat Tax or Fair Tax): The tax rate is the same for all income levels. Favors those with a higher income. Regressive Tax System: Tax rate is same regardless of income level. Proportion of income that goes toward taxes decreases as you earn more income. Favors those with a higher income. Progressive Tax System: As your income increases the percentage of taxes paid to the government also increases. Favors those with a lower income. The US’s income tax type. The United States’ system uses marginal tax rates. This means that people who fall into, for example, a 25 percent tax bracket do not simply pay one-quarter of their income in tax. In fact, they would pay different rates up to 25% for portions of their income according to defined tax brackets. In addition, not all income is taxable income. Reductions in taxable income exist for different circumstances, such as paying to make your home more energy efficient. 1.08: Save, Invest, or Spend Ways to get paid: Direct deposit—the employer deposits wages directly into the employee's bank account. Payroll card—the employer loads wages onto a card with a magnetic strip (like a credit or debit card) that can be used to make purchases. Paper check—the employer provides a paper check representing the employee's wages that must be deposited into a bank account or exchanged for cash. Types of bank accounts: Basic checking account: Basic accounts are often free to have and may not require a minimum balance or amount of money to stay active. They offer some simple services, such as a debit card and paper checks for making purchases. These accounts usually do not earn interest on balances. Interest-bearing checking account—this account is like a basic checking account, but by following some additional rules, you can earn interest on any balance you leave in the account. There is likely a minimum balance to maintain and fees to pay if your account drops below that amount, so it is important to pay attention to the rules of any account you open. Money Market deposit account—this is also a checking account, in the sense that you can use it to pay for purchases. However, it is also an investment, where the bank is using your money to invest in the stock market. Therefore, the bank limits transactions (withdrawals or checks) to usually six per month. This is not the account you would use for your daily gas and coffee. It does require a minimum balance, but does pay interest on it and usually better than you can get with other checking accounts. Savings account—a traditional savings account is designed to encourage you to do exactly that—save your money. You can deposit cash into it and make withdrawals but not write checks or use a debit card to make a purchase directly from it. Savings accounts may also come with a minimum balance but do also pay interest. Compound interest offers you interest on your initial deposit, or principal amount, as well as interest earned. This is a significant advantage for you as the depositor. Nominal Interest Rate: The rate quoted in loan or investment agreements. Real interest rate: The rate an investor can expect to make after taking out inflation. It can be found by taking the nominal rate and subtracting the rate of inflation. Investment Type Description Traditional Will earn little to no money Savings or Bank may charge money for you to have this accounts Checking You can get your money out in cash daily Account Easy to use checking account with debit cards and checks BUT, has the potential for identity theft! A conservative investment Individual Limit to how much money you can deposit Retirement Bank will charge money if you take out the money Account Save money on your taxes by putting money in this (IRA) A conservative investment Certificate of Will earn more money than traditional savings Deposit (CD) Bank will charge money if you take your money out early Requires a minimum amount of money to invest Safe way to save money but hard to get it out if you need it A conservative investment Money Will earn little money, but better than traditional savings Market Bank will charge money if you take money out too often Account Bank may require a minimum amount of money in the account A conservative investment Bonds Purchasing a bond means giving a loan to a company. Requires a minimum amount of money to purchase and a minimum length of time to hold on to the bond. "T-Bonds" are bonds issued by the U.S. Treasury and are safer than corporate bonds. A moderate investment Mutual Fund Share of ownership in a mixture of companies Requires a minimum amount of money to invest Can earn significantly more money but also potentially lose more But, your money is not based on only one company A moderate investment Stocks 1. Share of ownership in a single company 2. Makes the most money over a long period of time 3. If company fails, you lose all your money 4. An aggressive investment  Investment Type Description Futures Betting on the future price of a common product, like wheat You make a legal commitment to buy a certain amount, at a certain date for a certain price Riskiest of the investments, can earn or lose large amounts of money An aggressive investment Risk Levels: Investment Type Risk Level Traditional Savings or Checking Account Low Individual Retirement Account (IRA) Low Certificate of Deposit (CD) Low Money Market Account Low Bonds Moderate Mutual Fund Moderate Stocks High Futures High Credit is a borrowing service that allows you to obtain goods and services now but pay for them later. The business offering the credit charges you interest on the money borrowed. There are two types of credit: 1. Installment Credit: This type of credit is usually for expensive items. It allows you to purchase a good or service and pay it back in fixed monthly payments. People will get this type of credit to purchase cars, appliances, mortgages, and student loans. 2. Credit Cards: These are plastic cards with a magnetic strip, issued by stores, banks, and businesses, used to purchase goods and services. Depending on the deposit requirements, cards are secured, like prepaid credit cards, or unsecured. 1.08 Terms Review: A share of ownership in a company is a stock Share of ownership in many companies mutual fund Young people are encouraged to invest more … aggressively Person who trades stock for clients stockbroker Type of company that offers stock shares for sale public The place where securities are traded exchanges Profit payouts on shares of stock dividends Deceptive and illegal business practices fraud  Easily converted to cash liquid Saving account for specified time period CD Special retirement savings account IRA Best account for paying bills checking Protects your bank deposits FDIC Fee for use of borrowed money interest 1.09: Your Budget: A budget is a plan of income and expenses. It shows how much money is coming in and how much is going out during a set time frame. The purpose of budgeting is to plan spending so that you "live within your means." A budget is a framework for what you can afford. Living beyond one's means, or going into debt, is costly in terms of interest payments, stress, reduced credit-worthiness, and reduced money for savings and wants. How to create a Budget: 1. Calculate Your Income There are two types of income: gross income and net income after subtracting taxes and fees. To determine your net yearly income, or "take-home pay," you'll subtract approximate taxes and fees from your gross income. 2. Calculate Your Expenses An accurate and useful budget should account for all income and all expenses. Expenses can be grouped into fixed and variable. When making adjustments to a budget, look at the variable expenses first to see how you can save money.  3. Put Your Data Together Once you have determined what your yearly income and yearly expenses are, you will need to put those numbers together into an actual document. 4. Analyze Your Budget Now analyze your budget. Does your net income cover your expenses? If not, that means your budget is "in the red." Look at all possibilities in your budget. Where can you reduce your variable expenses? Work on the budget until there is more money coming in than going out. Budgeting by the numbers: This chart illustrates the income proportion economists recommend you spend on each category. You do not have to meet it exactly; each is a guideline. For example, economists recommend spending somewhere between 25% and 35% of your income on housing.