Intro to Economics Test Study Guide PDF

Concepts and Content to know for this Unit: Systems Systems - Structures organized for managing resources, production and distribution Free Market: In a free market, individuals and businesses make decisions with minimal government i...

Concepts and Content to know for this Unit: Systems Systems - Structures organized for managing resources, production and distribution Free Market: In a free market, individuals and businesses make decisions with minimal government interference, driven by supply and demand. Pros- Efficient allocation of resources : The market determines the distribution of goods and services, typically leading to optimal use of resources. Encourages innovation : Competition fosters new products, services, and technological advancements. Consumer choice : A wide variety of goods and services are available, catering to different tastes and preferences. Flexibility : The market quickly responds to changes in demand and supply, adapting to new circumstances or consumer desires. Cons - Inequality : Wealth and resources may be distributed unevenly, leading to economic disparity. Resource wastage : Overproduction or underproduction can happen if the market doesn't balance correctly (e.g., in cases of market failure). Exploitation of workers : In the pursuit of profits, businesses may underpay workers or provide poor working conditions. Lack of public goods : Essential services like healthcare and education may be underprovided if they are not profitable. Environmental degradation : The focus on profit maximization can lead to neglect of environmental sustainability. Command Economy: In a command economy, the government controls most aspects of economic activity, including production, pricing, and distribution.  Pros- Promotes equality : The government can ensure more equitable distribution of wealth and resources. Stability : Centralized control can prevent extreme fluctuations in the economy, providing more job security. Efficient use of resources for national goals : The government can direct resources toward essential sectors (e.g., defense, infrastructure). Prevents monopolies : State control reduces the risk of private monopolies dominating the market. Cons - Inefficiency : Centralized decision-making can result in bureaucratic delays and mismatches between supply and demand. Lack of innovation : Without competition or profit incentives, innovation may stagnate. Limited consumer choice : The government determines what is produced, leaving little room for diversity or personal preference in goods and services. Poor resource allocation : Government decisions may not reflect the true needs of consumers or local conditions. Potential for authoritarianism : The concentration of power in the government can lead to corruption and abuse of power. Mixed Economy: A mixed economy combines elements of both free-market and command economies, with both the government and private sector playing roles in decision-making. Pros - Balance between freedom and control : Private businesses operate freely in many sectors, while the government ensures social welfare and regulation. Flexibility : The system can adapt to changing economic conditions, drawing on the strengths of both market forces and government intervention. Public services and welfare : The government can provide essential services, such as healthcare, education, and infrastructure, while still encouraging private enterprise. Reduced inequality : The government can redistribute wealth through social programs or taxes to reduce inequality. Cons- Government inefficiency : Public sector inefficiencies can slow down economic progress, particularly in heavily regulated or state-controlled industries.  Higher taxes : The need to fund social welfare programs and government regulations may lead to higher taxes, which can burden businesses and consumers. Risk of overregulation : Excessive government intervention in markets can stifle entrepreneurship and economic dynamism. Political influence : Economic decisions may be influenced by political agendas, leading to corruption or favoritism. Traditional Economy: In a traditional economy, production and distribution are guided by customs, traditions, and community-based decisions. Pros - Stability : Social structures and economic roles are clearly defined, leading to a stable society with less conflict over resources. Sustainability : These economies often emphasize sustainable resource use and environmental conservation, as people rely on local resources and traditional practices. Strong community bonds : There is a high level of social cohesion, as people share a common culture and work together for mutual benefit. Low environmental impact : The emphasis on small-scale, localized production leads to minimal ecological damage compared to large-scale industrialization. Cons - Limited economic growth : The lack of technological advancement and innovation can keep economies stagnant and hinder progress. Inefficient use of resources : Traditional methods may be less productive and resource-intensive compared to more modern methods. Resistance to change : Communities may be resistant to new ideas, technologies, or approaches, which can limit development. Lack of access to modern healthcare or education : Limited resources and reliance on traditional systems may restrict access to essential services. Vulnerability to external shocks : These economies are more vulnerable to natural disasters, climate change, or other outside influences that can disrupt local resources or trade. Inequality: Causes -  1. Education is important for earning higher incomes, as those with more education tend to get better-paying jobs. However, not everyone has equal access to quality education. Factors like family income, location, and school funding can impact educational opportunities. Students from low-income families may attend underfunded schools, leading to lower educational attainment and, eventually, lower wages. 2. Globalization connects countries but can lead to job losses in wealthier nations as companies outsource production to cheaper labor markets. This harms low-skilled workers in rich countries while benefiting those in poorer ones, causing wage stagnation and increasing economic inequality. 3. Technology, including automation and AI, has significantly transformed job markets by replacing low-skilled jobs and reducing demand for such workers. Meanwhile, it creates high-paying opportunities for those with specialized skills or education. This leads to a growing income gap between skilled and unskilled workers, widening economic inequality gap. 4. The structure of taxes can impact economic inequality. In many countries, tax systems are not progressive, meaning wealthier individuals don’t pay a higher percentage of their income compared to lower-income earners. This leads to less funding for public services like education and healthcare, further worsening inequality. 5. Discrimination based on race, gender, or ethnicity can significantly limit economic opportunities for certain groups. For example, historical practices like redlining have restricted access to home loans for people of color in the U.S., preventing wealth-building through property ownership. Additionally, women and minorities often face wage gaps and limited opportunities for career advancement, further perpetuating economic inequality. Solutions 1. Ensuring equal access to quality education is key to reducing economic inequality. This can be achieved by increasing funding for underfunded schools, expanding financial aid for higher education, and providing technology to underserved areas, ensuring all students have the opportunity to succeed academically and professionally. 2. A progressive tax system ensures wealthier individuals and corporations pay a larger share of taxes, which can then fund essential public services. Raising taxes on high incomes and capital gains, closing tax loopholes, and using the revenue to support education, healthcare, and housing can help reduce inequality. 3. Raising the minimum wage helps reduce economic inequality by providing low-income workers with a livable income. It boosts purchasing power, improving quality of life and stimulating local economies. A higher minimum wage can reduce poverty and reliance on welfare, fostering greater financial stability for workers. 4. Strengthening workers' rights ensures fair wages, safe working conditions, and job security. This includes enforcing labor laws, protecting against exploitation, and supporting the right to unionize. By giving workers a voice, it helps reduce inequality, promotes fair treatment, and ensures equal opportunities in the workplace.  5. Inclusive economic policies focus on ensuring equal opportunities for all, regardless of background or status. This involves creating policies that support marginalized groups, including women, minorities, and people with disabilities, in accessing education, employment, and resources. By fostering inclusive growth, these policies help reduce inequality and promote broader economic participation. Economic Vocabulary Terminology Sheet 1. Microeconomics: The part of economics that studies how individual people and businesses make choices about buying and selling things. 2. Macroeconomics: The part of economics that looks at the whole economy, including big topics like national income, unemployment, and inflation. 3. Supply: The amount of a product or service that producers are willing to sell at different prices. 4. Demand: The amount of a product or service that consumers want to buy at different prices. 5. Opportunity Cost: The value of what you give up when you choose one thing over another. For example, if you spend your money on a toy instead of saving it for a game, the opportunity cost is the game. 6. Elasticity: A measure of how much the quantity demanded or supplied changes when the price changes. If a small price change leads to a big change in quantity, it is elastic. 7. Market Equilibrium: The point where the amount of product that consumers want to buy equals the amount that producers want to sell, meaning there is no surplus (extra supply) or shortage (not enough supply). 8. Consumer Choice: The decisions that individuals make about what to buy based on their preferences and how much money they have. 9. Gross Domestic Product (GDP): The total value of all goods and services produced in a country during a specific time period; it shows how well the economy is doing. 10. Inflation: The rate at which prices for goods and services increase over time, which can decrease the purchasing power of money (how much you can buy with your money). 11. Unemployment Rate: The percentage of people in the workforce who are looking for jobs but cannot find one. 12. Fiscal Policy: Government policies about spending and taxes that are used to influence the economy, such as increasing spending during a recession to help boost growth. 13. Monetary Policy: Actions taken by a country's central bank to control the amount of money in circulation and interest rates to help manage inflation and stabilize the economy. 14. Scarcity: The condition where limited resources are insufficient to meet human wants and needs, forcing choices to be made about their allocation. 15. Surplus: The supply of a good or service exceeds the demand for it, resulting in an excess that may lead to lower prices or adjustments in production. 16. GDP/capita: The total economic output of a country divided by its population, used to measure the average economic well-being of its citizens. 17. Goods: The physical items or products that are produced, bought, and sold to satisfy human wants and needs. 18. Services: The intangible activities or actions performed to satisfy the needs or wants of individuals or businesses, such as healthcare, education, or entertainment. Industries 1. Primary Industry: Involves the extraction and harvesting of natural resources, such as agriculture, mining, fishing, and forestry. 2. Secondary Industry: Focuses on manufacturing and construction, where raw materials from the primary sector are transformed into finished products, such as cars, clothing, and buildings. 3. Tertiary Industry: Also known as the service sector, it provides services rather than goods, including healthcare, education, finance, retail, and entertainment. 4. Quaternary Industry: Involves knowledge-based activities such as research, technology development, information services, and education.  Economic Factors to determine health of economy 1. Gross Domestic Product - GDP is a key measure of a country's overall economic activity, representing the total value of goods and services produced within a given period. When GDP grows, it often signals economic expansion, increased production, and higher consumer spending, suggesting a healthy economy. Conversely, a shrinking GDP can indicate a recession or economic contraction, as it reflects reduced production and potentially lower consumer and business confidence. Tracking GDP growth is essential to gauge the long-term health and direction of an economy. 2. Unemployment Rate The unemployment rate reflects the percentage of the labor force that is without work but actively seeking employment. A high unemployment rate suggests an economic downturn or inefficiencies in the labor market, often leading to reduced consumer spending and social challenges. Conversely, a low unemployment rate generally signifies a healthy economy, where businesses are expanding, and more people are employed, contributing to higher consumer confidence and economic growth. A balance is key, as very low unemployment can sometimes signal a tight labor market with potential for inflation. 3. Inflation Rate Inflation measures how quickly the general price level of goods and services is rising, and it directly impacts purchasing power. Moderate inflation is typically seen as a sign of a growing economy, as it suggests demand for goods and services is increasing. However, excessive inflation erodes purchasing power, raises costs, and can lead to financial instability. On the other hand, deflation (falling prices) can lead to reduced economic activity, as consumers delay purchases in anticipation of lower prices, potentially leading to a recession. 4. Interest Rates Interest rates, controlled by a country’s central bank, determine the cost of borrowing money. When interest rates are low, borrowing becomes cheaper, which can stimulate economic growth by encouraging businesses to invest and consumers to spend. High interest rates, however, can slow down borrowing, reducing consumer and business spending and potentially stalling economic expansion. Central banks adjust interest rates to either stimulate growth during recessions or cool down the economy during periods of high inflation, making interest rates a key tool in managing economic health. 5. Government Debt and Deficits Government debt represents the total amount of money a government owes, while deficits occur when government spending exceeds its revenues in a given year. High levels of debt and persistent deficits can signal an unsustainable fiscal policy, potentially leading to concerns about a country’s ability to meet its financial obligations. While some debt can be manageable and necessary for economic growth, excessive debt can lead to higher interest payments, reduce the ability to invest in essential public services, and limit the government's ability to respond to future economic crises, ultimately undermining long-term economic stability. 6. Income Distribution Income distribution refers to how wealth and income are spread across a population. Unequal distribution, where a small percentage of the population controls a large portion of the wealth, can lead to social and economic instability, as lower-income groups may struggle to access necessary goods and services. Economies with more equitable income distribution tend to have stronger consumer spending and social cohesion, which contributes to more sustainable growth. Tracking income distribution helps identify potential social tensions and underscores the importance of inclusive economic policies that benefit a broader segment of society. Supply & Demand Supply and Demand: Concept/Relationship Supply and demand are fundamental economic concepts that describe how goods and services are distributed in a market. They determine prices and quantities in an economy, playing a central role in shaping markets and guiding the allocation of resources. Demand refers to the amount of a good or service that consumers are willing and able to buy at different prices. The Law of Demand states that as the price of a good increases, the quantity demanded decreases (and vice versa), assuming all other factors remain constant. Supply refers to the amount of a good or service that producers are willing and able to sell at different prices. The Law of Supply states that as the price of a good increases, the quantity supplied increases (and vice versa). The relationship between supply and demand determines the equilibrium price, where the quantity demanded by consumers equals the quantity supplied by producers. If the price is too high or too low, there may be shortages or surpluses, which can lead to price adjustments. Graphing Supply and Demand Graphing supply and demand helps to visualize the relationship between price and quantity. Here’s how it's typically done: The X-axis represents quantity (how much there is, in terms of both demand and amount) The Y-axis represents price (how much people are willing to pay for the good). The Demand Curve slopes downward from left to right, showing that as the price decreases, the quantity demanded increases. The Supply Curve slopes upward from left to right, showing that as the price increases, the quantity supplied increases. The point where the two curves intersect is called the Equilibrium Point, and the corresponding price is the Equilibrium Price.  Scenarios in Supply and Demand 1. Increase in Demand: If consumer preferences for a product increase, the demand curve shifts to the right. For example, if smartphones become more desirable, more people want to buy them at every price point. This causes the price and quantity to rise. 2. Decrease in Demand: If consumer preferences decline or if there is a fall in income (for normal goods), the demand curve shifts to the left. For instance, if a new technology makes older devices obsolete, the demand for those devices drops, lowering both the price and quantity. 3. Increase in Supply: If a new technology makes production more efficient or the cost of inputs decreases, the supply curve shifts to the right. For example, if the cost of producing a type of clothing goes down due to new machinery, suppliers can afford to produce more at a lower price. 4. Decrease in Supply: If the cost of production increases (due to higher labor costs, for example) or if there’s a shortage of resources, the supply curve shifts to the left. For instance, if a natural disaster damages farms, the supply of certain crops decreases, pushing prices up. Commodity A commodity refers to a basic good or raw material that can be bought and sold. Commodities are typically standardized, meaning they are interchangeable with other goods of the same type. This makes them ideal for trading in large quantities, often on commodity exchanges. There are two main types of commodities: Hard commodities: These are natural resources that are extracted or mined. Examples include: Oil Gold Silver Copper Soft commodities: These are agricultural products or livestock. Examples include: Wheat Coffee Sugar Cattle Commodities are usually traded in bulk, and their prices can change based on supply and demand, geopolitical events, weather conditions, and other factors. They play a significant role in global trade and can be an important part of an investment strategy.