Gatos

Economics and State

January ~ May 2014

Study Guide

Economics

• Microeconomics: Branch of economic theory that deals with behavior and decision making by small units such as individuals.

• Macroeconomics: Branch of economic theory that deals with the economy as a whole and decision making by large units such as governments.

• What is economics? - Basic concepts (Chapter 1)

• What is Economics? Social science dealing with the study of how people satisfy unlimited wants with the use of limited resources.

• Scarcity: Fundamental economic problem that result from a combination of limited resources and people’s unlimited wants.

• Need ~ Want:

• Need: basic requirement for survival; includes food, clothing, shelter, etc.

• Want: a broader classification than needs.

• Economic questions:

• WHAT TO PRODUCE?

• HOW TO PRODUCE?

• FOR WHOM TO PRODUCE?

• Capital (financial, human, physical):

• Financial Capital: The money used to buy the tools and equipment used in production.

• Human Capital: Sum of peoples’ skills, abilities, and motivation
• Physical Capital: Tools, equipment, and factories used in the production of goods and services.

• Factor of production

• Land

• Capital

• Labor

• Entrepreneurship

• Economic products: Goods or services that are useful, relatively scarce, and transferable to others.

• Value (Paradox of Value): Apparent contradiction between the high value of nonessentials and low value of essentials.

• Circular Flow of Economic Activity: The wealth that an economy generates is made possible by the circular flow of economic activity.

• Market (factor and product markets): Place or mechanism allowing buyers and sellers to come together; may be local, regional, national, or global.

• Factor Market: Market where productive resources are bought and sold.

• Product Market: Market where goods and services are offered for sale.

• Economic growth: Sustained period during which a nation’s total output of goods and services increases

• Productivity (division of labor, specialization, economic interdependence): Degree to which resources are used efficiently.

• Division of labor: Division of work into a number of separate tasks to be performed by different workers.

• Specialization: Assignment of tasks so that each worker performs fewer functions more frequently.

• Economic Interdependence: Economic activities in one part of the country or world affect what happens elsewhere.

• Opportunity Cost: Cost of the next best alternative use of money, time, or resources when one choice is made.

• Production Possibilities Frontier –PPF: Diagram representing maximum combinations of goods and services an economy is capable of producing when all resources are fully employed.

• Economic Systems (Chapter 2 – sections 1 & 3)

• Economic System: Organized way a society provides for the wants and needs of its people

• Traditional economy: Economic system in which the allocation of scarce resources and economic activities is the result of ritual, habit, or custom.

• Command economy: Economic system characterized by a central authority that makes most of the decisions.

• Market economy: Economic system in which supply, demand, and price system help people make decisions.

• Capitalism: Economic system in which private citizens own the factors of production in order to generate profit.
• Laissez-Faire: Philosophy in which is stated that the government should not interfere with business activity.

• Business Organizations (Chapter 3 – sections 1 and 3, concepts seen in class and in your exam)

• Sole Proprietorship: Unincorporated business owned by a single person who has rights to all profits and unlimited liability for all debts of the firm.

• Partnership: Unincorporated business owned by two or more people who share the profits and have unlimited liability for the debts and obligations of the firm.

• Corporation (Stocks): Form of business organization recognized by law as a separate legal entity.

• Demand (Chapter 4 – sections 1,2 and 3 ~ it’s going to be general concepts)

• Law of demand: Rule stating that more will be demanded at lower prices and less at higher prices.

• Change in quantity demanded: Movement along the demand curve showing that a different quantity is purchased in response to a change in price.

• Change in demand: Consumers demand different amounts at all prices, causing the demand curve to shift to the left or the right.

• Substitutes: Competing products that can be used in place of one another, the products are related in such a way that an increase in the price of one increases the demand for the other.

• Complements: Products that increase the value of other products, this products are related in such a way that an increase in the price of one reduces the demand for both.

• Demand elasticity: Measure of responsiveness relating change in the quantity demanded of a certain product to a change in its price.

• Elastic, Inelastic & unit-elastic

• Elastic: Type of elasticity where the percentage change in the independent variable causes a more than proportionate change in the dependent variable.

• Inelastic: Type of elasticity where the percentage change in the independent variable causes a less than proportionate change in the dependent variable.

• Unit-elastic: Type of elasticity where a change in the independent variable generates a proportional change of the dependent variable.

• Output expenditure test: Macroeconomic model describing demand by the consumer, investment, government, and foreign sectors represented by this formula: GDP = C + I + G + F

• Supply (Chapter 5 – sections 1,2 and 3)

• Law of supply: Rule stating that more will be offered for sale at high prices than at lower prices.

• Change in the quantity supplied: Change in amount offered for sale in response to a price change, its movement is shown moving along the supply curve.

• Change in supply: Different amounts offered for sale at each and every possible price in the market, causing the supply curve to shift to the left or to the right.

• Supply elasticity: Responsiveness of quantity supplied to a change in price

• Elastic, Inelastic & unit-elastic: “See Demand”

• Stages of Production: Increasing, decreasing, and negative returns.

• Marginal Production: Extra output due to the addition of one more unit of input.

• Costs (fixed, variable, marginal)

• Fixed: Cost of production that does not change when output changes.

• Variable: Production cost that varies as output changes such as labor, energy, raw materials.

• Marginal: Extra cost of producing one additional unit of production.

• Prices (Chapter 6)

• Market equilibrium: Condition of price stability where the quantity demanded equals the quantity supplied.

• Surplus: situation where quantity supplied is greater than quantity demanded at a given price

• Shortage: situation where quantity supplied is less than the quantity demanded at a given price.

• Equilibrium price: price where quantity supplied equals quantity demanded; price that clears the market

• Market Structures (Chapter 7)

• What is a Market Structure? Market classification according to number and size of firms, type of product, and type of competition

• Perfect competition: Market structure characterized by a large number of well-informed independent buyers and sellers who exchange identical products.

• Imperfect competition: market structure where all conditions of pure competition are not met.

• Monopoly and types of monopolies: market structure characterized by a single pro- ducer:

• Natural Monopoly

• Geographic Monopoly

• Technological Monopoly

• Government Monopoly

• Oligopoly: Market structure in which a few large sellers dominate and have the ability to affect prices in the industry.

• Monopolistic competition: Market structure having all conditions of pure competition except for identical products.

• Employment, Labor and Wages (Chapter 8)

• Wage and wage determinants (theories of wage determination)

• Traditional Theory of Wage Determination: The theory states that the supply and demand for a worker’s skills and services determine the wage or salary.

• Theory of Negotiated Wages: Explanation of wage rates based on the bargaining strength of organized labor

• Concept of Labor Union: Organization that works for its members’ interests concerning pay, working hours, health coverage, fringe benefits, other job related matters.

• Collective bargaining: Process of negotiation between union and management representatives over pay, benefits, and job-related matters.

• Strike: union organized work stoppage designed to gain concessions from an employer.

• Market work:

• Non-market work

• Financial Markets (Chapter 11)

• Financial system: Network of savers, investors, and financial institutions that work together to transfer savings to investment uses.

• Financial intermediaries: Institution that channels savings to investors; banks, insurance companies, savings and loan associations, credit unions.

• Savings: The dollars that become available for investors to use when others save

• Savings and economic growth

• How do savings make funds available?

• Capital, money, primary & secondary markets

• What is a stockbroker? It is a person who buys or sells securities for investors

• Macroeconomic Performance (Chapter 12)

• Gross Domestic Product GDP: The dollar amount of all final goods and services produced within a country’s national borders in a year.

• Things not included in GDP:

• Intermediate products

• Secondhand sales

• Nonmarket sales

• Gross National Product: Total dollar value of all final goods, services, and structures produced in one year with labor and property supplied by a country’s residents, regardless of where the production takes place

• Sectors of economy

• Investment: It is made up of proprietorships, part- nerships, and corporations. It is the productive sector responsible for bringing the factors of pro- duction together to produce output.

• Consumer (households, unrelated individual, families): The largest sector in the macro economy is the consumer, or private, sector. Its basic unit, the household, is made up of all persons who occupy a house, apartment, or room that constitutes separate living quarters.

• Government: The government sector receives its income from sources such as indirect business taxes, corporate income taxes, Social Security contributions, and personal income taxes from the consumer or household sector.

• Foreign: This sector includes all consumers and producers outside the country of origin. Unlike the other sectors, the international sec- tor does not have a source of income specific to it.

• Economic Instability (Chapter 13)

• Unemployment: State of working for less than one hour per week for pay in a non-family owned business.

• Types of unemployment

• Seasonal Unemployment: Unemployment caused by annual changes in the weather or other conditions that prevail at certain times of the year.

• Technological Unemployment: Unemployment caused by technological developments or automation that make some worker’s skills obsolete

• Cyclical Unemployment: Unemployment directly related to swings in the business cycle

• Inflation and types of inflation: rise in the level of prices.

• Creeping inflation: Relatively low rate of inflation, usually 1 to 3 percent annually

• Galloping inflation: Relatively intense inflation, usually rang- ing from 100 to 300 percent annually

• Hyperinflation: Abnormal inflation in excess of 500 percent per year; last stage of a monetary collapse

• Consequences of inflation: The most obvious effect of inflation is that the dollar buys less. A second destabilizing effect is that inflation can cause people to change their spending habits, which disrupts the economy. A third destabilizing effect of inflation is that it tempts some people to speculate heavily in an attempt to take advantage of a higher price level. And finally, inflation alters the distribution of income.

• Poverty: Poverty is a relative measure that depends on prices, the standard of living, and the incomes that others earn.

• Money and Banking (Chapter 14)

• Barter economy: Moneyless economy that relies on trade or barter

• Functions of money

• Medium of exchange
• Measure of value
• Store of value

• Characteristics of Money

• Durability
• Portability
• Divisibility
• Limited availability

State ~ study them from the documents I left in blackboard and from your homework. The exam is very general on these points.

• State and its elements

• Territory

• Population

• Sovereignty

• What is law?

• Rights

• Constitution

• Individual guarantees

• Liberty / Freedom

• Equality

• Property

• Juridical Security

• State Forms

• Central State

• Federation

• Confederation

• Types of Governments

• Monarchy

• Republic

• Democracy

• Dictatorship

• Division of powers

• What is legislative power? Who is in charge of it?

• What is executive power? Who is in charge of it?

• What is juridical power? Who is in charge of it?

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