Chapter 1 Notes

I. An economic way of thinking

A. Importance of economics

2. Flow chart:

Producers---> Factors of Production--->Products--->Mediums of Exchange-->Consumers

Natual Resources Consumer Money,credit,barter

Human Resources goods and services

Capital Resources

Entrepreneur

D. Opportunity Cost

1. The next best choice you did not choose to do

E. Production Possibility Curves

1. Illustrates opportunity costs

2. In class examples

II. Flow Chart in class or page 9 of text

Chapter 2 Notes

Part 1

I. Economic Systems
A. Traditional Economies
1. Economic decisions repeat those made in earlier times.
2. The 3 economic questions are answered by past practices and customs.
3. Examples

B. Command Economies
1. Economic decisions are made by the government.
2. Government Planners answer the three economic questions.
3. Command decisions can be democratic or authoritarian.
4. Examples

C. Market Economies
1. Decisions are made by people engaged in voluntary exchange.
2. Consumers determine what to produce.
3. Producers determine how to produce.
4. Income depends on the productive resources a persons has to sell.
5. Market prices are signals that affect consumption and production.
6. Examples

D. Mixed Economies
1. Combination of all three type of economies mentioned above.
2. All economies fall in this category including the United States.

E. Adam Smith
1. Considered the father of the Free EnterpriseEconomy.
2. Laissez-faire ~Let the people do as they want without government
intervention.
3. Invisible hand ~ People will do the right thing
based on self interest & incentives.

Part 2

A. Circular Flow Model- Class example and your own creation

B. Economic Goals-

Chapter 3

DEMAND

Part 1 Notes

A. Nature of Demand

1. Law of demand

a.) An increase in a good’s price causes a decrease in the quantity demanded and that a decrease in price causes an increase in quantity.

b.) The law of demand has an inverse relationship between price and quantity demanded.

2. Three economic concepts that explain the law of demand

a.) Income effect
1.) Consumers’ purchasing power
2.) Examples;
- What you demand now vs. what you will demand 10 years from now.
– President Bush’s tax cuts

b.) Substitution effect
1.) Cheaper products that perform the same function.
2.) Examples;
- Store or generic brands vs. national brands
–Spartan Brand vs. Kraft Brand

c.) Diminishing Marginal Utility

1.) To entice people to buy more of a product, producers must lower the price because demand for a product is not limitless.

2.) Examples;
-A bag of potato chips
–All-you-can-eat-restaurants
-warehouse clubs

3. Graphing demand
Demand Schedule Graph

4. Determinants of demand 

Increase in demand will cause the demand curve to shift right and price & quantity both increase

Decrease in demand will cause the demand curve to shift left and price & quantity both decrease

B. Elasticity of Demand- The degree to which changes in a good’s price affect the quantity demanded by consumers.

1. Elastic demand-A small change in price will result in a large change in the quantity sold.

a.)To be elastic;
1.) The product is not a necessity

2.) There are readily available substitutes

3.) Fairly expensive product
b.) Examples

-pizza, stereo

c.) Graph

2. Inelastic demand- A large change in price will result in a small change in amount sold.

a.) To be inelastic;

1.) The product must act as a necessity

2.) No good substitutes

3.) Generally, only a small portion of a person’s income

b.) Examples
-gas, cigarettes, alcohol beverages

b.) Graph

3. Measuring Elasticity
a.) If lowering the price of a product raises total revenue, then the demand is elastic

b.) A rise in a business’s total revenue because of a price increase indicates inelastic demand.

Chapter 4 Notes

SUPPLY

1. Supply-
a) One must think as a seller to better understand this concept.
b) Quantity of a good that sellers are ready to sell at a specified price AND time.

2. Law of Supply
a) The higher the price for a product, the greater quantity offered for sale. The lower the price, the less quantity offered for sale.
b) Profit Motive gives direction to individual companies as well as entire markets on how best to use our resources.
Examples-What are the signals when prices fall or rise?

3. Graph of Supply

4. Elasticity of Supply
a.) Elastic Supply…
1.) Product is usually made;
-quickly
-inexpensively
-using few, readily available resources
2.) Examples;
-most food items, donuts, pizzas, etc.
b.) Inelastic Supply…
1.) Product usually takes a great deal of ;
-time to make
-money to make
-resources not readily available
2.) Examples;
-houses, hotel rooms, cars, etc.

5. Changes in Supply
a.) Determinants that will shift the supply curve
1.) Price of resources
2.) Government tools
3.) Technology
4.) Competition
5.) Price of related goods
6.) producers’ expectations
b.) Graphs

Increase in supply will cause Curve shifts to the right, Price decreases, Quantity increases

Decrease in supply will cause Curve shifts left, Price increases,  Quantity decreases

CHAPTER 5

I. The price system – how we decide who gets what

A. Producers and consumers communicate with each other through prices.

B. Benefits of the Price system

1) Information-production and purchasing decisions, what info do you get from prices.

2) Incentives to participate in the market. (even as workers, high prices people enter the market)

3) Choice-encourage many producers to compete by producing many different products.

4) Efficiency-only produce what people want or need.

5) Flexibility- price changes to offset determinants affecting supply and demand.

C. Limitations of the price system due to market failures.

1) Externalities-side effects for people not directly connected with the production or consumption of the good.

a) Positive- how you can benefit

b) Negative-pollution

2) Public goods-parks, police, national defense, judicial system, etc. Also can force you to sell.

3) Instability- drastic price swings. In crisis-

II. Putting Supply and Demand together to determine price

1) Refer to Graph in class

2) What if we price candy bars at $.75 surplus

3) What if we price candy bars at $.25 Shortage

4) Shifts in equilibrium - moving supply and demand
http://ecedweb.unomaha.edu/Dem_Sup/econqui2.htm

III. Price Controls- Price Ceilings and Price Floors

Chapter 6 Notes

Market Structures

I. Perfect Competition

A. Many buyers and sellers act independently

B. Sellers offer identical products

C. Buyers are well informed about products

D. Sellers can enter or exit the market easily

E. Examples
Internet businesses, agricultural markets (farmers market), stock market

II. Monopolistic Competition

A. Product may seem the same but hype (advertising and marketing ploys) from the producers make us believe there is a difference.

B. Product differences (Perceived at least)-Coke and Pepsi

C. Non-price Competition- Designer jeans vs. “no name” jeans

D. Profits-Brand loyal customers will pay more

E. This happens with almost all products and services-video examples

III. Oligopolies
A. There are only a few large sellers (about 3 or 4 that dominate and sometimes manipulate the market)

B. Sellers offer identical or similar products

C. Other sellers can not enter the market easily

D. Examples: Breakfast cereal companies
Coke and Pepsi
3 Ferry lines to Mackinac Island

IV. Monopolies

A. There is a single seller

B. No close substitutes

C. Other sellers can not enter the market easily.

D. Origin of monopolies in the U. S. A.

1. In the 1880’s many companies began to expand from coast to coast- buying up their competition.
Examples:
Proctor & Gamble with Ivory Soap
George Eastman
Andrew Carnegie (steel production)

John D. Rockefeller (oil)

2. These companies and many others formed cartels to set prices.

3. This led to the formation of trusts, which led to monopolies.
Examples:
Standard Oil
National Biscuit Company
James Duke (Tobacco)
DuPont
Also referred to as conglomerates

4. Competition was disappearing
By 1900, 2% of all the companies in the U.S. were making 50% of all the products.

5. Laws to break up the monopolies
a.) Sherman Antitrust Act of 1890
b.) Clayton Antitrust Act of 1914
c.) Robinson-Patman Act of 1936

6. Monopolies for the most part were broken up and made illegal
Example:
Standard Oil was broken up into Exxon, Chevron, Mobil, & Amoco.
AT&T into the babybells
Microsoft???

7. The Federal Trade Commission (FTC) stops and allows mergers.

8. Public Monopolies
Utilities
Post Office
Amtrak

Chapter 7 Notes

1. Corporations

a. completely owned by stockholders

b. corporation is a single unit that has certain,

rights and privileges by law

c. formation of a corporation

1. articles of incorporation must be drawn up

a. name, purpose, & location

b. number of directors

c. name & address of directors

d. amount and kind of stocks to be issued

e. other information as required by state government

2. Board of directors

a. They supervise and control the

affairs of the corporation

b. they must follow rules of the corporation called

by laws

c. they may or may not always be owners of the corporation-

ownership is based only on owning stocks

d. must be elected to be on board by the stockholders

3. capital formation-coming up with money for the corporation

a. stocks

1. common stocks-voting rights

2. preferred stocks-No voting rights, paid first

b. borrowing money and issuing bonds-(Principle &

Interest)

-very hard for a small corporation

c. reinvestment

-retained earnings, profits put back into a

corporation

d. subsidies and gifts

-usually in the form of a tax break

4. corporate profits

a. retained earnings

b. dividends-payments to stockholders

1. cash dividends

2. stock dividends

5. advantages of a corporation

a. limited liability of owners (stockholders)

b. continue existence

c. greater capital

d. easy transfer of ownership (liquidity)

6. disadvantages

a. government control

b. federal and state taxes

-double taxation of corporate profits

Chapter 10 Notes

Measuring Economic Performance

Chapter 10 Notes

I. Gross Domestic Product

A. The total value of all final goods and services produced within a country

B. Parts of the GDP

1. Consumption- This is the amount of money that consumers are spending on products like durable goods (cars, furniture, etc.), nondurable goods (food and clothing), and services like legal fees and medical care. This accounts for 58% of the total GDP.

2. Investments- This accounts for investments by businesses on property, plant and equipment along with residential investment on family homes and concludes with changes in business inventories. This accounts for 16% of the GDP.

3. Government Spending- This accounts for 15% of the total GDP.

4. Exports minus Imports- This accounts for the remaining 11%

C. The GDP is used to define a recession- Two consecutive quarters with negative growth defines a recession.

II. Business Cycle-Reflects the GDP, See examples in class

Chapter 11

Economic Challenges

A) Consumer Priced Index (CPI)

1.) Index that focused on the Market Basket

a) “Basket” of 400 goods and services used by a family of four

b) Includes 6 broad groups

1) food and Beverage (19%)

2) Housing (37.7%)

3) Clothes and Maintenance (5.2%)

4) Transportation (21.8%)

5) Medical Care (6.0%)

6) Other (10.3%)

2.) 1982-1984 is the base year period for the official CPI

a) This means in 1982-1984 $1.00=$1.00

b) In any price Index, use this formula

Price in any given year

Price Index = ---------------- * 100

Price in base year

EXAMPLE:

Refer to 'Student Price Index' homework assignment

3) Uses of the CPI

a) Cost of living adjustment (cola)

1) Provision of most labor contracts that grant wage increases based on changes in the CPI

2) CPI governs annual cola in social security payment

b) Determines rate of growth of our economy

c) Determines the inflation rate

B) Inflation

1) Money has decreased purchasing power and there is a rise in the general price level

2) Causes of inflation

a) Aggregate demand exceeds aggregate supply and the economy is at full employment

b) Cost of production greatly increases

3) Types of Inflation

a) Demand –Pull Inflation-

1) Demand for goods increases beyond the actual supply and total demand exceeds the full employment output capacity of the economy

2) Basically anything that increases the amount of money in circulation as compared with the available goods and services

b) Cost –Push Inflation-

1) Increases in production costs that are greater than the increases in labor productivity

2) Wages rise more rapidly than labor productivity so employers must raise prices

c) Other inflation issues

1) Stagflation- A combination of high unemployment and inflation

2) Hyperinflation- out of control inflation

Chapter 14 & 15 Notes

CHAPTER 18 NOTES

1. Specialization and Interdependence

A. Every country specializes in some part of the production process: natural, labor, or capital resources

Example: South America has a natural environment that grows coffee beans very well

B. Whatever a country specializes in that is, can do it with greater efficiency has an absolute advantage in producing that product.

Example: United States can produce, with greater efficiency, more automobiles and clothing products than Mexico. Therefore, the U.S. has an absolute advantage in both auto and clothing.

C. The greatest absolute advantage a country has, will be its comparative advantage.

Example: U.S. has a greater absolute advantage in autos, so compared to Mexico, the U.S. has a comparative advantage in producing autos.

2. Foreign Exchange

A. Foreign exchange rates:

1. Based on supply and demand

2. Stronger dollar, 1 dollar = 5 francs, if 1 U.S. dollar becomes stronger, $1.00 U.S. = 8 francs, now things in France become more expensive.

B. Foreign exchange

1. Trade surplus – we export more goods than we import.

2. Trade deficit – we import more goods than we export.