ECON 201 Exam Study Guide

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4 types of economic resources
land labor capital entrepreneurship
examples of land resource
water, forest, minerals, natural gas
physical or mental talents of human beings
produced goods that are used to produce other goods and services
examples of capital
plants, machines, equipment, tools
special mental talent needed to set up a business, assemble needed resources, and risk own money
economic growth effect on PPC graph
PPC shifts right; nation moves from left to right - moving from left point to right point
5 questions economy must answer
a) What goods and services to produce. b) What resource mix or technology to use. c) How to distribute the output. d) How to accommodate changes. e) How to promote economic growth.
circular flows of economy
• Resources, such as, land, labor, capital, and entrepreneurial ability flow from households to businesses. • Payments for the resources, such as, rent, wage, interest, and profit flow from businesses to households. • Goods and services flow from businesses to households. • Payments for goods and services flow from households to businesses. • Households supply resources and demand goods and services. • Businesses supply goods and services and demand resources.
points inside PPC graph represent
unemployment rate >5%
points ON PPC graph represent
employment rate of 5%
origin of PPC graph
represents 100% unemployment (nothing is produced, no resources)
circular flow model (economics)
- households supply resources and demand goods/services - businesses supply goods/services and demand resources - resources & payments flow from households to businesses - payments for resources & goods/services flow from businesses to households
payments for resources (examples)
rent, wage, interest, profit
negative externalities
market system overproduces a product
positive externalities
market system underproduces a product
market system does not produce
a product with public good characteristics
consumption expenditure
Consumption (2010) = Durable goods (11%) + Non-durable goods (29%) + Services (60%).
expenditures made by businesses on: - new structures - new equipments/software - new residential housing - additional inventories
advantages of proprietorship
quicker decisions and fewer taxes
disadvantages of proprietorship
1. whole burden on proprietor 2. limited skills, experiences, expertise
advantages of partnership
1. Wide range of skills, experiences, and expertise 2. Wide client/customer base 3. Fewer taxes
advantages of proprietorships and partnerships
1. Easy to form or to dissolve 2. Fewer legal hassles
disadvantages of proprietorships and partnerships
unlimited liabilities inability to raise large sums of money
disadvantages of partnerships
conflict of interest and delayed decision making
advantages of corporation
1. Limited liabilities 2. Ability to raise large sums of money (through new stocks and bonds) 3. Wide range of skills, experiences, and expertise 4. Economies of scale and scope 5. Wider market 6. Lower taxes 7. Perpetuity of life
disadvantages of corporation
1. The Principal-Agent problem (due to conflict of interest between the stockholders and the managers) 2. Double taxation (corporate income tax and individual income tax)
determinants of the level of consumption
- disposable income - wealth - availability of credit - real interest rate - households' expectation of future prices/income - stock of duration goods - taxation - demonstration effect
owners of corporation
lenders of corporation; not owners
a) Stabilization of real output (GDP) b) Stabilization of employment c) Stabilization of prices
direct taxes
taxes imposed on person/entity
examples of direct taxes
individual income tax, corporate income tax, property tax, estate tax, etc.
indirect taxes
taxes imposed on things
examples of indirect taxes
excise duty (tax), sales tax, customs duty, gift tax, etc.
sources of US federal REVENUES
- individual income taxes (47%) - corporate income taxes (8%) - social insurance/retirement receipts (36%) - excise taxes (3%) - other (6%)
federal expenditure items
- Social Security benefits (20%) - national defense (20%) - income security (17%) - Medicare (14%) - health (10%) - net interest (6%) - other (6%).
net investment calculation
gross investment - depreciation
ending value of capital stock
beginning capital stock + net investment
principles of taxation
1. adequacy 2. broad basing 3. compatibility 4. convenience 5. earmarking 6. efficiency 7. equity 8. neutrality 9. predictability 10. simplicity
induced consumption (IC)
consumption (C) - autonomous consumption (AC)
average propensity to consume (APC)
consumption (C) / disposable income (Y)
Average Propensity to Save (APS)
1 - APC (average propensity to consume)
Marginal Propensity to Consume (MPC)
ΔC/ΔY change in consumption / change in disposable income
Marginal Propensity to Save (MPS)
1 - MPC
opportunity cost
cost in terms of foregoing alternatives