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Overview of Important Concepts

 I.                   The Foundation:

              1. Economics is a social system that  fulfills basic human needs

·        Family: basic needs

·        Education and Religion: ideals and social values

·        Politics: rule enforcement

·        Economics: a way to examine the goods and services of a society

              2.   There are four fundamental tenets of economics:

·        Figure out how to allocate scarce resources

·        Determine how to allot goods and services among the people

·        Figure out how to ensure economic stability and security

·        Determine how to guarantee economic growth

             3.    Society must choose what, how, and for whom to produce

             4.     Basic Economic terminology

·        Markets: the place where people can come together to exchange goods

·        Marginal costs: the cost of producing supplementary parts of a good

·        The Law of diminishing return: a breaking point where the production of supplementary parts of a good results in diminished returns

II.        Economic Organization in the United States

             1.    The U.S. economy is established on modern capitalism

·        The concept of private property is essential to capitalism

·        A free-market, free-price, competitive system is needed for a capitalist society to function well

·        There are four basic categories of modern capitalism

Ø      Consumption: characterized by the freedom of consumer choice

Ø      Production: characterized by the freedom of enterprise

Ø      Finance: made up of all banking and financial institutions

Ø      Government: provides services to the public that cannot be efficiently provided through the private sector of the economy

·        The economy can be analyzed by measuring economic variables

Ø      Wealth

Ø      Income

Ø      Purchasing power of the U.S. dollar

Ø      Measuring changes in the value of the dollar

·        Production is the in and out flow of goods and services that creates a source of wealth and income

·        The U.S. has grown economically

Ø      This growth is the result of natural resources, technology, and accumulation of capital

Ø      The GNP (Gross National Product) is the measure of U.S. economic growth and is the value of all of the goods and services produced in one year

                2. Less developed areas have had less economic growth

·        This is due to a variety of factors

Ø      The quality of land, labor, and capital 

Ø      High populations

Ø      Low income makes the consumption of goods more difficult

·        Economic recovery is characterized by a decrease in unemployment and a simultaneous increase in prices, wages and profits

a.       External factors like war, new technology, and increased government spending can all help economic recovery

b.      Internally, goods need to eventually be replaced, which aids the economy

III.             The role of the U.S. Government in the Economy

1.      Throughout history, the government has developed a larger control on the economy. The government handles:

·        Labor-management relation problems that were created by industrialization

·        Problems like police, fire protection and sewage disposal, resulting from urbanization

Ø      The effects of foreign policy commitments and military spending have greatly affected the government’s role in the economy

2.      The government has direct controls over the economy, ownership of production, and welfare spending as some of its major activities

3.      The government’s spending, taxing, and public debt policies have major economic impact

·        Taxes: Direct, indirect, proportional, progressive, and regressive

·        Taxes affect economic growth as they can reduce purchasing power of income and affect resource allocation

·        “Ability to pay” and “benefits received” are the fundamentals of the U.S. tax system

Ø      “Ability to pay” presumes that taxation should be in accordance with income and wealth status

Ø      “Benefits received” presumes that taxation should be in accordance with the benefits received by the taxpayer

IV.              The Consumer’s Choice

1.      U.S. economic production is directed at the satisfaction of consumer desires

·        Consumer behavior is shaped by priorities, available money, and utilities

2.      Supply, demand, and equilibrium are essential to the price system

3.      In the marketplace, the government is in charge of enforcing regulations, imposing taxes, and controlling prices

·        This may lead to either shortages or surpluses

V.                 Labor:

1.      Demand: determined by the demand for the product in question and the price of substitute factors

2.      Supply: determined by population growth, immigration, and other lifestyles

3.      The varied labor market fluctuations have brought about the formation and growth of big firms and labor unions

·        The goal of management is to increase long-term profits

·        The goal of unions is to get higher wages, job security, and full employment

·        The conflict of interests between management and labor can be resolved through collective bargaining

Ø      Unions bargain by striking, which controls the supply of labor

Ø      Management can layoff employees or close the factory

VI.              Trade and Finance Overseas

1.      The movement of goods, services, people, and capital across national political boundaries makes up international economic relations

2.      The United States is the world’s largest single importer and exporter

3.      A balance of payment is inclusive of all financial and economic transactions between a single country and the rest of the world over a specific period of time

·        An advantageous balance of trade is the result of having more exports than imports

·        A negative balance of trade is the result of having more imports than exports

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