EE 314: PRAXIS Economics Review

IV. Economics

What is it? Economics is the study of resources, the study of choices, and the study of
production, consumption, and the transfer of wealth.

Macro: large, entire systems

Micro: small, individual businesses or individuals

A. Understands How Human Needs Are Met

1. The ways in which human needs are met through production, purchasing, and
trading/exchange of goods and services.
i. Wants: are things that are nice to have but not absolutely necessary
ii. Needs: are the things you can't get by without, such as a place to live and food to
eat.
iii. Four Factors of Production
1. Land
2. Labor
3. Capital
4. Entrepreneurship
2. How and why people consider costs and benefits when making economic choices. -
Benefit/cost analysis is the major tool used by economists to explain the past, analyze
the present, and predict the future
i. Opportunity Cost - the value of the next-best alternative when a decision is
made; it's what is given up,”
1. Cost - the measure of the alternative opportunities foregone in the
choice of one good or activity over others.
2. Benefit (HAPPINESS) - tangible benefits that can be measured in terms
of revenue generated or money saved through the implementation of
policies.
3. How scarcity influences economic decisions. -It means that the demand for a good or
service is greater than the availability of the good or service. Therefore, scarcity can limit
the choices available to the consumers who ultimately make up the economy.
i. Scarcity: the demand for a good or service is greater than the availability of the
good or service. Therefore, scarcity can limit the choices available to the
consumers who ultimately make up the economy.
ii. Surplus: the amount of an asset or resource that exceeds the portion that is
utilized.
iii. Shortage: when the quantity demanded exceeds the quantity supplied. To be at
market equilibrium, the quantity supplied must match the quantity demanded,
so when this is not the case, it either results in a surplus or a shortage.
B. Understands the concepts of goods and services and the roles of producers and consumers.
1. Resources(human use): Good and services, (ex. time, labor, toilet paper) are limited
2. Cost: - the measure of the alternative opportunities foregone in the choice of one good
or activity over others.
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3. Opportunity Cost - the value of the next-best alternative when a decision is made; it's
what is given up,”
4. Goods versus Services
i. Goods: are things
ii. Services: are acts
iii. Consumer: a person who purchases goods and services for personal use
iv. Producer: a person, company, or country that makes, grows, or supplies goods
or commodities for sale
v. Raw Goods: known as a feedstock, unprocessed material, or primary
commodity, is a basic material that is used to produce goods,
vi. Finished Goods: energy, or intermediate materials that are feedstock for future
finished products.
5. Supply and Demand: only word in a market economy
6. Trade and Barter
i. Trade - a fundamental economic concept involving the purchase and sale of
goods and services, with compensation paid to a seller by a purchaser or the
exchange of goods or services between parties. Trade can take place in a
producer-consumer economy.
ii. Barter- an act of trading goods or services between two or more parties without
the use of money
7. Specialization
i. Specialization - a method of production whereby an entity focuses on the
production of a limited scope of goods to gain a greater degree of efficiency.
ii. Division of Labor - the separation of a work process into a number of tasks,
with each task performed by a separate person or group of persons.
iii. Sectors of the Economy - an area of the economy in which businesses share the
same or related business activity, product, or service.
1. Primary - an economic activity that involves collecting, extracting or
harvesting natural resources.
2. Secondary - an economic sector in the three-sector theory that
describes the role of manufacturing. It encompasses industries that
produce a finished, usable product or are involved in construction.
3. Tertiary - the sector of the economy that concerns services. It is distinct
from the secondary sector (manufacturing) and the primary sector
(which concerns extraction such as mining, agriculture and fishing).
C. Understands the Purposes of Earning, Spending, and Saving Money - Earning — your ability to
bring in money. Spending — your ability to live frugally and spend wisely. Saving — your ability
to produce a surplus and to make that surplus grow.
1. Money is earned through work.
i. Be able to identify characteristics of various jobs.
1. Skill variety - The degree to which a job requires various activities,
requiring the worker to develop a variety of skills and talents.
2. Task identity - people make economic choices based on both monetary
incentives and their identity:
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3. Task significance - the degree to which the job has a significant impact
on the lives or work of other people—whether in the immediate
organization or in the external environment.
4. Autonomy - Right to work and earn one's own income, distribution of
paid and unpaid work between women and men.
5. Feedback - Positive feedback amplifies change, meaning as share prices
increase, more people buy the stock, pushing prices up further. Negative
feedback minimizes change, meaning investors buy stocks when prices
decline and sell stocks when prices rise.
ii. Explain the relationship between work and goods and services.
1. The economy makes society possible by providing the goods and
services it needs. Work gives people an income and also provides them
some self-fulfillment and part of their identity.
2. Understand and explain the relationship between and consequences of saving and
spending money.
i. Generally, as consumers save more, they spend less, and vice versa.
Opportunity costs of spending.
ii. The opportunity cost of spending today is that your spending will leave you with

less money to buy goods and services in the future. Saving builds wealth,
enabling you to buy goods and services in the future—perhaps a car, a college
education, a house, a vacation.
3. Understand and describe the basic services that banks and financial institutions
provide. - Financial institutions are essential because they provide a marketplace for
money and assets so that capital can be efficiently allocated to where it is most useful.
For example, a bank takes in customer deposits and lends the money to borrowers.
i. Interest: the price you pay to borrow money or the cost you charge to lend
money
ii. APR: Annual Percentage Rate (APR) is the cost you pay each year to borrow
money, including fees, expressed as a percentage.
4. Understand that different currencies exist globally.
i. Different currencies exist because different countries have various economic

landscapes. In most cases, a country which exports a lot of goods will aim to
have a low-value currency to keep on top of their trade advantage and attract
people to buy their products.
D. Understands How Businesses Operate
1. Supply and demand and how they affect profits. - As more suppliers stay away, the
demand for the commodity increases and the price also increases. Suppliers then join
the market to meet the demand and earn higher profits.
2. Explain and describe the role of an entrepreneur. - An entrepreneur is an individual
who creates a new business, bearing most of the risks and enjoying most of the rewards.
The process of setting up a business is known as entrepreneurship.
i. Entrepreneurship - The entrepreneur is commonly seen as an innovator, a
source of new ideas, goods, services, and business/or procedures.
3. Explain and describe the interactions between an individual, a business, and the
government. - Government and business are inextricably linked in the United States and
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other developed economies. Public policies, including regulations, taxes, and programs,
have a substantial influence on the economy and the environment in which businesses
operates.
i. Regulation - refers to rules that limit who can enter a business (entry controls)
and what prices they may charge (price controls).
ii. Economic Systems - a means by which societies or governments organize and
distribute available resources, services, and goods across a geographic region or
country. Economic systems regulate the factors of production, including land,
capital, labor, and physical resources.
iii. Market Forces - a factor that has some ability to affect change in a market.
Market forces determine the price and quantity of a good or service in a market.
Market forces occur naturally in a free market economy and are controlled by
government intervention.
iv. Command Economy - also known as a planned economy, requires that a nation's
central government own and control the means of production. Private
ownership of land and capital is nonexistent or severely limited.
v. Capitalism - Capitalism is often thought of as an economic system in which
private actors own and control property in accord with their interests, and
demand and supply freely set prices in markets in a way that can serve the best
interests of society. The essential feature of capitalism is the motive to make a
profit.
1. Laissez Faire - translates to 'leave alone' when it comes to economic
intervention. This means no taxes, regulations, or tariffs. Instead, the
market should be completely free to be led by the natural laws of supply
and demand.
vi. Socialism - a political and economic system in which property and the means of
production are owned in common, typically controlled by the state or
government. Socialism is based on the idea that common or public ownership of
resources and means of production leads to a more equal society.
vii. Communism - type of economy where all property, including land, factories and
companies, is held by the government.
E. Understands the Patterns of Economic Activities in the United States and the World: actions
that involve the production, distribution, and consumption of goods and services at all levels
within a society.
1. Reasons governments levy taxes: To help fund public works and services—and to build
and maintain the infrastructure used in a country
i. Taxes: Taxes are mandatory contributions levied on individuals or corporations
by a government entity—whether local, regional, or national.
2. Government’s role in maintaining the country’s currency: regulate the money supply
and level of interest rates.
i. Currency: the physical money in an economy, comprising the coins and paper
notes in circulation
ii. Inflation: the rate of increase in prices over a given period of time
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iii. Unemployment: People who are jobless, looking for a job, and available for
work.
3. National debt.
i. National Debt: the amount of money the federal government has borrowed to
cover the outstanding balance of expenses incurred over time.
4. Federal Reserve System: the most powerful economic institution in the United States,
perhaps the world. Its core responsibilities include setting interest rates, managing the
money supply, and regulating financial markets.