Introduction to Economics
This term describes limited resources and unlimited wants; it forces people and societies to make choices
Scarcity
An economy where people rely on custom and tradition to make economic decisions is called a ____ economy.
Traditional
According to the law of demand, what happens to quantity demanded when price falls, all else equal?
Quantity demanded increases
Name the three main types of business organizations covered in this review.
Sole proprietorship, partnership, corporation.
One function of money is to serve as a medium of ____.
Exchange.
What is gross income?
Total earnings before taxes and deductions.
The three factors of production are land, labor, and this (human-made goods used to produce other goods).
Capital (physical capital).
What type of economic system answers the three basic economic questions mainly through the decisions of buyers and sellers in markets?
Free-market (market) economy
The law of supply states suppliers offer more of a good when its price ____.
Rises (increases)
Which form of business is owned and operated by one person and is the most common in the U.S.?
Sole proprietorship
Name two characteristics of money that help it serve as a good store of value.
Durability and divisibility (also portability, scarcity, uniformity).
Define fixed expense and give two examples.
Fixed expense: predictable recurring costs (examples: rent, car payment, insurance).
Define the substitution effect in the context of consumer behavior when prices change.
The substitution effect: when a good’s price rises, consumers buy more of a cheaper substitute; when price falls, consumers may substitute toward that good
Describe one advantage and one disadvantage of a centrally planned (command) economy
Advantage: Can allocate resources efficiently and encourage innovation. Disadvantage: Limited individual freedom, potential shortages and poor allocation, little consumer choice. (Or government control can reduce incentives.)
If the cost of raw materials for a product increases at all price levels, does the supply curve shift left or right? Explain why.
Left — higher input costs make production more expensive, reducing supply at each price
What is the key legal difference in liability between a sole proprietorship and a corporation?
Sole proprietorship: owner has unlimited personal liability; corporation: shareholders have limited liability, separate legal entity
What federal agency insures bank deposits (note the coverage amount historically cited in class)?
FDIC $100,000 now $250,000
What is the difference between a budget and actuals (actual budget) in personal finance?
Budget = planned projection of income and expenses; actuals = what was actually earned and spent; comparing reveals variances.
Name the three basic economic questions every society must answer.
1) What to produce? 2) How to produce? 3) For whom to produce?
What is a mixed economy? Give a specific example of a public good or service that governments typically provide in mixed economies.
A mixed economy combines market systems with government intervention; example public good: national defense, highways, public education.
Explain the difference between a shift along a demand curve and a shift of the demand curve. Give one real-world factor that would shift demand.
Shift along curve = change in quantity demanded due to price change. Shift of curve = change in demand due to non-price factors (income, tastes, price of substitutes, expectations, number of buyers). Example: A health report increases demand for a product (shift right).
Describe the difference between a general partnership and a limited partnership, focusing on management and liability.
General partnership: all partners manage and have unlimited liability and share profits/losses. Limited partnership: general partner manages and has unlimited liability; limited partners invest, have limited liability, and usually do not participate in daily management.
Compare checkable deposits and time deposits in terms of liquidity and typical interest earned.
Checkable deposits: highly liquid, low/no interest. Time deposits: higher interest, lower liquidity, funds tied for a set period (e.g., CDs)
List five reasons why creating a budget is important.
Control finances; achieve goals; keep honest; improve habits; avoid debt/improve credit.
Explain how opportunity cost relates to every choice a person or society makes, and give a concrete example
Example: Choosing to work an evening shift (earn $100$100) instead of studying for an exam — the opportunity cost is the study time and potential higher grade.
Compare how incentives and innovation differ between a free-market economy and a centrally planned economy.
Free markets use profit incentives and competition to drive innovation; centrally planned economies rely on government directives and often have less innovation and weaker consumer incentives.
Describe how a price ceiling set below equilibrium creates a shortage, and give one real example where this has occurred or could occur.
A price ceiling below equilibrium causes quantity demanded to exceed quantity supplied: shortage. Example: rent-controlled apartments leading to fewer available units.
Explain how issuing stock can both help and limit ownership control in a corporation; include how shareholders’ liability compares to owners in a sole proprietorship.
Issuing stock raises capital but dilutes ownership/control because shareholders can influence management via voting; shareholders have limited liability — they are not personally responsible for corporate debts.
Explain compound interest and why it matters for long-term saving.
Compound interest: interest earned on principal plus prior interest.
Given a monthly net income of $2,000 , calculate the monthly net available amount for savings.
$400