Grades 9, 10, 11, 12

Scarcity

Decision Making

Allocation

Incentives

Trade

Specialization

Markets and Prices

Role of Prices

Competition and Market Structure

Institutions

Money and Inflation

Interest Rates

Income

Entrepreneurship

Economic Growth

Role of Government and Market Failure

Government Failure

Economic Fluctuations

Unemployment and Inflation

Fiscal and Monetary Policy

Choices made by individuals, firms, or government officials are constrained by the resources to which they have access.

Choices made by individuals, firms, or government officials often have long run unintended consequences that can partially or entirely offset or supplement the initial effects of the decision.

To produce the profit-maximizing level of output and hire the optimal number of workers, and other resources, producers must compare the marginal benefits and marginal costs of producing a little more with the marginal benefits and marginal costs of producing a little less.

To determine the optimal level of a public policy program, voters and government officials must compare the marginal benefits and marginal costs of providing a little more or a little less of the program's services.

To compare marginal benefits with marginal costs that are realized at different times, benefits and costs must be adjusted to reflect their values at the time a decision is made about them. The adjustment reflects expected returns to investment compounded over time.

Costs that have already been incurred and benefits that have already been received are sunk and irrelevant for decisions about the future.

People sometimes fail to treat gains and losses equally, placing extra emphasis on losses.

Some decisions involve taking risks in that either the benefits or the costs could be uncertain. Risk taking carries a cost. When risk is present, the costs should be treated as higher than when risk is not present.

Risk can be reduced by diversification.

Comparing the benefits and costs of different allocation methods in order to choose the method that is most appropriate for some specific problem can result in more effective allocations and a more effective overall allocation system.

Changing the distribution of income or wealth will cause the allocation of resources to change.

Acting as consumers, producers, workers, savers, investors, and citizens, people respond to incentives in order to allocate their scarce resources in ways that provide them the highest possible net benefits.

Decision-making in small and large firms, labor unions, educational institutions, and not-for-profit organizations has different goals and faces different rules and constraints. These goals, rules, and constraints influence the benefits and costs of those who work with or for those organizations, and, therefore, their behavior.

People tend to respond to fair treatment with fair treatment, and to unfair treatment with retaliation, even when such reactions may not maximize their material wealth.

Imports are paid for by exports, savings or borrowing.

When imports are restricted by public policies, consumers pay higher prices and job opportunities and profits in exporting firms may decrease.

Individuals and nations have a comparative advantage in the production of goods or services if they can produce a product at a lower opportunity cost than other individuals or nations.

International trade stems mainly from factors that confer comparative advantage, including international differences in the availability of productive resources and differences in relative prices.

Transaction costs are costs (not to be confused with the price of the good or service) that are associated with the purchase of a good or service, such as the cost of locating buyers or sellers, negotiating the terms of an exchange, and insuring that the exchange occurs on the agreed upon terms. When transaction costs decrease, trade increases.

The goods or services that an individual, region, or nation can produce at lowest opportunity cost depend on many factors (which may vary over time), including available resources, technology, and political and economic institutions.

Market outcomes depend on the resources available to buyers and sellers, and on government policies.

A shortage occurs when buyers want to purchase more than producers want to sell at the prevailing price.

A surplus occurs when producers want to sell more than buyers want to purchase at the prevailing price.

Shortages of a product usually result in price increases in a market economy; surpluses usually result in price decreases.

When the exchange rate between two currencies changes, the relative prices of the goods and services traded among countries using those currencies change; as a result, some groups gain and others lose.

Demand for a product changes when there is a change in consumers' incomes, preferences, the prices of related products, or in the number of consumers in a market.

Supply of a product changes when there are changes in either the prices of the productive resources used to make the product, the technology used to make the product, the profit opportunities available to producers from selling other products, or the number of sellers in a market.

Changes in supply or demand cause relative prices to change; in turn, buyers and sellers adjust their purchase and sales decisions.

Government-enforced price ceilings set below the market-clearing price and government-enforced price floors set above the market-clearing price distort price signals and incentives to producers and consumers. Price ceilings can cause persistent shortages, while price floors can cause persistent surpluses.

The pursuit of self-interest in competitive markets usually leads to choices and behavior that also promote the national level of well-being.

The level of competition in an industry is affected by the ease with which new producers can enter the industry, and by consumers' information about the availability, price and quantity of substitute goods and services.

Some market structures are dominated by large firms, often competing against only a few other firms. Prices in such markets may be higher than they would be in more competitive markets.

Collusion among buyers or sellers reduces the level of competition in a market. Collusion is more difficult in markets with large numbers of buyers and sellers.

The introduction of new products and production methods is an important form of competition and is a source of technological progress and economic growth.

Property rights, contract enforcement, standards for weights and measures, and liability rules affect incentives for people to produce and exchange goods and services.

Incorporation allows firms to accumulate sufficient financial capital to make large-scale investments and achieve economies of scale. Incorporation also reduces the risk to investors by limiting stockholders' liability to their share of ownership of the corporation.

The basic money supply in the United States consists of currency, coins, and checking account deposits.

In many economies, when banks make loans, the money supply increases; when loans are paid off, the money supply decreases.

The consumer price index (CPI) is the most commonly used measure of price-level changes. It can be used to compare the price level in one year with price levels in earlier or later periods.

The annual inflation rate is the percentage change in the average prices of goods and services over a twelve month period.

In the long-run, inflation results from increases in a nation's money supply that exceed increases in its output of goods and services.

The real interest rate is the nominal or current market interest rate minus the rate of inflation.

Higher real interest rates increase the rewards for saving and make borrowing more expensive.

Real interest rates normally are positive because people must be compensated for deferring the use of resources from the present into the future.

Riskier loans command higher interest rates than safer loans because of the greater chance of default on the repayment of a risky loan.

Higher real interest rates reduce business investment spending and consumer spending on housing, cars, and other major purchases.

Real interest rates rise and fall to balance the amount saved with the amount borrowed. This affects the allocation of scarce resources between present and future uses.

Expectations of increased inflation may lead to higher interest rates.

Future values can be converted to present values by discounting the future value based on the rate of interest.

Changes in the structure of the economy, including technology, government policies, the extent of collective bargaining and discrimination, can influence personal income.

In a labor market, in the absence of other changes, a higher wage increases the reward for work and reduces the willingness of employers to hire workers.

The hope of achieving wealth can affect productivity by energizing people to work harder, while the hopelessness of escaping poverty can discourage people from trying.

Changes in the prices of productive resources affect the incomes of the owners of those productive resources and the combination of those resources used by firms.

Changes in demand for specific goods and services often, in the short run, affect the incomes of the workers who make those goods and services.

Entrepreneurial decisions affect job opportunities.

Entrepreneurial decisions are influenced by tax, regulatory, education, and research support policies.

Productivity and efficiency gains that result from innovative practices of entrepreneurs foster long term economic growth.

Economic growth is a sustained rise in a nation's production of goods and services. Long term growth in output results from improvements in labor productivity and increases in employment. It varies across countries because of differences in investments in human and physical capital, research and development, technological change, and from alternative institutional arrangements and incentives.

Historically, economic growth that raises per capita output has been a vehicle for alleviating poverty and raising standards of living.

Investing in new physical or human capital can increase future productivity and consumption, but such investments require the sacrifice of current consumption and entail economic risks.

Lower interest rates encourage investment.

The rate of productivity increase in an economy is strongly affected by the incentives that reward successful innovation and investments (in research and development, and in physical and human capital).

Markets do not allocate resources efficiently if: (1) property rights are not clearly defined or enforced; (2) externalities (spillover effects) affecting large numbers of people are associated with the production or consumption of a product; or (3) markets are not competitive.

An important role for government in the economy is to define, establish, and enforce property rights. A property right to a good or service includes the right to exclude others from using the good or service and the right to transfer the ownership or use of the resource to others.

Property rights provide incentives for the owners of resources to weigh the value of present uses against the value of conserving the resources for future use.

Externalities exist when some of the costs or benefits associated with production and consumption fall on someone other than the producers or consumers of the product.

When a price fails to reflect all the benefits of a product, too little of the product is produced and consumed. When a price fails to reflect all the costs of a product, too much of it is produced and consumed. Government can use subsidies to help correct for insufficient output; it can use taxes to help correct for excessive output; or it can regulate output directly to correct for over- or under-production or consumption of a product.

In the United States, the federal government enforces antitrust laws and regulations to try to maintain effective levels of competition; however, laws and regulations can also have unintended effects of reducing competition.

When one producer can supply total output in a market at a cost that is lower than when there are two or more producers, competition may be undesirable. In the absence of competition, government regulations may then be used to try to control price, output, and quality, or government may directly provide the good or service.

Government laws establish the rules and institutions in which markets operate. These include such things as property rights, collective bargaining rules, laws about discrimination, and laws regulating marriage and family life.

Governments often redistribute income directly when individuals or interest groups are not satisfied with the income distribution resulting from markets; governments also redistribute income indirectly as side-effects of other government actions that affect prices or output levels for various goods and services.

Different tax structures affect consumers and producers differently.

Governments provide an alternative to private markets for supplying goods and services when it appears that the benefits to society of doing so outweigh the costs to society. Not all individuals will bear the same costs or share the same benefits of those policies.

A government policy to correct a market imperfection is not justified economically if the cost of implementing it exceeds its expected benefits.

Incentives exist for political leaders to implement policies that disperse costs widely over large groups of people and benefit small, and politically powerful groups of people.

Although barriers to international trade usually impose higher costs than benefits, they are often advocated by people and groups who expect to gain substantially from them. Because the costs of these barriers are typically spread over a large number of people who each pay only a little and may not recognize the cost, policies supporting trade barriers are often adopted through the political process.

Price controls, occupational licensing, and reductions in antitrust enforcement are often advocated by special interest groups. Price controls can reduce the quantity of goods and services produced, thus depriving consumers of some goods and services whose value would exceed their cost.

An increase in nominal GDP may reflect increases in the production of goods and services and also increases in prices. GDP adjusted for price changes is "real GDP." Real GDP per capita is a basis for comparing material living standards over time and among different countries.

The potential level of real GDP for a nation is determined by such things as the size and skills of its labor force, the size and quality of its stock of capital goods, the quantity and quality of its natural resources, its technological capabilities, and its legal and cultural institutions.

A business cycle involves fluctuations of real GDP around its potential level.

Fluctuations of real GDP around its potential level occur when overall spending declines, as in a recession, or when overall spending increases rapidly, as in recovery from a recession or in an expansion.

When real GDP rises above its potential, there is a tendency for inflation to rise. When real GDP is below its potential (as in a recession), there is a tendency for inflation to fall.

The unemployment rate is an imperfect measure of unemployment because, among other reasons, it does not: (1) include workers whose job prospects are so poor that they become discouraged from seeking jobs and leave the labor force, and (2) reflect part-time workers who are looking for full-time work.

Unemployment rates differ for people of different ages, races, and sexes. This reflects differences in work experience, education, training, and skills, as well as discrimination.

Unemployment can be caused by people changing jobs, by seasonal fluctuations in demand, by changes in the skills needed by employers, or by cyclical fluctuations in the level of national spending.

Some people are unemployed even when the economy is said to be functioning at full employment.

Changes in total employment are an important indicator of economic performance and influence levels of real GDP.

Unexpected inflation imposes costs on many people and benefits others because it arbitrarily redistributes purchasing power among different groups of people. Unexpected inflation hurts savers and people on fixed incomes; it helps people who have borrowed money at a fixed rate of interest.

Inflation can reduce the rate of growth of national living standards because individuals and organizations use resources to protect themselves against the uncertainty of future prices.

Fiscal policies are decisions to change spending and taxation levels by the federal government. As fiscal policies, these decisions are adopted to influence national levels of output, employment, and prices.

In the short run, increasing federal spending and/or reducing taxes can promote more employment and output, but these polices also put upward pressure on the price level and interest rates. Decreased federal spending and/or increased taxes tend to lower price levels and interest rates, but they reduce employment and output levels in the short run.

Over time, the interest-rate effects of an expansionary fiscal policy may lead to a decrease in private investment spending that offsets the output and employment effects of the policy.

The federal government's annual budget is balanced when its revenues from taxes (and other sources) equal its expenditures. The government runs a budget deficit when its expenditures exceed its revenues. The government runs a surplus when its revenues exceed its expenditures.

When the government runs a budget deficit, it must borrow to finance that deficit.

The national debt is the accumulated sum of all its past annual deficits and surpluses.

Monetary policies are decisions by the Federal Reserve System that lead to changes in the supply of money, short term interest rates, and the availability of credit. Changes in the growth rate of the money supply can influence overall levels of spending, employment, and prices in the economy by inducing changes in the levels of personal and business investment spending.

The Federal Reserve System's major monetary policy tool is open market purchases or sales of government securities, which affects the money supply and short-term interest rates. Other policy tools used by the Federal Reserve System include making loans to banks (and charging a rate of interest called the discount rate). In emergency situations, the Federal Reserve may make loans to other institutions. The Federal Reserve can also influence monetary conditions by changing depository institutions' reserve requirements.

The Federal Reserve targets the level of the federal funds rate, a short-term rate that banks charge one another for the use of excess funds. This target is largely reached by buying and selling existing government securities.

The Federal Reserve tends to increase interest rate targets when it feels the economy is growing too rapidly and/or the inflation rate is accelerating. It tends to lower rate targets when it wants to stimulate the short-term growth of the economy.