Economics Review

Chapter 1

Section 1

1. Economics: study of how individuals & nations make choices about ways to
use scarce resources to fulfill their needs & wants.
2. Scarcity: state in which people dont & cannot have enough income, time,
or other resources to satisfy.
3. Factors of production: resources of land, labor, capital, & entrepreneurship
used to produce goods & services.
4. Entrepreneurship: ability to start new businesses, to introduce new
products, & techniques.

Section 2

1. Trade-off: exchanging one thing for the use of another, often making
unavoidable choices because of the problem of scarcity.
2. Opportunity cost: value of the next best alternative given up for the
alternative that was chosen.

Section 3

1. Economy: all activity in a nation that affects the production, distribution, &
use of goods & services.
2. Economic model: simplified representation of the real world which shows
peoples reactions to changes in the economy; theory.
3. Values: beliefs or characteristics that an individual or group considers
important.

Chapter 2

Section 1

1. Traditional economic system: economic systems are based on customs,

beliefs, & ways of doing things that have been passed down from generation
to generation.
2. Command economic system: the government controls the factors of
production & makes all decisions about their use; also called controlled
economy.
3. Market economic system: individuals own the factors of production & make
economic decisions through free interaction government doesnt intervene.
4. Distribution of income: money payment for work, the amount of health
care, education, food, & so on, that each person receives; distribution of
goods & services among all members of an economic system.

Section 2

1. Capitalism: private individuals own the factors of production and decide

how to use them within the limits of the law; market economic system & free
enterprise system.
2. Free enterprise system: individuals own the factors of production & decide
how to use them within legal limits.
3. Profit: money left after all the costs of production wages, rent, interest, &
taxes have been paid.
4. Profit incentive: desire to make money that motivates people to produce &
sell goods & services that others ant to buy.
5. Competition: rivalry among producers or sellers of similar goods to win
more business by offering the lowest prices or better quality.

Section 3

1. Standard of living: material well-being of an individual, group, or nation

measured by the average value of goods & services used by the average
citizen during a given period of time.
Chapter 3
Section 1
1. Disposable income: income remaining for people to spend or save after all
taxes have been paid.
2. Discretionary income: money income a person has left to spend on extras
after necessities have been bought.
Section 2
1. Generic brand: general name or a product rather than a specific brand
name given by the manufacturer.

Section 3

1. Ethical behavior: acting in accordance with moral & ethical convictions

about right & wrong.

Chapter 4

Section 1

1. Principle: amount of money originally borrowed in a loan.

2. Interest: amount of money the borrower must pay for the use of someone
elses money.

Section 2

1. Commercial bank: bank offering wide range of services; main functions are
to accept deposits, lend money, & transfer funds among banks, individuals, &
businesses.
2. Credit union: depository institution owned & operated by its members to
provide savings accounts & low-interest loans to its members only.
3. Debit card: credit device used to make cashless purchases of goods &
services.

Section 3

1. Credit rating: rating of the risk involved in lending money to a specific

person or business.
2. Collateral: something of value that a borrower lets the lender claim if a
loan is not repaid.
3. Unsecured loan: loan guaranteed only by a promise to repay it.

Section 4

1. Usury: law restricting the amount of interest that can be charged for credit.
2. Bankruptcy: the inability to pay debts based on the income received; a
condition in which debtors give up most of what they own for distribution to
creditors.

Chapter 6

Section 1

1. Condominium: separately owned single unit in an apartment building or a

series of townhouses.

2. Depreciate: decline in value over time; occurs as an item wears out or

becomes outdated.

Section 2

1. Closing costs: fees involved in arranging for a mortgage or in transferring

ownership of property; can include fees for title search, legal costs, loan
application, credit report, house inspections, & taxes.
2. Points: fee paid to a lender & computed as percentage points of a loan.
3. Equity: amount of money invested in a property minus the debt, such as
the mortgage payments that are still owed.

Section 3

1. Excise tax: tax on the manufacture, sale, or use within the country of
specific products, such as liquor, gasoline, or automobiles.
2. Liability insurance: pays for bodily injury & property damage.

Chapter 7

Section 1

1. Money market:
2. Time deposits: savings plans that require savers to leave their money on
deposit for certain periods of time.
3. Certificates of deposit: time deposits that state the amount of the deposit,
maturity, & rate of interest being paid.

Chapter 15

Section 3

1. Demand deposits: money deposited in a bank that can be withdrawn at

any time; now called checkable deposits.

2. M1: narrowest definition of the money supply; consists of moneys that can
be spent immediately and against which checks can be written; includes all
the paper bills and coins in circulation including currency, travelers checks,
and checkable deposits.

3. M2: broader definition of the money supply; includes all of M1, plus such
near moneys as money market mutual fund balances and Eurodollars;
includes all paper bills and coins in circulation.

Chapter 16

Section 1

1. The Fed: Federal Reserve System created by Congress in 1913 as the

nations central banking organization; functions include processing checks,
serving as the governments banker, and controlling the rate of growth of the
money supply.
2. Monetary policy : policy that involves changing the rate of growth of the
supply of money in circulation to affect the amount of credit and, therefore,
business activity in the economy.
3. Reserve requirements: regulations set by the Fed, requiring banks to keep
a certain percentage of their deposits as cash in their own vaults or as
deposits in their district Federal Reserve Bank.

Chapter 16

Section 2

1. Check clearing: method by which a check that has been deposited in one
depository institution is transferred to the depository institution on which it
was written.

Chapter 16

Section 3

1. Discount rate: interest rate the Fed charges on loans to banks.

2. Prime rate: rate of interest banks charge on loans to their best business
customers.
3. Open-market operations: buying and selling of United States securities by
the Fed to affect the money supply by changing depository institution
reserves or by putting money into or taking it out of circulation in the
economy.