Business Economics Final

Study Guide
What to review:
● Vocabulary in Quizlet
● Past Tests
● Workbook
● Nearpod notes

Open Response Questions:

1. Use the scenario below about opportunity cost to answer the question. Stephanie is deciding
whether to spend her money from her job on a car or to save it for college. If she buys the car,
she can get a better job farther away and use it as a form of transportation. If she saves money
for college, she will not be able to get a better job. a. Define the concept of opportunity cost. b.
Explain what the opportunity cost is in the scenario.

2. Purchasing power is an important concept for consumers to understand. It can be affected by

fluctuating currency exchange rates. a. Define the term purchasing power. b. Explain how the
purchasing power of U.S. consumers is affected if the U.S. dollar decreases in value.

3. The concept of diminishing marginal returns is an important one for businesses producing
goods. a. Define the term diminishing marginal returns. b. Explain how diminishing marginal
returns affect production decisions for businesses.

4. Use the scenario below to answer the question. Ming has five dollars in his wallet. At lunch
break, Ming has to decide whether to buy a ticket for a school dance or pay the remainder of his
student activity fees. a. Define the concept of utility. b. Explain how either choice in the scenario
demonstrates the concept of utility.

5. The table below describes the production output of two countries that use the same resources
to produce either chairs or desks. The profit per chair is the same as the profit per desk. a.
Explain the concept of comparative advantage. b. Explain why Alpha has a comparative
advantage over Beta in the production of chairs and desks, but should import desks from Beta.
Focus on the following objectives:

Identify the differences and similarities between macroeconomics and microeconomics:

Describe why business economics is an important field of study

Demonstrate the ability to assess the costs and benefits of alternatives when making decisions,
taking into account opportunity costs and trade-offs
Identify examples of different forms of utility and explain how this concept drives consumption
and production decisions within an environment of diminishing marginal returns
Define the factors of production and describe how they interrelate
Explain how the factors of production go into making a selected product
Explain how the laws of supply and demand affect business
Describe the role of the entrepreneur and how entrepreneurs start businesses
Explain the importance of price in a free-market economy
Demonstrate the ability to analyze the impact of cost of production on price
Compare and contrast the impact of differing market structures on the success of a product or a
service
Describe key characteristics of command, free-market, and mixed-market economies
Describe the key characteristics of the US economy
Describe the US government's role in the economy, and develop a point of view about its impact
on business
Explain how fluctuating exchange rates impact businesses and individuals
Display understanding of how comparative advantage influences the structure of global trade
Three important terms arise from scarcity. After reading the definitions consider the following examples:
• Trade-offs: Choosing between a $3 lunch and something else that costs $3 is the process of
trade-offs in action. Most trade-offs do not require all-or-nothing choices. Instead, they generally
require that you give up a little of one thing for more of the other.
• Opportunity Costs: Say you have $3 to spend either on lunch or on three songs on iTunes. By
deciding to buy lunch, you are also deciding not to buy three songs on iTunes. Like the concept of
trade-offs, every economic choice includes considering the thing that you are not going to get.
• Utility: Remember, utility is a benefit or a gain received from a good or a service. So why might
picking three new iTunes songs over food seem to have more utility if you were asked this
question right after lunch break? Or conversely, why might the three new iTunes songs seem less
enticing than a cold Gatorade after an hour-long game of basketball, even though the Gatorade
costs less? The concept of utility helps us answer these kinds of questions.

Factors of Production
LAND LABOR CAPITAL
● Water ● Factory Workers ● Machinery
● Cotton ● Truck Drivers ● Trucks
● Metals ● Managers ● Tractors
● Wheat ● Farmers ● Factories
● Wind ● Designers ● Buildings
● Sunlight ● Equipment
● Animal Products ● Synthetic Materials
 ● Risks and rewards of starting a new business
Risks Rewards

Lower than expected sales Generates growth for economy

Unpredictable business conditions Unlimited profit potential

Long hours of work Employing more people

Flexibility for entrepreneur, including being

Unwanted/unexpected responsibilities
own boss
Recognition or respect (e.g., getting
Failure of venture positive publicity, an industry award, and so
forth)
Insufficient levels of funding/high start-up
Generates innovation for society
costs

Inadequate research on market Opportunity to be creative

● Review the production tables in Lesson 8 (8.6 and 8.7). Where is the break-even
point, how to determine marginal cost?

● What are the different types of market structures/characteristics of each

Perfect competition Monopolistic Oligopoly Monopolies

competition
Large number of There are large Few sellers One seller dominates
buyers and numbers of buyers and
sellers sellers. Differentiated products No product
that are functionally differentiation
Identical or nearly
Differentiated products identical or very similar
identical products
are present. Extremely high barriers
All buyers and sellers High barriers to entry to market entry
acting independently All buyers and sellers
act independently. Parallel pricing Price maker
Perfect and equal
structures
information on prices
Information on prices
and products
and products is Non-price competition
Easy entry into and exit extensive and equal for (advertising,
from the industry all consumers. promotions, cross
marketing, etc.)
The seller does not set
There are low or no
the price.
barriers to entry. Tendency toward price
fixing and collusion
There is non-price
competition Pricing generally higher
● Review Circular Flow Model in Notebooks
US Economy
Characteristics Pros Cons
/ Objectives

Consumers receive better goods at lower Puts production ahead of other social
prices and thus have more resources for other goals, such as environmental issues
purchases and consumption
Efficiency Workers’ interests are put behind
consumers’ interests

Drives innovation and new products Often creates competition where

cooperation would be a better way to
Self-Interest/ Generally rewards hard work, diligence, and
address economic challenges
Profit Motive appropriate risk-taking
Excessive risks may be taken (gambling
Encourages investors to invest
with the business) in hope of big rewards

Creates an economic environment in which all Can be taken advantage of by bad actors
participants gain from the productive who take from the system but do not give
Equity resources put to work back
Increases popular support of free enterprise May be perceived as unfair by some who
system think they have contributed more

Enhances people’s ability to plan and develop Free enterprise system grows from
economic security changing business environment
(instability), providing new opportunities
Reduces stress, anxiety, and conflict for
individuals, families, and management Stability may require policies (e.g., tougher
Stability regulation of banks and other financial
Helps companies make long-term
institutions) that might arguably lead to a
commitments, benefiting them and the
reduced ability to react quickly and nimbly
economy
to changes in the economic situation
Encourages investors to invest

Creates opportunities for a growing population Sometimes comes at the cost of

and new entrants to the economy environmental degradation
Growth
If benefits are widely distributed, can raise Can become an end unto itself driven only
material living standards (e.g., for housing) by profit motive, with little wider benefit

Frees individuals and businesses from costly Appropriate regulations (e.g., for product
and burdensome requirements that impede safety) can have positive effects on
enterprise markets and consumer confidence,
Limited encouraging greater consumption
Government Allows for supply and demand to drive the
allocation of resources for production, with Appropriate regulation of banks and other
efficient allocation financial institutions can improve stability
and help avoid crashes
Using ​purchasing power​ to measure living standards between nations is useful, because it offers a more
accurate picture of incomes and ability to spend than just looking at cash incomes. To measure people’s
real incomes, it’s important to look not only at how much money they make but also what that money can
buy.
The purchasing power in different countries is continually changing as economies change.
Purchasing power can be weakened by a number of causes:
• Inflation (a situation where prices of many goods and services go up). If wages remain the same,
consumers must spend more of their income for basic necessities, leaving less money available
for other purchases.
• Currency devaluation means that the currency is worth less compared with other currencies. This
means importers of goods have to charge higher prices in local currency in order to pay what
their foreign supplier is charging them in the foreign currency. This makes imported goods more
expensive for consumers. Currency devaluation also makes it more expensive for them to travel
to other countries, since they have to change more of their own currency to get the same amount
of foreign money.
• Countries that are heavily dependent on imported items, especially for necessities such as food
and fuel, can be hit hard by currency devaluation, as consumers must pay more for imported
necessities.

The ​comparative advantage principle​ shows that even if a country has no absolute advantage (i.e., it is
not the most efficient producer for any product), it can still benefit from specializing in and exporting the
product(s) for which the opportunity cost of production in that country is lowest. That’s also the best
outcome for the world economy as a whole: it means the most output is gained, worldwide, from the
inputs used in production.

Arguments for Free Trade

Free trade allows for specialization. Specialization creates the most efficient global market.
Free trade creates world peace.
Free trade compensates for the unequal distribution of natural resources in the world.
Protectionism leads to inefficient industries producing low-quality goods.

Arguments against Free Trade

Free trade can be bad for the environment.
Countries become too independent of each other.
Free trade fosters inequality.
Free trade gives too much power to corporations.