These are the main concepts in this subject:
- Basic Economic Concepts
- Economic History
- The American Economy
Here are a few specific economic concepts that you will see on the test.
Basic Economic Concepts
Goods and Services: In an economy, goods are the physical products or objects that can be purchased and services are non-material actions that are performed for a customer. So, buying food at the grocery store to make dinner is a purchase of goods, while paying a personal chef to make dinner for you is a purchase of services.
Needs and Wants: A need is defined as something essential to a person’s health and well-being that they cannot live without, while a want describes goods or services that a person prefers or desires to have, but are not necessary for basic human survival. For example, everyone needs food and water to survive but someone might want a soda and burger to eat because it’s their favorite meal.
Scarcity: Scarcity refers to the limited amount of resources available to fulfill every individual’s unlimited needs and wants.
Factors of Production: The Factors of Productions are the inputs needed for the successful production of a product. These four factors consist of land, labor, capital (physical and human), and entrepreneurship.
Interdependence: No single economy can fulfill all of its wants and needs, which leads to the development of interdependence, or reliance on another country’s supply of goods and services. For example, a country that cannot produce wheat may rely on trade arrangements with a neighboring country to ensure bread is available in their grocery stores.
Economic System: The production and exchange of goods and services are organized within an economic system that dictates how the exchange is managed. The three main economic systems are capitalism (free market), communism (command), and socialism (mixed).
Free Enterprise: A free enterprise economy occurs when the government does not control businesses but allows the market to regulate itself through the successes and failures of entrepreneurialism.
Supply-Side Economics (Reaganomics)
Supply-side economics is the idea that government involvement in the economy should primarily make business production easier. This can be done by decreasing taxes and business regulations with the assumption that increased capital allows more products to be produced and more people to be employed.
President Ronald Reagan was a proponent of supply-side economics, also known as Reaganomics, and attempted to stimulate the economy in the 1980s by reducing income taxes, specifically for those who paid the largest percentage of taxes. These cuts were expected to allow more money to trickle down to those with lower incomes, with the expectation that they would increase their own spending and therefore increase the amount of taxes they paid. That, combined with a reduction of government spending on social programs, was expected to replace the funds lost by lower tax rates.
While the economy was initially improved by the tax cuts, Congress did not cut social programs at the same rate that taxes decreased and the expected “trickle-down” was not experienced. This led to a significant increase in the federal deficit.
Traditional and Post-industrialization Economies
Traditional economies are based on individuals producing items of value and trading those items with other people in their family or tribe to fulfill their needs. For example, a farmer would be able to trade food to a blacksmith for tools. These economies relied on bartering or trade instead of currency. Subsistence agriculture is common in traditional economies.
A command economy is an economy that is controlled by the government. The government dictates how much of a specific product is produced and controls most aspects of its distribution. Exampled by communism.
A market economy is not controlled by the government but determined by the wants and needs of the people. Production varies according to the demand in the market. Exampled by capitalism.
A mixed economy combines characteristics of command and market economies. For the most part, the market dictates production and demand, but the government has the power to intervene and regulate private industry when necessary. Exampled by socialism.
Government Market Regulation and Taxes
Price Controls and Subsidies
Governments can regulate the economy in various ways, including price controls and subsidies.
Price controls place a maximum or minimum price on a product through price ceilings or price floors. This is usually done when the government sees demand for a good or service changing in a way that could have a negative impact on the public. For example, if there is a sudden drop in the availability of gas in an area, demand would be higher than the supply. Without price controls (in this case a price ceiling), businesses could charge customers exorbitant prices because of the increased demand.
Subsidies occur when the government directly pays certain individuals or industries in order to keep their product prices low for customers. Farmers frequently receive agricultural subsidies to help stabilize the cost of commonly grown foods for American consumption.
The government also impacts the economy through taxes. Taxes are used to keep basic government functions operational and pay for different government programs, projects, and services.
Taxes are a trade-off in the economy. While taxes are important and used to fund things that are essential for the country to function properly, like roads and infrastructure, they also limit both the consumer’s buying power and the producer’s ability to expand their business. Taxes can limit economic development by decreasing the amount of money that people have available to invest back into the economy. The most common taxes are property taxes and sales tax.
And that’s some basic information about the economics portion of the test.