1.1 ppc+circular flow of income Flashcards
PPC
production possibility curve, also called production possibility frontier.
A curve showing the maximum combinations of goods or services that can be produced by an economy in a given period, if all the resources in the economy are being used fully and efficiently and the state of technology is fixed
assumptions of PPC (5)
- each economy only produces two goods
- the goods produced using combinations og the available resources
- at each moment in time, the amount of resources that the country has is fixed
- the state of technology at each moment in time is fixed.
- the points on teh curve mean that all resources in the economy are fully employed
efficiency (def+2kinds of efficiency)
refers to improved resoure use. it is where a firm can produce the same good, but with fewer resources.
two kinds: allocative and productive
unemployment of resources
a situation where there are unused resources, anf not all factors of production are fully used.
actual output
the total amount of goods and services that an economy is producing at a certain moment in time
actual growth
When an economy produces a greater amount of goods and services in one period of time than in a previous one.
points outside PPC
are unattainable combinations of a good. - this is due to scarcity
potential output
The total amount of goods and services that an economy can produce when all of its available resources are being used efficiently.
potential growth
When the production capacity of an economy increases from one period to another. It means that the maximum amount of output that an economy can produce when all of its resources are being used efficiently increases.
PPC outward shift represents
increase in the potential output of a country
factors causing potential output of a country to be increased
increase in
- quantity of FOP
- quality of FOP
- an improvement in technology
capital goods
the tools and machinery necessary fro the production of other goods.
consumer goods
Finished products that are ready for satisfying people’s wants, not used in any further production process.
why is PPC usually a curve?
bc opportunity cost is not normally constant as you transfer resources from the production of one good to the other. this is bc not all FOP are suited for the production of both goods.
if all FOP are equally efficient at production each good, PPC would be a straight line
FOP and different rewards
capital - interest
land - rent
labour - wages
entrepreneurship - profits
national income
measure of total economic activity that takes place within an economy
national output
The total value of goods and services that all firms from all industries of a country produce at a certain moment in time. It is usually measured by the GDP.
national income = national output = national expenditure
in closed economy
value of goods and services that firms produce is the same from one period to another
households spend all their income -> national expenditure = total income
5 sectors in open economy
households, firms, government, financial institutions, and foreign countries
2 sectors of closed economy
households and firms
5 assumptions of closed economy model
- Households own all the factors of production.
- Firms produce all goods and services.
- There is no government.
- There are no other countries to trade with (it is a closed economy).
- There are no banks or commercial institutions.
5 assumptions of open economy model
- Households own the factors of production.
- Firms produce goods and services.
- Government collects taxes to provide public and merit goods to society.
- There are foreign countries, that both produce goods and services that they export to other countries, and consume goods and services that they import from other countries.
- There are financial institutions where households can save their income, and from which firms can take out loans to make investments and grow their businesses.
leakages
flows of money that leave the economy as savings, taxes, and imports
‘injections’
flows of money that enter the circular flow of income
e.g. investments, exports
leakages > injections
leakages < injections
national income fall, less income circulating and economy will shrink
national income will increase and economy will grow
transfer payments
Transfer payments are a type of government expenditure that is not in exchanges for goods and services. Often, transfer payments are used to redistribute income and support the poor.
circular flow of income
A model that illustrates the interactions between economic agents in an economy. It shows how factors of production, goods and income flow between households, firms, government, the financial sector and the foreign sector.
nine concepts of economy
scarcity, choice, efficiency, equity, economic wellbeing, sustainability, change, interdependence, and intervention
needs
Things that people must have for survival such as food, shelter and clothing.
wants
Goods and services that people would like to have but are not necessary for survival, such as TVs, computers and cars.
actual economic growth
increase in output of goods and services
actual economic growth
increase in output of goods and services actually produced
potential economic growth
refers to an increase in a country’s productive capacity
productive efficiency
When output is produced using the fewest possible amount of resources; when output is produced at the lowest possible cost.
allocative efficiency
Producing the optimal combination of goods from a society’s point of view; achieved when the economy is allocating resources so that no one can be better off without making somebody else worse off.
allocative efficiency > productive efficiency
difference between free goods and economic goods
economic goods
- made w scarce resources, thus opportunity cost is incurred
free goods
- do not embody scarce resources, thus does not incur opportunity cost
