AB13120, UNDERSTANDING THE ECONOMY. Flashcards
What is the relationship between money and economics, and why is money considered an essential aspect of economics?
Money is indeed a crucial element in economics, as it plays a significant role in determining various economic aspects. It’s involved in how much people earn, how much they spend, the cost of goods and services, firms’ revenue, and the overall money supply in an economy. However, economics is not solely about money; it’s also concerned with understanding economic activities’ broader implications and consequences.
How does economics go beyond the mere study of money, and what broader aspects does it encompass?
Economics extends beyond the study of money because it encompasses a wide range of topics and issues. Money is just a tool within the economic framework. Economics is primarily concerned with:
The production of goods and services, which involves assessing the total economic output, the production of specific items, the techniques employed in production, and employment levels.
The consumption of goods and services, entails analyzing how much people spend, their saving habits, their preferences in terms of what they buy, and how various factors like prices, advertising, fashion, and income levels influence consumption patterns.
What are some key factors that economics is concerned with regarding the production of goods and services?
Economics analyzes the production of goods and services by examining the quantity of output an economy generates, both in terms of the overall production and individual items. It also investigates the techniques used in production, such as labor-intensive vs. capital-intensive methods, and the extent of employment within different sectors of the economy.
Can you provide examples of how economics evaluates the production within an economy, both in terms of total production and individual items?
Examples of economic evaluation of production include assessing the annual GDP (Gross Domestic Product) of a country, which measures the total value of all goods and services produced within its borders. On a smaller scale, economics might examine the production levels of specific industries or products, such as the automotive industry’s annual vehicle output.
In what ways does economics analyze consumption patterns, and what are the factors that influence people’s consumption of goods and services?
Economics studies consumption patterns by analyzing how people allocate their income to spending and saving. It investigates what goods and services individuals choose to purchase, how price changes impact buying decisions, and how factors like advertising, fashion trends, and income levels influence consumption behavior.
How does the concept of savings relate to economics, and why is it important to study in the field of economics?
Savings are a critical aspect of economics because they reflect the portion of income that is not immediately spent on consumption. Economics examines savings patterns to understand how households and individuals plan for the future and how their saving habits impact overall economic stability and investment.
Explain how prices, advertising, fashion, and individuals’ incomes can impact consumption and play a role in economic analysis.
Prices, advertising, fashion trends, and income levels have a significant impact on consumption patterns. Prices affect the affordability of goods, advertising influences consumer preferences, fashion trends drive demand for specific products, and income levels determine how much people can spend on various items. These factors are essential in understanding and predicting consumer behavior.
What role does employment play in the study of economics, and how does it relate to the production of goods and services?
Employment is closely linked to production in economics. The number of people employed in an economy is a key indicator of its economic health. High employment levels are generally associated with economic growth and prosperity, while unemployment can lead to economic challenges and social issues.
Can you provide examples of the techniques of production that economics examines and their significance in economic analysis?
Economics examines various techniques of production, including labor-intensive methods that rely on human workforce and capital-intensive methods that utilize machinery and technology. For instance, in agriculture, traditional farming techniques involve more manual labor, while modern farming relies on machinery and automation.
How does economics study the choices individuals and firms make in the production and consumption of goods and services?
Economics studies the choices made by individuals and firms in both production and consumption. Individuals decide what to buy based on their preferences, needs, and budget constraints. Firms choose production methods and pricing strategies to maximize profit. These choices are fundamental in understanding how resources are allocated in an economy.
How does the limited availability of human resources, both in terms of the workforce size and skills, impact the overall productivity of labor in economic activities?
The limited availability of human resources has a direct impact on the productivity of labour in economic activities. First, the size of the labour force is finite, meaning there is a maximum number of people available for work in any given economy. Second, the skills and abilities of the workforce vary, which further influences productivity. Skilled workers are often more productive than unskilled ones. Therefore, the scarcity of labour, coupled with variations in skills, shapes the overall productivity of labour in an economy.
What are the implications of finite natural resources, such as land and raw materials, on the global economy, and how does this scarcity influence resource allocation decisions?
The finite supply of natural resources, including land and raw materials, has several implications for the global economy. It means that there is a limit to how much land can be used for agriculture, housing, and other purposes. It also means that there is a finite quantity of raw materials like minerals and timber available for various industries. This scarcity drives competition for these resources and influences resource allocation decisions. Economies must make choices about how to best use and distribute these limited resources, which can impact prices, production processes, and trade relationships.
In what ways does the finite supply of manufactured resources, including factories, machinery, and transportation infrastructure, affect the productivity of these capital inputs in economic production processes?
The finite supply of manufactured resources places constraints on their availability for economic production. For example, there is a limit to the number of factories and machines that can be used in a given economy. The productivity of these capital inputs is influenced by their quantity and quality. Additionally, the state of technology plays a critical role in enhancing the productivity of manufactured resources. Technological advances can make existing capital more efficient or lead to the creation of new and more productive capital.
How does technological advancement relate to the productivity of manufactured resources, and what role does technology play in mitigating resource limitations?
Technological advancement is closely tied to the productivity of manufactured resources. It plays a vital role in mitigating resource limitations by allowing economies to do more with less. Improved technology can enhance the efficiency and output of factories, machinery, and other capital inputs, thereby offsetting some of the constraints posed by their finite supply. In this way, technology helps economies overcome resource scarcity to some extent.
Why is the concept of resource scarcity a fundamental consideration in economics, and how does it influence economic decision-making at both individual and societal levels?
Resource scarcity is fundamental in economics because it underpins the concept of scarcity itself. Economics is the study of how societies allocate limited resources to fulfill unlimited wants and needs. The recognition of resource scarcity is a driving force behind economic decision-making. Individuals and societies must make choices about what to produce, how to produce, and for whom to produce due to resource constraints. These decisions influence production methods, prices, consumption patterns, and overall economic well-being. Therefore, understanding and managing resource scarcity is central to the field of economics.
What is scarcity?
the excess of human wants over what can actually be produced. Because of scarcity, various choices have to be made between alternatives
What is ‘production’?
The transformation of inputs into outputs by firms in order to earn profit (or to meet some other objective).
What is ‘consumption’?
The act of using goods and services to satisfy wants. This will normally involve purchasing the goods and services.
What is Factors of production (or resources)?
The inputs into the production of goods and services: labour, land and raw materials, and capital.
What is labour?
All forms of human input, both physical and mental, into current production.
Define Land and raw materials
Inputs into production that are provided by nature: e.g. unimproved land and mineral deposits in the ground.
Define Capital
All inputs into production that have themselves been produced: e.g. factories, machines and tools.
Define Macroeconomics
The branch of economics that studies economic aggregates (grand totals): e.g. the overall level of prices, output and employment in the economy.
Define aggregate command
The total level of spending in the economy.
Define aggregate supply.
The total amount of output in the economy.
What is the connection between macroeconomic problems and the balance between aggregate demand and aggregate supply, and why is this balance important in economic analysis?
The connection between macroeconomic problems and the balance between aggregate demand and aggregate supply lies in their impact on key economic indicators. When aggregate demand exceeds aggregate supply, it can lead to inflation and trade deficits. This balance is crucial because it reflects the overall health of an economy and influences policy decisions to maintain stability.
Explain the concept of inflation in macroeconomics and how it is influenced by changes in aggregate demand. What happens to prices when aggregate demand rises significantly?
Inflation in macroeconomics refers to a general increase in the level of prices throughout the economy. When aggregate demand rises significantly, firms often respond by raising their prices. This is because, with high demand, they can sell their products at higher prices while maintaining sales volume. When many firms increase prices simultaneously, it results in inflation, which erodes the purchasing power of money.
How is the rate of inflation typically measured in economic analysis, and why is the annual rate of inflation often used as a reference point?
The rate of inflation is typically measured by comparing price levels between different periods. The annual rate of inflation is commonly used, representing the percentage increase in prices over a 12-month period. This measurement provides a standardized way to track and communicate changes in price levels, making it easier to understand and analyze inflation’s impact on the economy.
What are balance of trade deficits, and how do changes in aggregate demand affect a country’s balance of trade? How does increased demand impact imports and exports?
A balance of trade deficit occurs when a country’s imports exceed its exports. Changes in aggregate demand can influence this deficit. When aggregate demand rises, people tend to buy more imports, increasing the demand for foreign goods. This results in more spending on overseas products like Japanese TVs, Chinese computers, or German cars. Additionally, if a country experiences a high rate of inflation, its domestically produced goods may become less competitive in the international market, leading to reduced exports and a larger trade deficit.
Define Inflation.
A general rise in the level of prices throughout the economy.
Define (Annual) Rate of inflation.
The percentage increase in the level of prices over a 12-month period.
Why might a high rate of inflation lead to a trade deficit? What are the mechanisms through which inflation can affect a country’s competitiveness in international trade, and what goods are likely to be affected by this phenomenon?
A high rate of inflation can lead to a trade deficit because it can make a country’s domestically produced goods less competitive in the global market. As prices rise due to inflation, these products become relatively more expensive compared to similar goods from countries with lower inflation rates. Consumers are then more likely to buy cheaper foreign imports, leading to a trade imbalance. Goods most affected by this phenomenon often include non-essential consumer items, as consumers are more price-sensitive when it comes to discretionary spending.
Define Balance of Trade.
Exports of goods and services minus imports of goods and services. If exports exceed imports, there is a ‘balance of trade surplus’ (a positive figure). If imports exceed exports, there is a ‘balance of trade deficit’ (a negative figure).
Define recession.
A period where national output falls for two or more successive quarters.
Define unemployment.
The number of people of working age who are actively looking for work but are currently without a job. (Note that there is much debate as to who should officially be counted as unemployed.)
Define demand-side policy
Government policy designed to alter the level of aggregate demand, and thereby the level of output, employment and prices.
Define supply-side policy
Government policy that attempts to alter the level of aggregate supply directly.
Define Opportunity cost.
The cost of any activity measured in terms of the best alternative forgone.
Define rational choices.
Choices that involve weighing up the benefit of any activity against its opportunity cost so that the decision maker successfully maximises their objective: i.e. happiness or profits.
Define Marginal costs.
The additional cost of doing a little bit more (or 1 unit more if a unit can be measured) of an activity.
Define Marginal benefits.
The additional benefits of doing a little bit more (or 1 unit more if a unit can be measured) of an activity.
Define Rational Decision Making.
Doing more of an activity if its marginal benefit exceeds its marginal cost and doing less if its marginal cost exceeds its marginal benefit.
Define Economic efficiency.
A situation where each good is produced at the minimum cost and where individual people and firms get the maximum benefit from their resources.
Define productive efficiency.
A situation where firms are producing the maximum output for a given amount of inputs, or producing a given output at the least cost.
Define allocative efficiency
A situation where the current combination of goods produced and sold gives the maximum satisfaction for each consumer at their current levels of income. Note that a redistribution of income would lead to a different combination of goods that was allocatively efficient.
When is economic efficiency achieved?
achieved when each good is produced at the minimum cost and where individual people and firms get the maximum benefit from their resources.
Define equity.
A distribution of income that is considered to be fair or just. Note that an equitable distribution is not the same as an equal distribution and that different people have different views on what is equitable.
Define production possibility curve.
A curve showing all the possible combinations of two goods that a country can produce within a specified time period with all its resources fully and efficiently employed.
What is the production possibility curve?
A production possibility curve illustrates the microeconomic issues of choice and opportunity cost. It also illustrates the phenomenon of increasing opportunity costs
Define increasing opportunity costs.
When additional production of one good involves ever- increasing sacrifices of another.
Define investment.
The production of items that are not for immediate consumption.
Explain the twin demand supply between firms and households.
households demand goods and services, and firms supply goods and services. In the process, exchange takes place. In a money economy (as opposed to a barter economy), firms exchange goods and services for money. In other words, money flows from households to firms in the form of consumer expenditure, while goods and services flow the other way – from firms to households. Second, firms and households come together in the market for factors of production. This time the demand and supply roles are reversed. Firms demand the use of factors of production owned by households – labour, land and capital. Households supply them. Thus the services of labour and other factors flow from households to firms, and in exchange firms pay households money – namely, wages, rent, dividends and interest. Just as we referred to particular goods markets, so we can also refer to particular factor markets – the market for bricklayers, for footballers, for land, and so on.
So there is a circular flow of incomes.
Define barter economy.
An economy where people exchange goods and services directly with one another without any payment of money. Workers would be paid with bundles of goods.
Define market.
The interaction between buyers and sellers.
Define Centrally planned or command economy.
An economy where all economic decisions are taken by the central authorities.
define free-market company .
An economy where all economic decisions are taken by individual households and firms and with no government intervention.
define Mixed economy
An economy where economic deci- sions are made partly by the government and partly through the market. In practice all economies are mixed.
Define informal sector.
The parts of the economy that involve production and/or exchange, but where there are no money payments.
define subsistence production
Where people produce things for their own consumption.
Define economic system.
A mechanism that allocates scarce resources among competing users.
Describe the operating system of an economic system.
Households, firms, government.
what are co-ordination mechanisms
mechanisms to make resource allocation decision
Describe factors of a command economy.
Planned, state-orientated, attempts to solve the economic problem, state allocates resources through a planning mechanism, Characterised by choice and productivity problems, Economy controlled
Define factors of a mixed economy.
Market dominated limited state involvement, Individual economic freedom, Market forces set prices, Government involvement -provision of public goods and services, Address issue of equality, Economy Managed
Define free market economy.
Little or no government interference, Market mechanism allocates resources, An unregulated market.
define informal sector
The parts of the economy that involve production and/or exchange, but where there are no money payments.
define subsistence production
Where people produce things for their own consumption.
define input-output analysis
This involves dividing the economy into sectors, where each sector is a user of inputs from and a supplier of outputs to other sectors. The technique examines how these inputs and outputs can be matched to the total resources available in the economy
