Basics of Economy Flashcards
Factors of Production
Land - any ‘gift from nature’; forests, water, oil, etc
Labour - physical and metal talents of an individual
Capital - Man-made goods used to produce good & services (e.g., factories, tools, buildings, etc)
Entrepeneur - Only in market economies, organises other factors to produce something more
Types of Economy
Free Market Economy:
- Market decides everything (no government intervention)
- Price mechanism used to decide price of everything
- Only role of government is to ensure contracts are upheld
- Believed that it will encourage innovation
- Lack of bureaucracy (all decisions made by representatives instead of officials)
- Incredibly inequal distribution of resources
- Causes overconsumption of demerit (unhealthy) goods and underconsumption of merit (healthy) goods
Command/planned economy:
- Everything controlled by government
- Control private businesses
- Rationing (providing set number of goods) instead of price mechanism (increasing or decreasing prices in response to market)
- Same products made, decreasing innovation and consumer goods
- Causes corruption
- Controls externalities
Mixed economy:
- Government & market each contrrol certain areas of economy
- Government control public goods; market controls consumer goods
- All modern countries have this type of economy
Opportunity Cost
- The cost of the goods you sacrifice buying as a result of purchasing something else
- Lose same out of opportunities on straight line
- Lose more when allocating resources on curve
Supply and Demand
Supply:
- Amount of a good or service producers are willing and logistically capable of selling
- Factors contextualize on what product is
- Affects costs, therefore impacting how much producers want to make based on potential profit
Demand:
- Amount of a good or service consumers are willing to purchase at a specific price
- Notional demad refers to consumers desiring a good they can’t afford (for legal or financial reasons)
- Effective demand refers to consumers desiring a good that they can purchase
- As price increases, effective demand decreases
- Except for Giffen goods (stales that economy relies on) or Veblen goods (luxury goods where demand increases as price increases)
- Can be affected by consumer income, availability, compliments, and taste and preferences
Min/Max Prices
- Minimum price set above FME, causing producing a good to be more expensive than ideal
- Maximum price set below FME, causing producers to earn less for producing a particular good
Taxes and Subsidies
Subsidy:
- Direct/indirect payment to individuals or firms
- Cash payment or tax cuts
- Prevent market failure or externalities
- Issues including calculating optimal subsidies, preventing political incentives, and overcoming externalities
- Increases supply
- Can popularize public goods, protect valuable economic sectors, and encourage people to vote for you
Taxes:
- Referred to as money earned by government from charging people or businesses
- Can be direct (actor pays government directly from income) or indirect (paid by sellers through all stages of production)
- Increase costs of production
- Decreases supply
- Also prevents market failures
Macroeconomics as a subject
- Considers all markets in a particular economy
- Main goals include promoting economic growth, limiting unemployment and underemployment, and keeping prices stable
- Economists believe in these responses to business cycle
Keynesians:
- Businesses driven by ‘animal spirits’ is an issue (impulsive spending and too many savings)
- Paradox of thrift is an issue (everyone saving money causes savings’ worth to decrease, reducing Ad and lowering levels of savings, repeating cycle)
- Believe in increasing savings and decreasing spendings in booms while increasing spendings during busts
- Causes stable economy
Monetarism:
- Controlling value of money and inflation is more important than controlling demand
- Manage by central banks and interest rates
- Maintain value of money to prevent boom and bust cycle
- Impossible while maintaining high levels of employment due to wage inflation (increase in wages causes increase in cost of goods)
Raworth:
- Growth is problem
- Needs to have limits, therefore donut economics
GDP equations
C + I + G + (NX) = Y
- C = consumption (all consumer spending
- I = investment (any infrastructure spending for future production
- G = government spending, including salaries and production of public goods
- Net exports = money flowing in and out based on prices of imports and exports (formula is cost of exports - imports)
- Y = Income AKA aggregate (total) demand spending, AKA GDP
Business Cycles
- Economy fluctuates overtime, leading to periods of boom & bust
- These are depicted through recessions and recoveries that make up a single cycle
- During peaks, there is inflation and full employment
- During trough, there is unemployment
Donut Economics
- Three parts: social foundation, safe zone, and ecological ceiling
- Social foundation is what is required for a basic society to function
- Ecological ceiling is the maximum point before the economy begins to damage the environment with externalities
- Safe zone is the sweetspot, between social foundation and ecological ceiling
PPC graph
- Production Possibility Curve
- Represents potential production between a pair of products, assuming full use of resources in production
Producer and consumer surplus
Consumer surplus:
- (What consumers are willing to pay for a good or service) - (what they actually pay; FME)
- Area above FME yet bellow demand line
Producer Surplus:
- Difference between two price levels
- (What producers are willing to charge) - (what they charge; FME)
- Area above supply line and below FME)
Price Elasticity of Demand:
- Shift in demand of good when change occurs in one of the variables
- If demand is inelastic = higher consumer surplus as more buyers willing to pay for increased price of good
