Chapter 1: Macroeconomics Flashcards
What is Economics?
Economics is the study of how individuals, businesses governments and other organisations choose to use scarce resources to satisfy their numerous needs and wants in a manner that is efficient and equitable.
What are the four ELEMENTS of Economics?
- SCARCITY OF RESOURCES
- MAKING CHOICES
- EFFICIENCY
- EQUITABLY
What does the element of scarcity of resources imply?
- Resources are finite/limited
- All resources have more than one use
- Every time we use a resource for one purpose we cannot use it for another purpose
- We need to make a choice
What does the element of making choices imply?
- People have to make a choice because their wants outweigh resources available
- Wants are unlimited/Infinite
- It is HUMAN NATURE to always want more, better, newer and nicer things
- Subsistence economies were based on what nature can provide
- Modern Economies are based on the availability of money one has (INCOME)
What does the element of efficiency imply?
- It is concerned with how well resources are used to produce an end result (OUTPUT)
- One person’s satisfaction can only be increased if some one else’s satisfaction is lowered
- There must not be a better way of using the available resources that will increase satisfaction
- Given output must have been produced with the minimum number of inputs
- Either substituting one input for another or reorganizing the scale of production must achieve no increase in output
What does the principle of Equitability imply?
- Fairness and justness
- Having concern for others
- Businesses should not exploit clients or workers for the sake of ever increasing profits
- Natural resources must not be used up to the extent of nothing being left for future generations
- Government ensures benefit of society’s resources are distributed fairly among society members, this is done through taxation etc.
What are the branches of Economics?
- Business cycles
- Development Economics
- Econometrics
- Economic Doctrines and Systems
- Economic history
- Environmental Economics
- International Economics
- Labour Economics
- Monetary Economics
- Public sector Economics
- Regional Economics
- Resources Economics
What are business cycles?
The study of the regular fluctuations in economic activities, they are periods of increasing economic activites that are followed by periods of decreasing economic activities
What is development economics?
The study of policies and actions that can result in an increase in standard of living and economic welfare
What is econometrics?
the study of application of statistical methods in economics
E.g Hypothesis testing, time series models etc.
What are economic doctrines and systems?
The study of the ideas that underpinned and shaped the unfolding of the real economics in the world
Includes topics of Capitalism and Socialism
What is economic history?
The study of the history of the economic activities of human beings. Focuses on how people managed to survive, develop and prosper
What is environmental economics?
The study of the economic importance of the environment for sustainable economic growth and development
What is International economics?
The study of the role of countries with regard to international trade and finances.
Trade in terms of goods and services and finances in terms of money.
Globalization is an important development in terms of this branch of economics
What is labour economics?
The study of the dynamics of a country’s labour force
What is monetary economics?
The study of the role of money and banks in the economy,
What is public sector economics?
The study of the role of sates or government in an economy
What is regional economics?
The study of the contribution of various geographic regions to consumption, production and exchange
What are resources economics?
The study of the natural and human-made resources of a country.
What are the TWO approaches of economics?
- MICROECONOMICS
- MACROECONOMICS
What does microeconomics focus on?
- focuses on a distinct starting point
- interactions of supply, demand and prices are involved
What are the methods of microeconomics?
- PRICE THEORY
- INDIVIDUAL DECISION MAKING UNITS
- THE METHOD OF MICROECONOMICS
- PRESENTATION
Why is microeconomics useful?
It helps us to zoom in on a component and analyse relationships involved, reasons why it exists and ways to strengthen and weaken the relationship
What does macroeconomics focus on?
focuses on entire economy
E.g inflation, unemployment, government expenditure and production.
What is the difference between microeconomics and macroeconomics?
MICROECONOMICS: -Small element -Capitalism -Individual performance MACROECONOMICS: -Aggregate -Socialism -Overall performance
What are positive statements?
- It invites a positive answer
- Includes facts about how the economy works
- Focus on what is in economics
- They are about matters of facts
- Can be proved right or wrong by evidence observed
What are normative statements?
- About opinions
- Focus on what OUGHT to be
- Reflects people’s judgments of what is good or bad, desirable or undesirable
What are scientific methods used for?
used to make investigations
What does the scientific method involve?
Starting the research -hypothesis and data collection Presentation -arrangement for interpretation Explanation of results -report where results and conclusion are explained
What are models?
- used to reduce complexity of economic activities and study them in isolation
- over simplified for understanding relationship between variables
How are models presented?
in quantitative expressions, illustrations, diagrams and statements in writing
What are the FOUR scarce factors of production?
Human Resources
Natural resources
Human-made resources
Entrepreneurial talents
Why is there absolute scarcity?
resources are finite, factors of production are scarce, therefore only a limited amount of goods & services and be produced
What is relative scarcity?
the human nature of people makes them want more, better, newer and nicer things, wants are infinite
as countries increase production capacity, the appetite of the consumers also increase
What is the difference between scarcity and poverty?
Scarcity: -Basic needs satisfied -Affects everyone -Unsatisfied wants will always exist Poverty: -No satisfaction of basic needs -Affects only poor -Earn less than minimum income
What are economic goods?
- they are scarce
- they have utility and value
- people economise
What are free goods?
- plentiful
- have utility but no commercial value
- do not belong to anybody
What are alternatives?
the choices we make for using a particular resource, the purpose is meant to satisfy
What are choices?
Decisions we make to achieve largest possible satisfaction in production of goods and services
What are decisions?
Aspects of choice and how we solve problems
How do customs influence decisions?
People work in different roles according to their social origin
How does the state influence decisions?
By orders, Consumption of goods are allocated by decision of authorities
How does the market influence decisions?
Choices are guided by price
What is opportunity cost?
The value of the next best alternative that has been given up
What does production create?
Goods and services that can satisfy needs and wants (UTILITY)
What is production?
Includes all those activities that provide the goods and services that people, enterprises and public sectors want and for which they are prepared to pay
Why are services important in a modern economy?
The higher the standard of living, the more people will spend on services, and the more services will be produced
What are the basic building blocks in the production sector of our economy?
Business enterprises, regardless of their size or scale of production
What are the three basic decisions producers need to make?
- WHAT to produce
- HOW to produce
- FOR WHOM to produce
What is the purpose of production?
To provide goods and services to satisfy needs and wants of society
How can production of goods & services be classified?
According to 3 main groups:
primary, secondary and tertiary production
What is primary production?
Extracting basic raw materials from nature
What is secondary production?
It involves processing raw materials into final products
What is tertiary production?
It involves service industries that work with the products
What is Labour specialization?
Where each worker performs only a small amount of the production activity
What is Product specialisation
Where each producer produces only one component
What are consumer goods?
Goods that satisfy our wants directly. divided into durable, semi-durable, and non-durable goods
What are services?
They are limited in supply, they are non material
What are capital goods?
Goods that aren’t wanted for their own sake, needed for production of other goods
Why are surpluses required in society?
Producers sell surpluses for money, money is used to pay workers who are consumers, they use money to by goods and services therefore exchange takes place
When does exchange take place?
When goods and services are made available to consumers , and these consumers buy these goods and services, takes place of efficient markets prevail
What is the function of markets?
to make the exchange of goods and services possible, serve as mechanism to bring buyers and sellers into contact
What is a market?
All those buyers and sellers that influence the price of a good or service
What are the three groups of markets?
- WHOLESALE MARKETS
- RETAIL MARKETS
- SERVICES MARKETS
What are wholesale markets?
- Markets that link producers and retailers
- wholesalers stock goods in large quantities and sell in smaller quantities to retailers
- saves retailers warehousing and capital costs
- Refereed to as middle person
- accused of unfairly inflating prices
- ensures consumers have a choice
- more developed the economy is, the more choice they will have
What are retail markets?
- They link consumers and retailers
- consumers main beneficiaries
- known as consumer markets
- goods ready for final consumption are exchanged
- consumers spend money on these markets
- demand for products are recorded
- Consumers influence price
- By increasing spending consumers have an influence on price
What are services markets?
- Services are sold and bought domestically and internationally
- services are bought by consumers, enterprises and public sectors
- Service markets have the same characteristics as retail markets with regard to demand, supply & prices
- Service markets rely on communication networks
What is consumption?
the final segment in economic process, absorbs utility created by production, destroys production
What are durable consumer goods?
They produce a steady stream of satisfaction, value diminishes slowly through age and use
What are Semi-durable goods?
They last for some time and must be replaced relatively quickly
What are non-durable goods?
They are consumed and destroyed in the process of being used, they are used once only
What are services?
Goods such as rent, communication
What is individual consumption expenditure?
- Expenditure on goods & services supplied to individual consumers
- use of service by one consumer excludes use by other consumers
What is collective consumption expenditure?
- expenditure on services provided
- provided simultaneously to all members of society
- use of service by one consumer does not exclude the use by another
What are human rights?
rights generally thought every living person should have
What are civil rights?
Rights such as equality before the law and freedom of expression
What are political rights?
the right to belong to a political party and the right to own fixed property
What are economic human rights?
practices that affect human rights
What are the instruments used to protect human rights?
- the constitution is the most powerful at protecting the rights of individuals in SA
- acts contribute to protect individuals
- the environment including surroundings and conditions that affect people’s lives
What are goods and services provided by the environment?
- Provides us with materials and energy
- Space
- The natural world
- Dumping space for our waste
What is the UNCED?
the first international conference on the environment
was held in Rio De Janiero and Johannesburg
What were the concerns of the Johannesburg summit?
Growth of POLLUTION and massive EXCESSIVE CONSUMPTION
Explain the pollution problem
- Occurs because of CO2 emissions into the air, extensive fossil fuels burned
- Results in reduction of ozone layer which protects earth from heat of direct sun
- Global warming effect causes droughts, floods, inconsistencies in weather
- As a result food production suffers, conditions worsen, developing countries are more affected
- developing countries contribute to CAUSES of global warming rather than GLOBAL WARMING
- suffer because they bear the burden of climate change through loss of food production
Explain the excessive consumption problem
- Consumption of renewable resources are extensive
- humans consume 50% more than nature can provide
- Natural environment and human economy are interrelated, change in one causes change in other
What is the circular flow?
A model explaining how the economy is organised and how participants interact with one another
What are the most important participants in the economic process?
consumers, businesses, other enterprises, the government and the foreign sector
What are the motives of consumers?
their needs and wants need to be satisfied
What are the means of consumers?
Consumers sell services of their factors of production to producers for a money income
they save by abstaining from consumption
they increase spending by borrowing from banks
What are the consumers’ effect on circular flow?
When they save, it is a withdrawal or leakage
when they borrow it is an injection
What are the motives of business enterprises?
businesses wan to maximize profits
What are the means of business enterprises?
Capital in cash from shareholders
Borrowing
Their profitability and solvability determines borrowing
What are businesses’ effect on circular flow
savings- withdraw Borrowing-injection Export- injection Import- withdrawal Taxes- withdrawal Dividends- injection
What are the three spheres of the public sector?
- central
- provincial
- local
What is the purpose of the public sector?
To satisfy collective needs and wants of the people
What is the function of the public sector?
to satisfy needs and wants that cannot be satisfied by individuals or business enterprises
What are the motives of the government?
Economic growth and development high levels of employment price stability exchange rate stability General motive redistribution of income from rich to poor
What are the means of government?
Levy taxes on income, wealth and expenditure of individuals and businesses
- Taxes on income
- Taxation on wealth
- taxation on consumption
- Taxation on imports
- Direct and indirect taxes
- Borrowings
What are the effects of government on circular flow?
- Imports and exports affected
- Size and smoothness of money flow
- Depreciation/Appreciation of currency
- change of exchangeable prices
What is the role of the foreign sector?
It supplies goods and services that are imported into a country and buys goods and services that are exported
What is the balance of payments in international transactions?
- it is recorded in the country’s balance of payments
- record of country’s transactions
- contains money values
What is the foreign exchange in international transactions?
- Transactions recorded in balance of payments cause money to change hands, which occurs in the foreign exchange market
- Exporters sell foreign exchange they were paid
- Importers buy foreign exchange they owed
- exchange rates are established
