Chapter 2 Flashcards

Microeconomics

1
Q

What are economic decision makers?

A

Economic decision makers within the economic system make decisions concerning the application of scarce resources and the use of the resulting output, with the view of improving their respective levels of wellbeing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are households decisions as role players in the economy?

A

Households may consist of a single person, a family or a group of people who live together, depend on common income and within the limits of that income exercise choices with a view to meeting their economic objective. Their function is to supply primary production factors and to use the income received from the supply of the production factors to purchase final goods and services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are business enterprises decisions as role players in the economy?

A

Business enterprises are firms and industries that will combine the factors of production effectively to produce goods and services. Their economic decision makers whose purpose is to earn income and to make profit by supplying goods and services for which there exists a demand in the economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are governments decisions as role players in the economy?

A

Governments are there to create an environment where the economy can operate freely and fairly. They have economic activities in the public sector which are extensive. Their functions consist of providing the legal framework and the services need for a market economy to operate effectively, to ensure fair competition, to take care of market failures and to redistribute income through transfer payments, market intervention and taxation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are foreign sectors decisions as role players in the economy?

A

Foreign sectors consist of a large number of individual states, governments, consumers and business enterprises which have interaction with other countries. It can have welfare benefits. This sector is sensitive to global changes and events.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What does society choose due to income disparity?

A

Society chooses to redistribute a total part of their income through a variety of government policies and programmes. They are transfer payments, market interventions and taxation. Redistribution involves both benefits and costs.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the benefits and cost of income redistribution?

A

Redistribution benefits are greater fairness or economic justice. While the redistribution costs are reduced, incentives to work, save, invest and produce which could lead to a loss of total output.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is externality market failure?

A

Externality market failure (externalities) is when the market system produces the wrong amounts of certain goods and services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is public goods market failure?

A

Public goods market failure is when market systems fail to allocate any resources to the production of certain goods and services whose output is economically justified

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are transfer payments?

A

Transfer payments are payments where there is no services rendered e.g. pension, disability payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the foreign sector?

A

Foreign sectors are part of the open economy as the country is extensively involved in international trade.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Who are the role players in the economy who make the decisions?

A
  1. Households
  2. Business enterprises
  3. Governments
  4. Foreign sectors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the three markets in the economy?

A
  1. Resource market
  2. Product market
  3. Financial market
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is a product market?

A

The place where goods and services produced by businesses who combined resources are bought and sold. Households use their limited income to buy and sell business. The monetary flow of consumer spending yields sales revenues for businesses.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is a financial market?

A

Financial markets take care of surplus funds in the economy. Savings in all forms are pooled together to create a source of funds for investment purposes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the resource market?

A

The place where resources are bought and sold. Households sell and businesses buy. The costs to business are wage, rent, interest and profit. Households own all economic resources directly as workers or entrepreneurs and indirectly through ownership of business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What does circular flow diagram display?

A

A circular flow diagram shows how the role players are connected with each other by the flow of real as well as financial objects. There is a continuous flow of real objects in one direction and a continuous flow of financial objects in the opposite direction. The direction of the flow of the money involved will determine whether it is inflow or outflow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What does a circular flow two sector model show?

A

-Production factors flow from households to firms through the resource market and goods and services flow from firms to households through the product market.
-Opposite these flows are real flows are monetary flows. In a monetary circular flow, households receive income from firms (their costs) through the resource market and the firms receive revenue from households (their expenditure) through the product market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the relationship between firms and households in a circular flow diagram?

A

Households purchase goods and services from firms by means of the income they earn. Firms use this revenue to buy household owned factor services and raw materials to produce goods and services or to distribute as profit.

20
Q

What does a three closed sector circular flow diagram show?

A

In a closed sector circular flow, governments buy products from the product market and employ resources from the resource market to provide government goods and services to households and businesses. The government finances its expenditures through net taxes it receives from households and firms.

21
Q

What does a four open sector circular flow diagram show?

A

In an open sector circular flow, domestic firms export goods and services to foreign sector and import goods and services from the foreign sector to meet the demand of domestic consumers. The financial market is included where savings of households are transferred to firms for investment purposes and the financial investments from and to the foreign sector.

22
Q

Define economic system

A

The economic system is defined as ownership of factors of production and the method used to motivate, coordinate and direct economic activity.

23
Q

What does the economic system have to determine?

A

The economic system has to determine what goods are produced, how they are produced, who gets them, how to accommodate change and how to promote technological progress

24
Q

What are the two extremes of the economic system?

A

Two extremes of the economic system is the market system (capitalism) and the command system (socialism or communism)

25
Q

What is a command system?

A

The command system is also known as socialism or communism. The economic decision making occurs through the government’s central economic plan. The government owns most of the firms, which produce according to government directives. The central planning board determines production goals for each enterprise and specifies the amount of resources to be allocated to each enterprise so it can reach its production goals.

26
Q

What is a market system?

A

The market system is also known as pure capitalism. There is a private ownership of resources. Participants act in their own self interest. Individuals and businesses seek to achieve their economic goals through their own decisions. The result is competition among independently acting buyers and sellers of each product and resource

27
Q

What is the role of governments in a pure market?

A

In a pure market government’s role would be limited to protecting private property and establishing an environment appropriate to the operation of the market system

28
Q

What’s a mixed system?

A

In a mixed system the government is not the dominant economic force the market is. Heavy incentive is placed on private incentives to allocate the resources and the government contributes GDP. The purpose of the government is to contribute to the economy to an extent that socially desired results in the market are reached.

29
Q

What is the characteristic of private property in a market system?

A

Firms and individuals own most of the property resources. This right to private property enables individuals and firms to dispose of property resources as they see fit, encourages investment, innovation, exchange, maintenance of property and economic growth. Private property extends to intellectual property.

30
Q

What is the characteristic of Freedom of enterprise and choice in a market system?

A

It requires that various economic units make certain choices that are expressed and implemented in the economy markets. These choices are free only within broad legal limitations

31
Q

What is the characteristics of self-interest in a market system?

A

Its motivating force of the various economic units as they express their free choices. Each economic unit tries to achieve its own particular goal which usually requires delivering something of value to others.

32
Q

What is the characteristics of Competition in a market system?

A

The basis of this competition is freedom of choice exercised in pursuit of monetary return. This freedom provides the economy with the flexibility needed to remain efficient over time.

33
Q

What is the characteristics of markets and prices in a market system?

A

A key component of the market system. A market system conveys the decisions made by buyers and sellers of products and resources

34
Q

What is the characteristics of technological and capital goods in a market system?

A

Monetary rewards for new products or production techniques accrue directly to the innovator. Encourages extensive use and rapid development of complex capital goods: tools, machinery, large scale factories and facilities for storage, communication, transportation and marketing.

35
Q

What is the characteristics of division of labour in a market system?

A

Contributes to the society’s output. It increases the total output society derives from limited resources.

36
Q

What is the characteristics of Geographical specialisation in a market system?

A

It works on a regional and international basis, used to achieve efficiency in the use of limited resources.

37
Q

What is the characteristics of active but limited government in a market system?

A

A market system promotes a high degree of efficiency in the use of its resources, it has certain inherent shortcomings and market failures.

38
Q

What does freedom in the market system enables?

A
  • Freedom of enterprise ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to see them in their chosen markets
  • Freedom of choice enables owners to employ or dispose of their property and money as they see fit and ensures that consumers are free to buy the goods and services that satisfy their wants that their budgets allow
39
Q

What does competition in an economy require?

A
  • Two or more buyer and sellers acting independently in a particular product or resource market
  • Freedom of sellers and buyer to enter or leave markets on the basis of their economic self-interest
40
Q

What is a market?

A

A market is an institution or mechanism that brings buyers and sellers into contact. A decision made on each side of the market determines a set of product and resource prices.

41
Q

What are the the five fundamental questions relating to a market system/

A

1.What goods and services will be produced?
2.How will the goods and services be produced?
3.Who will get the goods and services?
4.How will the system accommodate change?
5.How will the system promote progress?

42
Q

Relating to a market system: 1.What goods are produced?

A
  • Goods and services produced at a continuing profit will be produced contrary to those at continuing loss
  • Profit= total revenue (TR) - Total cost (TC)
  • Continuing economic profit (TR>TC) in an industry results in expanded production and the movement of resources toward that industry
  • Continuing losses (TC>TR) an industry leads to reduced production and to the exit of resources from that industry
  • Consumer sovereignty is crucial in determining the types and quantities of goods produced
43
Q

Relating to a market system: 2.How will the goods be produced?

A

2.How will the goods be
- In combinations and ways that minimise the cost per unit of output
- Right mix of labour and capital to maximise profit
- Most efficient production technique depends on:
+ Availability of technology and the various combinations of resources that will produce the desired results
+ Prices of the needed resources
- Economic efficiency means obtaining a particular output of product with the least input of scarce resources when both output and resource inputs are measure in monetary gain

44
Q

Relating to a market system: 3.Who will get the output?

A

Any product will be distributed to consumers on their ability and willingness to pay its market price
Market price depended on resource prices

45
Q

Relating to a market system: 4.How will the system accommodate change?

A

The adjustments in economy are in response to the change in consumers tastes
Market systems are dynamic and can adjust to changes
Consumers taste direct changes in price and profits

46
Q

Relating to a market system: 5.How will the system promote progress?

A
  • Technological advancement
    +The market system provides incentive for technological advances
    +New and improved methods that reduce production costs
    +Concept of creation destruction which is when creation of new products and production methods completely destroy the market position of firms that are wedded to existing older products
    -Capital accumulation
    +Entrepreneurs and business firms require additional capital goods for the most advanced technology
    +The market system provides this resource through an increase in rand votes for capital goods