Eco U3 Flashcards
Scarcity
When there are unlimited wants and needs but limited resources to satisfy them
Opportunity Cost
Opportunity cost is the value of the next best alternative forgone when scare resources are allocated to one choice over another.
Utility
the capacity to be useful and provide satisfaction
Production Possibility Frontier (PPF)
Gives an idea of productive capacity
Market
A place where buyer and seller meet to exchange goods and services
perfectly competitive market
- Many Buyers and Sellers
- Homogenous Product (similar)
- Little to no government intervention
Law of Demand
As prices increase the quantity demanded decreases (vice Versa)
What is the Income Effect in the Law of Demand?
As price increases, only people with a high income can afford the product.
What is Perceived Utility in the Law of Demand?
As price increases, consumers question the product’s value.
What does Diminishing Marginal Utility refer to?
The more you buy, the lesser the satisfaction.
What is the Substitution Effect in the Law of Demand?
As price increases, people seek substitute products.
Law of Supply
As Prices increases the quantity supplied also increases (Vice Versa)
What or when is the Equilibrium?
When the quantity supplied = the quantity demanded
- This means there are no shortages → suppliers raise their prices
- There is no surplus → To get rid of the excess stock, they reduce prices
What is meant by a shift in the demand curve?
When a factor other than price changes which then affects Demand and or Supply
What is meant by a movement in the demand curve?
A movement is caused by factors related to prices
Market Failure
When markets don’t always efficiently allocate their resources to maximise society’s living standards
Externalities
The effect of consuming/producing a good/service on third parties
- E.g. the effect on society
positive externalities
A positive externality is the benefit on third parties (Society)
Examples -
- Education: When a child receives an education, they gain skills and expertise that benefit society.
- Planting trees: Trees can provide benefits to society beyond the benefit to the owner of the tree, such as improving air quality and pest control.
Negative externalities
a cost imposed without compensation on third parties by the production or consumption of sellers or buyers.
Example: a manufacturer dumps toxic chemicals into a river, killing the fish sought by sports fishers; an external cost or a spillover cost
Gov Intervention
What can the government do in relation to the externalities.
- Impose Taxes
- Subsidise goods with pos exter
- Quotas: Only a certain amount of goods/services ca be produced/consumed
- Imposing bans
Material Living Standards
standards that can be easily measured in terms of income per person, or consumption or purchase of goods and services
Non-material living standards
standards that are not easily measured as they are intangible, and refer to the qualitative aspects of our lives, such as enjoyment of nature and feeling safe in the community
Aggregate Supply
the total amount of goods and services that businesses in an economy are willing and able to produce and sell at a given price and time period
What is the overall purpose of Macro-economic Goals?
To increase living standards
What is the goal of Price Stability?
Price stability is related to inflation, where the Aus gov aims to acheive an inflation rate of 2-3% per annum measured by the Consumer Price Index.
What is the goal of Economic Growth?
The goal of economics growth is to achieve a rate of 3-3.5% average growth in Real GDP on average overtime. This is because the higher the employment rate → a higher number of people earning an income → greater access to g+s → this increases material living standards.
If the CPI was 100 in the financial year starting July 2017. In the next financial year, the CPI was 104. How do we calculate the rate of infation?
Inflation = (CPI(new)-CPI(old))/CPI(old) x 100 = 4%
Real GDP
Measure of total value of production in the economy calculated without the effects of inflation.
If Aus had a real GDP of $500 in 2017. In 2018, the real GDP is $570. How do we calculate the rate of growth in Real GDP?
What are the formula’s for the differnt GDP Calculations?
%Growth = (GDP(new)-GDP(old))/GDP(old) x 100 = 14%
What is the goal of full employment?
To be considered employed a person must be the legal working age (15+) and must perform more than one hour of paid work. The australian government’s goal is to elimnate cyclical unemployment and acheive an unemployment rate of around 5%, as close as possible to the NAIRU. The lowest rate of unemployment possible without running into excessive inflation pressures.
When is a person considered unemployed?
- Legal Working Age (15+)
- Willing and actively seeking to work
- Not working less than one hour a week
What are the types of Unemployment?
The types of unemployment are:
- Structural Unemployment: Skillset does not match what employees want
- Cyclical Unemployment: Unemployment due to the business cycle → Low levels of Aggregate Demand (economic downturns)
- Seasonal Unemployment: When jobs can only be performed in specific seasons (E.g. Strawberry Picker, Cherry Picker)
- Frictional Unemployment: Temporary Unemployment → the position between leaving one job while seeking for another
- Hardcore Unemployment: People with certain circumstances hindering them from getting a job (E.g. A criminal record)
- 1000 ppl living in ATARLand
- 800 of them are over 15 years old
- 500 of them are employed
- 100 of them are unemployed
What is the participation rate?
What is the unemployment rate?
Participation Rate = (labour force/pop over 15)x100
= (500+100)/800 = 75%
Unemployment rate = (Unemp Ppl/labour force) x 100
= 100/600 = 16.7%
What is Productive Capacity?
Productive capacity is the maximum possible level of goods and services an economy can produce when all resources (labor, capital, and technology) are fully and efficiently utilized.
Define Relative Scarcity?
Relative Scarcity is when there are infinite wants and needs but finite resources to satisfy them, must maximise society’s living standards.
What are the factors of production?
The factors of production are:-
Land or natural resources - Resources which can be consumed raw or be used to generate more elaborate products. (Eg. Water, minerals, vegetables)
Labour - Human Labour (Eg. Teachers, Doctors, Construction Workers)
Capital - Labour + natural Resources - Eg. Machinery, Tools, factories and infrastructure
Entrepreneurship/Enterprise - Skills of people who combine - they take finance risks
What are the economic assumptions?
Rational Economic Decision making:
When a decision is needs to be made the consumer will consider all relevant information and know exactly what they are buying.
Consumers are utility maximisers and firms are profit maximisers
Diminishing Marginal Utility:
The utility of a product decrease with each additional unit of use.
What are the different types of market systems used to allocate resources?
Market Capitalism:
- Private individuals and businesses own and control the means of production, distribution and exchange of g+s.
- Operates on Supply and Demand
- Prices determined by market forces rather than gov intervention
Planned Socialism:
Planned:
- Gov responsible for resource allocation
- Gov decides how, what and for whom to produce
Socialism:
- Productive assets are state owned (Owned by the eople of the country collectively)
Planned Capitalism:
- Gov guides private owners of productive assets to produce specific g+s
- Has been used during war time
- Ownership of factors of production remains with private individuals -> hence is a form of ownership
Market Socialism:
- gov owns most resources (socialism) but market decides which g+s need to be produced
What are the different types of efficiencies?
Allocative Efficiency - The allocation of resources which would maximise utility and maximise society’s living standards.
Technical Efficiency - When in order to increase outputs you must increase inputs (Resources) at lowest cost. This means that there is no wastage or surplus of resources.
Dynamic Efficiency - How quickly an economy is adaptable to fluctuating circumstances in terms of how easily they can reallocate their resources to maximise needs and wants of society.
Inter-temporal Efficiency - How an economy can balance the allocation of resources between different time periods, for a country’s long-term prosperity as well.
Productive Efficiency - Produces goods at the lowest possible costs - allocating inputs in the most cost efficient way
What are the different sectors in the 5-sector circular flow model and what are each of the Flows?
- Household Sector → Members who sell their resources (Land, labour and capital) to business firms and receive money in return which is spent on purchasing finished g+s
- Business Sector → Purchases or demans resources from households, which are then concreted into finished g+s
- Financial Sector → Places like banks, buildings societies, stock exchange, credit unions and finance companies. These borrow households savings (S) and lend these to credit worthy customers to finance investment spendind and business expansion (I).
- Government Sector → Collects revenue from Taxation (T) and other sources, and uses this to pay for government spending (G) and other outlays that help to provide collective g+s for society to use.
- Overseas/External Sector → The amount we spend on imports (M) compared to what gains from selling exports to people overseas (X)
Flow 1:
Households → Factors of Production → Business
→ Their inputs to production Process → firms see this as cost of productions
Flow 2:
Businesses → Pay income → who provide factors of production
Income examples Wages, Salaries, Rent, Diviidents, interest and profits
Flow 3: Aggregate Demand = C+I+G+X-M
→ income received → ‘consumed’ via purchase
→ This is income is also diverted to Government, Financial and Overseas Sector
Leakages → Reduce level of economic activity
- Savings (S) → Financial Sector
- When unused income → Deposited to financial institutions
→ income is removed from core of economy → does not boost AD - Taxes (T) → Government Sector
→ A portion of income paid to government on legal basis (E.g. GST) → this is a leakage as it reduces the capacity of households and business to purchase g+s - Imports (M) → Overseas Sector
→ Imports the trade of g+s between Australia and other countries → this is a leakage as income is leaving the country and boosting economic Activity of another country
Injections:
- Investment (I) → Financial Sector
→ Firms → Borrow money to finance purchases (E.g. of new capital or land)
→ Investment → Productive capacity of firms increases → this is an injection as money flows backs into the economy - Government (G) → Government Sector
→ Government Use of taxes → E.g. Funds may be re-distributed back to some households as transfer payments → increases economic activity by households - Exports (X) → Overseas Sector
→ Opposite of imports → income earned from spending consumers overseas → Boost Australia Economy
Flow 4: Production of g+s (real GDP)
Businesses → Households
Leakages > Injections → neg influence on economic growth (Real GDP)
Injections > Leakages → Pos influence on economic growth (Real GDP)
