Economics Flashcards
economics
study of how society chooses to allocate its scarce land, labour and capital resources to the production of goods and services to satisfy the population’s needs and unlimited wants
needs
something essential for a person’s survival and are limited
wants
a desire that is not essential for survival and are unlimited
definition of factors of production (economic resources)
inputs that are used in production of goods and services
land
any natural resource provided by nature used in the process of production (wood, iron, oil)
labour
mental and physical capacity of workers to produce goods and services (plumbers, teachers)
capital
man made tools, machinery and equipment used in production of goods and services (trucks, hammers)
enterprise
entrepreneurship
three main ideas that form the foundation of economics
scarcity, choice and opportunity cost
scarcity
we have unlimited wants, however we have limited resources (fundamental challenge of meeting unlimited human wants and needs with limited land, labour and capital resources)_
what must people do because of scarcity
make choices!!
choice
an economic decision made between competing alternatives
opportunity cost
the choice that you make will come at a price, and that is opportunity cost. The loss of the value of the next best alternative forgone whenever an economic decision is made
production possibilites model
a simple economic tool used to illustrate the trade offs that exist when an economy decides what goods to produce
2 assumptions that the PPM makes
- that an economy can only produce two different goods or services
- that all scarce resources are being fully utilised
what is the PPM represented by
a graph called the production possibility frontier (PPF)
whats on the y and x axes of the PPF
each axis has one good and we’ll be given the outputs to make a curve
why would the PPF curve move up?
because there are more resources now
why would the PPF curve move down?
because there are less resources now
opportunity cost through PPF
the OC of spending resources on one good is the amount of the other good that cannot be made
behavioural economics
a field of study that combines psychology, economics and neuroscience to better understand how people make decisions in real world situations
traditional view of consumer behaviour
that all decisions a consumer makes are rational
assumptions of a rational consumer
consumers will always make logical decisions to maximise their satisfaction and is always for themselves
bounded rationality definition
concept that suggests that people have limited rationality and make decisions based on a limited set of information and cognitive abilities that often rely on mental shortcuts to simplify complex decision making
types of bounded rationality in decision making (5)
herd behaviour, vividness, framing effect, anchoring bias, sunk cost fallacy
sunk cost fallacy
where people keep investing because they have already been investing
bounded willpower
the idea that consumers are impulsive and emotional
bounded self interest
idea that consumers care about others and not just themselves
macroeconomics
branch of economics that looks at the big picture of the economy as a whole – looks at the overall performance of of a country
inflation
the cost of living – if goods and services go up, you get less for your money
economic activity
the overall level of production and consumption of goods and services in an economy over a certain period of time
what does high economic activity indicate
that people are spending money and that the economy is growing
what does low economic activity indicate
indicates the economy is experiencing slow growth
what is the economic cycle
production – more employment – more wages – more purchasing power – more production
types of living standards (2)
material and non material
whats the current inflation rate of australia
4%
consequences of inflation
reduced purchasing power and the wage-price spiral
reduced purchasing power
high inflation = increase of price of goods and services = people cant buy as much = decrease in standard of living
wage price spiral
high inflation = loss of purchasing power = higher wage demands = cost of labour goes up = increase prices = inflation
causes of inflation (2)
excessive spending in the economy and costs of production
what is a policy used to decrease inflation
interest rate
what is an interest rate
the cost of borrowing money
trade
the buying and selling of goods and services across international boundaries
imports
the things that the country buys
exports
the things that the country sells
free trade
the absence of gov intervention in international trade (unrestricted trade)
benefits of free trade (4)
increased competition, specialisation, greater choice for consumers, increased flow of new ideas and tech
increased compeition
means lowered prices
absolute advantage
ability of one country to produce a good using fewer resources than another country
theory of absolute advantage
since a country is better than the others, it leads to increased material living standards
negatives of free trade
increased unemployment, infant industries cannot develop, predatory pricing and loss of culture
increased unemployment
domestic companies shut down because the companies overseas are better and cheaper
predatory pricing
where they lower the prices at the right time and raise it on others
