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economics > economics pg 24 > Flashcards

economics pg 24 Flashcards

1
Q

why are savings and investment essential in cfoi?

A

-savings essential if investment occurs –> allow creation of new capital goods

-forgoing current consumption of g&s, invest in capital goods & improve future productive capacity of eco –> ^ stock of productive resources & allows to produce greater volume of g&s in future

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2
Q

investment into cfoi

A

current expenditure made to obtain benefits in future

represents injection into cfoi, OPP effect of LEAKAGE (^ size of cfoi –> ^ lvl of eco activity

eg. business invests by purchasing capital goods to gain profits in future from OUTPUT machine produces.

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3
Q

chain when firms undertake investment expenditure

A

spending on investment leads to RISING:
Expenditure
Production
Employment
Income levels

increase demand for capital goods –> stimulates production in firms that produce them –> demand more resources –> mroe resources employed, ind incomes ^ –> stimulate increase in demand for g&s –> more resources employed, higher income sgenerated

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4
Q

what makes the private sector?

A

individuals
businesses
financial institutions

IBF

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5
Q

GVTs in cfoi

A

satisfy collective wants (roads, schools, hospitals, defence) by imposing taxes on other sectors of eco

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6
Q

what are the 2 major roles gvt plays in cfoi

A
  1. imposes taxes on ind & bus
  2. uses tax revenue to undertake GVT expenditures
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7
Q

how does tax relate to the cfoi? falling IOE

A

LEAKAGE, causes reduction in lvl of eco activity (falling income, output & employment opp)

ind pay income tax –> reduce amt money spent on g&s

GVT takes bus –> reduces funds available to pay for resources

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8
Q

what are the 2 reasons GVT expenditure represent INJECTION into cfoi?
IOE

A
  1. gvt spends revenue on collective g&s, provides income to gvt employees & those of private bus (purchase g&s0
  2. gvt uses part of tax revenue to make TRANSFER PAYMENTS (pensions, unemployment benefits) income to recipients.

hence rising income, output & employment opportunities (opp of tax)

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9
Q

whgat is the public sector

A

government

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10
Q

what does public + private sector =?

A

domestic sector or eco

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11
Q

what does international trade represent in cfoi/

A

INJECTION (outward money flow, exports are leakage)

EXPORTS (g&s produce in aus & sold overseas)

IMPORTS (g&s produced overseas & sold in AUS)

INTERNATIONAL MONEY FLOWS (financial transactions eg. borrowing, lending and income payments betw AUS and other countries)

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12
Q

what are imports in cfoi regarded as?

also includes lending, paying income overseas (outward money flow)

A

LEAKAGE

money withdrawn from AUS eco & paid to businesses overseas

hence falling IOE

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13
Q

what are exports in cfoi regarded as?

also includes inflow of money from overseas (foreigners lending/paying income t oAUS)

A

INJECTION

money paid t oAUS bus by foreign consumers.
stimulates production & employment opp in AUS

RISING IOE

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14
Q

equilibrium in cfoi

A

sum of all leakages = sum of all injections

S+T+M = I+G+X

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15
Q

what happens when there’s a disequilibrium (total leakages > total injections) in cfoi?

A
  1. DOWNTURN in eco activity
    -falling IO(prod)E
    -as lvl eco activity falls, total leakages from eco fall as consumers have less income to save/spend on imports/collected as tax

hence, leakages & injections eventually equal, eco restored to equilibrium at LOWER level of INCOME

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16
Q

what happens when disequilibrium (total INJECTIONS > total LEAKAGES) IN CFOI?

A

UPTURN in lvl of eco activity (rising IOE)
-as lvl eco activity ^, total leakages from eco ^ (consumers more income t osave, spend on imports, collected as taxes)

leakages & injections eventually equilibrium at HIGHER lvl of income

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17
Q

why does the gvt have a significant influence on the cfoi? (3)

A

-change lvls of tax & gvt revenue –> manipulate size of total L&I and overall lvl eco activity.

possiblely offset undesirable outcome from inequality of savings & investment/international trade & financial flows

stimulate eco by ^injections/^leakages

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18
Q

goods & services

A

tangible items for consumption

intangible acts that benefit consumers

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19
Q

bartering in market ecos

A

non-cash exchange where g/s directly traded for another g/s

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20
Q

pure market economy/capitalist/free enterprise/laeissez-faire(let things be)

A

all major decisions made by individuals & private firms motivated by self-interest

most eco resources owned by private sector

ppl can seek wealth without gvt intervention/bus activities

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21
Q

centrally planned eco

A

gvt makes eco decision

individuals choices play small role in influencing eco outcomes

public ownership of FOP allows gvt to entirely allocate resources

22
Q

main weakness of (pure)market economy

A

those who owned & controlled means of production become extremely wealthy while majority exploited and few opp to escape poverty

vulnerable to cyclical boom & bust

23
Q

characteristics of a market economy MsPoCsFeC

A

Market system

Private ownership of property

Consumer sovereignty

Freedom of enterprise

Competition

24
Q

product market

A

interaction of demand for & supply of OUTPUTS of production (g&s)

25
Q

market

A

network of buyers & sellers to exchange particular product at certain price

26
Q

free market eco

A

markets for all g&s products and resources that produce them

27
Q

structure of product markets (price mechanism: price which g&s bought and sold)

A

BUYERS are consumers (constitute demand for products)

SELLERS are businesses (output decision make up supply of products)
-price IMP bc affects lvl consumer demand & supply by bus

28
Q

price mechanism

A

process which forces of supply & demand interact to determine the MARKET PRICE at which g&s sold + QUANTIY produced

consumers want LOWEST possible price to satisfy more wants

FIRMS want sell at HIGHEST possible price to make as much profit possible

29
Q

factor market

A

market for any input into production process (FOD, LLCE)

30
Q

changes in demand & supply in product market also influences supply & demand in _________ market

A

factor

if demand for sunglasses^, producers need extra FOD to increase SUPPLY (plastic, skilled labour)
-to attract resources away from other FOD, manufacturer offers HIGHER PRICES (rg. higher wages)

hence influences resource allocation

31
Q

private ownership of property in market eco

A

ppl right to own means of production/resources & can use to derive income & acquire wealth

also have right to sell property/transfer ownership to other under conditions they choose

32
Q

consumer sovereignty in market eco

A

consumers free to choose how they spend income to satisfy wants
-ultimately decide what g&s produced
-bus produce g&s demanded

33
Q

consumer sovereignty

A

manner which consumers through market demand collectively determine what’s produced & QUALITY of production

34
Q

freedom of enterprise in market eco

A

individuals right to use resources as they choose
-entrepreneurs free to set up profit-making activities & right to determine what g&s to produce & the PP
-workers fre to choose occupations/whether to work

35
Q

competition

A

pressure on business firms in market eco to lower prices/improve quality of output to increase sales of g&s to consumers

36
Q

competition in market eco

A

allows price mechanism to work effectively
-large no. buyers & sellers
-no single buyer/seller big enough on own to influence market price (greater bargaining power) over others

37
Q

high competition in pure market eco

A

large no. producers compete in every industry

38
Q

less competition in pure market eco

A

few large bus charge higher prices to make excessive profits at expense of consumer

39
Q

mixed eco

A

eco system where decisions concerning production & distribution made by combination of MARKET FORCES and GVT DECISIONS

no eco purely market based/totally planned

40
Q

mixed eco trend over time

A

globalisation 1980s away from gvt intervention to relying on market forces

but gvt play more interventionist role since GFC late 2000s & covid 19 pandemic

41
Q

why does gvt intervene in resource allocation? + 3 considerations

A

free market doesnt always provide most EFFICIENT ALLOCATION OF RESOURCES for eco as whole

  1. some necessities may not be provided under pure market system
    -g&smay be partially produced by private sector but require gvt to supplement supply to satisfy desirable social outcomes (public healthcare & edu)
  2. sometimes better for essential g&s to be provided by gvts than being left to private individuals
    -safer to have defence force for gvt than system of private armies
  3. markets dont always operate freely, competitively/best interest of eco as whole
    -gvt provides REGULATION enforced by ACCC to prevent producers from exploiting consumers with misleading info
    -gvts legislate to ban production of undesirable goods (illicit drugs) to ensure adequate safety standards for all products sold on market
42
Q

ACCC

A

australian competition and consumer commission

43
Q

why does the gvt intervene in DISTRIBUTION OF OUTPUT(income)?

A

free market wont necessarily provide fair distribution

44
Q

how does the gvt redistribute income? 2 ways

A
  1. SWP
    -under price mechanism alone, no income earned for elderly, unemployed, chronically sick
    -AUS taxes ppl on higher incomes more heavily (disability pensions, unemployment benefits, age pensions)
  2. PROGRESSIVE INCOME TAX
    -overall redistribution of income for more EQUITABLE sharing of produced output
    -high income earners taxed at higher MARGINAL rates & pay PROPORTIONATELY more tax than low income earners
45
Q

how does gvt intervene in business cycle for economic stability?

A

implement macroeconomic (countercyclical) policies to smooth effects of cycle & reduce problems of insufficient/excessive eco activity

46
Q

RIE 3 reasons why gvts intervene in market eco (summary)

A
  1. RESOURCE ALLOCATION
    -provide important g&s not provided by private sector
    -restrict production of harmful goods
  2. INCOME DISTRIBUTION
    -create fairer society & look after disadvantaged
  3. ECONOMIC STABILITY
    -smooth sharp fluctuations in eco cycle
    -ensure stability in eco & financial system
47
Q

Australia’s market economy is balanced by 2 things:

A
  1. MARKET FORCES (FePpCCs)
    -free enterprise
    -private property
    -competition
    -consumer sovereignty
  2. GVT INTERVENTION (PoRSP)
    -public ownership
    -regulation
    -social welfare payments
    -progressive taxation
48
Q

how does gvt in mixed eco aim to solve WHAT to produce?

A

PRODUCER
-provide collective g&s (schools, defence)
-compete directly with private enterprise
-encourage forms of production through subsidies, tax incentives/start-up funding
-limit/prohibit production of undesirable goods

49
Q

how does gvt in mixed eco aim to solve how MUCH to produce?

A

limit production of goods/delivery of some services

encourage greater provision of underprovided g&s (merit goods)

encourage AUS producers competing with foreigners to ^output by imposing PROTECTIONIST TRADE POLICIES **
-import restrictions
-taxes on g&s entering AUS**
-grant** subsidies (cash payments/lower taxes)** to AUS producers

50
Q

merit goods

A

g&s not produced in sufficient quantity by private sector bc inividuals dont place sufficient value on them

51
Q

how do gvts in mixed eco aim to solve HOW to produce?

A

infuence** COST of FOP & how they’re used in PP**
-industrial relation laws provide framework for MIN WAGE lvls & working conditions in diff industries –> influencing labour costs
-laws regulate behaviour of firms (safety rules, environmental controls & prohibition of child labour) –> firms wont always able choose cheapest method of production

52
Q

how do gvts in mixed ecos aim to solved how to DISTRIBUTE production?

A

gvt policies
-higher income earners pay more of income in tax–> redistributed to lower income earners through welfare
-changes distribution of production would prevail if incomes determined entirely by market forces and price mechanism

intervene in factor markets for redistributrion purposes
-impose min wage in labour market

economics (2 decks)

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