equilibrium, leakages, etc (ME CH2

Question 1

How does innovation drive a market?

Answer 1

innovation-> productivity-> profit-> market is now a living breathing organism

Question 2

/

Answer 2

The larger the supply, the greater the demand, the greater the demand the higher the productivity, the higher the productivity the cheaper the price.

Question 3

What factors determines price of a product?

Answer 3

Scarcity, quality, quantity.

Question 4

How does the government sector impact the market?

Answer 4

• act as third party regulator
• if any one individual company has an unfair advantage, people lose faith
• governments set enforced rules to prevent corrupt business practices like price fixing, monopoly, and insider trading
• it can also be a source of corruption, leading people to lose faith in the markets.

Question 5

Wants

Answer 5

• The material desires of the individual or the economy.
• Items that provide some pleasure or satisfaction when they are consumed.
• e.g. pair of headphones, overseas holiday, expensive clothing

Question 6

satisfaction or pleasure from the consumption of goods and services

Answer 6

utility

Question 7

needs

Answer 7

desires for the basic necessities of life, such as food and shelter

Question 8

individual wants

Answer 8

• desires of each person
• depends on personal preferences, can be influenced by broader social trends
• depends on income

Question 9

Do rich people or poor people suffer more severely from the economic problem?

Answer 9

Poor people, because they have resources that are more scarce to work with.

Question 10

collective wants: what are they and who provides them?

Answer 10

wants of the whole community
- desire will depend on preferences of community as a whole, not only those of individual person
- usually provided by the government, e.g. in AUSTRALIA, local government provides collective wants for local neighbourhoods, e.g. parks, libraries, local sporting facilities; state government provide for wider community: hospitals, schools, police force; commonwealth/ federal satisfies wants of the nation, e.g. defence force
- provide collective wants by using taxation revenue from the community

Question 11

Recurrent wants

Answer 11

e.g. food, newspaper, clothes, petrol
- will have to satisfy the want again and again in the future

Question 12

Complementary wants

Answer 12

natural follows the initial satisfaction of another want.
e.g. satisfy want for a car, will also want petrol and other car accessories

Question 13

The key economic issues

Answer 13

1. what to produce: decide which wants to satisfy first and leave which ones unsatisfied de to scarcity
2. how much to produce: produce too much will waste, too little will leave some individuals unsatisfied
3. how to produce: how to allocate resources, look for the most efficient method of production so the greatest number of wants can be satisfied
4. how to distribute production: problem between equity and efficiency (rich affords more, more effficient, but lack of equity)

Question 14

Opportunity cost can be applied to: _____, ______, and _______.

Answer 14

The individual: with limited resources (limited income), may have to choose between satisfying desire for a car or an overseas holiday.
The business firm: allocation of scarce resources, entrepreneur who decides to produce a computer gives up opportunity to produce something else with the same resources
Government: limited resources to satisfy community wants. decides to construct a new fleet of submarines, may be at the expense of a new airport.

Question 15

Opportunity cost formula

Answer 15

What one sacrifice/ what one gain

Question 16

How does new technology affect the ppf?

Answer 16

• may be able to develop more efficient methods of production.
• produce higher quantity of good with as resources
• outward shift of production possibility frontier

Question 17

How does new resources affect the ppf?

Answer 17

increases availability of production inputs, changes production possibility forever
- e.g. discovery of new resources/ expansion of population thru immigration
pushes production possibility frontier outward

Question 18

What does unemployment indicate?

Answer 18

• inefficient allocation of resources
• not achieving maximum satisfaction of wants with the minimum opportunity cost
• total output of goods and services is less than what it could be

Question 19

consumer goods

Answer 19

goods that can satisfy customer demand immediately

Question 20

capital goods

Answer 20

goods that will increase our productive capacity in the future

Question 21

describe what individuals, businesses, and governments need to think about when deciding between satisfying present or future wants.

Answer 21

individuals: make choices between spending or saving
businesses: choices abt price, how much to produce, what resources to use, how to manage employees
governments: influence choice of individuals and businesses by affecting the cost of choices and other factors (prohibiting/encouraging certain activities

Question 22

What are the rewards for the four factors of production?

Answer 22

Natural resources (land): rent
Labour: wages
Capital: interest
Enterprise: profit

Question 23

What are some factors that will influence supply of labour?

Answer 23

• size of country’s population, impacted by birth rate, death rate, immigration
• school leaving age
• retirement age
• social attitude towards role of women in workforce
• availability of childcare
• education standards
• amount of on-the-job training

Question 24

Capital

Answer 24

Produced means of production
- not produced for immediate consumption-> to be used in production of other goods and services
- e.g. machinery, tools, factories, computers, infrastructures
- does not include financial assets

Question 25

Infrastructures examples

Answer 25

includes roads, railways, bridges, telecommunications networks and schools

Question 26

How does capital impact an economy?

Answer 26

• can greatly increase productivity of other resources: how much output they can produce per factor of production per unit of time
• significant effect upon future earning capacity of an economy

Question 27

When consumers save money, they are shifting resources from _____ to ______.

Answer 27

consumer goods to capital goods.
- as entrepreneurs borrow money from the bank to invest in capital goods

Question 28

What do owners of capital get rewarded?

Answer 28

• interest-> price of capital

Question 29

Enterprise

Answer 29

Organising the other factors of production for the purpose of producing goods and services.

Question 30

What do enterprises earn?

Answer 30

• profit
• not only {revenue- expenses}
• e.g. rent for use of any land that they own in production, wages for work effort, interest for any capital invested into business

Question 31

How does scarcity impact the four factors of production?

Answer 31

• natural resources: limited land, fossil fuels, clean air, water
• labour: limited population size, labour market skills, people’s willingness to work
• capital: limited to extent to which governments and the private sector are willing to invest, level of domestic/overseas savings available for investment
• entrepreneur: size of population, cultural and economic factors affecting the ability and willingness of individuals to innovate and take risks.

Question 32

In a market economy, decisions about how scarce resources are allocated in production are largely determined by what?

Answer 32

• consumers’ spending patterns
• firms will respond to consumer demand by obtaining the resources necessary to produce the items consumers want, motivated by aim of gaining profit

Question 33

GDP

Answer 33

Total amount of goods and services produced in an economy in a given year.

Question 34

How do market economies distribute output?

Answer 34

• not equally
• provide people with income as a reward for contribution to the production process

Question 35

Benefits and problems of the income distribution system in the market economy.

Answer 35

Benefits:
- provides incentives for people to obtain better skills and work harder in order to improve their share of output
- or to develop entrepreneurial skills and start their own business
- improves resource base and encourage innovation and technological advancement

Problems:
- unfair for people with illnesses, old age, disability
- those with less bargaining power may not be able to secure a fair return for their labour return

Question 36

How are the problems in the income distribution of market economy improved?

Answer 36

• governments intervene to correct inequitable market outcomes and help people who otherwise won’t be able to receive an adequate level of income
• can influence distribution of goods and services
• take money away from higher-income earners through taxation and redistributing it to lower-income earners through social security payments

Question 37

How is money important in the exchange of goods and services?

Answer 37

• easier transactions when only one party is interested in what the other has to offer
• allows individuals to specialise in how they contribute to the production process

Question 38

Non-cash exchange of goods and services with example

Answer 38

barter
- common in earlier societies, uncommon in advanced economy with a stable currency
- e.g. bitcoin

Question 39

Business cycle

Answer 39

• change of level of economc activity over time
• also called the economic cycle

Question 40

when economies experience a continuing pattern of strong growth then followed by an economic slowdown:

Answer 40

The cyclical pattern of growth.
- presents problems for a society
- significant disruptions for both individuals and businesses
- during downturns(recessions), firms postpone plans for new investment, reduce production and reduce demand for labour-> unemployment

Question 41

Recession

Answer 41

stage of business cycle where there is decreasing economic activity
- 2 consecutive quarters (six months) of negative economic growth-> fall in GDP

Question 42

How does increase in unemployment affect consumers?

Answer 42

• negatively
• forced to rely on savings and social security payments while income has dried up
• reduce consumption
• economy contract further
• more unemployment
• living standards fall
• health problems rise, educational opportunities disrupted, social problems such as crime and suicide increase
  —> result in lower quality of life

Question 43

How does an economic upturn impact economy?

Answer 43

• boom in economic growth
• increased investment and production
• increased demand for labour-> falling unemployment
• increases disposable income (income available after tax deduction)
• further expansion of economy as consumption levels rise
  —> improvement in quality of life

Question 44

Example of how the government attempted to smooth out the cycle in an economic downturn.

Answer 44

• 2020 pandemic
• travel restrictions, border closures, city-wide lockdown causing first recession in almost 3 decades
  -> policies to encourage employment and consumer spending

Question 45

How do individuals contribute to the economy?

Answer 45

• supply factors of production (inputs) like labour and enterprise that businesses use to produce goods and services
• receive income in the form of rent, wages, interest and profit
• income goes to consumption of locally produced goods, savings, paying tax, or purchasing imports

Question 46

How do businesses/ firms contribute to the economy?

Answer 46

depend on individuals to supply resources for production and consumption of goods and services.

Question 47

Relationship between businesses (firms) and individuals.

Answer 47

interdependent

Question 48

What are savings represented as in the circular flow of income?

Answer 48

• a leakage
• involves money put aside and withdrawn from the circular flow of income
• leads to reduction in size of the circular flow of income and reduction in level of economic activity

Question 49

What happens when people keep saving money?

Answer 49

• leakage of savings causing a fall in expenditure on goods and services
• fall in production
• fall in the demand for resources
• fall in income to the owners of those resources
• gradually reduce size of the circular flow of income until it ceases to exist

Question 50

How are the acts of saving and investing important for an economy?

Answer 50

• by forgoing some current consumption of goods and services, we can invest in capital goods and improve the future productive capacity of the economy.
• increasing stock of productive resources to produce greater volume of goods and services in the future

Question 51

The effects of increasing investment

Answer 51

increased investment-> increased production of capital goods-> increased demand for resources-> increased incomes-> increased demand for goods and services-> increased demand for resources (repeat)

Question 52

How are taxes a leakage?

Answer 52

INDIVIDUALS
pay income tax-> reduces amount of money available to spend on goods and services

FIRMS
pay taxes-> reduces funds available to pay for resources

Taxation would cause a reduction in the level of economic activity, falling income, output, and employment opportunities

Question 53

How are government expenditures an injection?

Answer 53

1. government spends revenue on collective goods and services, providing income to government employees, employees purchase goods and services from private businesses
2. government uses parts of tax revenue to make transfer payments like pensions and unemployment benefits (income)

causing an increase in level of economic activity, with rising income, output and employment opportunities

Question 54

Public sector, private sector, domestic sector

Answer 54

Domestic sector:
Private sector-> individuals, firms, financial institutions
Public sector-> government

Question 55

International money flows

Answer 55

financial transactions such as borrowing, lending and income payments between Australia and the rest of the world

Question 56

equilibrium

Answer 56

circular flow of income when sum of all leakages= sum of all injections

Question 57

How can the government have a significant influence on the circular flow?

Answer 57

• can change levels of taxation and government revenue
• manipulate size of total leakages and injections and overall level of economic activity
• can offset any undesirable outcome from the inequality of savings and investment or international trade and financial flows
• can stimulate economy by increasing injections related to leakages or dampen economy by increasing leakages in relation to injections