equilibrium, leakages, etc (ME CH2 Flashcards
Overview of the circular flow model and the relationship between the five sectors in the Australian economy; injections, leakages, equilibrium, disequilibrium (ME chapter 2) Production Possibility Frontier
How does innovation drive a market?
innovation-> productivity-> profit-> market is now a living breathing organism
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The larger the supply, the greater the demand, the greater the demand the higher the productivity, the higher the productivity the cheaper the price.
What factors determines price of a product?
Scarcity, quality, quantity.
How does the government sector impact the market?
- 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.
Wants
- 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
satisfaction or pleasure from the consumption of goods and services
utility
needs
desires for the basic necessities of life, such as food and shelter
individual wants
- desires of each person
- depends on personal preferences, can be influenced by broader social trends
- depends on income
Do rich people or poor people suffer more severely from the economic problem?
Poor people, because they have resources that are more scarce to work with.
collective wants: what are they and who provides them?
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
Recurrent wants
e.g. food, newspaper, clothes, petrol
- will have to satisfy the want again and again in the future
Complementary wants
natural follows the initial satisfaction of another want.
e.g. satisfy want for a car, will also want petrol and other car accessories
The key economic issues
- what to produce: decide which wants to satisfy first and leave which ones unsatisfied de to scarcity
- how much to produce: produce too much will waste, too little will leave some individuals unsatisfied
- how to produce: how to allocate resources, look for the most efficient method of production so the greatest number of wants can be satisfied
- how to distribute production: problem between equity and efficiency (rich affords more, more effficient, but lack of equity)
Opportunity cost can be applied to: _____, ______, and _______.
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.
Opportunity cost formula
What one sacrifice/ what one gain
How does new technology affect the ppf?
- may be able to develop more efficient methods of production.
- produce higher quantity of good with as resources
- outward shift of production possibility frontier
How does new resources affect the ppf?
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
What does unemployment indicate?
- 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
consumer goods
goods that can satisfy customer demand immediately
capital goods
goods that will increase our productive capacity in the future
describe what individuals, businesses, and governments need to think about when deciding between satisfying present or future wants.
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
What are the rewards for the four factors of production?
Natural resources (land): rent
Labour: wages
Capital: interest
Enterprise: profit
What are some factors that will influence supply of labour?
- 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
Capital
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
Infrastructures examples
includes roads, railways, bridges, telecommunications networks and schools
How does capital impact an economy?
- 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
When consumers save money, they are shifting resources from _____ to ______.
consumer goods to capital goods.
- as entrepreneurs borrow money from the bank to invest in capital goods
What do owners of capital get rewarded?
- interest-> price of capital
Enterprise
Organising the other factors of production for the purpose of producing goods and services.
What do enterprises earn?
- 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
How does scarcity impact the four factors of production?
- 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.
In a market economy, decisions about how scarce resources are allocated in production are largely determined by what?
- 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
GDP
Total amount of goods and services produced in an economy in a given year.
How do market economies distribute output?
- not equally
- provide people with income as a reward for contribution to the production process
Benefits and problems of the income distribution system in the market economy.
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
How are the problems in the income distribution of market economy improved?
- 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
How is money important in the exchange of goods and services?
- 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
Non-cash exchange of goods and services with example
barter
- common in earlier societies, uncommon in advanced economy with a stable currency
- e.g. bitcoin
Business cycle
- change of level of economc activity over time
- also called the economic cycle
when economies experience a continuing pattern of strong growth then followed by an economic slowdown:
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
Recession
stage of business cycle where there is decreasing economic activity
- 2 consecutive quarters (six months) of negative economic growth-> fall in GDP
How does increase in unemployment affect consumers?
- 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
How does an economic upturn impact economy?
- 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
Example of how the government attempted to smooth out the cycle in an economic downturn.
- 2020 pandemic
- travel restrictions, border closures, city-wide lockdown causing first recession in almost 3 decades
-> policies to encourage employment and consumer spending
How do individuals contribute to the economy?
- 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
How do businesses/ firms contribute to the economy?
depend on individuals to supply resources for production and consumption of goods and services.
Relationship between businesses (firms) and individuals.
interdependent
What are savings represented as in the circular flow of income?
- 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
What happens when people keep saving money?
- 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
How are the acts of saving and investing important for an economy?
- 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
The effects of increasing investment
increased investment-> increased production of capital goods-> increased demand for resources-> increased incomes-> increased demand for goods and services-> increased demand for resources (repeat)
How are taxes a leakage?
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
How are government expenditures an injection?
- government spends revenue on collective goods and services, providing income to government employees, employees purchase goods and services from private businesses
- 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
Public sector, private sector, domestic sector
Domestic sector:
Private sector-> individuals, firms, financial institutions
Public sector-> government
International money flows
financial transactions such as borrowing, lending and income payments between Australia and the rest of the world
equilibrium
circular flow of income when sum of all leakages= sum of all injections
How can the government have a significant influence on the circular flow?
- 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
