Introduction To Economics Flashcards
The Economic Problem
how to satisfy unlimited needs and wants with scarce or limited resources
Needs
goods and services that are essential for survival (food, shelter, clothing, healthcare
Wants
the material desires of individuals that provide satisfaction when consumed
Opportunity Cost
What is sacrificed/What is gained
PPF four key assumptions
The economy only produces two goods
The state of technology remains constant
The quantity of resources remains unchanged
All resources are fully employed
Production of Capital Goods =
Increased Future Output
Production of Consumer Goods =
Decreased Future Output
Consumer goods
goods that satisfy consumer demands immediately
Capital Goods
goods that will increase productive capacity in the future
Resources
anything that can be used to produce a good or provide a service
Land
all natural resources, living and non-living. Reward = Rent
Labour
all forms of human effort used in the production process. Reward = Wages
Capital
all manufactured goods used in the production process. Reward = Interest
Enterprise
the ability to combine the FOP to produces a good or service, carried out by entrepreneurs. Reward = Profit
Gross Domestic Product
total amount of goods and services produced in a society
Advantages of a Market Economy
provides incentives for people to obtain better skills and work harder
Disadvantages of a Market Economy
unfair for those who are unable to contribute to production due to illness, age or disability
Money
a medium for exchanging goods & services
Bartering
The non-cash exchange of goods and services
The Business Cycle
the fluctuations in the level of growth in an economy over a period of time
Stages of the Business Cycle
Upswing/Expansion
Boom/Peak
Downswing/Contraction
Recession/Trough
Quality of Life is measured by
Income
Health
Education Levels
Consumer Goods
Leisure Time
The Five Sectors of the Circular Flow of Income
Households
Businesses
Financial
Government
International
Leakage
A withdrawal of money from the circular flow - decreases economic activity (savings, taxation, imports)
Injection
the addition of money to the circular flow - increases economic activity (investment, government spending, exports)
Equilibrium
a situation in the economy when there is no tendency to change
When does equilibrium occur?
Equilibrium occurs when leakages are equal to injections: S+T+M=I+G+X
Economic System
The way in which a country organises the production of its goods & services, the allocation of resources and the distribution of income
Questions that Determine the Economic System
What to produce?
How much to produce?
How to produce?
For whom to produce?
Types of Economic Systems
Market Economy
Planned Economy
Mixed Market Economy
Characteristics of a Market Economy
Individuals and businesses make all the economic decisions
There is minimal or no government involvement
The “price mechanism” (supply & demand) determines the price and quantity of goods & services
Businesses decisions are driven by the “profit motive”
Consumer decisions are driven by self-interest
Resources are privately owned - the owners of the resources receive income
Characteristics of a Planned Economy
The “state” (government) makes the major economic decisions
Central planning authorities determine the types of goods produced, quantity and price by setting output targets
There is public ownership of resources which are allocated by the government
Majority of businesses are state-owned
Limited economic freedom for businesses and individuals
Characteristics of a Mixed Market Economy
A mixed market economy is one where the decisions concerning production and distribution are made by a combination of market forces and government decisions
Individuals and businesses make most of the economic decisions
How does the government intervene in a market economy?
Regulates some of the economic decisions of businesses and consumers
Provides collective goods & services
Redistributes income through taxation & transfer payments
Stabilises economic activity
