Mod 1 Flashcards
1.1 What is the Economic Problem
The cycle in which people have unlimited wants (demand) and give up money to satisfy demand, however, there is limited means to satisfy these wants (money).
1.1. How do income levels affect people experiencing the economic problem
People at different income levels experience the economic problem differently. People with a lower income have more limited means to satisfy their wants.
1.1 Difference between collective and individual wants
Individual wants are specific to a person and Collective wants are particular to a group.
1.2 What are the factors of production, what do they do and how do we remember them?
Resources used to produce goods and services. Land, Labour, Capital, Entrepreneurship/Enterprise. LLCE
1.2 What does Land refer to with examples and what is the return for providing land?
Land refers to all natural resources, for example coal, or fish. The return of providing land is called rent.
1.2 What does Labour refer to with examples and what is the return for providing Labour?
Labour refers to human effort, both physical and mental, for example employees. The return for providing labour is called wages.
1.2 What affects quantity of labour in an economy
Influenced by migration
1.2 What affects quality of labour in an economy
Influenced by education
1.2 What is the Wage price Index (WPI)
The Wage Price Index (WPI) measures changes in the wages and salaries paid by employers for a unit of labour where the quality and quantity of labour are held constant.
1.2 What does Capital refer to with examples and what is the return for providing Capital?
Capital refers to the goods that are used in the production of other goods/services also known as equipment, for example the use of a laptop to provide psychologist appointment. Capital can also include infrastructure e.g. using a road to get to work. The return for providing capital is interest or capital gain.
1.2 How can capital be used/wasted?
It improves the production capacity of other factors of production, however overuse of capital equipment often results in diminishing returns in production as capital can be under-utilised and therefore the money spent to purchase capital is wasted.
1.2 What does Enterprise/entrepreneurship refer to with examples and what is the return for providing Enterprise/entrepreneurship?
Enterprise/entrepreneurship refers to the organisation of all other factors of production, the entrepreneur makes management decisions involving this. The return is profit. For example the CEO of TESLA - Elon Musk.
1.3 What is Opportunity Cost
The value of the next alternative you give up when you make a choice over another. For example the opportunity cost of producing one good over another.
1.3 What is the Opportunity cost formula?
OC = What is given up / What we get
1.3 What are Choices that should be made Opportunity cost
Choices should minimise opportunity cost, meaning choosing the scenario where the most money possible us generated.
1.3 Opportunity Cost of Business/Govt.
Opportunity cost is the profit from producing the next best alternative. This is important as businesses/govt. has more money to spend on a range of investments.
1.3 What is the Production Possibility Frontier (PPF)
https://d3rw207pwvlq3a.cloudfront.net/attachments/000/130/128/original/1-crop-1598286117184.png?1598286120
A graph that shows the possible choices of 2 good/services you can produce, based on resources.
1.3 What does the PPF show us.
- Points outside of PPF are unobtainable due to resource constraints.
- Points inside PPF represent underutilisation of resources
- Points on PPF represent maximisation of resourses.
1.3 How does linear PPF relate to Opportunity cost.
The linear model of the PPC (straight line) has a constant opportunity cost.
1.3 Opportunity Cost formula in regards to PPF
OC=GRADIENT (M)
M=RISE/RUN
OC=RISE/RUN
1.3 Interpreting Slope of PPF (flat vs steep) and what this does to opportunity cost?
Steep = To increase goods on x axis you have to give up a lot of goods on y-axis which increases opportunity cost.
Flat = To increase goods on x axis you only have to give up a little amount of goods on y axis, which decreases opportunity cost.
1.3 Real Shape of PPF vs. Opportunity cost
https://cdn.educba.com/academy/wp-content/uploads/2024/02/Production-Possibility-Frontier.jpg
The real shape is almost never linear, and therefore if all resources are devoted to a single good means using resources that possibly aren’t suited to making that good.
- Opportunity cost of a good increases as you make more of it.
1.3 Why do we want to shift the PPF (moving in or out)
To increase profit, and capitalise on greater quantities of production we want to reach points on the right. To shift the PPF.
1.3 How can we Shift the PPF?
-Population increase = more resources (supply of labour) to produce
- Specialisation of resources = improvement in the technology (Capital) to produce one or more goods (more output with same quantity of inputs)
1.3 Law of Increasing Opportunity Cost
The Law of Increasing Opportunity cost = The opportunity of cost of producing goods increases as we move along the curve.
1.3 What are tradeoffs between Producing Consumer goods (what consumers want) vs. Capital goods (goods that are used to produce consumer goods)
Consumers goods are wanted by consumers immediately to supply demand which = more cash in economy, which are good for short term growth
Capital goods are wanted by business over the long term to satisfy increasing demand with increasing population = more goods able go be produced in long term, which is good for long term growth.
1.3 When should producers allocate resources to Capital or Consumer Goods
- If the economy required more consumer goods, then the economy should produce closer to the consumer goods
- If the economy requires more capital, then the economy would be better suited producing further along the frontier towards the capital goods.
1.3 How do capital goods shift the PPF
Long Term: The accumulation of a larger stock of capital will expand the economy’s factors of production. This will improve the productive capacity of the economy and shift the PPC outwards.
1.4 What is GDP
GDP refers to the gross domestic product which is a monetary value of all goods and services produced within a country over a period of time.
1.4 What is GDP growth and Economic growth
Increased production of goods and services = GDP growth
Economic growth refers to the increase in the size of an economy over time
Economic growth is measured by GDP growth
1.4 How are factors of production and GDP growth linked
Countries with more factors of production will be able to make more products so they will have large GDPs
1.4 What is GDP per Capita
If we divide GDP by the number of people in the country we get GDP per capita, a rough idea of the value of the products each person could consume.
1.4 What is purchasing power parity
Purchasing power parity is the exchange rate at which one nation’s currency would be converted into another to purchase the same and same amounts of a large group of products.
1.4 What is GDP per Capita (Purchasing power parity)
Adjust GDP for Purchasing Power Parity (PPP) by taking into account exchange rates and costs of living, we can get a rough idea of the real power each person actually has to purchase products.
1.4 Law of Diminishing returns
Less advanced economies can expand their GDP more easily than Advanced economies as they can increase their capital more easily However, advanced economies experience “diminishing marginal returns to capital accumulation” where extra units of capital starts to increase GDP less and less.
1.4 What are Economic Systems
Economics is also about the systems through which these goods and services are distributed and exchanged. Australia’s system, for the most part, uses money to facilitate this process of distributing the goods and services to individuals.
1.4 What is Monetary Economic System, and its issue
We are (typically) given income in exchange for our contributions towards Australia’s production and we (typically) subsequently use this income to lay claim to part of what has been produced.
This system creates income inequality. People with more income can access more goods and services.
1.4 What is Inequality of income
Income inequality refers to the degree to which income is unevenly distributed among people in the economy
1.4 How to measure inequality of income
Measure this by dividing the population up into quintiles: “what % of income each proportion of the population has”
1.4 How do we graph inequality of income?
The Lorenz curve is used to show the proportion of income earned by any given percentage of the population.
1.4 How do we draw a Lorenz curve
https://www.intelligenteconomist.com/wp-content/uploads/2017/08/Lorenz-Curve-Gini-Coefficient.png
A quintile of a population is 20%, we divide the Lorenz Curve graph into 5 parts of 100% for income distribution on the y axis and 5 parts of 100% for population( poorest to richest) on the x axis.
1.4 What is the gini coefficient?
The Gini Coefficient measures the level of inequality in a country. Expressed as a value between 0 and 1
1.4 How do we interpret the gini coefficient?
A Gini of 0 means everyone has exactly equal income (perfect equality)
A Gini of 1 means one person receives the entire of national money (perfect inequality)
1.5 What is inflation
Sustained increase in the general level of prices in the economy.
1.5 How is inflation measured?
Inflation is measured using the Consumer Price Index (CPI) which measures changes in the prices of a “basket” of goods and services consumed by an average household.
1.5 Are all goods and serviced measured in CPI equally important?
Not all categories in the CPI are equally important - the groups are weighted based on their proportion of household spending.
1.5 How is inflation calculated
The inflation rate is the percentage increase in CPI between two periods
It is calculated using:
((New Value-Original Value)/Original Value)x100
1.5 What is Hyperinflation
Excessively large amounts of inflation.
1.5 What is deflation
Negative values of inflation
1.5 Why is inflation important for Australia
Investment, trade, saving, and banking are made difficult when prices change too rapidly. Hyperinflation and deflation can have devastating effects on the economic health of a country.
Australia aims to have moderate, positive inflation.
1.6 What is the Business Cycle
Cyclical fluctuations in the level of GDP in an economy over time.
1.6 What are the key terms of the business cycle and their descriptions.
Upswing = Positive GDP growth over time, injections>leakages
Recession= Negative GDP growth over time, leakages>injections.
Peaks
Occurs when GDP plateaus (positively) and neither rises nor falls
Trophs
Occurs when GDP plateaus (negatively) and neither rises nor falls
1.6 How do we measure an upswing?
- Increased production of goods and services (positive GDP growth)
- Rising income
- High inflation
- High levels of spending
- Falling levels of unemployment
1.6 How do we measure a recession?
- Falling production of goods and services (negative GDP growth)
- High unemployment
- Low wage rates
- Falling consumer spending
- Low inflation
