Module 1 - Economic Concepts Flashcards
Scarcity
Scarcity is the excess of human wants over what can be produced to fulfil those wants. Since resources are scarce, choices have to be made between different alternatives e.g. Consumers must choose which goods and services to consume, whilst firms must choose which goods and services to produce.
Consumption
Consumption is the act of using goods and services to satisfy wants. This will normally involve purchasing the goods and services
Production
Production is the transformation of inputs into outputs by firms in order to earn profit (or meet some other objective)
Factors of production
Factors of production (or resources) are the inputs into the production of goods and services: labour, land and raw materials, and capital
Labour
All forms of human input, both physical and mental, into production
Land and raw materials
Inputs into production that are provided by nature e.g. Unimproved land, oil, cotton
Capital
All inputs into production that have themselves been produced e.g. Factories, machines, tools
Macroeconomics
Macroeconomics is concerned with the economy as a whole and studies economic aggregates, such as national income, unemployment and the general level of prices
Microeconomics
Microeconomics is concerned with individual parts of the economy (e.g. households, firms and industries) and the way they interact to determine the pattern of production and distribution of goods and services
Aggregate demand
The total level of spending in the economy, by consumers, firms and the government
Aggregate supply
The total amount of output (i.e. goods and services) in the economy
Three categories of inputs, resources or factors of production
- Labour
- Land and raw materials
- Capital
Business economist studies:
- Consumer behaviour
How sensitive consumer demand is to various factors (price, advertising etc) and how the firm can try to persuade the consumer to buy its products - The role of the firm in production - what determines the type and quantities of goods produced, what production techniques and resources are used etc.
Rate of economic growth
The rate of economic growth is the percentage increase in output over a 12-month period
Recession
A recession is a period where national output falls, i.e. economic growth is negative. According to the official definition, a recession occurs if output declines for two or more consecutive quarters
Unemployment
Unemployment arises when people are currently without a job, but are actively looking for work
Inflation / Rate of Inflation
Inflation refers to a general rise in the level of prices throughout the economy.
The rate of inflation refers to a percentage increase in the level of prices over a 12 month period
Macroeconomic objectives of governments
- High and stable economic growth
- Low unemployment
- Low rates of inflation
- The avoidance of balance of payments deficits and excessive exchange rate fluctuations
- A stable financial system
- The avoidance of excessively financially distressed sectors of the economy, including government
Balance of trade
Exports of goods and services minus imports of goods and services.
If exports exceed imports there is a “balance of trades surplus”.
If imports exceed exports there is a “ balance of trade deficit”.
Demand-side policy
Government policy designed to alter the level of aggregate demand, and thereby the level of output, employment and prices.
Demand-side policy seeks to influence the level of spending and hence aggregate demand. For example the government might try to boost spending by:
- cutting taxes
- increasing government spending
- reducing interest rates
Supply-side policy
Government policy that attempts to alter the level of aggregate supply directly.
Supply-side policy seeks to influence the level of production directly and hence aggregate supply. For example, the government might:
- introduce tax incentives for investments or for people to work harder
- introduce new training schemes
- build new motorways
Circular flow of income
The circular flow of income summarises how:
- Firms pay income to households (in the form of wages, rent, profits and interest) in return for the use of factors of production owned by households.
- Households spend their incomes on goods and services produced by the firms - this represents the incomes of the firms.
Key allocation decisions faced by society
As resources are scarce, society needs to make three key choices or allocation decisions:
- What goods and services will be produced and in what quantities?
- How are the goods and services going to be produced, i.e. what resources and production methods are going to be used?
- For whom are goods and services going to be produced, i.e. how is the total national income going to be distributed?
Opportunity cost
The opportunity cost of an activity is the cost of the activity measured in terms of the best alternative forgone.
Rational choice
A rational choice is one that involves weighting up the benefit of any activity against its opportunity cost.
Rational decision making
Rational decision making involves weighting up the marginal benefit of an activity and the marginal cost.
Marginal cost
The additional cost of producing one more unit of output.
For an individual, it is the additional cost of a little bit more of a particular activity.
Marginal benefit
The additional benefit of producing one more unit of output.
For an individual, it is the additional benefit of a little bit more of a particular activity.
10 economic choices a firm must make
- How much to produce
- What to charge for its output
- What type of inputs to use
- How many inputs to use
- What production techniques to use
- At what location to produce the output
- Whether to invest in new capital
- Whether to undertake research and development
- How to respond to changes in competition
- Whether to merge with or take over another firm
Right firm choices will depend on 7 factors
- Type of market in which the firm operates
- Its predictions about future demand
- Its degree of power in the market
- The actions and reactions of competitors
- The degree and type of government intervention
- The current tax regime
- The availability of finance