Term 1, 2021 Flashcards
Want
a good or service beyond (surplus) to our needs, which we gain satisfaction from.
4 Factors of Production
Labour, Capital, Land, Enterprise
Land
natural resources
Labour
mental and physical human input
Capital
man-made resources
Enterprise
risk-takers who initiate and manage production by combining the other 3 FoP in attempt to make a profit
Economic Problem
Limited Resources + Unlimited Wants = Scarcity
∴ Choice
4 Questions an Economy must address
What to produce?
How to produce?
For whom to produce?
How much to produce?
Opportunity Cost
is the value of the next best alternative foregone when a choice is made.
Who makes Economic Decisions?
Consumers
Producers
Government
Consumer Sovereignty
consumer needs and wants determine the production of goods and services.
Production Possibility Curve/Frontier
represents all the different output variations of an economy at its maximum production potential.
Assumptions of a PPC/PPF
All available resources are used
There are only two goods/services produced
Resources can be allocated to either good/service
Resources and Technology are fixed/constant
Allocative Efficiency
allocating resources to produce maximum benefits for the producer, consumer and country.
Productive/Technical Efficiency
production is at a maximum whilst at the lowest average cost (spot on the PPC/PPF)
Productivity
a measure of efficiency for production expressed as a rate of output per unit of input.
Capitalist Economy
an ideology based on the market system, private ownership and limited government intervention. It believes the economy can thrive through individual motives. (free enterprise) (e.g. USA)
Mixed Economy
an economy that utilizes both government intervention and the market system. (e.g. Australia)
Socialist Economy
an ideology based on publicly owned production to benefit the whole community. (e.g. modern-day China)
Subsistence Economy
an economy with no market and mostly production for individual use. (e.g. remote Arctic regions)
Economic Model
a simple illustration of a complex, real-world situation
Ceteris Paribus
A Latin phrase meaning ‘all other things being equal’
GDP (Aggregate Demand) Equation
Consumption + Investment + Government Expenditure + (Exports - Imports)
C + I + G + (X - M)
Savings
Household income saved for the future (e.g. saving money in the bank)
Investment
Producer creation of goods not for current consumption, but for future profit (e.g. buying a new factory)
GDP
The measure of the monetary value of the final goods and services a country produces. It is a measure of economic health.
Aggregate Supply
The total value of goods and services produced and available in an economy in a given period of time.
Demand
The amount of a good or service that consumers are willing and able to buy at a given price.
Law of Demand
There is an inverse relationship between price and quantity demanded. For example, if the price increases, consumers demand less.
Determinants of Demand
Income Number of buyers (population) Substitute goods (competitive wants) Expectations (confidence) Complementary goods (cheaper pencils increase demand for rubbers) Tastes
Supply
The amount of a good or service that producers are willing and able to sell at a given price.
Law of Supply
There is a positive relationship between price and quantity supplied. For example, if the price increases, producers supply more.
Determinants of Supply
Alternative goods (farmer grows cotton instead of wheat) Unexpected events Number of sellers Technology Cost Joint supply (cow for beef and hide)
Price Elasticity of Demand
The responsiveness of quantity demanded to a change in price.
Determinants of Elasticity
Many substitutes (unessential)
Large part of the budget (expensive)
Luxury good
Determinants of Inelasticity
Few substitutes (essential)
Small part of the budget (inexpensive)
Necessity or habit
Relative to 1
PED < 1 = Relatively Inelastic
PED = 1 = Unit Elasticity
PED > 1 = Relatively Elastic
Formula for Elasticity
[(new Quantity - old Quantity) / old Quantity] / [(new Price - old Price) / old Price]
Characteristics of Wants
Wants are unlimited
Wants are recurrent
Wants are complementary
Wants are competitive
Wants are habitual
Wants are alternative
