The Economic Environment Flashcards
What is security
the condition of having stable income or other resources to support a standard of living now and in the foreseeable future
What is choice
we choose how we fulfil our unlimited wants with limited resources
What is opportunity cost
what we give up when a decision is made
What is the economics problem
We have unlimited wants and limited resources. We manage this by supplying based on deemed priority.
What type of economy does Australia have
mixed/market economy
What is a market economy
A market that runs itself but with some influence and participation by the government
What are the 5 sectors of the economy
Household Firms Financial Institutions The Government Overseas
What does the household sector make up in the economy
the consumers
What is consumption
When households spend money on goods and services
Households own
all factors of production - land, labour, capital, enterprise
What do households sell and what is their return used to buy?
households sell the factors of production in return for income to purchase goods and services from firms
what do firms purchase from households
factors of production
What are producers
suppliers of goods and services
what does Y = C = O represent
Income = Consumption = Output
What does the financial sector link
saves with borrowers
What is a leakage
A divergent stream of income or capital from the iterative system. E.g. taxes, savings
What is investment
When others can borrow savings from financial institutions, it is an injection
What is equilibrium
where production, employment and income remains constant
What is an injection
The introduction of income or capital into the flow of money. E.g. investment
How does the government inject money from taxes into the economy
supplying of collective goods and services such as law and order, defence, education, and health and welfare
In a 4 - sector model, equilibrium occurs when..
savings + taxes = investment + government spending ( S + T = I + G )
In a 5-sector model, equilibrium occurs when…
savings + taxes + imports = investment + government expenditure + exports ( S + T + M = I + G + X )
In a 3-sector model, equilibrium occurs when…
savings = investment ( S = I )
If leakages are greater than injections the economy will..
fall (recession)
If injections are greater than leakages than the economy will..
rise (boom)
Why is equilibrium not ideal
we want an economy to grow so that households can receive more income to improve their standard of living
What is disequilibrium
when the level of injections and leakages are not equal which leads to changes in production and consumption
What is an upswing in the economy
If leakages are less than injections.
savings + taxes + imports < investments + government spending + exports
What can an upswing in the economy result in
- firms producing more
- firms needing more FOP
- households have more income
- more income for households increases level of consumption and improve ec. activity
What is economic growth
If we are producing more goods and services
What is a downturn in the economy
If leakages are greater than injections
savings + taxes + imports > investment + government expenditure + exports
What can a downturn in the economy result in
- firms producing less
- firms needing less FOP
- households having less income
- less income for households can reduce level of economic activity, worsening it
What is investment
firms demand goods and services
What is government expenditure
government demand for goods and services
What are exports
overseas demand for goods and services
What are imports
Australia’s demand for goods and services
What is Aggregate Demand
The total demand for Australian goods and services impacting how much FOP is needed and hence how much income households receive
AD=
C + I + G + (X - M)
