The Operation of an Economy

Question 1

What are goods and services?

Answer 1

The outcomes of the production process that satisfy wants.

Question 2

What is a factor of production?

Answer 2

A resource used in the production process.

Question 3

What is the relationship between the factors of production and the standard of living?

Answer 3

A country with abundant, high quality resources will have a high standard of living.

Question 4

Identify the four factors of production and their return

Answer 4

Land - rent
Labour - wages
Capital - interest
Enterprise - profit

Question 5

Describe the factor of production of land

Answer 5

Any natural resource used in production (soil, water, forests). They are limited as they are finite.

Question 6

Describe the factor of production of labour

Answer 6

Physical and mental human effort used in production.

Question 7

Describe the factor of production of capital

Answer 7

Goods used in the production of other goods (machinery, tools).
Infrastructure is social overhead capital.
Capital increases the productivity of other resources.
Supplies of capital are limited by the willingness of businesses and governments to invest.

Question 8

Describe the factor of production of enterprise

Answer 8

An entrepreneur organises the factors of production in producing goods or services.

Question 9

Describe how scarce resources are allocated in an economy.

Answer 9

Generally, firms will respond to consumer demand and spending patterns to determine what and how to produce.

Question 10

How is income distributed in a market economy?

Answer 10

Income is allocated as a proportional reward for an individual’s role in the production process. Depends on how valuable, scarce or in demand a particular labour skill is. This system provides incentive for people to obtain better skills and work harder. The system can be unfair, as it disadvantages those who can’t contribute due to illness, age or disability. This is solved by government welfare payments.

Question 11

What is the business cycle?

Answer 11

The fluctuations in the level of economic growth over time in a market economy.

Question 12

Identify the four phases of the business cycle

Answer 12

upswings (expansion), boom, downing (contraction), recession

Question 13

What is the long-term trend of the business cycle?

Answer 13

Economic activity and living standards rise.

Question 14

Identify key areas that the business cycle impacts

Answer 14

production, income, employment, gov. revenue and expenditure, inflation, quality of life

Question 15

Describe the upswing phase of the business cycle

Answer 15

Expenditure, output, income and employment rise. Higher levels of tax collection to avoid unsustainable growth will increase quality of life as more is spent on infrastructure and welfare

Question 16

Describe the boom phase of the business cycle

Answer 16

Expenditure, income, employment reach their peak. As businesses are operating at maximum capacity, shortages of labour and other resources may occur, causing inflation

Question 17

Describe the downswing phase of the business cycle

Answer 17

Expenditure, output, income, employment are decreasing. There is less demand for labour which reduces employment and quality of life.

Question 18

Describe recessions

Answer 18

Expenditure, income, employment and output reach lowest point. Excess supply of labour leads to deflation as business cut prices to sell excess stock. Technically, it is two consecutive quarters of negative growth.

Question 19

What is the international business cycle?

Answer 19

Changes in the level of global economic activity.

Question 20

What areas of domestic economies does the international business cycle impact?

Answer 20

Demand for exports, market confidence, inflation, trade flows, employment

Question 21

What factors limit the effects of the international business cycle on domestic economies?

Answer 21

Interest rates, fiscal policies, exchange rates

Question 22

What is the circular flow of income?

Answer 22

A model that shows the flow of income and resources through the various sectors of the economy.

Question 23

Describe the household sector

Answer 23

Individuals and families, receive income from supply of labour and land to firms. Spend income on goods and services, or save.

Question 24

Describe the firms sector

Answer 24

All firms engaged in production. Spend money to buy resources from households, earn income from selling goods and services

Question 25

Describe the 2 sector circular flow model

Answer 25

Involves households and businesses, all income is spent, all output is purchased.

Question 26

Describe the financial sector

Answer 26

Financial institutions that borrow and lend money, take deposits from savers and lend it to borrowers.

Question 27

Describe the three sector circular flow model

Answer 27

Now includes the financial sector. Leakage of savings now introduced, while investment is an injection.

Question 28

Describe the government sector

Answer 28

Includes all levels of gov. Gain revenue from taxation of households and firms, funds provide collective wants.

Question 29

Describe the four sector circular flow model

Answer 29

New leakage of taxation, injection of gov. expenditure with the government sector.

Question 30

Describe the overseas sector

Answer 30

All organisations involved in the trade of goods and services with other nations.

Question 31

Describe the five sector circular flow model

Answer 31

Overseas sector with imports and leakage and exports and injection.

Question 32

What is equilibrium in the circular flow of income and what is its equation?

Answer 32

Equilibrium is the situation where there is no tendency for income, expenditure or output to change, as leakages are equal to injections.

S+T+M=I+G+X

Question 33

What occurs when leakages are greater than injections?

Answer 33

As not all output is consumed, firms will cut back on production. This creates less demand for resources held by households the lower demand results in lower incomes. As the economy contracts, people will reduce saving and spending on imports, which will decrease leakages until they reach the level of injections.

Question 34

What occurs when injections are greater than leakages?

Answer 34

Firms will expand production as all output is consumed. This creates more demand for resources, increasing incomes. As the economy expands, people will reduce spending and increasing spending on imports. Leakages continue to increase until they reach the level of injections.

Question 35

What are the factors that influence labour?

Answer 35

Factors that influence labour include, population size, school leaving age, retirement age.