The Operation of an Economy Flashcards
What are goods and services?
The outcomes of the production process that satisfy wants.
What is a factor of production?
A resource used in the production process.
What is the relationship between the factors of production and the standard of living?
A country with abundant, high quality resources will have a high standard of living.
Identify the four factors of production and their return
Land - rent
Labour - wages
Capital - interest
Enterprise - profit
Describe the factor of production of land
Any natural resource used in production (soil, water, forests). They are limited as they are finite.
Describe the factor of production of labour
Physical and mental human effort used in production.
Describe the factor of production of capital
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.
Describe the factor of production of enterprise
An entrepreneur organises the factors of production in producing goods or services.
Describe how scarce resources are allocated in an economy.
Generally, firms will respond to consumer demand and spending patterns to determine what and how to produce.
How is income distributed in a market economy?
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.
What is the business cycle?
The fluctuations in the level of economic growth over time in a market economy.
Identify the four phases of the business cycle
upswings (expansion), boom, downing (contraction), recession
What is the long-term trend of the business cycle?
Economic activity and living standards rise.
Identify key areas that the business cycle impacts
production, income, employment, gov. revenue and expenditure, inflation, quality of life
Describe the upswing phase of the business cycle
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
Describe the boom phase of the business cycle
Expenditure, income, employment reach their peak. As businesses are operating at maximum capacity, shortages of labour and other resources may occur, causing inflation
Describe the downswing phase of the business cycle
Expenditure, output, income, employment are decreasing. There is less demand for labour which reduces employment and quality of life.
Describe recessions
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.
What is the international business cycle?
Changes in the level of global economic activity.
What areas of domestic economies does the international business cycle impact?
Demand for exports, market confidence, inflation, trade flows, employment
What factors limit the effects of the international business cycle on domestic economies?
Interest rates, fiscal policies, exchange rates
What is the circular flow of income?
A model that shows the flow of income and resources through the various sectors of the economy.
Describe the household sector
Individuals and families, receive income from supply of labour and land to firms. Spend income on goods and services, or save.
Describe the firms sector
All firms engaged in production. Spend money to buy resources from households, earn income from selling goods and services
Describe the 2 sector circular flow model
Involves households and businesses, all income is spent, all output is purchased.
Describe the financial sector
Financial institutions that borrow and lend money, take deposits from savers and lend it to borrowers.
Describe the three sector circular flow model
Now includes the financial sector. Leakage of savings now introduced, while investment is an injection.
Describe the government sector
Includes all levels of gov. Gain revenue from taxation of households and firms, funds provide collective wants.
Describe the four sector circular flow model
New leakage of taxation, injection of gov. expenditure with the government sector.
Describe the overseas sector
All organisations involved in the trade of goods and services with other nations.
Describe the five sector circular flow model
Overseas sector with imports and leakage and exports and injection.
What is equilibrium in the circular flow of income and what is its equation?
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
What occurs when leakages are greater than injections?
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.
What occurs when injections are greater than leakages?
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.
What are the factors that influence labour?
Factors that influence labour include, population size, school leaving age, retirement age.
