The Operation Of An Economy Flashcards
The operation of an economy
To the way in which a society is organised to solve the economic problem driving decision making around the figure key questions. Economies co-ordinate activities such as resource allocation, production and distribution. Also provide law and framework for operations of markets where goods and success are exchanged.
What to produce?
Based on demand and society’s preference.
How to produce?
Level of technology and resources to use in production. Resource availability and costs. Capital verse labour intensive production methods.
How much to produce?
Degree of resource availability. Level of demand in economy.
How to distribute?
Distribution of income (wages / salaries) Basel on productivity and market forces (demand and supply of labour, profitability). Based on needs, productivity, and contribution to production.
Different systems of economies around the world
Relates to questions around property rights, market dynamics, role of government
1. Market or free enterprise economy
2. Planned economy
3. Mixed market economy
Market economy
Individuals/firms have private property rights
Prices driven by market dynamics
Freedom of enterprise
Small role of government (minimum regulations, control of enterprise/property)
Planned economy
Government owns most of the resources
Large role of government
Prices set by gov
Extensive regulations, significant public ownership of property.
Mixed market economy
Elements of both systems.
Significant reliance on market forces
Moderate role of gov
- min wage
- Australia consumer laws
- RBA sets interest rates
Efficiency
The more efficient the firms in an economy are at producing, the lower the opportunity cost and therefore less scarcity.
Return on factors of production
Labour = wages
Land = rent
Capital = interest
Entrepreneurship= profit
Distribution of income in a free market economy
Tend to have unequal distribution of income as individuals free to accumulate income and wealth.
Distribution of income in a planned economy
Incomes and prices set by government. More equal distribution. However, political elites received higher income
Mixed market economy
More equal income distribution due to government intervention. Income assistance, higher degree of taxation and redistribution, minimum wage.
Factors affecting income
Interest rates, educations, skills, housing value, demand, business cycle, age, government policy
Benefits of income inequality
Low levels of class stratification, incentives for education, less extremes of poverty, incentives to increase productivity
Disadvantages of income inequality
Rich have low marginal propensity to consumes, reduced incentive to work and set education
Distribution of income in Australia
Top quintile get more than lowest three quintiles combined (45% to 30 %)
Bottom two quintiles stagnated growth
2nd and 3rd decreasing share of income
Top quintile increasing
Product markets
When that goods and services that are produced by firms are sold to consumers
Factor markets
Where the 4 factors of production are bought and sold.
Income = expenditure = output
Y = E = O
The level of income cannot exceed the level of expenditure, money can’t come from nothing. Y = E
It expenditure has taken place, that money must have been used to purchase a good or service. E=0
Leakages
Savings (S)
Taxation (T)
Imports (M)
Money that is not presently contributing to an output
Injections
Government Expenditure (G), Investment (I), Exports (X)
Money that is presently contributing to the production of an output
Expanding, contracting, equilibrium
STM>IGX. contract
STM<IGX. expand
STM=IGX. equilibrium
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