topic 1 Flashcards
Definition: Price
monetary indicator of relative value for both consumers and producers
Definition: Economic Growth
refers to the increase in the output (GDP) of an economy over a period of time. it is a key economic indicator!
this is also shown by an outward shift of the PPF
Real GDP Formula ($)
Nominal GDP
x
100/100+INFLATION
Definition: technical efficiency
achieving the maximum improvement in output from resource inputs
Definition: Human Capital
level of skills, education, training, experience, productivity and health of an individual in the workforce (low human capital = structurally unemployed)
Definition: Complementary Wants vs Substitute Wants
two products that are generally consumed together vs products that are consumed as alternatives of each other
3 contributors to the economy/marketplace
households
businesses
governments
What are the key differences between a free and planned market economy?
- government intervention
- ownership of resources
- inequality rates
- standards of living
Definition: Consumer Sovereignty
consumer spending and demand (and available resources) determines the pattern of business production
Definition: Mixed Economy Market
an economic system that uses more than one aspect of both planned and market economies
- has a free market for consumers and firms
- government only steps in when necessary to protect consumer rights, etc.
Definition: Individual Wants vs Collective
is specific to a person’s taste (provided by a private business) vs G&S that are wanted by a community of people (provided by government)
Definition: allocative efficiency
allocating resources efficiently (how well you do something) to best satisfying the needs of society. this is achieved by minimising the Opportunity Cost.
Definition: aggregate demand
the total demand for goods and services within the economy
C+I+G+(X-M)
Definition: real GDP
monetary value of the G&S (output) produced in a country over a period of time after adjusting for inflation
Definition: GDP / nominal GDP
monetary value of the G&S (output) produced in a country over a period of time
What are the economic indicators?
- employment (95%) (rest are structurally unemployed)
- inflation (2-3%)
- economic growth (3-4%)
Definition: Marginal rate of Substitution
sacrifice of good A
/
to gain 1 unit of good B
MPC/MPS formula
change in C or S
/
change in Y (income)
MPC + MPS = 1
Definition: Basic Need vs Luxury Wants
a good or service needed for survival*, vs non-essential G&S
Definition: Planned/Command Economy
economic system where the government (public sector) makes all the economic decisions about the big 4
- big 4 are controlled by specialised divisions within the government
- offers more security
- communistic (business cycle controlled bu government/public)
- reduces inequality
- lower standard of living (shortages, corruption, etc.)
What are the 3 types of industry catergories?
- primary industries (extraction of raw materials = 5%)
- secondary industries (conversion of raw materials into goods, final or capital = 10%)
- tertiary industries (provision of services = 85%)
leakages > injections
economy contracts
Definition: Economics
Economics is about the study of human behaviour in the Distribution and Exchange and Production of goods & services in an economic system. (DEP)
What are the 4 types of income?
- wages (provided by labour = 56%)
- rent, profits and interest/dividends (from providing FOP = 28%)
- welfare payments ( =11%)
- insurance claims/other ( = 5%)
Investing in Capital Goods (y axis on curved graph) ______
helps increase future GDP (CAPmax)
leakages < injections
economy expands
Definition: Marginal Propensity to Consume/Save
change in one unit of income that leads to a change in ‘x’ units of consumption/savings
Investing in Consumer goods (x axis on
curved graph)
helps increase current GDP (CONmax)
2 sector, 3 sector, 4 sector and 5 sector model equilibrium’s
2: Y=O=E
3: Y=O=E / leakages = injections (S=I)
4: Y=C+I+G / leakages = injections
5: S+T+M=I+G+X / leakages = injections
Definition: Nominal Interest
the rate you see when you apply for a credit card or loan. the lenders real profit desired + inflation
Definition: Market Economy
economic system where individual producers (private sector) own and determine the big 4 of G&S production
- allocation = price mechanism
- production = consumer sovereignty
- economic decisions = free enterprise (market competition)
- capitalistic (business cycle controlled by private)
- government has no say
- lots of inequality
- insecure
- higher standard of living
Factor Income for FOP
Capital = interest
Enterprise = profit
Land = rent
Labour = wages/salaries
Definition: dynamic efficiency
the economies ability to adopt to changing needs and wants
Definition: Recurring Wants
wants that need to be repeatedly satisfied over a period of time
Definition: Opportunity Cost
the cost of the next best alternative forgone by present consumption expressed in money, items or time (graphically shown through the PPF)
Definition: Real interest rate
expresses the cost of borrowed funds after the expected erosion of the value of those funds due to the rise in the general price level
Real Interest = Nominal Interest - Inflation
what are the key factors of the Business Cycle?
Expenditure
Investment
Employment
Inflation (always a step behind)
Output
Definition: Production Possibility Frontier
is a graph representing the maximum employment of resources (slope of PPF = opportunity cost)
ASSUMPTIONS:
- between 2 options (x and y axis)
- in the short run
- all resources are used efficiently
What is the Economic Problem?
the problem of trying to allocate scarce resources to satisfy societies unlimited needs and wants
Economic Growth Formula (%)
current real GDP - prior real GDP
/
prior real GDP
Definition: Productivity
output per unit of usually labour per unit of time
2 sector, 3 sector, 4 sector and 5 sector model sectors
2: households and firms
3: households, firms and financial (banks)
4: households, firms, financial and government
5: households, firms, financial, government and overseas
4 main questions: Whom to and how to distribute
decided using the price mechanisms and incomes
Definition: Disposable Income
= Gross Income - Taxation
Where does Economic Growth come from?
- additional resources discovered
- resources increase productivity
- technology improves
Factors of Production
Capital (producer goods used to make more G&S)
Enterprise (effort of managers to take risks while managing the FOP)
Land (natural resources used in the production process)
Labour (human put into the production
What causes an increase in GDP?
increase in:
1. population
2. participation
2. productivity (how much you produce of smth)
Definition: Business Cycle
a series of fluctuations termed as troughs and peaks of a countries real GDP over a period of time
4 main questions: what and how much to produce?
decide between consumer or capital goods
consumer demand decides this factor of production as they have consumer sovereignty
Definition: Gross Income
total of household income from the factor incomes before deduction of taxation
Definition: specialisation
runs the economy because people rely on others who are more skilled in other goods and services opposite of self sufficiency
Total revenue formula
= price x quantity sold
What is the governments role?
to prevent dis-market failure by
- allocating resources
- stabilising the business cycle
- redistributing income
- market regulation
