Topic 1 - Introduction to Economics Flashcards
Explain what the economic problem is.
How to satisfy unlimited consumer demand with a limited supply of resources.
What are the 4 basic questions which businesses must answer when producing G&S?
1) What to produce?
2) How much to produce?
3) How to produce?
4) How to distribute production?
Explain what opportunity cost is and the formula used to calculate it.
Opportunity cost is satisfying the current wants and needs by giving up another want/need.
OC = Quantity Forgoe / Quantity Gained
Briefly state what the Production Possibility Frontier is.
What does it represent?
Why isn’t it straight?
PPF is a graphical representation of Opportunity Cost and the possible combinations of producing 2 different G&S.
The graph is not straight since there is no perfect tradeoff when substituting DIFFERENT G&S.
List the 3 factors that affect the PPF.
Briefly the effect of each and the outcome when each one either increases/decreases.
1) New Technology - ↑ will shift PPF outwards.
2) Resources - ↑ will shift outwards for the specified G/S. ↓ in supply will shift that quantity inwards.
3) Unemployment - Underutilised resources, inside the PPF.
Determine the general opportunity costs with individuals, businesses and governments.
Individuals: Spending or saving (Short-term vs Long-term)
Businesses: Price, Quantity, Quality of resources.
Governments: Must satisfy different community wants vs Economic fluctuations (roads, schools vs recessions).
List the 4 factors of production.
List the types of return on each one.
1) Land –> Rent
2) Labour –> Wage
3) Capital –> Interest
4) Entrepreneurship –> Profit
Define Consumer goods
Items are produced for the immediate satisfaction of individual’s and community’s wants and needs.
Define Capital goods
Items that are not consumed immediately but are used for the production of other goods.
State the formula for calculating income.
Y | C | S
Income (Y) = Consumption (C) + Savings (S)
List the 5 sectors which the Circular Flow of Income represents.
1) Households
2) Businesses
3) Overseas/International Trades
4) Financial institutions
5) Governments
From the Circular Flow of Income;
The private sector consists of?
The public sector consist of?
Private: Individuals, businesses and financial institutions.
Public: Government
Explain what leakages represent in the economy and the 3 factors it represents (S, T, M)
Leakages represent the outflow of liquid funds from the economy.
Represented through Savings, Imports and Taxation.
Explain what Injections represent in the economy and the 3 factors it represents (I, G, X)
Injections represent the inflow of liquid funds into the economy.
Represented through Investment, Government Expenditure and Exports.
What are the 3 main reasons government intervention occurs in a market economy?
1) Reallocate resources between community and country needs. (Roads vs Defence)
2) Redistribute income between low and high-income earners. (Taxation)
3) Stabilise the economy from fluctuations of the business cycle. (Boom, trough)
How is economic growth measured?
Explain this measurement/formula.
Economic growth is measured by Gross Domestic Product (GDP).
Measures the total value of G&S produced by its nation ÷ Population.
How is the quality of life measured?
Measured by the Human Development Index (HDI). Takes into account:
1) Income | 2) Life expectancy | 3) Educational levels
Explain the difference between a ‘planned’ economy and a ‘market’ economy.
Planned: Supply and price of G&S are fully controlled by the Government.
Market: Economy characterised by private enterprises, consumer sovereignty and no government intervention.
List the 4 ways how the Government intervenes for minority groups, students and income earners.
1) Minimum income/wage
2) Free education until Year 12
3) Progressive Tax System
4) Unemployment/disability benefits
Explain the difference between Factor Markets and Goods Markets.
Factor Markets: Factors of production sold (land, labour, capital and enterprise).
Goods Market: Where final G&S are sold to consumers.
State the % employment of each Primary, Secondary and Tertiary Industries.
Primary: 5%
Secondary: 15%
Tertiary: 85%
Distinguish between a closed and open economy.
Closed Economy: No overseas sector - No internal trade.
Open Economy: Promotes international trade, allowing money to flow in easier.
Distinguish between equilibrium and disequilibrium, regarding Leakages and Injections.
Equilibrium: Sum of all leakage are equal to the sum of all injections.
Disequilibrium: Sum of total leakages do not equal to the sum of total injections.
