Topic 1 - Introduction to Economics Flashcards
What is GDP?
Gross Domestic Product, Total value of the goods and services produced by a country’s economy during a specified period of time (usually one year)
Inflation
Refers to general increase in prices or the supply of money, causing purchasing power to decline, measured in inflation rate or the change in CPI.
What are the factors of production?
Land, Labour Capital, Enterprise
Monetary policy
Involves influencing interest rates to affect aggregate demand, employment and inflation in the economy.
Nature of Wants
Wants are fundamentally unlimited; as soon as one is satisfied, we move on to satisfying another. Income is limited, ∴ we cannot satisfy all of them at once.
Some wants can be recurrent. When we satisfy a want such as food, we will still have to satisfy them again.
Our wants change over time; as people get older, their wants change. The factors that affect change include age, income, technology and fashion.
What is the economic problem?
Unlimited wants, limited resources
The 4 Economic Questions
What to produce? Capital or Consumer Goods
How much to produce? Demand and resource allocation
How to produce? Resource availability and technology
To whom to distribute? Demographics and Target Audience.
Production possibility frontier (PPF)
Illustrates opportunity cost and graphically represents possible combinations of the production of two goods and services that the economy can create at any given time.
Opportunity Cost
Opportunity Cost is the phenomenon where we satisfy one want, and must then forgo the opportunity to satisfy another. The real cost is ∴ not the monetary value but the unit measure of the next best alternative that me must forgo.
Production Possibility Frontier
can be used to demonstrate how opportunity costs arise when individuals or the community make choices. The PPF (sometimes called the Production Possibility Curve) shows the various combinations of two alternatives that can be produced.
Economic Factors underlying decision-making (Individuals)
Age, income, expectations, future plans, family circumstances, personality factors, how much they want to save and spend, plans in relation to education, work, family and retirement.
Opportunity cost formula
Product forgone/Product produced = Opportunity cost
Economic Factors underlying decision-making (Businesses)
- Pricing decisions are based on market strategy
- Will seek to minimise costs, but need to strike balance between quality over cost.
- Generally choose cheapest available resources, but if not reliable may choose higher priced.
- Ethical issues play a role for example the role of the natural environment.
- Industrial relations issue- choosing to employ on wage levels set by industrial awards.
Income for each FOP
Land- Rent
Labour- Wages
Capital- Interest
Enterprise- Profit
Economic Factors underlying decision-making (Government)
- Pricing decisions are based on market strategy
- Will seek to minimise costs, but need to strike balance between quality over cost.
- Generally choose cheapest available resources, but if not reliable may choose higher priced.
- Ethical issues play a role for example the role of the natural environment.
- Industrial relations issue- choosing to employ on wage levels set by industrial awards.
Recession
A significant decline in economic activity for long periods.
Types of economies
→ Free Market: is based on system of markets and prices, which allocate resources and allow private property rights, the profit motive and the freedom of enterprise. There is limited Govt intervention.
→ Planned Economy: based on a system of govt ownership of most resources, and the allocation of these resources according to govt planning priorities and target (More common in times fo war or major strife)
Factors of Production:
(Nmeuonic: C.E.L.L.)
Capital
Enterprise
Labour
Land
What is CAPITAL?
○ Refers to the produced means of production. Before capital accumulation takes place, there must be saving out of current income, to invest in capital goods.
Return for capital is INTEREST
What is ENTERPRISE?
○ Entrepreneurship: refer to the risk taking behaviour in establishin or managing and operating businesses.
○ Entrepreneurs receive two types of profit:
§ Normal Profit: is the rate of profit sufficient to keep the entrepreneur in business or the industry in which a firm operates
§ Supernormal profit: is profit over and above what is necessary to keep the entrepreneur in biz
What is LABOUR?
○ Labour Force is everyone who is capable of working & actively seeking
○ Labour = Derived Demand, AKA Second-Hand Demand - Requires on demand on something else i.e. the product that the labour is producing.
Labour provides human capital = refers to knowledge, skills, education, training and experience of the workforce.
Consumer price index
Measures the percentage change in the price of goods and services consumed by households.
Leakages
Leakages are the actions that remove income for the circular flow, decreasing aggregate (total) income and the general level of econ activity.
SAVINGS, TAXATION, IMPORT
Injection
Injections are the actions in the circular flow of income that increase aggregate income and the general level of econ activity.
INVESTMENT, GOVERNMENT EXPENDITURE, EXPORTS
Exchange rate
The value of one currency for the purpose of conversion to another.
Liquidity
The ease with which an asset or security can be converted into ready cash without affecting its market price.
What is Market Equilibrium?
Equilibrium occurs in the circular flow when the sum of all leakages is equal to the sum of all injections.
Downturn
The leakages are greater injections there will be downturn in economic activity, with falling incomes and production with rising unemployment. As leakages occur, the level of leakages will fall as ind will have less income to save and to be taxed, This will lead to a = but with a lower level of income in the circular flow.
Upturn
When injections are greater than leakages, there will be an upturn in econ activity. Income rises with production and employment. As the level of economic activity increases, so too will the level of leakages as consumer have more income to save and to be collected as taxes and spend on imports. This will lead to a = but with a higher level of income in the circular flow.
Fiscal policy
The use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions.
Gross national product
income earned by residents from overseas investments, minus income earned by foreign residents.
