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11ECONOMICS > UNIT 1 > Flashcards

UNIT 1 Flashcards

1
Q

What is the economic problem?

A

The economic problem arises because resources are scarce, but wants are unlimited, forcing individuals, businesses, and governments to make choices.

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2
Q

4 questions every society must address:

A
  1. What to produce
  2. How much to produce
  3. How to produce
  4. How to distribute?
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3
Q

Define ‘wants’ in economics.

A

Wants are desires for goods and services that provide satisfaction. They can be material (e.g., cars) or non-material (e.g., entertainment).

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4
Q

What are individual vs. collective wants?

A

Individual wants are personal desires, like a phone or car. Collective wants are shared by a community, like hospitals, roads, and public schools.

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5
Q

Why are wants considered unlimited?

A

Because as one want is satisfied, new ones emerge due to social trends, technological advancements, and economic growth. For example, smartphones replaced landlines.

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6
Q

Why are some wants prioritized over others?

A

Essential wants (like food and housing) take precedence over luxury wants (like jewelry) due to necessity and budget constraints.

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7
Q

How does scarcity force economic choices?

A

Scarcity forces individuals, businesses, and governments to allocate resources efficiently, choosing between competing alternatives.

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8
Q

Explain why production distribution is income-dependent in modern economies.

A

Higher income allows greater access to goods and services, while lower income limits purchasing power, affecting distribution.

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9
Q

What is the difference between equitable and inequitable distribution?

A

Equitable distribution ensures fairness based on need, while inequitable distribution occurs when wealth and resources are concentrated among a few.

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10
Q

Define opportunity cost.

A

Opportunity cost is the next best alternative foregone when making a decision.

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11
Q

Give three real-world examples of opportunity cost.

A
  1. Choosing university over working means losing potential income.
  2. A company investing in new machinery instead of advertising.
  3. A government funding healthcare instead of infrastructure.
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12
Q

What economic factors influence individual choices?

A

Income, price of goods, preferences, advertising, government policies, and future expectations.

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13
Q

How do governments influence economic choices?

A

Through taxation, subsidies, regulations, public goods, and monetary (interest) and fiscal (budget +taxes) policies.

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14
Q

What are incentives, and how do governments use them?

A

Incentives are rewards or penalties that influence behavior, such as tax breaks for businesses or fines for pollution.

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15
Q

What are the four factors of production?

A
  1. Land – Natural resources.
  2. Labor – Human effort (mental or physical).
  3. Capital – Machinery, buildings.
  4. Entrepreneurship – Innovation, risk-taking.
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16
Q

Give an example of land as a factor of production.

A

A farm using soil and water to grow crops.

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17
Q

Give an example of labor as a factor of production.

A

A teacher providing education.

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18
Q

Give an example of capital as a factor of production.

A

A factory using machines to produce cars, or a new computer software for designing.

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19
Q

Give an example of entrepreneurship as a factor of production.

A

Elon Musk founding Tesla and SpaceX.

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20
Q

What does the PPF show?

A

The PPF shows the maximum possible output combinations of two goods given available resources and technology.

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21
Q

What does a point inside the PPF indicate?

A

It represents inefficiency, meaning not all resources are fully utilized.

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22
Q

What does a point on the PPF curve indicate?

A

It represents full efficiency, where all resources are fully utilized.

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23
Q

What does a point outside the PPF indicate?

A

It represents an unattainable combination given current resources and technology.

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24
Q

What causes a PPF to shift outward?

A

Increase/better factors of production - land, labour, capital, entrepreneurship.

Economic growth, better technology, or an increase in resources.

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25
Draw the circular flow model (including the symbolic letters)
26
What are leakages in the circular flow model?
Leakages are withdrawals from the economy, including savings, taxes, and imports. They can exit at any point in the household-firm cycle.
27
What are injections in the circular flow model?
Injections are additions to the economy, including investment, government spending, and exports. They can enter any point in the household-firm cycle.
28
What happens when leakages exceed injections?
The economy contracts, leading to lower output (GDP), income, and employment.
29
What is GPD?
Gross Domestic Product - the monetary value of final goods and services—that is, those that are bought by the final user—produced in a country in a given period of time
30
What happens when injections exceed leakages?
The economy expands, leading to higher output, income, and employment.
31
What are the four phases of the business cycle?
Expansion Peak Contraction Trough (recession, strictly speaking, is when economic growth (% GDP increase) is negative)
32
What characterises the expansion phase in the business cycle?
Rising GDP, increasing employment (lowering unemployment), increasing incomes, increasing business output, increasing consumptiion, increasing investment, increasing standard of living, increasing inflation, increasing interest rates--EVERYTHING INCREASING!
33
What characterizes the peak phase?
Max economic growth, minimum unemployment, max incomes, max business output, max consumption, max investment, highest standard of living, high inflation, high interest rates.
34
What characterises the contraction phase?
Decreasing economic growth, decreasing income, decreasing business output, decreasing consumption, decreasing investment, decreasing standard of living, decreasing inflation, decreasing interest rates.
35
What characterises the trough phase?
Lowest economic growth, highest unemployment, lowest income, min. business output, min. consumption, min. investment, lowest standard of living, low inflation, low interest rates.
36
Explain inflation
Inflation is the sustained increase in the general price of goods and services, reducing purchasing power of consumers.
37
How does increasing aggregate demand influence inflation?
Higher demand leads to higher prices (demand-pull inflation).
38
How does increasing aggregate supply influence inflation?
If supply rises faster than demand, prices may stabilize or decrease.
39
What are the economic indicators used to assess the business cycle?
GDP growth, unemployment rate, inflation rate, and consumer confidence index.
40
How does the Reserve Bank of Australia (RBA) influence the economy?
It controls monetary policy by adjusting interest rates and regulating money supply.
41
How do exchange rates impact aggregate demand?
A weak currency boosts exports but raises import costs, while a strong currency makes imports cheaper but exports less competitive.
42
A factory is polluting a river, affecting local fishermen. How should the government respond?
The government could impose a pollution tax, regulate waste disposal, or subsidize cleaner production methods.
43
A country has high inflation and wants to control it. What policy should it use?
The central bank could raise interest rates to reduce borrowing and slow down spending.
44
A government wants to increase employment. Should it lower taxes or increase spending?
Lowering taxes increases disposable income, while government spending directly creates jobs—both can work depending on economic conditions.
45
A country’s exports are declining due to a strong currency. What could the government do?
It could reduce interest rates to weaken the currency, making exports more competitive.
46
A developing nation wants to industrialize but lacks capital. How could it attract investment?
By improving infrastructure, offering tax incentives, and ensuring stable economic policies.
47
How does the government influence resource allocation?
Governments use taxes, subsidies, regulations, and public spending to encourage or discourage certain economic activities.
48
What are the five sectors in the circular flow model?
Households – Provide labor and consume goods/services. Businesses – Produce goods/services and pay wages. Government – Collects taxes and provides public services. Financial Sector – Channels savings into investments. Overseas Sector – Handles exports and imports.
49
What are leakages in the circular flow model?
Leakages withdraw money from the economy, reducing economic activity: Savings (S) – Money saved instead of spent. Taxes (T) – Money taken by the government. Imports (M) – Money leaving the economy for foreign goods/services.
50
What are injections in the circular flow model?
Injections add money to the economy, increasing economic activity: Investment (I) – Businesses buying capital goods. Government spending (G) – Funding public services/infrastructure. Exports (X) – Selling goods/services overseas.
51
How does the circular flow model relate to GDP?
GDP measures the total value of all goods/services produced. When injections increase, GDP grows; when leakages rise, GDP falls.
52
How does consumer confidence affect the business cycle?
When confidence is high, spending and investment increase, boosting growth. When confidence is low, spending drops, slowing the economy.
53
What is fiscal policy?
Government policy involving the budget - taxation and spending to influence the economy.
54
What is expansionary fiscal policy, and when is it used?
Used during a downturn or recession: Lower taxes to increase disposable income. Higher government spending to create jobs and demand.
55
What is contractionary fiscal policy, and when is it used?
Used during a boom to control inflation: Higher taxes to reduce disposable income. Lower government spending to slow demand.
56
What is monetary policy?
Central bank (RBA) policies that control money supply and interest rates to stabilize the economy.
57
How does lowering interest rates stimulate the economy?
Cheaper loans → More borrowing → More investment/spending. Lower mortgage costs → More disposable income. Lower savings returns → Encourages spending instead of saving.
58
How does raising interest rates slow the economy?
More expensive loans → Less borrowing → Less spending. Higher mortgage costs → Less disposable income. Higher savings returns → Encourages saving instead of spending.
59
What are the main causes of inflation?
Demand-pull inflation – Too much demand, driving prices up. Cost-push inflation – Higher production costs passed to consumers.
60
How does inflation impact consumers?
Reduces purchasing power (money buys less). Erodes savings if interest rates don’t keep up. Increases cost of living (rent, food, fuel).
61
How does inflation affect businesses?
Higher costs → Less profit or higher prices. Uncertainty → Less investment. Wage pressures → Employees demand higher pay.
62
How does inflation affect borrowers and savers?
Good for borrowers (loans are repaid with money worth less). Bad for savers (money loses value over time)
63
How can the government control inflation?
1. Raise interest rates (reduces spending and borrowing). 2. Cut government spending (slows demand). 3. Increase taxes (reduces disposable income).
64
Why is deflation a problem?
1. Consumers delay spending, expecting lower prices later. 2. Businesses cut jobs, reducing wages and demand. 3. Debt becomes more expensive, harming borrowers.
65
The economy is in a boom with high inflation. What should the central bank do?
Increase interest rates to slow down borrowing and spending.
66
The economy is in a recession with rising unemployment. What should the government do?
Introduce a fiscal policy to increase government spending and cut taxes to boost demand.
67
A country is experiencing deflation. What can policymakers do?
Lower interest rates to encourage borrowing and spending.
68
A business notices that inflation is rising. What should it do?
Increase prices gradually, negotiate wage increases, and reduce reliance on costly materials.
69
Consumers are saving more money than spending. How does this impact the economy?
It reduces demand, slowing economic growth and potentially leading to a recession.
70
Explain how a fall in business investment affects the business cycle.
Lower investment leads to fewer jobs, lower incomes, and weaker economic growth, pushing the cycle toward recession.
71
State the formula for equilibrium in the circular flow model.
S + T + M = I + G + X (Savings + Taxes + Imports = Investment + Government Spending + Exports)
72
How does an increase in disposable income affect consumption spending?
Increases consumption spending as households have more money to spend.
73
How does an increase in consumer confidence impact consumption?
Higher spending due to optimism about future income and job security.
74
How do lower interest rates affect consumption?
Lower borrowing costs encourage spending on credit.
75
How does an increase in household wealth influence consumption?
Higher spending as people feel financially secure.
76
How can government policy (such as tax cuts or transfer payments) affect consumption?
More disposable income leads to higher spending.
77
How do expectations of future prices (inflation) impact consumption?
If consumers expect prices to rise, they may spend more now.
78
How do lower interest rates impact business investment?
Cheaper borrowing encourages businesses to invest in capital.
79
How does higher business confidence affect investment?
Firms invest more when they expect strong economic growth.
80
How does increased demand for goods and services influence investment?
Businesses invest more in capital to expand production.
81
How do technological advancements influence business investment?
Businesses invest in new technology to improve efficiency.
82
How does a recession or economic downturn affect government spending?
Increased government spending to stimulate economic activity.
83
How does population growth affect government expenditure?
Increased demand for public services like healthcare and education.
84
How do geopolitical or defense concerns impact government spending?
Higher spending on military or security.
84
85
How does the depreciation of the Australian dollar affect net exports?
Exports become cheaper, increasing demand for Australian goods.
86
How does strong overseas economic growth influence net exports?
Higher demand for Australian exports.
87
How does increased domestic income affect net exports?
More imports as consumers buy more foreign goods.

11ECONOMICS (2 decks)

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