Unit 1: Economics Flashcards
What is the economic problem?
Asserts that there is scarcity, or that finite resources available are insufficient to satisfy all human wants and needs.
The fundamental questions of economics determines…
What is to be produced and how the factors of production are to be allocated.
What are the three economic questions?
1) What to produce? - best combination of goods and services to meet varied wants and needs, and how factors of production are to be allocated
2) How to produce? - best combination of factors to create desired output of goods and services
3) For whom to produce?- who benefits from the output, problem of distribution
What is choice?
An act of choosing between two or more possibilities.
What is opportunity cost?
The next best alternative foregone when a choice is made, benefits are lost due to sacrifices.
What do the factors of production impact?
Financial markets and investment outcomes
The inputs used to produce a good or service to produce income and is measured by GDP.
The success or failure of the outcome.
Define economic resources
The factors of production - land, labor, capital, and entrepreneurship
Define the ceteris paribus assumption…
A Latin phrase meaning ‘other things being equal’
Define economic growth…
Sustained increase in the productive capacity of an economy over a specific period of time, usually indicated by the increased availability of goods and services in the economy.
Define efficiency…
Achieving maximum productivity with minimum wasted effort or expense.
Define Production Possibility Curve / Frontier…
A model used by economists to demonstrate the concept of opportunity cost
Assumptions involved in the PPC/F are…
- economy aims to use all resources fully and efficiently
- only two goods produced in this simplified economy
- all resources can be used to produce each good - perfect mobility
- level of technology is assumed to be fixed
- resources are fixed
Define productivity…
How much output can be produced with a given set of inputs. Productivity increases when more output is produced with the same amount of inputs or when the same amount of output is produced with less inputs.
Define scarcity…
Insufficiency relative to wants. Universal problem - resources available for satisfaction of human wants are limited while wants are unlimited
Define recession…
A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP
During a recession, the economy struggles, people lose work, companies make fewer sales and the country’s overall economic output declines. The point where the economy officially falls into a recession depends on a variety of factors.
Why is the economy so important?
It can influence the decisions we make, which influences how the economy is performing. It is important to us all and can equally affect our lives.
What are the four phases of the cycle?
- expansion
- peak
- contraction
- trough
What is economic expansion?
The upswing of the cycle towards a peak. It is associated with
- increase in production/output
- decrease in unemployment
- increase in wages
- increase in consumer spending
What is economic contraction?
The downswing of the cycle towards a trough. It is associated with
- decrease in production/output
- increase in unemployment
- decrease in wages
- decrease in consumer spending
What is a boom?
A period of strong economic expansion where businesses are operating at full capacity or above and the unemployment rate is very low. Income and production are at very high levels. This can lead to rapid growth in prices.
What is a depression?
very severe recession.
large contraction in the economy
very high unemployment rate
Efficiency is…
using the least amount of resources to produce the goods and services that people value most
how cheaply firms can combine land, labor, and capital resources to maximise output while generating profits
Underutilisation is…
using fewer resources than an economy is capable of using.
Trade-offs are…
a balance achieved between two desirable but incompatible features, a compromise
Economic models are…
used to explain economic concepts and relationships providing a simplified version of reality.
The PPC shows / demonstrates…
- maximum possible production and various combinations of two goods with a given factor of production
- scarcity, choice and opportunity cost
- point that any nation’s economy reaches its greatest level of efficiency during specialisation
- production of one commodity may increase only if the other decreases (law of opportunity cost)
Economic assumptions are…
- initial conditions made before a micro or macroeconomic analysis is built
- used for simplification and to isolate effects of changes in variables
Assumptions of the PPC are…
- economy aims to use all resources fully and efficiently
- only two goods produced in the economy
- all resources used to make either goods, so there is perfect mobility between the production of the two goods
- level of technology is fixed
- resources are fixed
Interpretations of the PPC are… (points in the graph)
- points on the curve show efficient use of resources - maximum output. Full employment and productive efficiency
- points beyond the curve are unattainable given the resource constraint - only after economic growth.
- points below the curve are feasible, but inefficient. Unemployment and productive inefficiency
Why is the PPC curved?
a reflection of the law of diminishing returns, the addition of a production factor has no impact
Shifts in the PPC are…
inward - economic shrinkage due to resource allocation failure, high unemployment, rising inflation
outward - economic growth, increase in highly trained workers, improved technology, greater access to capital funds
Comparative advantage is…
ability to produce a particular good or service at a lower opportunity cost than its trading partners.
Aggregate demand is…
total expenditure and the good and services produced in an economy in a period of time.
Law of demand is…
higher prices results in lower purchases / demand and vice versa
Aggregate supply is…
total values of goods and services available in an economy in a period of time.
Law of supply…
ceteris paribus - price of good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa
GDP is…
monetary value of all final goods and services produced in a country’s border by its citizens and foreigners in a specific time period
Real GDP is…
market value gdp adjusted for price changes may occur
Trade deficit is…
when a country imports more than it exports.
Price level is…
average of current prices across the entire spectrum of goods and services produced in an economy.
AD downwards slope curve effects include…
wealth effect, interest rate effect, net exports effect.
Right shifts in the AD curve mean…
at the same price levels, the quantity demanded of real GDP increased
the components of AD rise, and the equilibrium quantity of output and price level will rise
Left shifts in the AD curve mean…
at the same price levels, the quantity demanded of real GDP decreased
the components of AD fall, and the equilibrium quantity of output and price level will fall
Factors that cause the AD curve to shift are…
- exchange rates
- distribution of income
- expectations
- foreign income
- monetary and fiscal policies
- interest rates
- employment
Right shift in the AS curve mean…
increase in supply
Left shift in the AS curve mean…
decrease in supply
Factors that cause the AS curve to shift are…
- resource or input costs
- productivity / technology
- producer expectations
- actions of government, taxes and subsidies
- prices of other goods
Equilibrium price is…
where supply and demand intersect on the graph.
the price we would predict the market will operate.
where consumers and producers plans agree
Surplus in the AD and AS graph is…
if the market price is above the equilibrium price, quantity supplied is greater than quantity demanded, creating a surplus
Shortage in the AD and AS graph is…
if the market price is below the equilibrium price, quantity supplied is less than the quantity demanded, creating a shortage
Aggregate demand formula is…
C + I + G + ( x - m ) = AD
The aggregate demand/aggregate supply model is…
model that shows what determines total supply or total demand for the economy and how total demand and total supply interact at the macroeconomic level.
Short-term changes in aggregate supply are impacted most significantly by…
increases or decreases in demand
Long-term changes in aggregate supply are impacted most significantly by…
new technology or other changes in an industry
When prices increase, the aggregate real GDP output demanded…
decreases
When prices decrease, the aggregate real GDP output demanded…
increases
When prices increase, the aggregate real GDP output supplied…
increases
When prices decrease, the aggregate real GDP output supplied…
decreases
If equilibrium occurs in the flat range of the AS curve then…
the economy is not close to potential GDP and be experiencing unemployment, but stable price levels
If equilibrium occurs in the steep range of the AS curve then…
the economy is close to or at potential GDP and be experiencing rising price levels or inflationary pressures, but will have a low unemployment rate
What is the law of diminishing marginal return?
adding an international factor of production results in smaller increases in output
What is marginal productivity?
extra output, return or profit yielded per unit by advantages from production units
What is the law of diminishing marginal productivity?
advantage gained in a factor of production, the productivity gained from each subsequent unit produced will only increase marginally from one unit to the next
What is economic equity?
fairness and distribution of economic wealth, tax liability, resources and assets in a society
What are the sectors that make up the Circular Flow of Income model?
- Household Sector
- Firms Sector
- Financial Sector
- Government Sector
- Overseas Sector
What is the Circular Flow of Income model?
describes the flows of resources, goods and services, and income in parts of the economy - an endless loop and interdependence
What are leakages?
a situation which occurs when some money withdrawn Savings, Taxation, Imports.
What are injections?
inflow of income to the circular flow.
Investment, Government Expenditure, Exports
How do we measure the economy?
by macroeconomic indicators
- GDP
- Per-Capita GDP
- GDP Growth Index
- Unemployment Rate
- CPI
- Inflation Rate
Draw and label the business cycle
see notes
Draw and label the circular flow of income
see notes
What is monetary policy?
The use of interest rates to influence demand, employment and inflation in the economy.
Objectives: economic prosperity and welfare, stability of currency, full employment
What is fiscal policy?
When the government adjusts its spending levels and tax rates to monitor and influence a nation’s economy. Objectives: stability and reduction of gross and net debt, target budget balance, control expenditure growth, support revenue growth.
Effect of increased interest rates…
personal:
- increased cost
- improved return for savers
economic:
- currency will appreciate making exports less competitive, imports cheaper
- inflation will tend to be lowered
Effect of decreased interest rates…
personal:
- lower cost of borrowing
- cheaper mortgage payments
economic:
- currency will depreciate making exports more competitive, imports expensive
- inflationary pressure
What is the cash rate?
interest rate which banks pay to borrow funds from other banks in the money market on a overnight basis
What is the paradox of thrift?
An increase in savings during a recession, though logical, would actually worsen a recession
How to measure fluctuations in output?
GDP
How to measure price changes in economy?
price index, CPI
