Economics 3 (exam)

economics

study of how scarce resources are allocated to fulfill infinite needs and wants

macroeconomic

study of large-scale inflation and unemployment at a national level, while trading with different economies

microeconomic

study of small scale economics, individual market situations and how consumers and producers interact within one market

importance of economics

help people make rational decisions on how to spend money, allow citizens to understand and analyse decisions made by the government, and economists can use the 4 economic questions to find a solution for the basic economic problem

basic economic problem

people have to make choices because of scarcity and infinite wants

scarcity

having unlimited wants but limited resources

choice

decision-making process among alternatives

opportunity cost

second-best alternative that is given up to obtain a choice

PPF

demonstrates how opportunity costs arise when individuals or communities make choices

A represent

maximum amount of product 1 produced

C represent

maximum combination of product 1 and 2 produced

D represent

maximum amount of product 2 produced

E represent

inefficient use of resources

F represent

unobtainable because of scarcity of resources

purpose of 4 economic questions

guide societies into allocating scarce resources to satisfy unlimited wants and needs

what to produce

what the society should make

how to produce

most efficient way of making goods and services with limited resources

how much to produce

quantity of goods and services that should be manufactures

for whom to produce

who will consume the goods and services

land

natural resources

land examples

oil, coal

labour

physical and mental effort that people contribute to produce goods and services

labour examples

teacher, builder

capital

man-made production that is used to produce other goods and services

capital examples

machinery, building

enterprise

skill involving the ability to innovate things

enterprise examples

CEO, founder

purpose of economic systems

manage the production, allocation and consumption of limited resources and services

market economy

laws of supply and demand direct the production of goods and services

market characterisitics

private property, freedom of choice, motive of self-interest, competition, limited government intervention and system of market and prices

freedom of choice

owners are free to produce, sell, purchase goods and services in a competitive market

motive of self interest

owners sell for the highest price and buy at the lowest price

mixed economy

both planned and market economy together, it uses their advantages and suffers few disadvantages

mixed characteristics

protects private property, allows the free market and laws of supply and demand to determine prices, driven by the motivation of the self-interest of individuals

planned economy

central government makes all the decisions

planned characteristics

government or a collective owns all the land and means of production, uses each person's skill to the best of their ability to their highest capacity

market strength

increased economic growth through competition

market weakness

market failures and underprovide basic goods

mixed strengths

increased innovation and improved public services

mixed weakness

government inefficiency and higher taxes

planned strengths

provide basic needs and mobilise resources

planned weaknesses

have limited personal freedom and innovation

adam smith theories

philosophy of free markets, assembly line production methods and GDP

philosophy of free markets

freedom to produce and exchange goods and minimising role of government intervention and taxation in the free market with the invisible hand theory

invisible hand

forces of supply and demand, every person helps to create the best outcome for all

assembly line production markets

division of labour resulting in specialisation producing prosperity

GDP

believed countries should be evaluated based on their levels of production and commerce

karl marx theory

communist manifesto

communist manifesto

focus on the struggle between the working class and capitalists, examines the effect of capitalism on labour, productivity and economic development

john maynard keynes theory

government expenditure

government expenditure keynes

macroeconomic theory of total spending in the economy and its effect on output, employment and inflation

david ricardo theories

comparative advantage, labour theory of value, theory of rents

comparative advantage

countries can benefit from international trade by specialising in the production for goods for which they have a relatively lower opportunity cost

labour theory of value

value of a good should not be based on the compensation paid for labour but on the total cost of production

theory of rents

rents or benefits should be paid for ownership of assets rather than their contribution to any production

classical economics

advocating for self-regulating, free markets with minimal government intervention, against government intervention in the marketplace, for free trade and invisible hand theory

invisible hand theory

unseen forces that move the free market economy, market will find its equilibrium without government or other interventions

keynesian economics

macroeconomic theory which argued that private sector decisions sometimes lead to inefficient macroeconomic outcomes, government intervention is necessary for full employment and price stability, especially during recessions, which the macroeconomy can be in a long time, which they advocate for higher government spending, aggregate demand

aggregrate demand keynesian

created by households, businesses and the government, not the dynamics of the free market

supply side economics

income taxes reduce incentives for work, savings, and investment and those accelerated economic growth without inflation which can be achieved by increasing supply of goods and services, adovates large scale tax cuts for individuals and businesses, deregulates businesses and strong incentives for investment

monetarism economics

regards the money supply as the most important driver of economic growth, when money supply increases aggregate demand increases, central banks play a critical role as they control the money supply

when money supply expands

lower interest rates and banks have more on hand to lend, charging lower rates

sustainable economic growth

maintaining economic growth without creating economic or environment problems

sustainable economic growth target

3.25%

sustainable economic growth measurement

quaterly and annual change in real GDP

sustainable economic growth benefits

increases capacity of the economy to satisfy the needs and wants of consumers

sustainable economic growth problems

bottlenecks, labour shortages and limited resources as the economy nears capacity

price stability

a general price level an economy remains over time

price stability target

2-3%

price stability measurement

CPI (consumer price index)

price stability benefits

confidence rises, maintenance of international competitiveness

price stability problems

reduces disposable income, higher unemployment

full employment

where everyone who is willing and able to have a job has a job

full employment target

4.5%

full employment measurement

unemployment rate

full employment benefits

raises living standards, self-esteem, social and economic standards

full employment problems

may increase inflation and wages

leading indicators

used to predict changes in the economy before they happen

leading examples

building approvals, share prices

lagging indicators

ones that follows an event and has the ability to confirm a pattern is occuring

lagging examples

unemployment rate, interest rate

coincident indicators

occurs at approximately the same time as the conditions they signify

coincident examples

personal income, GDP

expansion

occurs when there is positive growth in real GDP, employment of resources increases and general price level in the economy increases

peak

represents cycle's maximum real GDP and marks end of expansion, economy likely experiencing inflation

contraction

occurs when there is negative growth in real GDP, unemployment of resources increase and price level increase will slow down

trough

represents cycle's minimum level of real GDP, there may be widespread unemployment

fiscal policy

refers to the use of government spending and taxation to affect the level of economic activity, resource allocation and income distribution

discretionary fiscal policy

deliberate use of taxes or government spending to influence the economy, used when non-discretionary fiscal policy is inefficient

discretionary examples

direct taxes

non-discretionary fiscal policy

automatic and built-in stabilisers, used to smoothen the fluctuations in the BTC without the need for government intervention

non-discretionary examples

present tax structure, unemployment benefits

budget

statement of expected revenue and expected expenditure in the coming fiscal year

purpose of budget

decides how revenue should be raised and allocated to areas of need, redistributes income from wealthy to less wealthy, influences level of macroeconomic activity

balanced/neutral budget outcome

impact on level of aggregate demand and economic activity is neutral, has little effect on production, employment and inflation

deficit/expansionary budget outcome

(G>T), causes less money to be taken out of tax and poured back into expenditure, expansionary effect on aggregate demand and economic activity, stimulates production, employment and inflation

if size of deficit is cut

becomes contractionary

if size of deficit increases

becomes even more expansionary

surplus/contractionary budget outcome

(G<T), causes more money to be withdrawn from taxes and poured into expenditure, contractionary effect on aggregate demand and economic activity, limits production, employment and inflation

if size of surplus is cut

becomes expansionary