economics

What is the purpose of cost benefit analysis?

Decides what is the best course of action

How do you conduct a cost benefit analysis?

potential rewards minus the total costs of taking that action

What is marginal thinking?

Marginal thinking compares marginal benefit and marginal cost of the next decision.

What are sunk costs?

Sunk costs are money that has already been spent and cannot be recovered.

Why do sunk costs not matter in future decision-making?

because they cannot be recovered.

What is the sunk cost fallacy?

When people fixate on the money that has been spent and continue to invest in a decision to justify their past expenditures.

What does the production possibility frontier (PPF) show?

the range of production alternatives available to an economy that is producing two goods at max capacity

What does a point on the production possibility curve represent?

that it is achieving technical efficiency

How can the PPF be shifted outward?

improving technology, educating skills, and moving people and resources to increase efficiency

How do borrowing and importing affect the PPF?

can lead to trade deficits, which may eventually result in inflation.

Why is the PPF typically curved rather than straight?

Because resources are not equally suited for producing different goods, so are not as efficient

What is the concept of specialization and trade in relation to the PPF?

focusing on producing goods that the economy is advantaged in, and trading it so that an economy can reach beyond its PPF in a sustainable way

What does 'PPF' stand for?

Production Possibility Frontier.

What are the characteristics of an efficient allocation of resources?

1. Productivity is maximized. 2. Goods produced are valued by society. 3. Opportunity costs are minimized. 4. Satisfaction or utility of society is maximized.

What is productive or technical efficiency?

When all factors of production are being employed, curve of PPF

What are the assumptions of the production possibility model?

1. Only 2 goods are produced. 2. All resources can be used to produce the goods.

What does movement along the production possibility curve signify?

shows a shift in the use of resources, indicating opportunity cost.

What does it mean if an economy is not achieving productive capacity?

when there are unemployed resources, and the economy could produce more goods without trade-offs.

What does it mean for an economy to choose resources suited to specific goods or services?

that an economy will allocate resources to produce goods where they are most effective, maximizing output

Labour Productivity

Output per hour of work

Capital productivity

output per machine hour of work

multi-factor productivity

output per hour of labour and machine work

Allocative efficency

When you are achieving technical efficiency but are also producing what society wants/values

1st flow in two sector flow model

Nation’s flow of resources, household sector to business sector

2nd flow in two sector flow model

Nation’s flow of all wages paid (income flow), business sector to household sector

3rd flow in two sector flow model

Nation’s flow of spending / aggregate demand for finished goods (expenditure flow), household sector to business sector

4th flow in two sector flow model

Nation’s flow of all finished goods and services produced (production flow, total GDP), business sector to household sector

3rd flow in three sector flow model

The government taxes consumer spending, which is a leakage from the circular flow. It then injects money back into the economy to provide essential services

1st, 2nd and 4th flows in the three sector flow model

same as two sector

Traditional economic system

Economic questions answered according to customs and beliefs, only what you need is created, trade is based on barter.

Market Economy

All economic decisions about the production and distribution of output and incomes are made by reference to the price system, without any government interference

Market economics what and how much to produce

Is based on demand and profit, so only the most profitable goods and services are produced

Market failure

when resources are not allocated in a way that maximises society’s well fare

Market economy how to produce

Is driven by maximising profit and minimising production costs, which improves technical efficiency

Market economy for whom to produce

The price system determines this, because different values are placed on different goods and services, so different people will have higher/lower incomes, so they would spend differently

Planned Economics

All economic decisions about production and distribution are made by one entity

Planned economics what and how much?

Government plans everything, so the consumer has no choice because the government assumes to know the consumers needs

planned economy how to produce

Everything is produced by government monopolies, so there is no competition and therefore lacks innovation and growth to improve efficiency (no personal gain)

planned economy for whom to produce

Trying to reduce income inequality, the government will standardise wages and provide essential goods and services.

Mixed economy

Inbetween market and planned economy, most decisions are made by the market economy with a degree of government intervention to reduce market failure and regulate/improve society’s wellfare

mixed economy for whom to produce

Made by consumers, producers and government

skip

yes

mixed economy how to produce

Is mostly decided by businesses with some government intervention in order to prevent market failure because businesses want to maximise profit

Mixed economy what and how much to produce

decided by the market based on relative scarcity, competition, demand and profit to satisfy the consumer. some government intervention

Nominal GDP

total of all consumer and government spending, exports and investments minus the value of imports

Real GDP

nominal gdp adjusted for inflation, more accurate when looking at the growth of an economy

Real GDP per capita

used as an indicator of a country’s wealth, real gdp/population

HDI (run by UN)

human development index, measures non material living standards not directly related to income

HDI Dimensions (the result)

Long and healthy life, knowledge, decent standard of living

HDI indicators

life expectancy at birth, expected and mean years of schooling, mean income per person

HDI dimensions index (what it is measuring)

life expectancy, education, a decent standard of living

Public sector

local, state and federal governments as well as government enterprises

Private sector

consumers/households, businesses, social enterprises, charities

Assumed consumer behavior

consumers are rational and will act in their self-interest to maximise utility. consumers are logical and calculated, and will make decisions based on cost of benefits, not emotions

Consumers make informed decisons

it is assumed consumers have access to perfect information and will make accurate cost of benefit analysises.

Marginal utility

the extra utility from consuming an additional unit of a good / service at a point in time

Law of diminishing marginal utility

that with each additional unit consumed, it generates less utility than the previous unit

consumers and marginal utility

they will want to consume different combinations of goods and services to maximise utility

consumers and budget

budget will impact their decision to buy based on relative price, e.g. inferior goods over superior goods

Incentives

Benefits, rewards or costs that motivate economic agents (consumers/producers) to follow a certain type of behaviour or evoke a certain response

Indirect taxes

Disincentive - used to tackle externalities by taxing the production of goods so that the price is then passed onto the consumer

Tax Rebate

Incentive - Reduces that amount of tax if people follow a certain behaviour, which makes it more profitable

Subisidies

Incentive - used to promote the consumption/production of goods/services by giving money to the producer/consumer to cover some to all of the cost.

Profit Maximisation - traditional viewpoint

that consumers and businesses want to maximise their personal utility/profit

Making profit - price discrimination

When businesses charge consumers differently depending on how much they are willing to pay

Making profit - multi branding

When companies create multiple identities that attract more customers by being able to reach more and giving customers the illusion of choice

Predatory pricing - illegal strategy for profit maximisation

When companies reduce the price of a good to kill off competition and increase it again when there’s no more competition and they can charge more and get away with it

Cartel conduct - illegal strategy for profit maximisation

when two or more businesses collude to try and increase their profits collectively instead of competing with each other, e.g agreeing on a fixed price

Production subisidies

when the government subsidises some of the cost for producing a good/service, making it more profitable

Traditional role of the government

To maximise the living standards of an economy in both material and non material standards

Macroeconomic Goal S

Sustainable economic growth, to grow the economy in a way that is sustainable for future generations so that it can continue to grow (3-3.5% economic growth)

Macroeconomic Goal P

promoting employment opportunities (4-5% unemployment)

Macroeconomic Goal K

Keeping inflation to a minimum (2-3%)

Dynamic efficiency

The speed at which resources are reallocated from one area of production to another, having mobile tools, multi skilled workers and repsonsiveness to changes in the economy

Intertemporal efficiency

When resources are appropriately allocated between current and future consumption

expansionary fiscal policy

To increase economic growth - usually tax cuts or government spending to increase aggregate demand

Expansionary monetary policy

to increase economic growth - lowering interest rates to encourage borrowing and spending

Contractionary fiscal policy (budgerary)

to slow down economic growth - (increased) tax collection and reduced government spending, lowers demand

contractionary monetary policy

to slow economic growth - increases interest rates to discourage borrowing and spending by making it expensive

government redistribution of income

progressive income tax - the more you earn, the more you pay and the money goes to support lower incomes