Introduction to Economics: Key Vocabulary

These flashcards cover foundational vocabulary from the lecture notes on scarcity, opportunity cost, supply and demand, the business cycle, and the 2008 Global Financial Crisis.

Scarcity

The economic concept where individuals must allocate limited resources to satisfy their needs

Opportunity Cost

Represents the potential benefits that a business, an investor or an individual consumer misses out on when choosing one alternative over another

Cost of Production

Total expenses incurred in creating a product, influencing firms’ willingness to supply.

Consumer Confidence

The degree of optimism that consumers feel about the overall economy, affecting their spending behavior.

Scarcity

The economic concept where individuals must allocate limited resources to satisfy their needs

Opportunity Cost

Represents the potential benefits that a business, an investor or an individual consumer misses out on when choosing one alternative over another

Incentives

The factors that motivate individuals, businesses, or governments to take certain economic actions or make specific decisions. Incentives are typically based on the potential for gaining a benefit or avoiding a cost

Macroeconomics

A branch of economics that studies the behaviour of an overall economy, which encompasses markets, businesses, consumers, and governments

Microeconomics

A social science that studies how individuals respond to changes in incentives, prices, resources, and/or methods of production

Inflation

The gradual loss of purchasing power that is reflected in a broad rise in prices for goods and services over time

Unemployment

Refers to a situation where a person actively searches for employment but is unable to find work

GDP

Measures the monetary value of final goods and services

The Price Mechanism

Forces of supply and demand, which determine the prices of products and the quantities sold in the market

Demand

A consumers willingness and ability to pay a particular price for a certain product or service

Law of Demand

As price increases, the quantity demanded decreases

Supply

Quantity that producers are ready, willing and able to supply for purchase at a given price at a given time.

Law of Supply

As price increases the quantity supplied increases

Five Sector Circular Flow of Income Model

A simplified representation of the movement of money, goods and services in the economy. It shows that money never leaves the economy but rather, flows from one sector to another.

The Business Cycle

It is a theory that reflects the natural fluctuations of economic activity or growth in an economy

Boom

A period of prolonged contraction in the business cycle, where there is a significant, widespread, and prolonged upturn in economic activity

• Highest employment rate and wages

• High consumer spending

• Highest inflation, GDP and economic growth

• Highest production

• High interest rates

• Businesses operating at full capacity (demand is more than supply)

Contraction

• Lowering the employment rate and wages

• Lowering consumer spending

• Lowering inflation, GDP and economic growth

• Lowering production

• Lowering interest rates

Recession

A period of prolonged contraction in the business cycle, where there is a significant, widespread, and prolonged downturn in economic activity

• Lowest employment rate and wages

• Lowest consumer spending

• Lowest inflation, GDP and economic growth

• Lowest production

• Lowest consumer demand, and therefore, business sales

• Businesses have a lot of unused resources

Expansion

• Rising employment rate and wages

• Rising consumer spending

• Growing inflation, GDP and economic growth

• Rising production

• Rising interest rates

What causes a contraction in demand

Rise of prices

What causes a expansion of demand

Fall of prices

What type of change in demand is this

Price change

What type of change in demand is this

Non-price change

What can change demand

• Income

• Change in consumer taste and preference

• Size of population

• Substitute good

• Price expectations in the future

Equilibrium

The intersection between the supply and demand curve, or, when the injections = leakages

Production (five sector model)

When firms use the resources of households to produce goods and services

Consumption (five sector model)

When households use their income to buy various goods and services

Relationship between consumers and buisnesses

Interdependence

Interdependent

When a sector cannot survive without another sector (e.g. businesses would not survive without consumers buying their goods and services)

Financial sector (thirds sector)

Financial institutes (e.g. banks) that act as intermediaries between savers and borrowers

What is something unique that the government sector does (five sector model)

Manages the economy and ensures that there is not too many injections or leakages through fiscal policy

Overseas sector

A global influence upon a nation’s economy consisting of imports (the buying of overseas goods or services) and exports (the selling of Australian goods or services)

What happens when injections are greater than leakages

Economic growth will occur and the economy will expand

What happens when leakages are greater than injections

The economy will experience economic decline and will contract

Relationship between the government sector and financial sector

• Monitors the financial service industry (makes sure it follows the law)

• Monitors the provision of financial services (ensures that it is accurate and fair)

• Provides consumer protection in financial services (protects from unfair or unsafe financial products)

The role of the financial sector in facilitating business investment

• Act as intermediaries between the savers and the borrowers in an economy

• Households deposit money (savings) and the financial sector invests it out to businesses for business investment/to expand the business (investments)

Why do recessions occur

Lack of spending