Economics Year 11 Term 1

Economics basic concepts

1st economic question

What goods and services should be produced?

2nd economic question

How should these goods and serivices be produced

3rd economic question

Who consumes these goods and services?

What is the central economic question?

Our wants are unlimited but our resources are finite.

What are the 4 factors of production?

Land, Labour, Capital and Enterprise

What are the 3 economic agents?

Households, Firms and Governments

What is opportunity cost?

The best alternative opportunity forgone when a choice is made (referred to as ‘real cost’ or ‘economic cost’). For example, being unable to study chemistry because you chose to study economics

What is meant by ‘National Income’?

Measured by the value of output of goods or services, or expenditure by households on goods and services.

What is meant by ‘Real National Income’?

Considered effects of inflation

What is meant by ‘Real National Income: per capitia’?

Takes into account individual welfare rather than a whole economies monetary growth

What is meant by ‘Economic development’?

Measure of welfare via monetary, health and social indicators (HDI or Human Development Index)

What is scarcity?

Scarcty is the concept of having limited resources but having unlimited wants. It drives relitive scarcity and other economic factors

What is ‘Market Mechanism’

The interaction of the forces of demand and supply to determine the price at which a commodity is sold

What is ‘Ceteris Paribus’?

A latin phrase that means ‘other things being equal’

What is a ‘Trade off’?

Trading off the costs against the benefits (cost benefit analysis)

What does a PPF curve show?

1. The maximum possible production of 2 goods/services with given factors of production (macro)

2. The various combinations of 2 good/services that can be produced with given factors of production (micro)

What does the slope indicate on a PPC curve?

The opportunity cost of producing one good vs the other

What does the shape of the curve on a PPC indicate?

Increasing, decreasing or constant costs

What is the law of ‘Diminishing Returns’?

The marginal output of one item diminishes as more resources are allocated to it. Not all problems can be solved by shifting production.

What is ‘customer sovereignty’?

Consumers determine the pattern of production through spending.

What are ‘economic indicators’?

economic variables which portray a predictable course of economic activity

What is government intervention?

Action by the government affecting economic activity + resource allocation

What are the incomes that each factor of production produces?

Labour - Wages

Capital - Interest

Land/natural resources - Rent

Enterpreneurs - Profit

What are the symbols for the injections and leakages in the 5 sector model?

y = Income

c = Consumer expediture

s = Saving

i = Investment expediture

t = Taxes

g = Government expediture

m = Imports

x = Exports

What are the 5 - sectors of a CFI?

Households, firms, financial, government and foreign/overseas

What do leakages represent?

Money leaking an economy, causing contractional activity

What do Injections represent?

Money entering an economy, stimulating activity.

What are the equations for government surplus and deficit?

• Surplus (T>G

• Deficit (G>T)

When Net exports (x-m) is positive or negative what is it?

• Positive (Surplus)

• Negative (Deficit)

What are the equations for expansion and contraction in the economy’s?

• Expansion: Injections (I, G, X) > withdrawals (S, T, M)

• Contraction: Withdrawals > Injections

What is Aggregate demand?

The total expenditiure on the goods and services produced in an economy over a period of time.

What is the term when the demand of goods and services is constant?

Equilibrium

What is disposable income?

How much money households have to spend; a main factor of supply and demand.

What does aggregate mean?

Aggregate means total or to bring everything together.

What is the equation for aggregate demand?

AD = C + G + I + Xn

What is GDP_(p)

Total value added from G&S produced

What is GDP_(I)

Total income generator by employees & businesses (Taxes - Subsidies)

What is GDP_(E)

Total value of expenditure by consumers businesses & governments on goods services

What is aggregate supply?

Total supply of good produced within an economy at a given price level in a given period. AKA total output of an economy.

What is Real GDP

GDP over a period of time, adjusted for inflation

What is a balanced budget?

Revenue is equal to current expenditure, T = G

What is a deficit budget?

Revenue is less than expenditure, T < G

What is a surplus budget?

Revenue is greater than expenditure, T > G

What is fiscal policy?

Measure undertaken by the government to raise revenue.

What is internal stability?

State of economy with full employment and price stability.

What is monetary policy?

Measure implemented through the RBA to bring changes in aggregate demand by influencing money supply via interest rates.