VCE Economics Units 3 & 4 Flashcards

Comprehensive vocabulary flashcards covering microeconomic fundamentals, macroeconomic goals, external stability, monetary policy, budgetary policy, and aggregate supply policies from the lecture notes.

Microeconomics

An economy on a small scale involving buyers and sellers in specific industries or sectors.

Relative Scarcity

The economic concept of having unlimited needs and wants but limited resources available to satisfy them.

Opportunity Cost

The value forgone when choosing the next best alternative.

Material Living Standards

The ability of households to access goods and services.

Non-Material Living Standards

Factors relating to the quality of life that are unrelated to physical possessions.

Market Capitalism

An economic system where resource allocation decisions are made predominantly by private owners rather than the government.

Market Socialism

An economic system where resource allocation decisions are made by the government rather than private owners.

Production Possibility Frontier (PPF)

A diagram displaying different output options based on resource allocation; points along the frontier represent maximum efficiency, points inside are inefficient, and points outside represent future possibilities.

Allocative Efficiency

A situation where resources are used to produce the specific combination of goods and services that maximizes society's living standards.

Technical Efficiency

Achieving the lowest-cost production methods while minimizing wastage.

Dynamic Efficiency

The speed and ease with which resources can be reallocated to meet changing consumer needs.

Intertemporal Efficiency

Achieving a balanced allocation of resources between current consumption and future consumption.

Consumer Sovereignty

The principle that consumers of goods and services, rather than governments, dictate how scarce resources will be allocated.

Law of Demand

An economic law stating that as price increases, the quantity demanded decreases.

Diminishing Marginal Utility

The economic principle that over successive purchases, a product provides less additional satisfaction, leading to lower willingness to purchase at the same price.

Disposable Income

Total household income minus tax plus welfare payments.

Discretionary Income

Disposable income remaining after paying for necessities.

Law of Supply

An economic law stating that as the price of a good increases, the quantity supplied increases.

Market Price Mechanism

The operation of the market system involving negotiated equilibrium, where relative prices change over time to guide firms in allocating resources.

Relative Price

The comparison of value between two products, which guides changes in resource allocation based on profitability.

Market Failure

A situation where the operation of a market results in an inefficient allocation of resources and fails to maximize the satisfaction of society's needs and wants.

Public Goods

Goods or services that provide positive externalities and are non-rivalrous and non-excludable.

Asymmetric Information

A market failure occurring when either the buyer or the seller possesses more knowledge about the good or service being transacted than the other party.

Common Access Resources

Environmental resources that are rivalrous and non-excludable, which can lead to overconsumption and intertemporal inefficiency if not sustainably managed.

Government Failure

A situation where government intervention intended to resolve market failure unintentionally makes resource allocation less efficient.

Price Ceiling

A government-legislated maximum price set below the market equilibrium, intended to make a product accessible but frequently causing shortages and black markets.

Price Floor

A government-legislated minimum price set above the market equilibrium, intended to boost incomes but frequently creating surpluses and unemployment.

Price Elasticity of Demand (PED)

A measure of the responsiveness of the quantity demanded of a good or service to a change in its price.

Price Elasticity of Supply (PES)

A measure of the responsiveness of the quantity supplied of a good or service to a change in its price.

Gross Domestic Product (GDP)

The dollar value of all finished goods and services produced within a nation over a specific period of time.

Real GDP Per Capita

An approximate measure of living standards reflecting a nation's real GDP, income, and expenditure adjusted for population size.

The Business Cycle

The regular fluctuations in the rate of economic growth (real GDP) experienced by an economy over time.

Aggregate Demand (AD)

The total planned expenditure on Australian-made final goods and services over a period of time, defined by $AD = C + I + G + X - M$.

Private Consumption Spending ($C$)

Expenditure by households on goods and services, representing the largest component of Aggregate Demand at approximately $60\%$.

Private Investment Spending ($I$)

Expenditure by private businesses on newly produced capital goods, constituting the most volatile component of Aggregate Demand at roughly $15\%$ to $20\%$.

Government Spending ($G$)

Expenditure by the government consisting of day-to-day operational spending ($G_1$) and capital investment projects ($G_2$), usually comprising $20\%$ of Aggregate Demand.

Aggregate Supply (AS)

The total value of goods and services that all producers in an economy are willing and able to supply over a given time period.

Productive Capacity

The maximum possible volume of goods and services that an economy can produce when all available resources are fully utilized.

Goal of Strong and Sustainable Economic Growth

The fastest rate of increase in real GDP (an unofficial target of $3\%$ to $3.5\%$ annually) that generates strong employment growth without creating excessive inflationary, external, or environmental pressures.

Goal of Low Inflation

Achieving a sustained increase in the general consumer price level of between $2\%$ and $3\%$ per year on average over the medium term, as measured by the Consumer Price Index.

Consumer Price Index (CPI)

The primary measure of headline inflation in Australia, tracking price changes of a representative basket of over $100{,}000$ goods and services purchased by metropolitan households.

Trimmed Mean

An underlying core inflation measure calculated by removing the top and bottom $15\%$ of price changes from the CPI basket.

Weighted Median

An underlying core inflation measure calculated by identifying the inflation rate of the expenditure class located at the middle of the weighted price distribution.

Goal of Full Employment

The lowest possible unemployment rate where there is no cyclical unemployment and the rate does not drop below the NAIRU (estimated at approximately $4.5\%$).

NAIRU

The Non-Accelerating Inflation Rate of Unemployment; the minimum level of unemployment possible before wage and price inflation begins to accelerate.

Structural Unemployment

Unemployment resulting from a mismatch between the skills held by job seekers and the skills demanded by employers.

Cyclical Unemployment

Unemployment that occurs due to a downturn or deficiency in the level of Aggregate Demand and economic activity across the business cycle.

Participation Rate

The percentage of the population aged $15$ and over who are members of the labor force, calculated as $\frac{\text{Labor Force}}{\text{Working Age Population}} \times 100$.

Under-Utilization Rate

The proportion of the labor force that is either completely unemployed or underemployed (employed but wishing to work more hours).

Comparative Cost Advantage

The economic theory stating that a nation should specialize in producing goods and services where its opportunity cost is lowest or its relative cost advantage is greatest.

Balance of Payments (BOP)

An accounting record of all financial transactions between Australian residents and the rest of the world over a specified period of time, which sums to zero.

Current Account

The section of the Balance of Payments recording the net flows of goods, services, primary income, and secondary income between Australia and overseas.

Net Foreign Debt (NFD)

The total amount of money borrowed and owed overseas by Australian entities minus the total amount lent or invested abroad by Australians.

Terms of Trade (TOT)

An index measuring the ratio of the average prices received for a nation's exports relative to the average prices paid for its imports, calculated as $\frac{\text{Export Price Index}}{\text{Import Price Index}} \times 100$.

Monetary Policy

A macroeconomic Aggregate Demand management policy implemented by the Reserve Bank of Australia involving adjustments to the target cash rate.

Cash Rate

The interest rate charged on overnight loans between financial institutions in the short-term money market.

Open Market Operations (OMO)

The buying and selling of government securities or repurchase agreements by the RBA in the short-term money market to manage liquidity and keep the cash rate at its target.

Quantitative Easing

An unconventional monetary policy tool where the central bank purchases longer-term government bonds and financial assets directly from the private market to inject cash and lower yields.

Budgetary Policy

An Aggregate Demand management strategy administered by the federal government that alters the composition and level of government receipts and outlays for the financial year.

Direct Tax

A tax levied directly upon the income or wealth of individuals and companies, making up nearly $70\%$ of all Australian government budget receipts.

Indirect Tax

A tax levied on the purchase of goods and services, added to the final sale price, which accounts for approximately $24\%$ of federal budget receipts.

Crowding Out

A situation where government borrowing from the domestic market to fund a budget deficit increases demand for credit, driving up domestic interest rates and dampening private sector investment.

Automatic Stabilisers

Counter-cyclical budget components (such as income tax and welfare payments) that automatically adjust with changes in the level of economic activity without deliberate legislative intervention.

Discretionary Stabilisers

Deliberate policy actions and changes to budget outlays and taxation rates announced by the government to influence economic activity.

Aggregate Supply Policies

Government microeconomic reform policies designed to improve supply-side efficiency, expand productive capacity, and increase the quantity and quality of production factors.

Safeguard Mechanism

A market-based environmental policy placing declining emissions baselines (currently falling by $4.9\%$ annually) on facilities emitting over $100{,}000$ tonnes of $\text{CO}_2$ per year.