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Economic Problem

Satisfying unlimited wants with limited resources.

Economic Choices

What to produce, how to produce, how much to produce, how to distribute what is produced

Utility

The satisfaction or pleasure that individuals derive from the consumption of goods and services

Individual want

Desires of each person

Collective want

Wants of the whole community

Opportunity Cost

Represents alternative use of resources - the cost of satisfying one want over an alternative (real cost or economic cost)

Production possibility frontier

Graphical representation of all possible combinations of production of 2 goods/services at any given time

Outward shift of a PPF

New technology (efficiency) or new resources

If the point is below the curve

Unused resources

Consumer goods and services

items produced for immediate satisfaction of individual and community needs and wants

Capital goods

Items that haven't been produced for immediate consumption but will be used for production of other goods

An economy that focuses more on the production of ______ goods will experience a higher level of economic growth in the future.

capital

If individuals choose to save more resources, they experience ______ living standards in the present, though will eventually experience ______ in the future.

lower, higher

Businesses may choose to invest in capital and have current reduced ______ ______, higher ______ and lower ______, though will experience increased ______ and potential ______ in the future.

cash flow, risk, profit, production, growth

Governments may choose to increase their spending and therefore have increased ______ ______ ______ at the present, though will later have an overall improved ______ ______ ______ in their area and increased ______ ______.

levels of debt, quality of life, economic growth

Governments influence the economic choices of individuals and businesses through

taxes (e.g. smoking), tax rebates (e.g. private health care) and subsidies (e.g. solar panels)

Factors of production

Any resource that can be used in the production of goods and services. The four main types are land, labour, capital and enterprise

Natural resources

All the resources provided by nature that are used in the production process e.g. soil, water, forests

Return for natural resources

rent

Labour

Human effort, both physical and mental, used to produce goods and services.

Return for labour

Wages: includes executive salaries, commissions, fees for professionals and the earnings of self employed people.

Capital

Is the "produces means of production". They are not produced for immediate consumption, but to be used in the production of other goods and services e.g. machinery, tools, computers

Return for capital

interest

Infrastructure

Another form of capital that is usually owned by the community as a whole e.g roads, railways, bridges, schools

Productivity

How much output produced per factor of production per unit of time. (Capital goods can increase the productivity of other resources)

Enterprise

Involves organising the factors of production for the purpose of producing goods and services.

Return for enterprise:

profit

Problem of scarcity

Resources are scarce yet their are unlimited wants.

Gross Domestic Product (GDP)

The total amount of goods and services produced in an economy in a given year. It also measures the total income of a society that is received for the production of goods and services.

Business cycle

Fluctuations in the level of economic growth due to either domestic or international factors

Peak (or boom)

when economic activity, and thus GDP growth, reaches a maximum.

Recession

The stage of the business cycle where there is decreasing economic activity, defined as two consecutive quarters (six months) of negative economic growth, that is, a fall in GDP

Impacts of business cycle during contractions & recessions

falling production of goods and services, falling levels of consumption and investment, rising unemployment, falling income levels, falling quality of life

Impacts of business cycle during expansions & cycles

Increasing production of goods and services, rising levels of consumption and investment, falling unemployment, rising income level, rising quality of life

Five sector circular flow of income model

Describes the operation of the economy and the linkages between the main sectors in the economy

Circular flow of income equation:

S + T + M = I + G + X (S: savings, T: taxation, M: imports, I: investments, G: government expenditure, X: Exports)

Financial institutions (capital market)

Third sector in the economy (made up of all the financial intermediaries that accept savings from individuals and lend them out to businesses for investment purposes)

Leakages

The items that remove money from the circular money from the circular flow of income, decreasing aggregate income and the general level of economic activity. The three leakages are savings, taxation and imports

Injections

Injections into the circular flow model of income are those flows of money that increase aggregate income and the general level of economic activity. The three injections are investment, government spending and exports

Investment

Is any current expenditure where the benefits will be obtained in the future. Most typically, this injections will involve the purchase of capital goods or the build up of stock or inventory.

Government expenditures

Is an injection in the circular flow of income. It includes all money that the government spends to provide services such as health and education

Taxation

Is the leakage from the circular flow model of income. It refers to the amount of revenue that the government obtains from different sectors and activities in the economies

Public sector

Refers to the parts of the economy that are owned or controlled by the government. It includes all tiers of the government as well as government business enterprises

Domestic sector

The combination of household, business and government sectors that operate within the political boundaries of an given economy

Equilibrium

Occurs in the circular flow of income when the sum of all the leakages is equal to the sum of the injections in an economy

Disequilibrium

Occurs when there is an inequality between the total leakages and total injections in an economy

In a disequilibrium, when injections are greater than leakages

there is an increase in economic growth

Market economy

Economic system whereby all major economic decisions are made by individuals and private firms, which are both motivated by self-interest, without government intervention

Product market

The interaction of demand for and supply of the outputs of production

Price mechanism

The process by which the forces of supply and demand interact to determine the market price at which products are sold, as well as the quantity produced.

Factor market

Market for any input into the production process including natural resources, labour, capital and enterprise

Consumer sovereignty

The manner in which consumers, through market demand, collectively determine what is produce and the quantity of production.

Competition

Pressure on business firms in a market economy to lower prices or improve the quality of output to increase their sales of goods and services to consumers

Mixed economy

An economic system where the decisions concerning production and distribution are made by a combination of market forces and government decisions

Social welfare payments

Payments administered by the government including disability pensions, age pensions and unemployment benefits

Progressive income tax

The redistribution of income to achieve a more equitable (even) sharing of produced output where higher income earners are taxed higher marginal rates and pay proportionately more tax than low income earners

Merit goods

Goods and services that are not produced in sufficient quantity by the private sector because individuals do not place sufficient value on them

Human Development Index

It is a measure of economic development. [Includes life expectancy at birth/ levels of educational attainment and material living standards]

Market economy

An economic system in which production and prices are determined by unrestricted competition between privately owned businesses.

Planned economy

An economy in which production, investment, prices, and incomes are determined centrally by the government.

Deregulation

The act or process of removing restrictions and regulations

Privatisation

The transfer of a business, industry, or service from public to private ownership and control.

Social welfare

The well-being of the entire society

Industrialised

develop industries in (a country or region) on a wide scale.

Infrastructure provision

long-term physical assets that operate in markets with high barriers to entry and enable the delivery of goods and services

Social security

monetary assistance from the state for people with an inadequate or no income

Planned obsolescence

When firms produce goods that are designed to wear out quickly, or go out of date in order to encourage consumers to make further purchases in the future

Anti-competitive behaviour

Firms that operate in markets where there are few other sellers, which diminishes consumer sovereignty

Average Propensity to Consume (APC)

The proportion of total income that is spent on consumption

Average Propensity to Save (APS)

The proportion of total income that is saved for future consumption

Marginal Propensity to Consume (MPC)

The proportion of each extra dollar earned that is spent on consumption

Marginal Propensity to Save (MPS)

The proportion of each extra dollar of earned income that is saved for future consumption

Dis-savings

Spending more than you save

Utility

Satisfaction or pleasure that individuals derive from the consumption of goods and services

Necessities

Individual desires for the basic needs of life.

Substitute

Good that consumers may choose to buy in place of another good

Complement

Good that is used in conjunction with another good

Social welfare payments

Payments made to increase incomes of individuals or families in need by the government

Industry

Collection of firms involved in making a similar range of items that usually compete with each other, such as the financial services industry or the car industry.

Niche market

A segment of a mass market for a good or service that can be defined by the specific tastes or characteristics of target customers.

Capital

The manufactured products used to produce goods and services, commonly described as the "produced means of production".

Profit motive

The process by which a business seeks to maximise profit by using the lowest-cost.combination of resources and charging the highest possible price.

Satisficing behaviour

The idea that firms will attempt to pursue a satisfactory level in all goals (profit maximisation, sales maximisation etc.) rather than maximising any single goal.

Productivity

The quantity of goods and services the economy can produce with a given amount of inputs, such as capital labour.

Internal economies of scale

The cost saving advantages that result from a firm expanding its scale of operations.They occur when a firm's output level is below the technical optimum.

Internal diseconomies of scale

The cost disadvantages specifically, the increase in marginal costs pe unit) faced by a firm as a result of the firm expanding its scale of operations beyond a certain point. The firm's output level is above the technical optimum

Technical optimum

The most efficient level of production for a firm. At this point, average costs of production are at their.lowest possible level.

External economies of scale

The advantages that accrue to a firm because of the growth of the industry in which the firm is operating. They are not the result of the firm changing its own scale of operations.

External Economies of scale

Advantages within a firm because of the growth of that industry the firm is operating in.

External Economies of scale

Are cost-saving advantages that accrue to a firm due to outside influences → not because of the firm changing its scale of operations.

External Diseconomies of scale

Result of the growth of an industry in which a firm is operating in, this can also result in a rapid growth across the entire economy

Ethical Decisions

This is when a business/firm makes decisions on their production methods and employment, are made taking into consideration of their firms impact on the broader society and environment.

Production Methods

Technology advancement has increased the productivity capacity of the economy. → uses resources more efficiently.

Demand

Quantity of a particular good or service that consumers are willing and able to purchase at various price levels at a given point in time

Individual demand

Demand of each individual consumer for a particular good or service

Market demand

Demand by all consumers for a particular good or service

Necessities

Goods or services that consumers will buy regardless of changes in their income levels. These products are less sensitive to income change.

Substitutes

Goods that consumers may choose in place of another good

Complements

Goods that are used in conjunction with another good

Technological progress

Economic measure seeking to explain changes in the level of economic output in terms of the level of innovation and technical progress