Introduction to Economic Systems and the Circular Flow

Flashcards covering economic systems, the circular flow model, supply and demand principles, and economic sectors based on the lecture notes.

Main economic problem

The condition of having unlimited wants but limited resources.

Human needs

The basic requirements for survival.

Human wants

Unlimited desires for things such as luxuries, technology, and entertainment.

Karl Marx ($1818$-$1883$)

The father of socialism and communism and author of Das Kapital, who believed capitalism exploited workers.

Planned Economy

Also known as a communism or command economy, this system features strong government control, equality, and no profit motive.

Adam Smith ($1723$-$1790$)

Known as the father of capitalism, he promoted free markets in his book The Wealth of Nations ($1776$).

Market economic system

A system based on supply and demand, private ownership, profit motive, and competition where hard work is encouraged.

Mixed economy

An economic system where the government and private sector share control, combining positive aspects of capitalism and socialism.

Globalisation

The process of connecting the world's economies into one global system, allowing the free trade of goods, services, labour, and capital.

Interest

The remuneration or payment earned for providing Capital.

Rent

The remuneration or payment earned for provideing Land.

Profit

The remuneration or payment earned for Entrepreneurship.

Wages

The remuneration or payment earned for providing Labour.

Circular flow model

A simplified representation of how participants like households, businesses, and the government function within an economy.

Open economy

An economy where trade occurs both within the local economy and with foreign countries through international trade.

Closed Economy

An economy where no international trade takes place and money circulates only within the country.

Role of Households

Participants who own the factors of production, sell them to businesses, consume goods and services, and pay taxes.

Businesses/Firms

Organisations that purchase factors of production from households to provide goods and services in order to make profit.

Government/Public Sector

The sector that provides infrastructure, security, education, and healthcare by collecting taxes from households and businesses.

Market

Any place where a buyer and seller meet and agree on a price.

Factor market

The specific market where households sell factors of production to businesses.

Real flow

The movement of actual goods and services within the economy.

Money flow

The circulation of money between participants, including consumer spending and the payment of wages or rent.

Economic Good

A tangible item that is scarce and limited in supply, thus carrying a price.

Free goods

Resources like air that are available in unlimited quantities and occur naturally.

Demand

The quantity of a good or service that consumers are willing and able to purchase at a given price.

Supply

The quantity of goods or services that producers are willing and able to offer at a given price.

Market Equilibrium

Occurs when the quantity demanded equals the quantity supplied, resulting in a market-clearing price with no surplus or shortage.

Primary sector

The sector focused on extracting raw materials from the earth or sea, employing mainly unskilled workers for physical labour.

Secondary sector

The sector focused on manufacturing and processing raw materials into tangible products, employing semi-skilled workers.

Tertiary sector

The service sector providing skills to individuals and businesses, employing skilled workers and entrepreneurs.

Industry

A group of businesses that produce similar goods and services, such as mining, quarrying, or agriculture.