Economics 1/2

Macroeconomics

The economy as a whole on a national or worldwide scale

Microeconomics

Individual economic units, such as individuals, families, and companies

Positive economics

Factual economic statements without opinion or judgement

Normative economics

Describes economic facts while making judgements

Scarcity

Wants are infinite while resources are limited

Scarce goods

Goods for which demand would exceed supply if it was free

4 factors of production

Land, labour, capital, entrepreneurship

Economics

The study of how resources are allocated to meet the needs and wants of society.

Economic agents

Entities that participate in the economy and make economic decisions

Private sector

Consumers and businesses

Public sector

Government and government enterprises

3 economic questions

What and how much to produce, how to produce, for whom to produce

Needs vs wants

Needs are goods and services needed to survive, wants are goods and services that are desired but not essential

Opportunity cost

The value of choosing the next best forgone option

Cost benefit analysis

The total cost subtracted from the potential benefits to calculate the trade off

Sunk cost

Costs that have already been spent and cannot be recovered

Sunk cost fallacy

When individuals continue to invest in an unproductive endeavour because they’ve already spent resources on it

Traditional economies: What and how much to produce?

whatever and however much is needed

Traditional economies: How to produce?

hunting gathering or farming

Traditional economies: For whom to produce?

For yourself or your family

Market economies:What and how much to produce?

whatever is profitable and in demand

Market economies: How to produce?

in the most profitable way

Market economies:For whom to produce?

for whomever is willing to pay

Planned economies: What and how much to produce?

whatever the government decides

Planned economies: How to produce?

however the government decides

Planned economies:For whom to produce?

for the needs of the nation or as determined by the government

Mixed economies: What and how much to produce?

based on supply and demand dynamics and government regulations

Mixed economies: How to produce?

in the most efficient way with respect to government regulations

Mixed economies: For whom to produce?

for whomever can pay with respect to government regulations

Drawbacks of traditional economies

Reliance on goodwill and lack of innovation

Drawback of market economies

Prone to market failure and inequality

Drawbacks of planned economies

Lack of innovation and freedom

3 sector circular flow model 3 sectors

Household, business, government

3 sector circular flow model 4 flows

Supply of resources, payment of incomes, spending of incomes, supply of products

Material living standards

The wealth and material comfort available to an economic agent

Non material living standards

Factors not measured by monetary value

GDP abbreviation

Gross domestic product

Nominal GDP

total market value of all goods and services produced in an economy over a specified period

Real GDP

Nominal GDP adjusted for inflation

GDP per capita

Real GDP/population

5 assumptions of the traditional consumer viewpoint

Rationality, ordered preferences, informed decisions, marginal benefits, utility maximisation

Rationality

Assumes consumers act logically to maximise utility

Ordered preferences

Assumes that consumers rank their preferences of goods and services

Informed decisions

Assumes that consumers have access to relevant and accurate information

Marginal benefits assumption

Assumes consumers will only consume up to a certain amount of a good or service

Utility maximisation

Assumes consumers seek to maximise utility by consuming different goods and services

What does the gini coefficient represent?

The level of wealth or income inequality, with 1 being absolute equality and 0 being absolute inequality

What does it mean if the Lorenz curve shifts outwards?

Wealth or income distribution has become more equal

What does it mean if the Lorenz curve shifts inwards?

Wealth or income distribution has become less equal

Bounded rationality

Individuals are limited by cognitive constraints and can be influenced by factors such as others’ perceptions

Bounded willpower

Consumers lack self control leading them to make choices that are not in their long term interest

Bounded self interest

Individuals are influenced by the wellbeing of others, such as donations to charity or gifts to friends

Equation for aggregate demand

AD=C+I+G+(X-M)

C in AD equation

Consumption expenditure

I in AD equation

Investment spending by businesses

G1 in AD equation

Consumption spending by government

G2 in AD equation

Investment spending by government

X and M in AD equation

Imports and exports

ceteris paribus

Means all else equal, and assumes that all other variables remain constant

Assumptions of a perfectly competitive market

Large number of buyers and sellers in the market

Economic activity

Production, income, and expenditure across the economy

Traditional viewpoint of businesses

Maximising profit

Price discrimination definition and legal or illegal

legal, charging different customers different prices for the same products

Multibranding definition and legal or illegal

legal, marketing products under multiple distinct brand names

Cartel conduct definition and legal or illegal

Illegal, competing businesses collaborating to artificially raise prices

Predatory pricing definition and legal or illegal

Illegal, pricing products artificially to drive out competition to gain full market power

Traditional view of the government

Maximising living standards of the nation

3 macroeconomic goals

Low inflation, sustainable economic growth, full employment

Inflation goal (%)

2-3

Economic growth goal (%)

3-3.5

Unemployment goal (%)

4-5

Allocative efficiency

producing goods and services that satisfy societies wants and needs

Technical efficiency

maximising output from available resources

Dynamic Efficiency

the speed at which resources can be reallocated to produce different products

Intertemporal efficiency

allocating resources between future and current production

Market

buyers and sellers interact to negotiate for goods and services

Types of markets from most to least competitive

Pure competition, monopolistic competition, oligopoly, monopoly

Pure competition

Homogenous products, full transparency, low entry barriers

Monopolistic competition

Differentiated products, high transparency, relatively low entry barriers

Oligopoly

Reliance on brand image, high entry barriers

Monopoly

No competition, no product differentiation, high entry barriers

Demand

Willingness and ability to purchase a product

Law of demand

As price increases, demand decreases

3 effects affecting demand

Substitute effect, income effect, perceived value effect

Supply

The willingness or ability to sell a product

Law of supply

As the price increases, supply increases

5 P's of marketing

Product, price, people, place, promotion

Nudge

a gentle strategy used to alter behaviour

Economic costs of economic growth

Higher structural unemployment and inflation

Environmental costs of economic growth

Depletion of common access resources, accelerated climate change

Social costs of economic growth

Reduced leisure time, greater inequality, affluenza

5 sectors of 5 sector circular flow model

Households, businesses, government, overseas, financial

Role of financial sector

Allows investment and savings

Role of overseas sector

Allows imports and exports

4 stages of business cycle

Expansion, peak, contraction, trough

Define economic indicator

Data used to interpret the state of an economy

Example of leading indicator

Consumer confidence

Example of coincident indicator

Sales volumes

Example of lagging indicator

Unemployment rate

Benefits of HDI vs GDP

Life expectancy, education, income