Economics Prelim Topic 1- Introduction to Economics

What is economics about?

Finding ways to answer the questions: what to produce, how much to produce, how to produce, and how to distribute production

What is the economic problem?

The problem of scarcity, there are an unlimited amount of consumer and community wants but limited resources to fulfill them. Hence, individuals, businesses and governments must make choices and sacrifices

Why is there a need for choice for individuals and society?

Because whenever a choice is made to satisfy a want, the opportunity to satisfy an alternative want is given up. Eg. going on a holiday or saving for a house.

What is opportunity cost?

It relates to the wants left unsatisfied when others are fulfilled, so the next best thing that could be done/ brought if the particular thing was not brought.

What is a production possibility frontier (PPF)?

A graphical representation of all the possible combinations of the product of two goods or services that the economy can produce at any given time. It can be used to demonstrate opportunity cost.

What are the assumptions of a PPF?

That only two goods can be produced, at each point all resources are fully employed, the level of technology is fixed, and the amount of resources is fixed but transferable

What happens when new technology is introduced?

When this new technology is introduced, more efficient methods of production are introduced. This means that a higher quantity of goods will be produced with the same resources. It is represented by an outwards shift of the PPF

What are the effects of new resources on the PPF?

The PPF is changed by anything that increases the inputs available for production. It pushes the PPF outward.

How can new resources be introduced?

Through the discovery of new resources or the expansion of the population through immigration.

What is unemployment in terms of production?

When resources are not fully employed. This situation does not actually change the PPF but changes the position where we are in relation to it.

What does unemployment indicate for production?

That there is an inefficient allocation of resources, and we are not achieving maximum satisfaction of wants with minimum opportunity cost. In summary, unemployed resources means that output is less than it could be.

What are consumer goods and services?

Items produced for the immediate satisfaction of individual and community wants and needs.

What are capital goods?

Items that have not been produced for immediate consumption but will be used for the production of other goods.

How can opportunity cost be calculated using the PPF?

By the formula: change in good lost ➗change in goods gained. Eg. Going from production of 150 cars and 50 motorbikes to 100 cars and 100 motorbikes. Therefore, the opportunity cost of each additional motorbike is one car.

Why would a PPF pivot?

If an economy’s ability to produce only one specific good changes, but the ability to change the other good remains the same.

How can you tell that resources are being underemployed a PPF?

If the point of production is anywhere within the line on the graph, instead of sitting on it, that means resources are being underemployed.

What economic factors influence decision making for individuals, and how do individuals influence the economy?

Education (and therefore income), as generally the higher the level of education, the greater the income, prices, scarcity of resources, work, retirement, and opportunity cost (often saving vs spending).

How might businesses influence decision making?

Pricing, production, resource use and industrial relations.

How might governments influence decision making?

Allocation of resources, redistribution of wealth and tax, policies, regulation of economic behaviour, influencing the decisions of consumers and businesses.

How does distribution occur in a market economy?

Individuals are paid money in exchange for their resources. These individuals will use these funds to purchase goods and services.

How does exchange occur in a market economy?

Money is used as a medium of exchange.

How does distribution occur in a planned (command) economy?

The government allocates goods and services towards its people, usually in rations.

How does exchange occur in a command economy?

Through barter (non cash exchange of goods).

What are some advantages of a market economy?

It is easier to determine the value of goods and services, greater innovation, and greater consumer choice.

What are some disadvantages of a market economy?

Wealth inequality (=unequal distribution of resources), monopolies and market failures.

What are some advantages of a command economy?

Equal distribution of goods and services, focused national priorities.

What are some disadvantages of a command economy?

It is difficult to determine the exchange rates of goods and services, less consumer choice, less innovation.

What income provisions are there?

Income received is dependent on the value of input.

What is taxation?

A redistribution of wealth

What does the government spend taxes on?

Community wants

What is the business cycle?

The fluctuations of economic activity over time

What are the stages of the business cycle?

Expansion, peak, contraction, trough.

What occurs during expansion?

GDP increases, jobs increase, consumer spending rises.

What occurs during a peak?

Economic growth reaches its highest and maximum point. GDP, employment and consumer spending hit their highest levels, factories operate at their maximum level and the labour market is at its highest.

What occurs during a contraction?

GDP decreases, production slows down and unemployment rises as the demand for goods and services drops.

What occurs during a trough?

GDP, production and employment are at their lowest.

How is the circular flow of income present for individuals?

They demand goods and services, and supply labour and resources

How do businesses contribute to the circular flow of income?

They demand labour and resources, and supply goods and services.

How do financial institutes contribute to the circular flow of income?

They collect money as savings, and spend money as investments into businesses.

How do governments contribute to the circular flow of income?

They collect taxes, and supply collective goods.

How do international bodies contribute to the circular flow of income?

They buy imported goods, and sell exported goods.

What is equilibrium?

When leakages (money not being spent in the economy) are equal to injections (money going into the economy). S+T+M = I+G+X

What are leakages in the circular flow of income?

Savings (S), Taxation (T) and Imports (M).

What are injections in the circular flow of income?

Investments (I), Government spending (G) and Exports (X).

When is an economy in downturn?

When leakages are greater than injections. S+T+M > I+G+X

What are the effects of a downturn?

Over time, individuals will have less to save, spend on overseas imports or have collected as taxes.

When is an economy in upturn?

When injections are greater than leakages. I+G+X > S+T+M

What are the five sectors in the circular flow of income model?

Individuals, businesses, financial institutes, governments, international trade and financial flows.

What does the private sector include?

Individuals, businesses and financial institutes.

What does the government represent in our economy?

The public sector.