Pre-Q Economics - Term 2 Examinations

PPC

Production Possibility Curve

• Y Axis = Capital Goods

• X Axis = Consumer Goods

Supply V Demand

Elasticity

% Change in QD
PED = ————————-
% Change in Price

New Price - Old Price
—————————— x 100 = % Change in price
Old Price

QD - Old QD
—————— x 100 = % Change in QD
Old QD

Macroeconomics

How a national economy works as a whole.

Fiscal Policy

Involves varying the level of public expenditure and taxation to influence aggregate demand.

Expansionary Fiscal Policy

Used when:

• unemployment is high

• economy is slow/recession

Government will:

• increase spending (G ↑)

• OR reduce taxes (T ↓)

Effect:

• people have more money

• businesses earn more

• demand increases

• jobs increase

👉 Result: AD (Aggregate Demand) shifts RIGHT

Contractionary Fiscal Policy

Used when:

• inflation is too high

• economy is overheating

Government will:

• decrease spending (G ↓)

• OR increase taxes (T ↑)

Effect:

• people have less money

• spending drops

• demand falls

👉 Result: AD shifts LEFT

Problems with Fiscal Policy

• Hard to predict

• Higher taxes reduces work incentives

Government Aims

• Low & Stable inflation

• High & Stable employment

• Economic Growth

GDP

Gross Domestic Product = The measurement of the monetary value of all finished goods and services produced within a nation over a period of time.

Conflicts with Government aims

• Too much growth causes demand inflation

• Boosting employment can trigger inflation

• Increased output raises poullution

Consumer Expenditure (C)

Spending within households, holidays, foods, etc.

Monetary Policy

The manipulation of interest rates, exchange rates, and money supply, to influence AD

Expansionary Monetary Policy

• Lower interest rates - Cheaper to borrow, less return on saving, good to spend

• Quantative Easing = Printing more money to buy bonds, giving banks more money

Contractionary Monetary Policy

• Raise interest rates - More expensive to borrow, high return on savings, bad time to spend

• Government sells bonds to banks to reduce lending

Exchange rate policy

Lower interest rates reduce demand for NZD, lowering exchange rate (Cheaper exports)

Higher interest rates attract overseas investors, increase demand for NZD, raising exchange rate

Supply side policies

Used to boost AS (Aggregate Supply)

• Tax incentives

• Education and training to upskil the workforce and increase productivity

• privatisation

• competition policy to reduce prices and monopolies

Government Expenditure (G)

Total consumption and investment spending by the public sector and the government. Hospitals, public schools

Investment Expenditure (I)

The expenditure undertaken by a private sector business to expand long term productivity. New machines

Exports (X)

Money generated by selling domestic goods and services overseas. Dairy to china

Imports (M)

The outward payments made to buy overseas products. Cars and technology

Economic Growth

Occurs when GDP rises faster than Inflation

Drivers of Growth

• Factor Endowments
  - High dairy and fertile land
  

• Labour force
  - Scale and skill
  

• Labour Productivity
  - GDP / Country’s workforce
  

Advantages of Economic Growth

• More goods and services to satisfy needs and wants

• More sales and business profits

• Higher employment rates

• Better living standards

Disadvantages of Economic Growth

• Technology may take over jobs, causing unemployment

• Expansion can reduce the amount of natural resources we have

• More factory production = more pollution

Negative Economic Growth

• Total productive output shrinks

• Fewer goods and services are produced

• Living standards decline
  

Long time = Slump

Short time = Recession

Living Standards with Economic Growth

Living standards may not always increase as Country X has deprived cities, then very rich and modern cities that produce lots, contributing to GDP. Their GDP is very high, and increases more than inflation, but the country’s living standards are still low.

The role of the government (As a producer)

Providing:

• Public goods

• Merit Goods

• Public Services

• Welfare Services

Public Good

100% Needed in consumption (Defence force, police)

Merit Goods

Have social benefits but are under-consumed (Education)

Public Services

Directly provided services (Transport, ambulances)

Welfare Services

Supporting those in need of jobs and payments (JobSeeker)

Tax Burden

Measuring the proportion of tax from national income of an economy.

Good tax requierments

• Equity - Fair for everyone to have the ability to pay

• Non-discretionary - Should not be so high that people stop working

• Certainty - People know how much to pay

• Convenience - It is easy and simple to do

Reasons for tax

• Fund public expenditure

• Manage the macroeconomy

• Reduce income inequality

• encourages to buy local rather than overseas

• discourages harmful products

Total Cost (TC)

TC = FC + VC

Marginal Costs (MC)

Change in Total Cost / Change in quantity

Average Cost (AC)

TC / Total Output (Q)

Total Revenue (TR)

Price per unit (P) x Quantity sold (Q)

Average Revenue (AR)

Total Revenue (TR) / Total units sold (Q)

Break Even

Total Revenue = Total Cost

Contribution Per Unit

Contribution = Selling price (SP) - Variable cost per unit

Break even point volume

Break-even point = fixed costs / contribution per unit