Economics

The Basic Economic Problem & Economic Flaws

What is the economic problem?

Is scarcity based on unlimited wants and limited resources, leading to choices about how to allocate resources efficiently, with opportuning costs incurred.

What is an economic system?

is the organizational and institutional pattern through which choices are made about which wants to satisfy, and how to allocate resources to do this.

Define opportunity cost

When having to choose the next best alternative due to their not being enough of everything to go around.

Production and possibility curve/frontier

Is a curve depicting all maximum output/possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.

What happens inside the PPC curve

Represent inefficient use of resources (unemployment/spare capacity)

What happens outside the PPC curve

Points outside are currently unattainable given existing resources and technology, they require growth in resources, improved technology, or productivity to reach.

What is the paradox of thrift

Is an example of the fallacy of composition, the idea that what is true of the parts must always be true of the whole.

What do leakages represent in the 5-sector circular flow of income model

Leakages represent money leaving in an open economy, the leakages are S + T + M

What do injections represent in the 5-sector circular flow of income model

Injections is money entering economy. The injections are I + G + X

Define aggregate demand

Total amount of demand for goods and services produced in an economy

Define aggregate supply

Total number of goods and services that producers make and are willing to sell at a certain price within a certain time.

Economic Indicators

• CPI (consumer price index)

• Unemployment

• GDP growth

• Inflation

What’s CPI?

Change in prices of goods and services over time, used to track inflation and the cost of living (CPI inflation of 2.3%)

What’s GDP growth?

The increase in the value of goods and services produced by an economy over time, total output (3.4%)

What’s unemployment

Individuals of working age unable to find a job (falling unemployment/rising unemployment rate 5.6%)

The economic theory of paradox thrift

When people try to save more during a trough, their reduced spending lowers overall demand and output, causing total savings in the economy to fall rather than rise.

Define Equilibrium in Supply and Demand

Where supply = demand

Define Equilibrium in Injections and Leakages

Economy is stable when: Injections = Leakages

The PPC phases

• Recovery growth resumes phase

• Peak/Boom phase - high growth, low employment, maximum output

• Slowdown/contraction - economic downturn

• Trough - lowest point

Define Monetary Policy (RBA)

Control of interest rates (cash rate) to influence the economy.

Define Fiscal Policy

Government use of:

• Spending

• Taxation

to influence a country's economic activity, including growth, employment, and inflation.

Types of Fiscal Policy

• Expansionary - Increase spending → boost economy

• Contractionary - Reducing spending → slow inflation

5 sector equation

Y = C + I + G + (X − M)

Fiscal & Monetary Responses - in a trough

Increased spending and lower interest rates—to boost aggregate demand and help lift the economy out of low GDP and high unemployment.

Fiscal & Monetary Responses - in a peak

Reducing spending and raising interest rates—to cool an overheated economy and bring inflation back into the desired range.