Economics term 2

what does economics study

Studies the decisions made by individuals, households, businesses, governments and other groups about how scarce resources are allocating in attempting to satisfy unlimited needs and wants

what is economics the study of

choices

who is part of the economy

individuals-consumers

businesses- producers

government- local, federal and state

What are goods

Tangible items that satisfy needs and wants- they can be seen and touched

what are services

An intangible activity that satisfies needs and wants- it does not result in ownership

What are the types of goods

• economic goods

• free goods

• luxury goods

• essential goods

What is scarcity

The economic problem of having unlimited needs and wants but limited resources that can be used to achieve them

opportunity cost

Each and every time a choice is made there is something given up or foregone

This is the opportunity cost of the decision

-The next best alternative given up when a choice is made

What are factors of production (or resources)

• resources that are the building blocks of the economy

• what people use to produce goods and services

What are the four factors of production

Land, labour, capital and entrepreneurship

What is land

All of the natural resources found on the planet e.g. oil, water, timber

What is labour

The physical effort put into making goods/providing services e.g. artist, mechanic, nurse

What is capital

Any human-created resource used to produce other goods and services

What are the two types of capital

human and physical

what is physical capital

physical human-made stuff e.g. buildings, machinery, equipment

What is human capital

Knowledge, skills and experience of individuals which can be used to earn income for the business

What is entrepreneurship

The process of launching and running a business in order to make money e.g. taking risks, new ideas, making profit

What is the basic economic problem

How to allocate finite resources, given unlimited needs and wants.

This forces choices to be made

1. what to produce

2. how much to produce/what price

3. how to produce

4. whom to produce

What is a production possibility frontier (PPF)

A curve depicting the various combinations of two products that can be produced when all the available resources are fully and efficiently used

What is the ceteris paribus assumption

-it means all other influencing factors are held constant

What are the assumptions of a PPF

• the amount of resources (factors of production) in an economy is fixed, but these resources can be transferred from one use to another

• Only two goods are being produced

• the resources are fully and efficiently utilised

• resources are not always equally efficient in production of all products

• the level of technology stays the same

What are the steps for creating a PPF

1. Draw and label the axes

2. Determine an appropriate scale for each

3. Plot each of the possibilities for goods A and B

4. Create a curve connecting each of the points

What does GDP stand for

Gross domestic product

What is GDP

a measure of how much production (or output) an economy makes each year.

Monetary value of good produced + Monetary value of services provided equals?

GDP

What does the five sector flow model represent?

The flow of resources between the different stakeholders or of “sectors” within the economy.

What does the 5 sector circular flow model tell us

• a basic way of understanding how firms and households trade with each other

• the arrows represent the flow of income within the economy

• shows how GDP can be created

The government sector

the government also holds significant power within an economy through two measures:

• taxing the populace (T)

• Spending the money back into the economy (G)

How is the Australian government involved in the economy

• taking population

• education

• roads

• beaches

• housing

• imports/exports

• medicare

What contributes to having a high GDP

Engaging in more trade, higher population, having access to more resources, higher incomes

How does having a higher income contribute to having a high GDP

Higher demand for goods and services, more people to spend money and boost the economy

How does having higher incomes contribute to having a high GDP

increases spending in the economy, factors of production are more readily available

Government intervention- what are the three different approaches to the economic role of the government

Free market, centrally planned/command, mixed economy

What is free market

The government doesn’t interfere with the market system

What is centrally planned /command

Decisions on what to produce, how to produce and for whom are made by the government

What is mixed economy?

the market allocates good and services, but the government intervenes to provide products that are not provided by the private sector (aka public goods) and regulates some parts of production (e.g. laws)

What type of economy do we have in Australia

Mixed economy

The financial sector

Investment occurs when a private firm or household allocates income toward firms production with the hope that it will generate more back to them in the future

The external sector

Almost every economy in the world trades with other economies. This means that domestic firms and households and as such income moves between different economies

what is an export

A good or service that is produced domestically and sold offshore

What is an import

A good or service that is produced offshore and consumed domestically

What is the social cost

Costs incurred by society from the consumption (or production) of a good

What is the social benefit

Benefits obtained by society from the consumption (or production) of a good

What choices to firms often make without considering the social cost or benefit

• what to produce

• how to produce

• how many to produce

• for whom to produce

What is demand

the quantity consumers will accept of a good or service at a given price

What is the law of demand

There is an inverse relationship between the price and the quantity demanded

As price increases, quantity demand decreases

as price decreases, quantity demand decreases

What is supply

The quantity of a good or service that is available to consumers at a given time

What is the law of supply

There is a positive relationship between the price and the quantity supplied

as the price of a good or service increases, producers will supply more

What is shortage (excess demand)

Occurs when the quantity demanded exceeds the quantity supplied at the current price

Competition amongst buyers eventually bids up the price until equilibrium is reached

What is surplus (excess supply)

Occurs when the quantity supplied exceeds the quantity demanded at the current price

Competiton amongst producers eventually causes the price to decline until equilibrium is reached

What is equilibrium

The demand and supply are balanced and equal to each other

Reaching equilibrium

• The market price will adjust until equilibrium is reached

• if price is too high→ there will be a surplus→ price comes down until equilibrium

• If the price is too low → there will be a shortage→ price goes up until equilibrium

Graphing surplus

• if producers (supply) sets a price too high, consumers (demand) will not purchase many

• this creates a surplus (Q1-Q2)

• The only way to achieve the equilibrium quantity is to decrease the price

Graphing shortage

• if producers (supply) sets a price too low, consumers (demand) will wish to purchase more than available

• this creates a shortage (Q1-Q2)

• the only way to achieve the equilibrium quantity is to increase the price

what is at the top of the graph

surplus

What is at the bottom of the graph

shortage

What is some important language

• changes in price will cause movements along the curves

• other factors shift the curves

what are the reasons for a shift in demand (demand side factors)

1. Change in incomes

2. Price of substitutes

3. Price of complements

4. Changes in tastes and preferences

Change in income

• as consumers earn higher income, the demand for most goods and services will increase (outward shift)

• As consumers earn less money, the demand for most goods and services will decrease (inward shift)

The price of substitutes

• substitutes are other goods or services which consumers can choose instead of another

• if there is a substitute product, demand for an item may be influenced by the price of the substitute

Price of complements

• complements are goods or services which consumers will likely buy if/when we buy something else. they are products which go well together

• the demand for an item will increase or decrease if the price of a complementary good or service increases or decreases

Changes in tastes and preferences

As consumers tastes, preferences and attitudes about products change, so does the quantity demanded

What are the reasons for shift in supply (supply side factors)

1. Change in production technology

2. The costs of factors of production/inputs/resources

3. Expectations

4. Weather events and International events (Domestic and international)

Change in production technology

If firms have more efficient (better, cheaper, quicker) technology/capital firms are willing and able to supply more at a given price (e.g. new machinery, fertiliser, robots)

Cost of factors of production/ inputs/resources

If the price of an input (factor of production) changes the cost of producing the product will change and therefore affect supply

Expectations

• if firms suspect that they will sell more in the future, they will therefore produce more

• if they suspect sales to fall, they will reduce production and supply of the good or service

Weather, international and domestic events

• natural disaster drought, cyclone, flood, war, economic instability can all have an impact on supply

What is the movement along the curve determined by and an example from both supply and demand

changes in price for example

demand if bananas go from $2 to $3 people buy fewer bananas thats a movement up the curve

supply if the price of wheat rises farmers will supply more this is a movement up the same curve

shift in demand

price reacts to that new level of demand

shift in supply

price reacts to that new level of supply

How do you write about shifts

ISAPE paragraphs

what does ISAPE stand for

Identify

Shift

Analyse

Price

Equilibrium

What is the sentence starters for an Isape paragraph

The increase in (reason for supply or demand shift) has caused a shift

The demand/supply curve has shifted inwards/outwards

The increase/decrease has caused a shortage/surplus

The price of ___ has increased/decreased

E1 shifts to E2, P1 increase/decreases to P2 and Q1 increases/decreases to Q2

what do you write in the introduction of a long response

Reword the question and state was has changed

What is a sentence you can write in your intro

There have been many positive and negative outcomes of this decision

What do you include in your analysis

Showing and explaining what the sources are

Using IQTAPE when you see a graph

No emotion/positive/negative impacts

What do you include in the evaluation

Short term and long-term impacts on households and firms

How do you start an evaluation paragraph

The effectiveness of ___ can be further evaluated by examining their impacts on households and firms.

What should you refer to/draw in your evaluation

The circular flow model

what do you include in your decision paragraph

if what you were talking about has been effective or not

if it is effective state the short-term risks

if it is not effective state the short-term benefits

What words should you use when u make your overall decision

justified and essential

What does IQTAPE stand for

Identify

Quote

Transform

Anomalies

Patterns

Explain

IQTAPE sentence starters

A key element of analysis is the data presented in source _, which illustrates

The graph shows that… (quote most recent data)

transform the data into a percentage from the previous one

note any anomalies

suggest any patterns or trends (could be a seasonal pattern or that certain years were steady or fluctuating)

Explain what factors might explain the changes