Key Economic Terms and Concepts

Want

something not necessary for survival. eg sports car

Need

something necessary for survival. eg vegetables

Economic Problem

unlimited wants, limited resources aka SCARCITY

Opportunity Cost

the item you forgo for another item of equal value. $10,000 car or $10,000 purse

Economics

the study of the economic problem

Natural Resources

All resources supplied from the earth eg water, oil

Human Resources

(labour) All resources supplied by humans eg labour, intellect

Capital Resources

All resources that assist the production of goods + services eg drill machine

Enterprise

The coordination and management of the other resources

Microeconomics

Understanding how consumers and producers make decisions. includes theory of Supply and Demand

Macroeconomics

Understanding the performance of the whole economy, including total production, employment, inflation

GDP (Gross Domestic Product)

Total market value of goods and services produced in an economy within a year.

Relative Scarcity

Resources are scarce compared to society’s unlimited needs and wants.

Trade Off

When something is given up for something else

The three economic questions

What to produce? How to produce? For whom to produce?

Business Cycle

Fluctuations in the economy in terms of output and growth measured by changes in Real GDP every quarter.

Peak

When an economy is producing its maximum, demand exceeds supply, 'Unsustainable growth', and maximum consumer spending and inflation.

Recession

When demand and supply fall, profit decline, unemployment rises, income cuts, and decrease in GDP and inflation.

Trough

Lowest point of GDP, and GDP starts to grow again.

Depression

When there is high unemployment, decrease in inflation and price of goods, and decrease in production.

Expansion

When there is an increase in employment, consumer spending and investment. Increase in prices, GDP and inflation. Increased consumer confidence, and economic growth.

Economics

The study of the economic problem.

PPF (Production Possibilities Frontier)

Shows all production possibilities, where points on it represent the current production.

What does the term 'frontier' refer to in economics?

The frontier refers to the maximum possible production of goods with the given resources.

What does it mean if production is below the frontier?

It indicates underemployment of resources.

What does it mean if production is above the frontier?

It is impossible to achieve with the current resources.

What causes a shift on the production frontier?

A shift on the frontier is the result of technological advancement or an increase in available resources.

Law of Opportunity Cost

Demonstrated by the PPF model, it states that as you increase the production of one good, the opportunity cost of another good increases.

Circular flow of income

Demonstrates the flow of income through an economy.

Households (in Circular flow)

Provide money for goods and services to firms, Provide the factors of production to firms, Give money as savings to financial institutions, Give money as taxes to the government, Provide money for imports overseas.

Firms (in Circular flow)

Give goods and services to households, Give money as income to households, Receive money as investments from financial institutions, Receive money as government spending from the government, Receive money from exports overseas.

Leakages

When money exits the economy. This includes consumer savings to financial institutions, taxes to the government, and money given for imports from overseas.

Injections

When money enters the economy. This includes investments from financial institutions, governments spending from the government, and money received from exports sent overseas.

Factor Market

Households give factors of production for income from firms (DR WISP).

Product Market

Households give money to purchase goods and services from households.

GDP

Market value of all finished goods and services produced within a country within a year; Only counts products produced that year; Only counts products that won't be sold again as another product.

Nominal GDP

Increases with inflation.

Real GDP

Increases when more goods are produced and sold or when higher value goods are sold. It controls for inflation by measuring different years with the same prices, eg 1950-2015 w/ 2009 prices.

PER CAPITA

Divides Real GDP by population, with dips showing recessions. Per capita is used to measure standard of living. GDP per capita misses distribution of wealth but is meant to show the average wealth per person.

Standard of Living

Higher Real GDP per capita = better standard of living.

Importance of GDP

Shows growth or decline in economy; Helps understand living standards.

Law of Supply

As the price of a good or service increases, the quantity supplied by producers increases.

Law of Demand

As the price of a good or service increases, the quantity demanded by consumers decreases.

Equilibrium

When the quantity demanded by consumers = the quantity supplied by producers.