Economics Review Flashcards: Micro & Macro Concepts from Lecture Notes

A comprehensive set of question-and-answer flashcards covering core micro and macro concepts, from scarcity and PPF to AD/AS, unemployment, inflation, and international trade.

What is relative scarcity?

The condition where needs and wants exceed available resources, requiring choices about how to allocate resources.

Define the Production Possibility Frontier (PPF).

A model showing the trade-offs between producing two goods with a fixed set of resources; illustrates opportunity costs and efficiency.

What are the three basic economic questions every economy faces?

What to produce, how to produce, and for whom to produce.

How are microeconomics and macroeconomics different?

Microeconomics studies individual consumers and firms and markets; macroeconomics analyzes economy-wide aggregates (e.g., unemployment, inflation, government goals).

What is the price mechanism in markets?

How prices act as signals to allocate resources through changes in demand and supply.

Explain ceteris paribus in economic analysis.

All other factors are held constant to isolate the relationship between two variables; not realistic but useful for analysis.

What does rational economic decision making assume about individuals?

That people weigh all potential costs and benefits and act to maximise utility (consumers) or profit (firms).

utility maximisation and profit maximisation

Utilities: consumers seek to maximise satisfaction; profits: firms seek to maximise profits.

What is diminishing marginal utility?

Each additional unit consumed provides less additional satisfaction than the previous one.

Name the factors of production.

Natural resources, labour, and capital.

Give examples of natural resources, labour resources, and capital resources.

Natural: water, forests, land; Labour: mental/physical effort; Capital: factories, machinery, infrastructure.

What is opportunity cost?

The value of the next best alternative forgone when a choice is made.

What is the Production Possibility Frontier used to represent besides trade-offs?

Opportunity cost and how an economy allocates scarce resources over time.

What does a point outside the PPF imply?

Unachievable with current resources; could be possible with technological progress or external borrowing (trade-offs exist).

What does a point inside the PPF indicate?

Inefficiency: resources are underutilised or unemployment exists.

What does a shift of the PPF outward signify?

An expansion of productive capacity due to discoveries, new resources, or more efficient technologies.

What is allocative efficiency on the PPF?

Producing the mix of goods that best satisfies consumer preferences; only one point on the PPF is allocatively efficient.

What is productive (technical) efficiency on the PPF?

Producing at maximum output with given resources; all points on the PPF are technically efficient.

Define dynamic efficiency and intertemporal efficiency.

Dynamic: how quickly an economy reallocates resources to reach allocative efficiency; Intertemporal: balance between current and future consumption.

What is the role of a free and perfectly competitive market?

Numerous buyers and sellers; homogeneous products; low barriers to entry/exit; full information; resources mobile; rational self-interested actors.

What is market failure?

A situation where free markets fail to allocate resources efficiently, leading to under- or over-allocation.

Name four common types of market failure.

Public goods, externalities, asymmetric information, common access resources.

What is a public good?

A non-rivalrous, non-excludable good whose free provision can lead to underallocation in a free market.

What are externalities?

Costs or benefits of a decision not borne by the decision-maker, affecting bystanders.

What is asymmetric information?

When one party has more information than another, potentially leading to market inefficiency.

What are common access resources?

Non-excludable but rivalrous resources that can be over-consumed (tragedy of the commons).

How do government interventions aim to address market failure?

Taxes, subsidies, regulations, advertising, and direct provision; may cause government failure if misapplied.

What is the law of demand?

As price falls, quantity demanded generally increases, and as price rises, quantity demanded falls (inverse relationship).

What are the income and substitution effects?

Income effect: higher prices reduce real purchasing power; substitution effect: consumers switch to cheaper alternatives as prices rise.

What causes a demand curve to shift vs. move along the curve?

Non-price determinants (shifts): income, substitutes/complements, tastes, interest rates, population, etc. Price changes cause movements along the curve (expansion/contraction).

List non-price determinants of demand.

Disposable income, prices of substitutes and complements, preferences, interest rates, population/demographics, consumer confidence.

What is disposable income?

Total income available to households to spend, calculated as earnings + government benefits − taxes.

What is the difference between disposable and discretionary income?

Disposable: total take-home income. Discretionary: income left after essential expenditures.

How do interest rates affect demand?

Higher interest rates reduce discretionary income and make credit more expensive, decreasing demand for many goods.

What is the law of supply?

Quantity supplied varies directly with the price; higher prices incentivise more production.

List non-price determinants of supply.

Costs of production, number of suppliers, technology/productivity, and climatic conditions.

What is the impact of higher production costs on supply?

Supply decreases as higher costs reduce profitability at each price point (shift left).

What affects the elasticity of demand?

Degree of necessity, availability of substitutes, proportion of income, and time.

What affects the elasticity of supply?

Spare capacity, production period, durability of goods, and ability to store inventories.

Define price elasticity of demand (PED).

The percentage change in quantity demanded divided by the percentage change in price.

Define price elasticity of supply (PES).

The percentage change in quantity supplied divided by the percentage change in price.

How do you interpret PED/PES values?

PED/S > 1 = elastic; < 1 = inelastic; = 1 = unit elastic; sign is ignored for magnitude when dealing with negative numbers.

What are the typical determinants of PED?

Necessity vs. luxury, substitutes, proportion of income, and time horizon.

What are the typical determinants of PES?

Spare capacity, production period, durability of goods, and ability to store inventory.

What does relative prices mean in resource allocation?

Prices relative to other goods, not the absolute price; changes shift resource allocation toward goods with higher relative profitability.

What is market efficiency and market failure in relation to relative prices?

Efficient markets allocate resources to where they are most valued; market failures occur when allocations are suboptimal.

Explain public goods and the free rider problem.

Public goods are non-excludable and non-rivalrous; individuals can consume without paying, leading to underproduction.

What is a common access resource and its problem?

Non-excludable but rivalrous resources that can be overused, leading to overconsumption and depletion.

What is an externality?

A spillover cost or benefit to others not borne by the decision-maker (positive or negative).

What is government intervention and what is government failure?

Policies like taxes, subsidies, regulation to improve efficiency; government failure occurs when interventions reduce welfare compared to a free market.

What is living standards (MLS vs NMLS)?

Material living standards are measured by income and consumption; non-material living standards are qualitative aspects like health and environment.

What is the circular flow model?

A diagram of money, resources, and goods/services flows among households, firms, government, financial institutions, and the external sector; includes leakages and injections.

What are the stages of the business cycle?

Expansion, peak/boom, contraction, trough/recession.

What is aggregate demand (AD)?

Total expenditure on Australian-made goods and services; AD = C + I + G + (X − M).

What factors affect aggregate demand (AD) besides C, I, G, and X-M?

Disposable income, interest rates, consumer/business confidence, exchange rate, overseas economic growth.

What is aggregate supply (AS)?

Total quantity of goods and services that firms are willing to produce at a given price; influenced by quantity/quality of factors, costs, technology, productivity, exchange rates, climate, and regulations.

What is economic growth and how is it measured?

An increase in real GDP (output) over time; commonly around a sustainable 3% per year; associated with lower unemployment if growth is on the demand side.

What is NAIRU?

Non-Accelerating Inflation Rate of Unemployment; the unemployment rate at which inflation does not accelerate.

What are the major types of unemployment?

Cyclical (business cycle), structural (mismatch in skills/production), frictional (between jobs), underemployment, and hidden unemployment.

What are the main components of the Balance of Payments (BOP)?

Current account (goods and services, net services, net primary and secondary income) and Capital & Financial account (net capital transactions).

What is the difference between the current account and the capital/financial account?

Current account tracks trade in goods/services and income flows; capital/financial tracks financial asset transactions and investment, which offset over time.

What are the terms of trade (TOT)?

The ratio of export prices to import prices; TOT = (export price / import price) × 100; indicates how many imports can be bought per unit of exports.

How does exchange rate affect competitiveness and AD/AS?

A depreciation makes exports cheaper and imports more expensive, potentially boosting AD and improving competitiveness; appreciation has opposite effects.

What is international competitiveness?

The ability of domestic firms to produce and sell at prices equal to or lower than foreign rivals, influenced by productivity, costs, resources, and exchange rates.

What are absolute and comparative advantages?

Absolute: produce a good at lower cost; Comparative: lower opportunity cost in producing a good, leading to gains from trade.

Why is specialization and trade beneficial beyond a country’s PPF?

Trade allows countries to specialise, exploit economies of scale, and consume beyond their own PPFs.

Give an example of how productivity growth can shift AS.

Improvements in technology or capital efficiency raise output per input, lowering costs and increasing AS.

What are the five sectors in the circular flow model?

Households, firms, government, financial institutions, and the external sector.