Economics Revision Flashcards: Nature, Operations, and Markets

A comprehensive set of flashcards covering the introductory topics of economics, including scarcity, production possibilities, market forces, labour markets, and the role of government.

What is the core definition of the 'economic problem' as described in the lecture?

The study of how people solve the problem of scarcity, which refers to the gap between unlimited wants and limited, finite resources.

Distinguish between individual and collective wants.

Individual wants are the material desires of each person (e.g., a phone), whereas collective wants are the desires of the whole community usually provided by the government (e.g., roads).

What are the four key questions every economy must attempt to answer?

1. What to produce? 2. How much to produce? 3. How to produce? 4. How to distribute production?

Define 'opportunity cost'.

The cost of a choice represented by the next-best alternative that is foregone when an economic decision is made.

What are the four assumptions upon which the Production Possibility Frontier (PPF) model is based?

1. Only two goods can be produced. 2. All resources are fully employed. 3. The level of technology is constant. 4. Resources are fixed but transferable between the production of the two goods.

What is the difference between allocative efficiency and productive efficiency?

Allocative efficiency occurs when resources are allocated to produce goods according to consumer preferences; productive efficiency occurs when the economy is operating on the PPF curve and not wasting any resources.

How do capital goods differ from consumer goods in terms of future implications?

Consumer goods provide utility and a higher quality of life in the present, while capital goods are used to produce other goods and increase an economy's productive capacity for the future.

List the four factors of production and their respective rewards (income).

1. Natural resources (Land) earn Rent. 2. Labour earns Wages. 3. Capital earns Interest. 4. Enterprise (Entrepreneurs) earns Profit.

What is the formula for Equilibrium Income in the five-sector circular flow of income model?

Injections must equal Leakages, expressed as: $S + T + M = I + G + X$ where $S$ is savings, $T$ is taxation, $M$ is imports, $I$ is investment, $G$ is government spending, and $X$ is exports.

Name the four main phases of the business cycle.

1. Upswing (expansion). 2. Peak. 3. Downturn (contraction). 4. Trough.

What are 'automatic stabilisers' in the context of the business cycle?

Policies like progressive income taxes and unemployment benefits that work to reduce the magnitude of economic swings without explicit government intervention.

Define the 'Gini coefficient' and its range.

A statistic summarizing income distribution where 0 represents perfect equality and 1.00 represents perfect inequality.

What is the difference between absolute poverty and relative poverty?

Absolute poverty occurs when income is too low to meet basic needs like food and shelter; relative poverty occurs when individuals earn less than a specific percentage (e.g., $50\%$) of the average income in their society.

State the relationship between income ($Y$), consumption ($C$), and saving ($S$).

The basic relationship is: $Y = C + S$

Define Average Propensity to Consume (APC) and Average Propensity to Save (APS).

APC is the proportion of total income spent ($APC = \frac{C}{Y}$) and APS is the proportion of total income saved ($APS = \frac{S}{Y}$).

What are marginal propensities in economics?

Marginal Propensity to Consume (MPC) is the proportion of extra income spent ($MPC = \frac{\Delta C}{\Delta Y}$) and Marginal Propensity to Save (MPS) is the proportion of extra income saved ($MPS = \frac{\Delta S}{\Delta Y}$).

According to the Life Cycle Consumption Hypothesis, when do individuals typically save the most?

During maturity, when individuals earn their maximum level of disposable income.

Define 'consumer sovereignty'.

The concept that the pattern of consumer spending determines the pattern of production and resource allocation in a market economy.

What is 'derived demand'?

Demand for a factor of production (like labour) that arises from the demand for the final goods and services it helps produce.

Explain the Law of Demand.

There is an inverse relationship between price and quantity demanded: as price rises, quantity demanded falls; as price falls, quantity demanded rises.

What factors cause a shift in the demand curve rather than a movement along it?

Changes in income, population size, consumer tastes, expectations of future prices, or the prices of substitutes and complements.

Explain the Law of Supply.

There is a direct relationship between price and quantity supplied: as price increases, quantity supplied increases as producers seek to maximize profit.

What is a 'price ceiling' and what is its purpose?

A maximum price established by the government below the market equilibrium to protect consumers from high prices.

What is a 'merit good'?

A good or service that is beneficial to society but may be underproduced by the market, such as libraries or public schools.

Define the two characteristics of 'public goods'.

1. Non-excludable (no one can be excluded from using it). 2. Non-rival (one person's use does not reduce the amount available for others).

What is the Total Outlay Method for measuring price elasticity of demand?

It compares changes in price to changes in total revenue ($Price \times Quantity$). If price and revenue move in opposite directions, demand is elastic; if they move in the same direction, demand is inelastic.

Define internal economies of scale.

Cost savings that accrue to a firm as a result of it becoming more efficient as its own volume of output increases.

What is an oligopoly?

A market structure consisting of a few large firms with significant market share, differentiated products, and high barriers to entry (e.g., the Australian banking industry).

Define the 'participation rate'.

The percentage of the working-age population ($15$ years and over) that is in the labour force (employed plus unemployed).

Distinguish between cyclical and structural unemployment.

Cyclical unemployment results from changes in economic activity over the business cycle; structural unemployment results from a mismatch between available jobs and the skills or location of job seekers.

What is the 'RED triangle' in the context of the Australian Government's economic functions?

It represents the three major fiscal policy outcomes: 1. Resource Allocation. 2. Economic activity stabilisation. 3. Distribution of income.

Define 'privatisation'.

The sale of part or all of a Government Business Enterprise (GBE) to the private sector.