MAO PRAC EXAM

MAO PRAC EXAM

1.           What is economics? Provide a definition.

Economics is the science that deals with the production, allocation and use of goods and services. It is important to study how resources can best be distributed to meet the needs of the greatest number of people. As we are more connected globally to one another the study of economics becomes extremely important.

Economics is the study of how societies allocate limited resources to meet their needs and wants. It is about people making choices under conditions of scarcity and uncertainty.

2.           What is the difference between microeconomies and macroeconomies?

Microeconomics is the study of how the systems affect one business or parts of the economic system. (Within Australia.)

Macroeconomics is the study of the entire system of economics. (Within the world, Australia to other countries)

3.           Give three examples of needs and wants respectively.

Needs are items you must have to live, to survive, that you cannot live without. For example, food, water, and shelter are examples of needs.

Wants are items you do not need to survive but would like to have. For example, a mobile phone, nice clothes and entertainment like television are wants.

4.           What are goods and services? Give an example for each.

Goods can be defined as anything anyone wants or needs, for example food, or clothes.

Services would be the performance of any duties or work for another; help or professional activity. For example, dentistry is a service.

5.           What is a market and who are the two parties involved?

A market is a place where buyers and sellers meet to exchange goods and services at an agreed price. Producers are the sellers who make goods are services to sell to others. Consumers are the people who buy the goods and services produced. They set the demand and influence production.

6.           What is the difference between the public and private business sectors?

The private sector encompasses businesses and firms that are owned by private individuals, while the public sector encompasses businesses owned by the government.

7.           Draw the circular flow model, ensuring you add all inflows and outflows of money.

8.           Give the law of supply and demand.

The law of demand is states that the quantity demanded will be higher at a lower price than at a higher price.

This occurs because as the price of a product rises, it becomes more expensive relative to other products, so people will substitute a cheaper product for the one that has increased in price (the substitution effect), because as the price of a product rises, you can buy less of that product with the same income (the income effect), and because as the price falls new buyers are attracted to the product as they are now able to afford it (new buyers).

The law of supply states that the quantity supplied will be low at a low price and more will be supplied at a higher price.

This occurs because if the price for your product rises, you are more likely to produce more for sale to take advantage of the higher price and increase profit, and supply more from your stockpiles to take advantages of better returns.

9.           What is equilibrium?

The equilibrium market price is the one price on which both consumers and producers agree and are reasonably satisfied. Equilibrium occurs when the quantity demanded exactly equals the quantity supplies and there is no force for further change. The market would then be stable.

10.   Provide 3 measures of economic performance.

GDP (gross domestic product) is the main measure of economic performance. GDP measures the total value of goods and services produced in an economy over a period of time. 1 limitation is that it does not take account of illegal economic output such as work undertaken for ‘cash in hand’ that is not declared to the tax authorities. It also does not include unpaid work like volunteer work. Also does not take into accounts reductions in quality of life and losses that occur through natural disasters.

11.   Explain injections and provide an example.

Injections occur when money is put into the economy, meaning it is being utilized elsewhere in the economy. An example is a business borrowing money to invest in new equipment to increase its output.

12.   Explain leakages and provide an example.

Leakages occur when money is being taken out of the economy, meaning that it is not being utilized elsewhere in the economy. This could be if someone is saving money with not intention to spend it or if the money leaves the Australian economy. An example is that an Australian electronic retailer decides to buy products from an overseas business. Also, if the state government receives tax revenue but has not yet decided how to spend it, this is also a leakage.

13.   What is opportunity cost?

Opportunity cost is the loss of other alternatives when one alternative is chosen. The opportunity cost of a particular activity is the value or benefit given up by engaging in that activity relative to engaging in an alternate activity. More simply, it means if you choose on activity, you are giving up the opportunity to do a different option. It is the potential forgone profit from a missed opportunity.

14.   What is inflation and how is it measured?

Inflation is the broad increase in the price of goods and services. As price increases, consumer spending power decreases. Living standards then fall as a result. Inflation devalues people’s incomes, spending power and savings. Is incentive for investors to invest in fixed assets like houses rather than new business ventures. Reduces exports because our products are more expensive than other countries meaning that there is too much competition for us to compete. The CPI (consumer price index) is used to gauge the level of inflation. It is measured by calculating the average percentage price increases of a basket of consumer items typically used by Australian household. The annual percentage change n the CPI is used as the measure of inflation.

Examples of items in the CPI are food, alcohol, clothing, housing, health, transport.

15.   State the 4 types of unemployment and give an example for each.

The four types of unemployment are frictional, cyclical, structural and seasonal unemployment. Frictional unemployment occurs when an employee is transitioning from one job to the next. Also occurs when a student is finishing school and starting in the workforce. An example is a woman who has been on maternity leave is now ready to move back into the workforce. Cyclical unemployment is associated with the business sector. When there is a period of economic downturn, many workers have to be made redundant because the company can no longer afford to keep them on. An example is a man who works in a factory however, his business is struggling to pay their bills and as a result he becomes unemployed. Structural unemployment occurs when workers available for employment do not have the skills and experience required for the jobs available. An example of this is a person who does not have the skills required to work in an office, so they complete a business diploma at TAFE. Seasonal unemployment occurs when the demand for certain workers changes depending on the season. An example of this is fruit pickers or ski instructors.

16.   Explain the difference between expansions and contractions along a graph.

A contraction for demand means that there is less demand (usually at a higher price) and there is an upwards movement along the demand line.

An expansion for demand occurs when there is more demand (usually at a lower price) and there is a downwards movement along the demand line. Expansions are only caused by a fall in price, while contractions are only caused by a rise in price.

For supply, expansions occur when price increases and contractions occur when price decreases.

17.   Explain what market shortages and surpluses are and when they occur.

A market shortage occurs when the price is below the equilibrium. This means that due to the lower price, the quantity of a good or service supplied does not meet the demand. This would make consumers unhappy when they go away empty handed.

A market surplus occurs when the price is above the equilibrium. This means that the demand does not meet the quantity of a good or service provided. This would make producers unhappy because they have unsold stock that would perish.

18.   Give three examples of scarce resources.

Gold, oil, fossil fuels. Money, labour and capital.

19.   Explain the impact of high unemployment rates on each of the 5 sectors of the economy.