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economics (1) Flashcards

chapter 1-4

1
Q

wants

A

material desires of individuals/community provide satsifaction when consumed
-derive UTILITY

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2
Q

individual wants

A

desires of each person depending on preferences/influenced by social trends
-satisfaction depends on ability to purchase (lvl income)

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3
Q

collective wants

howthe gvt does this

A

wants of whole community, depend on preferences of community as whole
-usually provided by government
LOCAL: local neighbourhoods eg parks, libraries
STATE: most for wider community eg. hospital school
FED: entire nationeg defence force

gvt provide collective wants by using taxation revenue collecting from community

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4
Q

recurrent

A

satisfy want over and over in future

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5
Q

complementary wants

A

naturally follows initial satisfaction of another want

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6
Q

what wants are there? 7

A

basic (needs), recurring (food). substitute (butter,margarine), luxury, complementary (cars + petrol), individual, collective (healthcare)

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7
Q

changes in want caused by 4 things

A

age, income, tech, social trends

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8
Q

PPF

A

production possibility frontier to demonstrate how opportunity costs arise deciding between competing alternatives

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9
Q

what are th 4 assumptions made by a PPF?

A
  1. only produce 2 goods
  2. land, labour, capital, enterprise fully utilised
  3. tech and resource level constant
  4. resources substitutable
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10
Q

opportunity cost coefficient/marginal rate of substitution (MRS) formula to measure opportunity cost

A

OP for each unit of X = change in production of Y + change in production of X (use division)

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11
Q

what are the 4 features of capital goods?

A

do NOT satisfy consumer wants NOW
satisfy in FUTURE by expanding ABILITY to produce
(economy produce more capital goods ^ productive capacity –> higher eco growth)
sacrifice high living standards in present

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12
Q

what 2 questions does the business trade off involve?

A

what’s best use of available resources (LLCE) + what to do with profit?
producing popular products now –> decline sales future / research & develop new ones sacrifice profit, may lead to greater success
higher restraint to keep profits INSTEAD of paying DIVIDENDS –> high potential profit in future

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13
Q

how are profits distributed to businesses?

A

to owners & shareholders satisfying present wants/retained by business to invest capital goods –> boost production & profit in future

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14
Q

government trade off

A

gvt prioritise spending present wants (higher welfare payments)
-expense of funding wants w/ longer payoffs (infrastructure, education, healthcare) –> lower eco growth (less skilled workforce, weak infras, less innovation)
-choose betw sacrifice politically popular short term < plan for future needs

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15
Q

one’s factors of decision making

A

age, income level, expectations of future, family circumstances, leisure in retirement
restraint on spending
income rise + spend/save ?
spending satisfies present wants while saving raises future living standards

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16
Q

business’ decision making

A

-seek available resources will generate highest return to cost
PRICE
-higherprice hoping maximising profits and small impact on lvl sales
-based on marketing strat: sell to mass market/target exlcusive group of customers
-
PRODUCTION how much to produce (minimise costs and maximise quality, choose cheaper inputs but if supply not assured, pay slightly more for reliable supply, best combo of labour & capital)

-what RESOURCE USE (inputs environmentally sustainable or risk negative publicity)

-INDUSTRIAL RELATIONS issues
-how to manage employees
-employ ppl on wage lvls set by industrial awards/negotiate wage agreements with workforce/negotiate individual contracts with staff

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17
Q

Finite resources occur..

A

when we face OPPORTUNITY COSTS in productions

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18
Q

economic problem

A
  1. wants are unlimited
  2. resources to satisfy wants scarce
  3. cant satisfy wants with limited resources, choose between
  4. rank preferences, choose highest wanted and leave some unsatisfied
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19
Q

key economic issues (4)

A
  1. what to produce
    since the eocnomy cannot satisfy all wants, it must decide which wants should be satisfied and others left unsatisifed to decie what g&s to produce.
  2. how much?
    economies need to allocate limited resources efficiently and maximise satisfaction. if produce too little = unsatisfied, too much = wasted
  3. how to?
    economies need ot decide the most effieicnt method ofp roduction USING LEAST AMOUNT OF RESOURCES SO GREATEST no wants can be satsified any time
  4. how to distribute production?
    for modern economies, everyones total share of total production depends on their level of income. higher income earners can afford to purchase more g&S, receiving a greater share of totalp roduction. the economy must decide if SHARE of total production should be more equitable/ inequitable. more efficient systems may produce less equitable outcomes.
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20
Q

opportunity cost

A

whenever we choose to produce/consumer 1 product, we miss out on the alternative products that could’ve been produced using those resouces

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21
Q

what can opportunity costs we applied to (business firm, individual, government)

A

BUS FIRM: make choice in allocating scarce resources

consumer: limited income choose between satisfying desire for something else (new car or holiday)

GVT: limited resources to satisfy community wants

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22
Q

production possibility frontier

A

demonstrate how opp costs arise
-shows various combinations of 2 alt products can be produced
-producemore of 1 goods requires producing less of other

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23
Q

what are the 4 assumptions of the PPF?+ what happens when the point is WITHIN curve?

A
  1. economy only produces 2 goods
  2. state of tech is constant, no tech advances
  3. quantity of resources unchanged
  4. all resources fully utilised (full productive capacity),

inside curve means producing less than max possible output and not all resources employed

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24
Q

OUTWARD SHIFT of PPF

A

due to NEW TECHNOLOGY.
-produce higher quantity of good with same amount resources
-1 pt stays

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25
Q

point inside PPF

A

due to UNEMPLOYMENT
-any resources not fully employed,
-frontier doesnt change but position underneath line

  • insufficient allocation of resources,
  • not achieving maximum satisfaction of wants with min opp cost
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26
Q

shape of PPF

A

curve: some resources better suited to (oil) production and others (leather, cannot expect move resources from oil to leather w/o loss of productive capacity.

move more resources into prod leather, less productive, inc opp cost of leather, –> CONCAVE

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27
Q

capital goods

A

items not been produced for consumption but used for production of other goods(machinery)

although do not satsify wants now, satisfy in future by expanding ability to produce

long run, eco focuses more on prod capital goods ^ productive capactiy and exp higher lvl eco growth (higher pt on frontier 9 long term satsify wants better than country with lower pt)

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28
Q

economic decision making (capital goods vs consumer wants) implications on BUSINESS (BIG)

A

-must focue on one area of bus activity over another
-limited labour, cap, entrepreneurial skill & resources –> focus on products likely to max profit

eg. business likely to most effective if can identify next wave in bus growth come from (eg. IT) otherwise enter market too late and cant obtain competitive advantage

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29
Q

economic decision making implications for INDIVIDUALS

A

holiday instead of taking out mortgage & purchase house.
-saving for deposit sig sacrifice, years to pay off mortgage
-long term home ownership improves financial security (Dont have to pay rent, asset that can pass to children)

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30
Q

economic decisions implications on GVT

A

for gvt & entire eco
immediate needs: ^ welfare benefits, healthcare –> less funding for edu, infras, r&d –> long term less eco growth (lower skilsl in workforce, less innovation, weak infras (bad transport)

short term: politically popular to satisfy immediate wants than plan for future needs

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31
Q

factors that affect eco decision making process for BIG (individuals)

A

choose how much incoem to save & spend, influenced by income level, age, asset performance, expect of income rise/fall in future, family circumstances, future plans

plans in edu, work, family(cut personal expenditure, reduce working hrs & income to care for children), retirement

vote in elections (eco policies esp eax & infras, who is best at managing eco and budget & least likely to deliver lower unemployment, inflation & interest rates)

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32
Q

factors that affect eco decision making for business

A

pricing decisions (max profits, market stat to sell product to mass market/target exclusive group of customers)

minimise costs & maximise quality (higher costs for quality equipment –> longer operating life, less maintenance)
-choose cheaper inputs/choose pay more for input reliable supply, ethical issues

manage industrial relation issues
-choose to employ ppl on wage lvls set by industrial awards
-negotiate wage agreements with workforce
-negotiate individual contracts with staff
-encourage union representation/involvement from employees in decisions

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33
Q

factors that affect eco decision making for GVTs

A

may prohibit activities & impose heavy penalties

encourage activities & provide incentives for them (eg join private health insurance scheme)

gvt influence on eco from inflencing decisions of ind & bus and providing g&S directly

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34
Q

factors of production

A

any resources used in production of g&s

LAND (natural resources), CAPITAL
LABOUR
ENTERPRISE

-another name for resource/input
-quantity & quality of eco’s FOP/resources influence how welathy/poor country will be (lower standard of living/quality of life with fewer, poor quality resources)

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35
Q

Return/reward for FOP

A

land –> RENT
labour –> WAGES
capital –> INTEREST
enterprise –> PROFIT

LLCE –> RWIP

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36
Q

land (natural resources) in FOP

A

natural materials used in production process (soil, water)

owners of natural resources rewarded with rent (all income rewards derived from productive use of natural resources)

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37
Q

labour in FOP

A

human effort (physical & mental) to produce g&s
-supply of labour (can change over time) depends on country’s pop size (birth rate, life expectancy, immigration lvls), school leaving age, retirement age, social attitudes towards women in workforce

rewarded with wages

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38
Q

capital in FOC

A

produced means of production (not produced for immediate consumption, used in producing other g&s)
-machinery, factories
- owned privately by ind/firms
-infrastructure(social overhead capital) owned by community as whole eg. roads, schools

capital equipment increases productivity of other resources (how much output produced per factor of production per unit of time) satisfy more wants

entrepreneurs borrow money not spent by consumers (savings) to invest in capital goods (funds)
-consumers save money > spend, shift resources from consumer to capital goods

rewarded by earning INTEREST (etpnrs borrow excess savings in eco, pay interest(price of capital) on their loans
-alt, etpnrs invest own surplus funds in cap equip , int % could earn if put funds in bank represents opp cost of investing in capital.

capital in economics is NOT financial assets (money, shares, stocks, bonds)

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39
Q

enterprise in FOP

A

organising LLC to produce g&s, brings production process together

return to enterprise is PROFIT (not just revenue earned - expenses), entitled to receive rent for any land use owned in production process, wages for work & interest for capital invested in business.
-profit ECOMPASSES

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40
Q

limited supply for LLCE

A

land: limited natural resources for production (fossil fuels, clean air&water)

LABOUR
-population size
-labour market skills
-ind’s willingness to work

CAPITAL
-limited by extent to which GVTS & private sector willing to invest, and level of domestic/overseas savings available for investment

ENTERPRISE
-lim by population size & cultural and eco factors (ability and willingness of ind to innvoate and take risks)

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41
Q

in a MARKET ECO, decisions of how scarce resources are allocated in production are laregely determined by?

A

consumer spending patterns

-firms respond to demand by obtaining resources to produce items consumers want
-pay for resources & labour skilsl to produce g&s demanded
-bus decides which combo of resources to use in PP (prod proc), labour intensive/capital intensive

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42
Q

considerations accounted for when distributing what an economy produces

A

strike balance providing rewards for investment
-etpnrs & innovation
-ensure acceptable QOL

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43
Q

how do economic systems determine hwo to distribute and exchange g&s produced?

A

assign each individual certain lvl of income, commands them a certain proportion of output produced –> exchange income with others to obtain g&s

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44
Q

how do market economies distribute output

A

-not equal within society
-provide ppl with income as reward for contribution to PP, value of input (labour)
-price paid for inputs determines ind’s share of total output, depend on how scarce/highly demanded resources are

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45
Q

benefits of a market economy inc distribution

A

-provides incentives for ppl to obtain better skills and work harder to improve their share of output/develop entrepreneurial skills and start business –> improve resource base, encourage innovation & technological adv

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46
Q

problems with market eco inc distribution

A

-unfair for those w/ illness, age, disability
-those w/ less bargaining power unable to secure fair return for labour input

47
Q

how do GVTS redistribute income in market eco

A

-take money from higher income earners w/ taxation & redistributing to lower income earners through social security payments

48
Q

how does money exchange allow individuals to contribute to production prcess?

A

allows ind to specialsie in how they contribute to production process (paid in money)

49
Q

business cycle

A

fluctuations in level of eco growth due to domestic/international factors

50
Q

economic activity

A

amount of g&s produced in given period of time

51
Q

recession/eco slowdown

A

stage og bus cycle w/ decreasing eco activity for 2 consecutive quarters (6 months) of negative eco growth (fall in GDP)

52
Q

how does the cyclical pattern of eco activity present problems for society?

A

-sig disruptions for ind & businesses
firms:
- postpone plans for new investment
-reduce production
-reduce demand for labour
hence, employment falls

53
Q

how does increased unemployment negatively affect consumers?

A

-families forced to rely on savings & social security payments to meet expenses while normal sources of income ‘dried up’
-unemployed reduce consumption –> eco contract further –> more out of work –> poverty, living standards fall, health problems rise, edu opp disrupted, social problems (crime, suicide) ^ –> LOWER QOL

54
Q

what happens during economic upturn?

A

-boom in eco growth = increased investment & production –> ^ demand for labour –> falling unemployment lvls –> ^ disposable income available –> further eco expansion as consumption lvls rise –> improve QOL

55
Q

5 impacts of RECESSION PC&IIQU

A

FALLING prod g&s
FALLING lvls consumption & investment
FALLING income lvls
FALLING QOL
RISING unemployment

PC&IIQU

56
Q

5 impacts of BOOM

A

INCREASING prod of g&s
RISING levels of C&I
RISING income levels
RISING QOL
FALLING unemployment

for prod of g&s, FALLING –> INCREASING, rest is falling to rising

57
Q

aim for GVTS when intervene due to recession/slowdown

A

-to restore eco to growth
-improve employment opp
-ensure eco sustain eco grwoth for longer period of time to avoid major eco downturns

58
Q

CFOI (circular flow of income) for INDIVIDUALS

A

-activities in earning income & spending on g&s
-owners of productive resource + consumers
-supply FOP (INPUTS) eg. labour & enterprise to BUS to produce g&s
-reward for supply resources to firms, ind receive incomes in RENT, WAGE, INTEREST, PROFIT (RWIP)
-spending goes to STI & consumption

59
Q

BUSINESS in CFOI

A

-all business firms engaged in production & sale of g&s (apart from financial servies for financial sector)
-all activities involved with BUYING FOP and USING to produce & sell g&s
-businesses & individuals are INTERDEPENDENT (need each other)

!!! cfoi depicts flow of money between ind & bus, NOT flow of g&s/fop

60
Q

FINANCIAL INST in cfoi

A

-all institutions engaged in BORROWING and LENDING money
-INTERMEDIARIES between SAVERS and BORROWERS of money
-banks, superfunds, life insurance comp…

61
Q

why are financial institutions needed by individuals & firms?

A

undertake saving & investment

62
Q

what is the financial institution sector and its function?

A

-financial ins (capital market)
-all financial intermediaries accepts savings (depositys) from ind & lend to bus for investment purposes

-mobilise savings so they can be used for investment

63
Q

why do savings represent a LEAKAGE from cfoi?

A

savings involves money put aside & withdrawn from cfoi
-reduce size of cfoi –> reduce lvl eco activity –> upsets state of equilibrium in eco

64
Q

injections (into cfoi)

A

flows of money that increase aggragate income & general level of eco activity (IGX)

investment, GVT spending, exports

65
Q

leakage of savings chain EPDI

A

fall in exp on g&s
fall in prodction
fall in demand for resources
fall in income to owners of resources

66
Q

What happens whtn cfoi reduces size (from leakage of savings) EPIU

A

falling expenditure
falling production
falling income
rising unemployment

67
Q

what does injection of investment do?

A

stops reduction of cfoi by counteracting the leakage of savings

68
Q

what does Y = C + S mean

A

for specific level of income, increase in CONSUMPTION causes equal reduction in level of SAVING vice versa

change in disposable income –> change levels of consumption & savings

69
Q

APC average propensity to consume

A

proportion of total income spent on consumption

70
Q

APS average propensity to save

A

prop of total income not spent, saved for future consumption

71
Q

formulas for APC & APS

A

C/Y = APC

S/Y = APS

72
Q

do ecos with higher per capita income save more/less proportion of income?

A

save greater proportion of their income

73
Q

factors that influence levels of spending & saving in economy ICFLGA

A

INCOME LEVELS & future EXPECTATIONS

Cultural factors

Confidence & future expectations

Life stage & age distribution

GVT policies

Availability of credit

74
Q

How does income levels and future expectations influence levels of spending & saving in a neconomy?

A

income across eco rise –> greater capacity to save
-saving may higher in ecos with greater INEQUALITY in income distribution (higher income = more capacity to save)
-uncertain of future income lvls, more likely to save

75
Q

how do cultural factos influence lvls of spending and saving in an eco

A

cautions vs easygoing personalities
wider cultural values

76
Q

how does confidence and future expecations influence levels of spending and saving in eco

A

consumers worried about eco outlook/job stability/future income –> cautious, save more

confident abt future & expect income rise –> increase consumption & save less

77
Q

how does life stage & age distribution affect conumer spending & saving?

A

consump & saving behaviour changes over time
-young adulthood
-start family, settle down
-late middle age incomes generally highest
-retirement

78
Q

how do gvt policies influence consumer spending & saving patterns?

A

make more attractive to save
-lower taxes on super savings
-spend (abolition of consumption tax)

79
Q

how does availability of credit influence consumer spending & saving?

A

credit CHEAP & readily available –> spending likely higher (creates new source of money for expenditure)

less likely to save if confident they’ll access credit easily in future

80
Q

what are the two most significant factors that influence a consumer’s decision to spend/save?

A

LEVEL OF INCOME and AGE

81
Q

is income rises, people tend to ____ a higher proportion of their income

A

save (APS rises, APC falls)

82
Q

consumers on lower incomes spend proportionately ____ of their disposable income than people with higher incomes

A

more

income ^, dont need to spend as much of income on necessities

83
Q

consumption function

A

-relationship between income & consumption
-upward slope with gradient <1
-positive y-int

84
Q

because income rises ______ than consumption, the APC ___

A

faster, falls

85
Q

Marginal propensity to consume (MPC formula)

A

proportion of each extra dollar of earned income SPENT on consumption

change in consumption /change in income

86
Q

MPS (marginal propensity to save) & formula

A

proportion of each extra deollar of earned income NOT spent, SAVED for future consumption

change in saving/change in income

both denom change in income

87
Q

MPC + MPS = ?

A

MPC + MPS = 1

each extra dollar of income earned either spent or saved

88
Q

as a person’s income RISES, their MP to __ tends to FALL and their MP to __ tends to RISE

how is this shown in the consumption function (graph)

A

mpc FALLS –> mps RISES

therefore consumption function LESS STEEP as income RISES

89
Q

when young, ppl tend to receive ____ levels of income bc they lack SKILLS, EXPERIENCE, EDU.

Hnece, they tend to ___ movst of their income and save ____/often __ or __ to finance their EDU

A

lower (income)
spend
(save) very little
dis-save/borrow

90
Q

ppl start working (esp middle age), incomes __, and will consume ___ proportion of income as they start saving & accumulating assets for ____.

A

(incomes) rise
smaller (prop)
retirement

91
Q

in retirement, ppl no longer ___ income from their ___, and they consume out of past ____ & wealth/rely on ______

A

earn (income) from labour
savings
GVT’s age pension

92
Q

individuals on higher incomes tend to have ___ average propensity to consume than ___ income earners. why is this?

A

lower
lower
save more to accumulate wealth & assets for retirement whereas lower earners MUST use higher prop of income to meet costs of daily needs (living expenses)

93
Q

what does the life-cycle theory of consumption looks like

A

triangle with line of consumption in middle
bottom left and right dissavings
peak is savings
school –> work –> retirement(x-axis age)
y-axis income)

94
Q

utility

A

satsifaction individuals derive from consuming g&s

95
Q

what does achieving higher utility mean?

A

individual satisfied more of their wants but more CONSTRAINED with ability to INCREASE utility by lvl of income & market price of g&s

96
Q

main factors affecting consumer’s expenditure choices (IPS/CTA)

A
  1. level of INCOME
  2. PRICE of g/s
  3. price of SUBstitute/COMPLEMENT goods
  4. consumers TASTES & PREFERENCES
  5. ADVERTISING
97
Q

how does level of income affect consumer expenditure choices?

A

earn higher incomes, tend to buy more items of higher quality

98
Q

how does price of g/s itself affect consumer expenditure choices?

A

decide whether/not willing to pay nominated price for item given lvl of income

some goods necessities regardless price changes need to buy(price of basic food ^, demand will not reduce greatly, luxury items reduce demand when $^)

99
Q

how does price of substitute & complement goods affect consumer expenditure choice?

A

QUANTITY of good demanded at time affected by PRICES of OTHER goods.

SUBS
(butter & margarine: price of margarine rises –> demand for butter increase)

COMPLEMENTS
tend to purchase together ($ iPhone falls, expect INCREASE in demand for iPhones & complements (airpods))

100
Q

substitute good

A

good consumers may choose to buy in place of another good

101
Q

complement good

A

good used in CONJUNCTION w/ another good

102
Q

how do consumer tastes & preferences affect consumer expenditure choice?

A

individuals purchase g&s give them highest level of utility

some g&s give individual consumer higher lvl satisfaction than others

as consumer tastes & preferences change over time, so will demand for certain goods
-innovation & tech progress, demand new & better products at expense of superseded ones

103
Q

how does advertising affect consumer expenditure choice?

A

can create demand for certain g/s non existed before.
-can make demand for g&s less RESPOSNIVE to price increases by building CUSTOMER LOYALTY to brands over time

104
Q

consumer income

A

rewards to owners of FOP (sellign these)

105
Q

consumers receive income from selling FOP , which are RWIP

A
  1. RENT from land
  2. WAGES from labour
  3. INTEREST from capital
  4. PROFIT from entrepreneurial skills
106
Q

how do consumers receive income from wages (labour)?

A

wage/salary payments when participating in labour market
-main source of income
-includes non-wage income (fringe benefits, employer contributions to super, workers compensation payments)

107
Q

how do consumers receive income from RENT (land)?

A

when rented, source of income
-iown investment property generates property income

108
Q

how do consumers earn income from INTEREST (capital)?

A

RETURNS from ownership of capital
-wealth creates ongoing income through returnes from owning capital
-indirectly through super/other investment funds
-owning SHARES (earn dividends yrly)
-earn interest on savings in cash management accs/bonds

109
Q

how do consumers earn income from PROFIT (entrepreneurship)?

A

operate businesses, make profit, income is return for entrepreneurial skill

110
Q

social welfare payments

A

payments made to INCREASE income of individuals in need of assistance by GVT

111
Q

what is social security/swp/transfer payments?

A

incoem collected through taxation & transferred from GVTs to individuals

112
Q

examples of transfer/social welfare payments

A

age pension (67+ & retired from work)

disability support pension
-permanent, physical/intellectual/psychiatric condition stops them from working

JobSeeker payment
(22-67 seeking work, unable to find, unemployed)

113
Q

aim of social welfare

A

minimum income safety net allowing individuals w/ low incomes to purchase basic necessities

GVTs may raise transfer payments to increase consumer DEMAND & help eco growth

114
Q

largest beneficiaries of welfare spending & fastest growing expenditure items in budget

A

elderly & disabled (least for ATSI )

aged care & National Disability Insurance Scheme

Economics (12 decks)

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