Mod 1

Question 1

1.1 What is the Economic Problem

Answer 1

The cycle in which people have unlimited wants (demand) and give up money to satisfy demand, however, there is limited means to satisfy these wants (money).

Question 2

1.1. How do income levels affect people experiencing the economic problem

Answer 2

People at different income levels experience the economic problem differently. People with a lower income have more limited means to satisfy their wants.

Question 3

1.1 Difference between collective and individual wants

Answer 3

Individual wants are specific to a person and Collective wants are particular to a group.

Question 4

1.2 What are the factors of production, what do they do and how do we remember them?

Answer 4

Resources used to produce goods and services. Land, Labour, Capital, Entrepreneurship/Enterprise. LLCE

Question 5

1.2 What does Land refer to with examples and what is the return for providing land?

Answer 5

Land refers to all natural resources, for example coal, or fish. The return of providing land is called rent.

Question 6

1.2 What does Labour refer to with examples and what is the return for providing Labour?

Answer 6

Labour refers to human effort, both physical and mental, for example employees. The return for providing labour is called wages.

Question 7

1.2 What affects quantity of labour in an economy

Answer 7

Influenced by migration

Question 8

1.2 What affects quality of labour in an economy

Answer 8

Influenced by education

Question 9

1.2 What is the Wage price Index (WPI)

Answer 9

The Wage Price Index (WPI) measures changes in the wages and salaries paid by employers for a unit of labour where the quality and quantity of labour are held constant.

Question 10

1.2 What does Capital refer to with examples and what is the return for providing Capital?

Answer 10

Capital refers to the goods that are used in the production of other goods/services also known as equipment, for example the use of a laptop to provide psychologist appointment. Capital can also include infrastructure e.g. using a road to get to work. The return for providing capital is interest or capital gain.

Question 11

1.2 How can capital be used/wasted?

Answer 11

It improves the production capacity of other factors of production, however overuse of capital equipment often results in diminishing returns in production as capital can be under-utilised and therefore the money spent to purchase capital is wasted.

Question 12

1.2 What does Enterprise/entrepreneurship refer to with examples and what is the return for providing Enterprise/entrepreneurship?

Answer 12

Enterprise/entrepreneurship refers to the organisation of all other factors of production, the entrepreneur makes management decisions involving this. The return is profit. For example the CEO of TESLA - Elon Musk.

Question 13

1.3 What is Opportunity Cost

Answer 13

The value of the next alternative you give up when you make a choice over another. For example the opportunity cost of producing one good over another.

Question 14

1.3 What is the Opportunity cost formula?

Answer 14

OC = What is given up / What we get

Question 15

1.3 What are Choices that should be made Opportunity cost

Answer 15

Choices should minimise opportunity cost, meaning choosing the scenario where the most money possible us generated.

Question 16

1.3 Opportunity Cost of Business/Govt.

Answer 16

Opportunity cost is the profit from producing the next best alternative. This is important as businesses/govt. has more money to spend on a range of investments.

Question 17

1.3 What is the Production Possibility Frontier (PPF)

https://d3rw207pwvlq3a.cloudfront.net/attachments/000/130/128/original/1-crop-1598286117184.png?1598286120

Answer 17

A graph that shows the possible choices of 2 good/services you can produce, based on resources.

Question 18

1.3 What does the PPF show us.

Answer 18

• Points outside of PPF are unobtainable due to resource constraints.
• Points inside PPF represent underutilisation of resources
• Points on PPF represent maximisation of resourses.

Question 19

1.3 How does linear PPF relate to Opportunity cost.

Answer 19

The linear model of the PPC (straight line) has a constant opportunity cost.

Question 20

1.3 Opportunity Cost formula in regards to PPF

Answer 20

OC=GRADIENT (M)

M=RISE/RUN

OC=RISE/RUN

Question 21

1.3 Interpreting Slope of PPF (flat vs steep) and what this does to opportunity cost?

Answer 21

Steep = To increase goods on x axis you have to give up a lot of goods on y-axis which increases opportunity cost.

Flat = To increase goods on x axis you only have to give up a little amount of goods on y axis, which decreases opportunity cost.

Question 22

1.3 Real Shape of PPF vs. Opportunity cost

https://cdn.educba.com/academy/wp-content/uploads/2024/02/Production-Possibility-Frontier.jpg

Answer 22

The real shape is almost never linear, and therefore if all resources are devoted to a single good means using resources that possibly aren’t suited to making that good.

• Opportunity cost of a good increases as you make more of it.

Question 23

1.3 Why do we want to shift the PPF (moving in or out)

Answer 23

To increase profit, and capitalise on greater quantities of production we want to reach points on the right. To shift the PPF.

Question 24

1.3 How can we Shift the PPF?

Answer 24

-Population increase = more resources (supply of labour) to produce

• Specialisation of resources = improvement in the technology (Capital) to produce one or more goods (more output with same quantity of inputs)

Question 25

1.3 Law of Increasing Opportunity Cost

Answer 25

The Law of Increasing Opportunity cost = The opportunity of cost of producing goods increases as we move along the curve.

Question 26

1.3 What are tradeoffs between Producing Consumer goods (what consumers want) vs. Capital goods (goods that are used to produce consumer goods)

Answer 26

Consumers goods are wanted by consumers immediately to supply demand which = more cash in economy, which are good for short term growth Capital goods are wanted by business over the long term to satisfy increasing demand with increasing population = more goods able go be produced in long term, which is good for long term growth.

Question 27

1.3 When should producers allocate resources to Capital or Consumer Goods

Answer 27

- If the economy required more consumer goods, then the economy should produce closer to the consumer goods - If the economy requires more capital, then the economy would be better suited producing further along the frontier towards the capital goods.

Question 28

1.3 How do capital goods shift the PPF

Answer 28

Long Term: The accumulation of a larger stock of capital will expand the economy’s factors of production. This will improve the productive capacity of the economy and shift the PPC outwards.

Question 29

1.4 What is GDP

Answer 29

GDP refers to the gross domestic product which is a monetary value of all goods and services produced within a country over a period of time.

Question 30

1.4 What is GDP growth and Economic growth

Answer 30

Increased production of goods and services = GDP growth Economic growth refers to the increase in the size of an economy over time Economic growth is measured by GDP growth

Question 31

1.4 How are factors of production and GDP growth linked

Answer 31

Countries with more factors of production will be able to make more products so they will have large GDPs

Question 32

1.4 What is GDP per Capita

Answer 32

If we divide GDP by the number of people in the country we get GDP per capita, a rough idea of the value of the products each person could consume.

Question 33

1.4 What is purchasing power parity

Answer 33

Purchasing power parity is the exchange rate at which one nation's currency would be converted into another to purchase the same and same amounts of a large group of products.

Question 34

1.4 What is GDP per Capita (Purchasing power parity)

Answer 34

Adjust GDP for Purchasing Power Parity (PPP) by taking into account exchange rates and costs of living, we can get a rough idea of the real power each person actually has to purchase products.

Question 35

1.4 Law of Diminishing returns

Answer 35

Less advanced economies can expand their GDP more easily than Advanced economies as they can increase their capital more easily However, advanced economies experience “diminishing marginal returns to capital accumulation” where extra units of capital starts to increase GDP less and less.

Question 36

1.4 What are Economic Systems

Answer 36

Economics is also about the systems through which these goods and services are distributed and exchanged. Australia’s system, for the most part, uses money to facilitate this process of distributing the goods and services to individuals.

Question 37

1.4 What is Monetary Economic System, and its issue

Answer 37

We are (typically) given income in exchange for our contributions towards Australia’s production and we (typically) subsequently use this income to lay claim to part of what has been produced. This system creates income inequality. People with more income can access more goods and services.

Question 38

1.4 What is Inequality of income

Answer 38

Income inequality refers to the degree to which income is unevenly distributed among people in the economy

Question 39

1.4 How to measure inequality of income

Answer 39

Measure this by dividing the population up into quintiles: “what % of income each proportion of the population has"

Question 40

1.4 How do we graph inequality of income?

Answer 40

The Lorenz curve is used to show the proportion of income earned by any given percentage of the population.

Question 41

1.4 How do we draw a Lorenz curve https://www.intelligenteconomist.com/wp-content/uploads/2017/08/Lorenz-Curve-Gini-Coefficient.png

Answer 41

A quintile of a population is 20%, we divide the Lorenz Curve graph into 5 parts of 100% for income distribution on the y axis and 5 parts of 100% for population( poorest to richest) on the x axis.

Question 42

1.4 What is the gini coefficient?

Answer 42

The Gini Coefficient measures the level of inequality in a country. Expressed as a value between 0 and 1

Question 43

1.4 How do we interpret the gini coefficient?

Answer 43

A Gini of 0 means everyone has exactly equal income (perfect equality) A Gini of 1 means one person receives the entire of national money (perfect inequality)

Question 44

1.5 What is inflation

Answer 44

Sustained increase in the general level of prices in the economy.

Question 45

1.5 How is inflation measured?

Answer 45

Inflation is measured using the Consumer Price Index (CPI) which measures changes in the prices of a “basket” of goods and services consumed by an average household.

Question 46

1.5 Are all goods and serviced measured in CPI equally important?

Answer 46

Not all categories in the CPI are equally important - the groups are weighted based on their proportion of household spending.

Question 47

1.5 How is inflation calculated

Answer 47

The inflation rate is the percentage increase in CPI between two periods It is calculated using: ((New Value-Original Value)/Original Value)x100

Question 48

1.5 What is Hyperinflation

Answer 48

Excessively large amounts of inflation.

Question 49

1.5 What is deflation

Answer 49

Negative values of inflation

Question 50

1.5 Why is inflation important for Australia

Answer 50

Investment, trade, saving, and banking are made difficult when prices change too rapidly. Hyperinflation and deflation can have devastating effects on the economic health of a country. Australia aims to have moderate, positive inflation.

Question 51

1.6 What is the Business Cycle

Answer 51

Cyclical fluctuations in the level of GDP in an economy over time.

Question 52

1.6 What are the key terms of the business cycle and their descriptions.

Answer 52

Upswing = Positive GDP growth over time, injections>leakages Recession= Negative GDP growth over time, leakages>injections. Peaks Occurs when GDP plateaus (positively) and neither rises nor falls Trophs Occurs when GDP plateaus (negatively) and neither rises nor falls

Question 53

1.6 How do we measure an upswing?

Answer 53

- Increased production of goods and services (positive GDP growth) - Rising income - High inflation - High levels of spending - Falling levels of unemployment

Question 53

1.6 How do we measure a recession?

Answer 53

- Falling production of goods and services (negative GDP growth) - High unemployment - Low wage rates - Falling consumer spending - Low inflation