The Operation of the Economy (Topic 1) Flashcards
(23 cards)
What is a function of an economy?
Coordinating economic activities such as resource allocation, production and distribution.
What are the two broad types of economic systems?
- Free market
- Planned economy
What characterizes a free market economy?
- Minimal government interference
- Private property rights
- Profit motive
What defines a planned economy?
Based on government ownership of most resources and allocation according to government planning priorities.
What are the four basic economic questions?
- What to produce?
- How much to produce?
- How to produce?
- To whom to distribute?
What does the ‘what to produce’ question focus on?
Production based on society’s preferences and consumer goods to raise living standards.
What is allocative efficiency?
Satisfying consumer needs and wants through efficient resource allocation.
How does a market economy determine production volume?
Guided by consumer demand and the incentive of profit maximization.
What influences the method of production selected by producers?
- Availability and cost of resources
- Nature of goods and services
- State of technology
What are the primary resources used in production?
Labour and capital.
What is derived demand?
Demand for labour influenced by the demand for goods and services.
What is human capital?
Knowledge, skills, education, training, and experience of the workforce.
What is the relationship between savings, investment, and capital accumulation?
Savings –> Investment –> Capital accumulation.
What determines wages?
Demand and supply of labour.
What are normal and supernormal profits?
- Normal profit: Sufficient to keep the entrepreneur in business
- Supernormal profit: Above what is necessary to keep the entrepreneur in business
What is the redistribution effect in market economies?
Government redistributes income and wealth from higher income earners to lower income earners.
What are the broad sectors of employment in Australia?
- Primary industry
- Secondary industry
- Tertiary industry
What does the tertiary industry include?
Retailing, wholesaling, and distribution of goods and services.
What factors improve the quality of life?
- Quantity and quality of material goods
- Access to non-material goods and services
What are the four phases of the business cycle?
- Upswing
- Boom
- Downswing
- Recession
What does the business cycle reflect?
Economic activity in cycles occurring in market economies.
What are prices in an economy?
Monetary indicators of the relative value of goods and services.
How do prices affect resource allocation?
- Match output with consumer demand
- Ration limited supply
- Prevent wastage of resources
- Signal producers and consumers
