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Economics > what is economics/ how economies operate (me ch2) > Flashcards

what is economics/ how economies operate (me ch2) Flashcards

1
Q

aggregate

A

total

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2
Q

five sector circular flow of income

A
  • household/individuals
  • firms/ businesses (firm=business, all levels)
  • financial institutions (banks, credit unions, lenders, investment companies, etc)
  • governments (local, state, federal)
  • overseas (international trade)
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3
Q

Household sector

A
  • any individual who earn an income (e.g. interest, wages, rent, profit)
  • by selling productive resources (land, labour, enterprise, capital)
  • to the firms sector
  • with the money they earn, households purchase goods and services from the firms sector to satisfy their needs and wants
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4
Q

Firms sector

A
  • includes all private business enterprises in the economy that produce and distribute goods and services to consumers
  • firms buy productive resources from the household sector and make factor payments in return
  • firms attempt to maximise profit from their production activities by minimising costs and maximising revenue
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5
Q

Difference between goods and services

A

tangible= goods
intangible= service

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6
Q

two sector circular flow of goods and income

A

interaction between household and firms

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7
Q

the economy consists of two sectors ____ and ______

A
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8
Q

o

A

output

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9
Q

e

A

expenditure

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10
Q

y

A

income

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11
Q

c

A

consumer

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12
Q

real flows

A

A type of flow that shows the flow of goods and services only

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13
Q
A

goods and services and consumer expenditure goes opposite ways
while wages, rent, divid

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14
Q

finance sector

A
  • all financial institutions who engage in the borrowing (bank and non bank) and lending of money and the sale and purchase of financial assets and services to firms and households
  • attempt to maximise profits by charging interest> than the amount they pay to public for depositing funds
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15
Q

government sector

A
  • economic activities of local, state, and federal governments in Australia
  • raise revenue via taxes, rates, fees and charges
  • then use this revenue to provide COLLECTIVE (helps community) goods and services to the community such as law and order, defence, education, health, social security and community services.
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16
Q

overseas sector

A
  • international money flow (borrowing and lending, payment and receipts
  • export and import of goods and services out of and into Australia
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17
Q

trade flow

A

export and import) of goods and services

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18
Q

how much is the goods and services tax in Australia?

A

10%

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19
Q

leakages (another word for it)

A

withdrawals

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20
Q

Leakages=(another name and examples of it

A

outflow:
includes savings, taxes, imports

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21
Q

Equilibrium(how does it relate to stability)

A
  • we want
  • stability within economy is dependent upon having this between inflows and outflows In the circular flow of income
  • no
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22
Q

Equilibrium formula

A

S+T+M= I+G+X

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23
Q

Disequilibirum

A

injections> leakages= growth of economy

24
Q

PPF

A

production possibility frontier

25
Q

ppf definition

A

graphical representation of al the possible combinations of the production of the two goods or services that the economy can produce at any different time

26
Q

the simple ppf is based on a number of assumptions:

A

The economy produces only two goods &/or services
The technology used is constant
The quantity of resources available remains unchanged
All resources are used to their full capacity

27
Q

ppf concave shape:

A

not all resources are being utilised (2 points away from ppf curve

28
Q

cost-benefit analysis

A

A cost-benefit analysis is a process used to measure the benefits of a decision or taking action minus the costs associated with taking that action.

29
Q

Factor market

A

Resource market
Includes the four

30
Q

What are the two markets?

A

Factor market and product market

31
Q

What is the relationship between factor/resource market and product market?

A

In the factor market, households sell their resources while firms purchase them (to produce goods and services for their consumers), paying them back with wages and rents
In the product market, firms sell their goods and services to consumers of the household sector(who pays consumption expenditure), thereby gaining revenues.

32
Q

Consumption expenditure

A

Spending on goods and services

33
Q

A sector is defined as…

A

an aggregation of economic units which perform a similar function.

34
Q

Leakages and injections occurs when

A

The other 3 sectors (international, fnance, government) has interactions of money with the household and the firms sector.

35
Q

Factor payments

A

A wage, interest, rent, and profit payment for the services of scarce resources, or the factors of production (labor, capital, land, and entrepreneurship), in return for productive services.

36
Q

Describe assumed tendency for income to change in economics.

A

There is no tendency for levelsof income to change – thecircular
flow of incomeremains constant.

37
Q

What are the assumptions for a 2-sector circular flow to be possible?

A
  1. The economy consists of two sectors: households and firms
  2. Households spendall oftheir income (Y) on goods &services or consumption (C).There is no saving.​
  3. All output (O) produced byfirms is purchased byhouseholds through theirexpenditure (E).​
  4. There is no financial sector, governmentsector or overseas sector.​
    Therefore,​ Y = E = O​
  5. There is no tendency for levelsof income to change – thecircular flow of incomeremains constant.
38
Q

Real flow

A
  • does not consist of money
  • barter
39
Q

Explain what leakage are.

A

Items that remove money from the circular flow of income, decreasing the aggregate income and general level of economic activity, e.g. savings, taxation and import expenditure

40
Q

Injections

A

Flows of money that increase aggregate income and the general level of economic activity. E.g. investment, government expenditure, exports

41
Q

Describe the circular flow of income (full cycle)

A
  • Households consume domestically produced goods and services, paying expenditures.
  • Leakages occur via net savings (to bank) net taxes (to gov.) and import expenditure (to overseas)
  • injections occur via investment from bank, government expenditure from gov. and export expenditure from overseas
  • while firms make factor payments back to the household
42
Q

recession

A

a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.

43
Q

What happens when the economy keep leaking money?

A
  • expenditures reduce, production decrease, income decrease unemployment increase, economy will collapse
  • therefore we need injections
44
Q

S

A

Savings

45
Q

i

A

investment

46
Q

t

A

taxes

47
Q

g

A

government spending

48
Q

m

A

imports

49
Q

x

A

exports

50
Q

What happens when S+T+M> I+G+X?

A
  • levels of income, expenditure and output will fall causing a contraction or recession
  • as income falls,
    households will cut back spending, pay less taxes, spend less on imports
  • leakages of saving, taxation and imports therefore fall until they equal injections of investment, government spending and exports
  • therefore lower level of equilibrium income will be established
51
Q

How is equilibrium achieved when S + T + M < I + G + X?

A

-levels of income, expenditure & output will rise causing an expansion or boom in economic activity.
- As income rises:-households will increase their saving, pay more taxation and spend more on imports
- leakages of saving, taxation, and imports will rise until they equal injections of investment, government spending & exports
- a higher level of equilibrium income will be established

52
Q

How does new technology affect the ppf?

A

With the application of new technology more efficient methods of production may be developed. This might allow us to produce a higher quantity of good with the same resources.
e.g. Automated Harvesting and using robotics in food processing to increase efficiency of food production.

This can be represented by an outward shift in the PPF.

53
Q

what affects the ppf?

A
  • new technology (e.g. robots, automated harvesting
  • availability of resources (e.g. labour)
  • unemployment
54
Q

How does unemployment affect the ppf?

A

not just people – other resources can be unemployed too - when they are used inefficiently & are therefore unable to satisfy maximum wants).

In this case the economy produces at a point underneath (or within) the PPF – shown as Point A in this example.

55
Q

What does the shape of the ppf tell us? What about whether if points land on the curve or not?

A
  • linear:
    If opportunity costs are constant; reflects a situation where resources are not specialised and can be substituted for each other with no added cost.
  • concave,curving outwards irl: because of increasing opportunity cost
  • efficient output if the points lie on the existing ppf, not yet attainable if lie on top of ppf, inefficient combination if lie below ppf (not all resources are full utilised
56
Q

gdp

A

gross domestic product
monetary value of final goods and services bought by the final user produced in a country in a given period of time (say a quarter or a year).

57
Q

aggregate demand

A

the amount of goods and services we are going to produce in our economy domestically and which get demanded for over a period of time
- factor that shifts this demand= injection

Economics (15 decks)

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