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ECON TEST 1
Unit 1-3
| Question | Answer |
|---|---|
| Economic problem | Unlimited wants, limited resources |
| What is economics? | The choices we make to manage limited/scarce resources to satisfy unlimited wants About scarcity, choices & opportunity costs |
| Choices are based on: | Wants (desires) Needs (essentiaal for survival) Demands (only if you have the means to satisfy the want/need) |
| Scarcity | Limited resources: can't satisfy all goods & services people want |
| Types of resources: | Natural(land) Human (labour & entrepreneurship) Capital(input) |
| Opportunity cost: | Value of best foregone opportunity Results from choices we make |
| How is scarcity, choice & OC illustrated | PPC (Production possibilities curve/frontier) |
| Explain PPC | Shows relationship between 2 goods attainable when resources are fully used Underutilization: under curve Full utilization: on curve (choice) Not attainable: above curve (scarcity) Shape: Sloping downwards & concave (opportunity cost) |
| Shifts in PPC | When the whole curve shifts |
| Improving techniques for producing capital goods | Swivels outward on x-axis |
| Improving techniques for producing consumer goods | Swivels ouwards on y-axis |
| Improved productivity OR increase in resources | Economic growth Shift whole PPC to right |
| Goods vs Services | Goods: tangible, can be stored Services: intangible, produced & consumed at the same time |
| Consumer vs Capital goods | Consumer: for personal consumption; satisfy wants directly Capital: Used to produce other goods & services |
| Non-durable, semi-durable and durable goods | Non-durable: used once Semi: Used more than once for a limited period Durable: Lasts a number of years |
| Final vs Intermediate goods | Final: sold and used as final product Intermediate: purchased to produce other goods |
| Private vs public goods | Private: individual or per household Public: for good of society or community |
| Economic vs Free goods | Economic: scarce - has price Free: unlimited: no cost |
| Homogenous vs heterogenous | Homo: exactly alike Hetero: Varieties |
| Micro vs Macro | Micro: individual parts in economy (supply & demand) Macro: economy as a whole (Total productions, unemployment....) |
| Positive vs Normative | Positive: Fact Normative: Opinion |
| Blinkered approach | Own vantage point |
| Fallacy or composition mistake | whole is not the same as parts in the economy |
| Post hoc ergo propter hoc | after this, therefore because of this |
| Correlation and causation mistake | one event is not the cause of another |
| Factors of production | Resources to produce goods natural, capital, labour, entrepreneurship, some see tech as 5th |
| Common economic misperceptions | Blinkered /bias approach Fallacy or composition Post hoc ergo propter hoc Correlation and causation Levels and rates of change |
| Economics as a social science: | Studies human behaviour as empirical science, and measures actual experiences in constantly changing environment. |
| What is an economic system? | Patterns of org that are aimed at solving 3 central questions (what, how, whom) |
| Three central questions | Output: what goods & services in what quantity Input: how goods & services are produced Distribution: whom is in produced for |
| Economic systems | Traditional Market Command Mixed |
| Traditional system | Oldest system Rigid social customs Based on culture & tradition Family & gender oriented Small communities focused on subsistence farming & hunting Found in parts of Asia, Africa & South America |
| Pros & Cons of TS | Pros: Economic behavior still governed by tradition Children follow parents' way Clear & easy answers to central questions Cons: Rigid - slow to change Resists innovation Econ activity is not first priority |
| Three central questions | Output: what goods & services in what quantity Input: how goods & services are produced Distribution: whom is in produced for |
| Command Systems | Government makes all econ decisions; like allocating resources Centrally planned/ socialist/ communist More socialist than communist |
| Socialist vs communist | Socialist: all but labour is state owned Communist: All factors are common property |
| Pros and Cons of CS | Pros: Reduced inequality Basic needs guaranteed Economic stability Cons: Lack of incentives Inefficiency Limited consumer choices |
| Market: | Contract of communication between potential buyers & sellers. No requirement for location Requirements: a buyer & seller; seller have something to sell; buyer has means to buy; exchange ratio must be determined; agreement guaranteed by law/tradition |
| Market system | Based on private ownership & allows prices & markets to direct economy Market prices are indication of scarcity Types of goods & services depends on distribution of income Capitalist system - profit driven Based on self interest Invisible hand (Adam) |
| Characteristics of MS | - Right to possession of property - Decentralized decision making - Supply & demand -Technical progress - Specialization - Active, yet limited government intervention |
| Pros and Cons of MS | Pros: Efficient allocation of resources Strong incentives Wide variety Cons: Income inequality Underprovided public goods Economic instability |
| Mixed system | Limited gov intervention using free market concepts: CS + MS |
| Privatization vs Nationalisation | Privatization: Selling to private sector Nationalization: state acquires privately owned assets |
| Adam Smith | Wealth of Nations 1776 Market system extended trade (X more Z less) Decentralized decision making: selfish interests/ invisible hand Division of labour Free trade Expand market Limit gov role |
| Karl Marx | Das Kapital 1867 Labour adds value to economy Against capitalism: exploits labour ,increase tech unemployment, discriminating End capitalism by giving companies or workers or gov Communism as final system Didn't predict capitalist system to adapt |
| John Maynard Keynes | Theory of unemployment 1936 helped lay Mixed S foundation Total economic activity determined by total demand; production won't create demand Gov intervention to stimulate AD & reduce taxes (fiscal policy) Reduce interest rates (monetary policy) |
| Fiscal vs Monetary | Fiscal: Stimulate AD to reduce taxes or increase spending Monetary: Reduce interest rates or increase money supply |
| Production | to satisfy human wants in mixed economy, all econ agents are participating in production process firms employ factor of productions households are rewarded for their factors household spends income on consumer goods & firms spend on capital goods |
| Flows in economy | Production Income Spending |
| Stocks vs flows | Stocks: no time dimension, measures @ specific moment ex. wealth & population Flows: Time dimension, measured over period of time ex. income & demand for labour |
| Natural resources: | gifts of nature cannot increase availability |
| Labour resources | Definition: Exercise of mental and physical effort in production of goods Quantity: dependent on population, able & willingness to work and age and gender Quantity: Human capital, skill, knowledge & health |
| Capital resources | manufactured resources, tangible depreciation allownace |
| Entrepreneurship | innovators who see opportunities willing to take risks by producing goods and expecting it to be sold |
| Technology | Amount of knowledge in production Invention: discovery of new knowledge Innovation: incorp of new knowledge into production argued to be part of entrepreneurship and capital resources rather than its own resource |
| Money as a factor of production | NOT a factor! Goods & services cannot be produced WITH money, medium of exchange |
| Sources of production | How goods & services should be produced Choosing best method for production Capital intensive: production dominated by machines Labour intesive: production dominated by labour used Depends on avaiability, cost and quality |
| Sources of income | Rewards for FOP Rent: Natural resources Wages & Salaries: Labour Interest: Capital Profit: Entrepeneurship |
| Sources of spending | - Households - Firms - Gov - Foreign sector |
| Households / Consumers (C) | Units in economy Live together & make joint econ decisions Owns most FOP & sells them on factor market to firms Rewarded with income Use income to buy consumer goods & services (C) in goods market Rational being - max satisfaction |
| Firms (I) | Production agent- decides how goods & services are produced Rational beings - max profit Buys FOP in factor market Transforms FOP into goods & services, and sells it in goods market When firms buy capital good = investing (I) |
| Circular flow of goods & services: | Firms provides goods & services on goods market Goods market provides goods & services to consumers Consumers provide FOP to factor market Factor market provides FOP to firms |
| Circular flow of income: | Anti - clockwise of circular flow of goods & services |
| Government | Local, provincial & national gov Serve communities & achieves national goals Sets up frameworks in economy In middle of circular flow, buying from both markets & levying taxes on households & firms |
| Gov main economic functions: | Gov expenditure (G) taxes levied on & paid by households & firms (t) transfer payments |
| Total expenditure: | A = C+I+G+X-Z |
| Foreign sector: | Exports (X): sold to rest of world Imports (Z): purchased from other countries |
| Balance of payments | Various flows between a country and the rest of the world |
| Injections | Additions into circular flow, multiplying expansion of output - Investment spending (I) - Government spending (G) - Exports (X) |
| Leakages | Withdrawals from main flow, reducing money available - Taxes (t) - Savings (S) - Imports (Z) |
| FInancial Institutions | Not directly involved in production Links surplus units and deficit units Also in middle of cicular flow |
| Main economic activities | - Production - Consumption - Exchange |
| Specialisation | Production is categorized by specialization Causes division of labour Needs exchange for other specializations |
| Exhange | Trade between different parties |
| Opportunity costs | Determines where to specialize & exchange: where OC is the lowest. |
| Law of comparative advantage: | Absolute advantage: better in all aspects Relative advantage: Comparing OC, and choosing based on relativity |
| Macroeconomic objectives | 1. Economic growth: Production increases, income increases 2. Full employment: Low to no unemployment 3. Price stability: Low to no inflation 4. Balance of payment stability 5. Equitable distribution of income: lower poverty & narrow income gap |
| SA's factor endowment | Natural: Agriculture relatively poor; forestry little commercial value; mineral wealth Labour: Shortage of skilled labour, oversupply of unskilled labour Capital: import a lot of machinery Entrepreneurship: Imporoved, but still have strict laws |
| Aggregate spending does not include | Taxes |
Created by:
CARA.FAURIE
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