What is your problem?!
What is the economic problem?
Unlimited wants and limited resources resulting in scarcity.
What are wants?
Goods and services that we desire because they give us satisfaction
Define opportunity cost
Opportunity cost is the value of the next best alternative foregone when a choice is made
What does PPC stand for?
Production Possibility Curve
What are the 5 sectors of the Circular Flow of Income model (CFM)?
Household sector
Production sector
Finance sector
Government sector
Foreign sector
Define the business cycle
The business cycle is an economic model that demonstrates the alternate but irregular periods (4-6 years) of prosperity and recession which naturally occur within an economy.
What is the formula for AD/GDP?
AD = C + I + G + (X-M)
What are the three questions that every economy has to make a choice on?
What and how much do we produce?
How do we produce it? (capital v labour)
For whom do we produce?
What are needs?
Goods and services necessary for survival in our society (ie. food, water, shelter, etc.)
How do you calculate opportunity cost?
give up/gain
What is an alternative name for the PPC?
PPF - Production Possibility Frontier
How would you describe the equilibrium of the economy, using the CFM? (including formula)
Equilibrium is a balanced situation from which there is no tendency to change. For example, in the circular flow, where injections equal leakages, causing output, income, expenditure and employment to remain unchanged. To be in balance, total Leakages equal total Injections (S + T + M = I + G + X). It does not happen often in the real world.
Describe the characteristics of the Upturn phase of the business cycle
A period where there is rising GDP/economic activity/AD;
Increasing business and consumer confidence;
Increasing use of resources (factors of production); Decreasing unemployment;
More increase in general price levels (inflation)
Define Aggregate Demand
Aggregate demand is the total demand for all finished goods and services in an economy. It is calculated by adding consumption expenditure by households, private investment expenditure by firms or the production sector, government expenditure and net exports.
Who makes economic decisions?
Individuals, Businesses, Governments
What are some of the characteristics of wants? (including an example)
unlimited/unsatiable
varying in intensity (seasonal) - eg. ice cream, winter clothes, toys)
recurring
complimentary - eg. fish & chips
competitive/substitute - burger or hotdog or pizza, Maccas v Hungary Jacks
EXPLAIN the concept of opportunity cost
[definition] Opportunity cost is the value of the next best alternative foregone when a choice is made.
[example] For example, if I choose to play football in Term 2 (gain), I give up playing tennis (opportunity cost).
[explanation linking to eco concept] This is because I only have a limited amount of time (scarce resource) to play sport and cannot fit both activities into my schedule.
What is technical efficiency?
At this point, the nation’s resources are being used in the most efficient way to produce the maximum amount of goods and services at the lowest cost.
What would happen to the economy if the government decides to build a hospital, ceteris paribus?
Work your way through the CFM.
G^ = Injections increase -> Producers confidence ^, Jobs ^, Output ^ -> more income to the consumer sector Y^ -> Consumer confidence ^ -> Consumption increases C^ = meaning further injections into the production sector. As a result, ceteris paribus, the economy is expected to expand.
Describe the characteristics of the business cycle when the economy is in a trough
•The lowest point in a cycle with below average economic activity/AD/GDP;
•Reduced profits; Low business and consumer confidence; High unemployment;
•Low inflation (prices may even be falling).
What factors are affecting consumptions (C) and investment expenditure (I) in an economy?
Consumption: Level of income, wealth, prices/inflation, expectations, consumer confidence, interest rates, etc.
Investment expenditure: Interest rates (=the cost of borrowing money), business confidence/expectations, technological developments, etc.
What are the factors of production (FOP) and what is their incentive/reward?
Land - Rent
Labour - Wages
Capital - Interest
Enterprise/Entrepreneurship - Profit
Recall the structure of EVALUATION
EVALUATION
* Topic Sentence with CLEAR STANCE and CRITERION
* 2-3 supporting arguments with DATA/EVIDENCE, explaining HOW THE KEY TREND impacts the chosen criterion explicitly.
* 1-2 qualifiers/limitations explaining how it impacts the chosen criterion
* Conclusion - reiterating your decision and arguments, linking it again to how it impacts the criterion and the economy overall.
System of decision making: the Government controls economic decisions
System of ownership: State-owned resources and enterprises
Income & Wealth distribution: Incomes set by government; tends to be more equal distribution
Production of G&S: Govt provides most of the goods and services for households
eg. North Korea, Cuba
What is allocative efficiency?
Occurs when resources are allocated in the most efficient way to generate the maximum possible benefits for both consumers and the nation.
(Give people what they want.)
What would happen to the economy if an Australian mining company sells iron ore to a steel manufacturer in China. Work your way through the CFM.
Exports increase X^ = Injections increase -> Producers confidence ^, Output ^, Jobs^ -> more income to the consumer sector Y^ -> Consumer confidence ^ -> Consumption increases C^ = meaning further injections into the production sector. As a result, ceteris paribus, the economy is expected to expand.
Explain what the government would experience in a downturn
Due to people losing their jobs, the Government will start spending more on unemployment benefits (G) and collecting less tax (T) revenue (both from individuals through income tax, the production sector through company tax, and less GST is collected as consumption (C) is decreasing with the declining income level of the households.
Explain how expectations might influence consumer expenditure (C) levels in the economy.
Households base their consumption decisions on expected future income and economic conditions. If consumers expect higher future income or economic growth, they are more likely to increase spending, boosting aggregate demand. Conversely, pessimistic expectations about income, job security, or inflation may lead to higher savings and reduced consumption, slowing economic growth.
Describe each factor of production
LAND - Natural resources which can be used in production (renewable & non-renewable)
LABOUR - Mental and physical human input. Both the number of workers and their level of skills measure the labour resource
CAPITAL - Human made resources that can be used to create further goods and services
ENTERPRISE - Risk takers who have the ability to initiate and manage the process of combining land, labour and capital to make a profit.
Recall the structure of ANALYSIS
ANALYSIS
* Topic sentence - what is the key message
* Key trend - what is/are the key trend(s) using 4DS&2C
* Causes and Effects of the key trend - Linking each idea back to the key trend explicitly
Describe market economies using an example country
System of decision making: Consumers decide how resources are used (market based)
System of ownership: privately owned resources and enterprises
Income & Wealth distribution: greater inequality; those with more income purchase more G&S
Production of G&S: private sector produces G&S, driven by profit motive
What does Ceteris paribus mean?
"All else equal"
What would happen in the economy if the Government increases taxes? Work your way through the CFM.
Households would have less disposable income as their taxes increases (T^), resulting in less consumption (C decrease), therefore the Production section would decrease output (O) and jobs, which will then cause the income (Y) to Households to decrease so consumer confidence would decrease.
Overall, ceteris paribus, the economy is expexted to contract as a result.
Explain the concept of Paradox of Thrift
The paradox of thrift is an economic theory that suggests people try to save more in times of recession, which leads to a fall in both aggregate demand (the total demand for goods and services within the economy) and economic growth. While saving money is beneficial for an individual, if everyone in an economy increases their savings simultaneously, it can lead to a decrease in overall economic demand. The impact of this might be an economic slowdown or contraction of the economy.
Explain how expectations might influence business investment (I) levels in the economy.
Firms make investment decisions based on expected future profits, interest rates, and economic stability. If businesses anticipate strong demand and economic growth, they are more likely to increase investment in capital goods, expanding production. However, uncertainty or expectations of a downturn may lead to delayed or reduced investment, dampening economic activity.