Introduction to Economics
The fundamental economic problem every society faces
What is meant by the term 'scarcity' in relation to Economics?
What is the main goal of most firms in a market economy?
Profit maximisation
Where the factors of production are bought and sold.
Factor markets
What is the formula used to calculate the unemployment rate?
Unemployment rate = Unemployed / Labour Force * 100
Reducing the cash rate in order to stimulate aggregate demand and increase consumption, employment and economic growth.
Expansionary monetary policy
Name two instruments of fiscal policy
Government spending and taxation
What is opportunity cost?
The value of the next best alternative foregone (what you gave up)
Name one factor that influences consumer spending decisions
Income, price, advertising
Identify one factor that could cause a decrease in demand.
Decrease in consumer income, rise in interest rates, fall in popularity/change in preferences away from the good, decrease in price of a substitute good
Individuals who have been unemployed for more than 52 weeks
Long term unemployed
The difference between the nominal interest rate and inflationary expectations.
Real interest rate
Goods or services that are beneficial to society but may be produced in insufficient quantities because the private sector lacks incentive to supply.
Merit goods
What is meant by the 'allocation of resources'?
How limited resources are distributed among uses
An increase in average costs due to factors outside the firm’s direct control.
External diseconomies of scale
What is meant by the term ‘derived demand’?
The demand for productive resources (e.g. labour) is derived from the demand for the final goods and services.
Caused by a mismatch between the skills of employees and the job vacancies offered by employers.
What is the cause of structural unemployment?
The difference between a primary financial market and a secondary financial market
Primary = where new securities are issued
Secondary = where existing securities are traded
How can fiscal and monetary policy be used to reduce inflation?
Reduce government spending and increase taxation - fiscal
Raise the cash rate to lower demand - monetary
What are the four factors of production?
Land, labour, capital, enterprise
The mathematical formula that shows the relationship between disposable income, consumption and savings.
Y = C + S
Distinguish between a movement and shift in demand.
Movement = caused by a change in the price of the good itself. Will move to a different point on the same curve.
Shift = caused by factors other than a change in the price of the good itself e.g. increase in the size of the population. Will result in a new curve.
Individuals that are applying for jobs or have registered with a job agency or Centrelink as a jobseeker.
What is meant by the term 'unemployed'?
What is the cash rate?
The interest rate on overnight loans between banks, set by the RBA as the target for monetary policy
Consumption of the good by one individual does not reduce the quantity of the good available for other consumers.
Non-rival
What does the production possibility frontier show? (PPF)
The maximum output combination of two gives given resources and technology
When consumers go into debt because consumption exceeds income.
What is meant by the term 'dissavings'?
The sum of individual demands for a good or service.
What is market demand?
Derived from the demand for the goods and services that labour is used to produce.
What is meant by the term ‘derived demand for labour’?
Provides funds from people with a surplus to those with a shortage of funds and want to borrow.
Financial markets
Why might the government intervene in markets?
To address market failure, redistribute wealth, stabilise the economy
If a country is producing inside its PPF, what does this indicate?
Resources are underutilised
The business structures that have unlimited liability.
Partnership, sole trader.
Determine the impact on demand if consumers expect that the price of new shoes will increase in the future because of a new government tax.
Increase in demand (will purchase now before the price increases).
Name two factors that could increase the supply of labour
Higher immigration, increased participation rate, better pay and working conditions
The buying and selling of commonwealth government securities to maintain the cash rate.
Liquidity management
Involves achieving a budget deficit by increasing government spending and/or reducing taxation.
Expansionary fiscal policy
Identify two ways that a country can shift its PPF outward
1. Obtaining additional resources
2. Technological change that leads to efficiency improvements in the production process
Two sources of economies of scale.
Lower input costs
Advances in technology
Specialisation
Division of labour
The responsiveness of the quantity demanded to a change in the price of a good or service.
What is meant by the ‘price elasticity of demand’?
Individuals who have been discouraged from seeking work or due to family responsibilities, short-term illness or study.
What is meant by ‘hidden unemployment’?
Requires a buyer to purchase and a seller to set the asset, on a specific date.
What is a futures contract?
Explain one way that the government can reduce income inequality
Progressive taxation, welfare payments, education funding, healthcare access
The study of production, distribution and exchange of goods and services in an economic system.
What is economics?
What will be the impact on demand if there is a change in the price of a substitute good?
Price increase of substitute = increased demand
Inverse is true.
Identify one of the main factors that influence the price elasticity of demand for goods and services.
Necessities/luxuries
Substitutes
Proportion of income spent on the good
Length of time since a price change
Name two macroeconomic factors that determine the demand for labour.
Level of economic activity
Productivity of labour
Cost of labour
Government policies
What is the difference between debt financing and equity financing?
Debt = borrowing funds. Must be repaid with interest e.g. a loan from a bank
Equity = selling ownership stakes (i.e. shares). Don't have to be repaid. Dividends are issued from profits.
What are 'automatic stabilisers' in fiscal policy?
Economic policies that automatically offset economic fluctuations without new legislation (e.g., progressive tax, unemployment benefits)
Deals with the economy as a whole and how government policies and other factors impact the economy.
What is macroeconomics?
Calculate the APS and MPS if:
Savings = $600, APC = 0.7 and MPC = 0.6
APS = 0.3 and MPS = 0.4
Compare and contrast a monopoly and an oligopoly.
Both have high barriers to entry.
Both are price setters (monopoly to a greater degree than an oligopoly).
A monopoly involves a single firm that has no close substitutes e.g. Australia Post.
An oligopoly involves a few large firms (3-8). They sell a slightly differentiated product e.g. banks.
Refers to benefits employees receive in addition to their ordinary payments, such as sick leave, holiday leave, superannuation and fringe benefits.
What is meant by ‘non-wage outcomes’?
A firm that holds the funds or individuals or firms as deposits, and then loans these funds to other firms or individuals.
Financial intermediary
Why do governments attempt to control monopoly power?
To avoid a reduction in consumer sovereignty, consumer choice and output which can lead to a decline in consumer welfare.
The theory that consumer preferences determine the production of goods and services.
What is consumer sovereignty?
Outline the main components of the consumption function.
C = C0 + cY
C = total consumption
C0 = autonomous consumption (what you will spend regardless of how much you earn)
c = MPC (△C/△Y).
Explain an issue associated with the use of a price support scheme.
Price support scheme = price floor.
Floor established above equilibrium = excess supply.
This will need to be stockpiled/stored for sale at a later date to remove the surplus from the market.
The performance of the labour market in terms of wage and employment levels and how efficiently labour is allocated in the economy.
What is meant by ‘labour market outcomes’?
Where financial assets that are based on the value of other financial assets are bought and sold.
Derivatives market
People who benefit from a good or service without having to pay for its production or maintenance.
What are ‘free-riders’?