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Economics - Coggle Diagram

- - - - The Fundamental Economic Problem
        
        Scarcity: Unlimited human wants exceeding finite resources
        
        Economic Goods: Scarce resources that require an opportunity cost to consume
        
        Free Goods: Abundant resources without opportunity cost (e.g., air, sunlight)
      - Factors of Production (CELL)
        
        Land: All natural resources (e.g., minerals, oil, farmland) — Reward: Rent
        
        Labour: Human physical and mental efforts in production — Reward: Wages
        
        Capital: Man-made resources used to produce other goods (e.g., machinery, factories) — Reward: Interest
        
        Enterprise: Risk-taking and managerial ability to combine CELL — Reward: Profit
        
        Mobility: Occupational (ability to change jobs) and Geographical (ability to change location)
      - Opportunity Cost
        
        Definition: The next best alternative foregone when a choice is made
        
        Importance: Helps consumers, producers, and governments allocate resources efficiently
      - Production Possibility Curve (PPC)
        
        Definition: Shows maximum combinations of two goods/services an economy can produce with full resource use
        
        Points on the curve: Efficient utilization of resources
        
        Points inside the curve: Inefficient use or unemployed resources
        
        Points outside the curve: Unattainable with current resources
        
        Shifts of PPC: Shift right = Economic growth, improved technology, higher labor supply; Shift left = Natural disasters, war, resource depletion
  - - - Microeconomics vs Macroeconomics
        
        Microeconomics: Study of individual decision-makers (consumers, firms, markets)
        
        Macroeconomics: Study of the entire economy (GDP, inflation, unemployment, trade)
      - The Role of Markets & Price Mechanism
        
        Allocates scarce resources via interaction of supply and demand without government intervention
        
        Signals shortages/surpluses, creates price incentives, and rations resources
      - Demand
        
        Definition: Willingness and ability of consumers to buy a good at a given price
        
        Law of Demand: As price rises, quantity demanded falls (inverse relationship)
        
        Individual vs Market Demand: Market demand is the sum of all individual demands
        
        Factors Shifting Demand Curve: Changes in income, price of substitutes/complements, consumer tastes, advertising, population size
      - Supply
        
        Definition: Willingness and ability of producers to offer a good for sale at a given price
        
        Law of Supply: As price rises, quantity supplied rises (direct relationship)
        
        Factors Shifting Supply Curve: Costs of production, advances in technology, indirect taxes, government subsidies, weather conditions
      - Market Equilibrium & Price Determination
        
        Equilibrium Price: Quantity Demanded = Quantity Supplied (Market clears)
        
        Disequilibrium: Excess Demand (Shortage) when price is below equilibrium; Excess Supply (Surplus) when price is above equilibrium
      - Price Elasticity of Demand (PED)
        
        Formula: % Change in Quantity Demanded / % Change in Price
        
        Elastic Demand (PED > 1): Quantity changes by a larger % than price (Flatter curve)
        
        Inelastic Demand (PED < 1): Quantity changes by a smaller % than price (Steeper curve)
        
        Determinants: Availability of substitutes, degree of necessity, proportion of income, time period
        
        Relationship to Total Revenue: If elastic, price cut increases revenue; if inelastic, price rise increases revenue
      - Price Elasticity of Supply (PES)
        
        Formula: % Change in Quantity Supplied / % Change in Price
        
        Determinants: Time period, spare capacity, availability of raw materials, factor mobility
      - Cross and Income Elasticity
        
        Income Elasticity (YED): Measures demand response to changes in consumer income (Normal vs Inferior goods)
      - Economic Systems
        
        Market Economy: Private ownership, price mechanism decides what/how/for whom to produce; Pros: Efficiency, choice; Cons: Monopolies, inequality
        
        Planned Economy: Government owns resources and controls production; Pros: Basic needs met; Cons: Inefficiency, shortages
        
        Mixed Economy: Combines market mechanism with government intervention
    - - Market Failure
        
        Definition: Occurs when the price mechanism fails to allocate resources efficiently
        
        Externalities: External Costs (Negative) and External Benefits (Positive) imposed on third parties
        
        Equations: Social Cost = Private Cost + External Cost; Social Benefit = Private Benefit + External Benefit
        
        Merit Goods: Under-consumed and under-provided by market (e.g., healthcare, education)
        
        Demerit Goods: Over-consumed and over-provided by market (e.g., cigarettes, alcohol)
        
        Public Goods: Non-excludable and non-rivalrous (e.g., streetlights, defense) — Free-rider problem
      - Government Intervention Tools
        
        Indirect Taxes: Increases production costs to reduce consumption of demerit goods
        
        Subsidies: Financial aid to reduce costs and boost production of merit goods
        
        Direct Provision: Government provides public/merit goods directly using tax revenues
        
        Price Controls: Maximum Price Ceiling (must be set below equilibrium to protect consumers, causes shortages); Minimum Price Floor (must be set above equilibrium to protect producers, causes surpluses)
        
        Regulations & Laws: Mandates, bans, and quotas to restrict harmful activities
  - - - Money
        
        Functions: Medium of exchange, unit of account, store of value, standard of deferred payment
        
        Characteristics: Acceptable, durable, portable, divisible, scarce, uniform
      - Banks
        
        Commercial Banks: Accept deposits, provide loans, facilitate payments, earn profit via interest rate margins
        
        Central Bank: Government's bank, issues notes/coins, sets interest rates, manages foreign reserves, lender of last resort
    - - Spending, Saving, and Borrowing
        
        Factors Influencing Spending: Real disposable income, interest rates, consumer confidence, wealth
        
        Factors Influencing Saving: Interest rates, economic uncertainty, age demographic, future financial goals
        
        Factors Influencing Borrowing: Interest rates, credit availability, confidence, wealth/collateral
    - - Wage Determination
        
        Interaction of demand for labor (derived demand) and supply of labor
        
        Factors Affecting Wages: Qualifications, experience, working conditions, risk, fringe benefits
      - Division of Labour & Specialisation
        
        Definition: Workers concentrate on specific tasks in the production process
        
        Pros for Workers/Firms: Higher skill mastery, faster production, increased output
        
        Cons for Workers/Firms: Boredom, risk of automation/repetitive strain, loss of flexibility
    - - Role and Functions
        
        Organizations representing workers to protect wages, working conditions, job security, and health/safety
      - Impact on the Economy
        
        Collective Bargaining: Negotiates higher wages or better conditions
        
        Potential Drawbacks: Industrial action (strikes) reduces output; excessively high wages can increase unemployment
    - - Types & Organization
        
        Primary Sector: Extraction of natural resources (agriculture, mining)
        
        Secondary Sector: Manufacturing and construction
        
        Tertiary Sector: Services (banking, tourism, retail)
      - Size of Firms
        
        Measurement Metrics: Number of employees, total turnover/revenue, market share, capital employed
        
        Why Small Firms Survive: Niche markets, personalized service, flexibility, lower startup costs
    - - Production vs Productivity
        
        Production: Total volume of output produced
        
        Productivity: Output per unit of input (e.g., output per worker per hour)
      - Economies and Diseconomies of Scale
        
        Internal Economies of Scale: Average cost falls as output increases (Purchasing, Financial, Technical, Risk-bearing, Managerial)
        
        External Economies of Scale: Cost advantages enjoyed by all firms in an industry due to growth of the sector
        
        Diseconomies of Scale: Average cost rises as output grows too large (Communication barriers, coordination issues, low morale)
    - - Costs of Production
        
        Fixed Costs (FC): Do not change with output in the short run (e.g., factory rent)
        
        Variable Costs (VC): Change directly with output (e.g., raw materials, wages)
        
        Total Cost (TC) = FC + VC
        
        Average Total Cost (ATC) = Total Cost / Quantity
      - Revenue
        
        Total Revenue (TR) = Price x Quantity
        
        Average Revenue (AR) = Total Revenue / Quantity = Price
      - Profit & Objectives
        
        Profit = Total Revenue - Total Cost
        
        Firm Objectives: Profit maximization, revenue maximization, growth, corporate social responsibility, survival
    - - Competitive Markets
        
        Features: Many buyers/sellers, homogeneous products, freedom of entry/exit, price takers
        
        Consequences: Lower prices, high consumer choice, efficiency
      - Monopoly
        
        Features: Pure monopoly is a single seller; dominant firm has >25% market share, high entry barriers, price maker
        
        Pros: Economies of scale, profits fund innovation/R&D
        
        Cons: Exploitative pricing, lower output, restricted consumer choice, inefficiency
  - - - Five Primary Macro Goals
        
        High and stable economic growth (GDP)
        
        Low and stable inflation (Price stability around 2%)
        
        Low unemployment / High employment
        
        Balance of Payments stability (Avoid huge deficits)
        
        Redistribution of income (Reducing poverty and inequality)
      - Conflicts Between Aims
        
        Growth vs Inflation (rapid growth causes demand-pull inflation)
        
        Economic Growth vs Balance of Payments (higher incomes increase import demand)
        
        Inflation vs Unemployment (Phillips Curve relationship in the short run)
    - - Government Budget
        
        Tax Revenue vs Government Spending
        
        Budget Deficit: Spending > Revenue; Budget Surplus: Revenue > Spending
      - Taxation
        
        Direct Taxes: Levied on income, wealth, or corporate profits (e.g., Income Tax, Corporation Tax)
        
        Indirect Taxes: Levied on spending/goods (e.g., VAT, Excise Duty)
        
        Tax Systems: Progressive (tax rate rises with income), Regressive (takes higher % of low incomes), Proportional (flat rate)
      - Policy Stance
        
        Expansionary Fiscal Policy: Lower taxes and higher government spending to stimulate aggregate demand (AD) and growth
        
        Contractionary Fiscal Policy: Higher taxes and lower spending to reduce AD and control inflation
    - - Key Policy Tools
        
        Interest rates set by Central Bank, regulation of money supply, foreign exchange rate manipulation
      - Policy Stance
        
        Expansionary Monetary Policy: Cutting interest rates to encourage borrowing/spending and increase AD
        
        Contractionary Monetary Policy: Raising interest rates to curb borrowing, increase saving, and cool inflation
    - - Objectives
        
        Increase productive capacity (shift PPC right) and improve long-run aggregate supply (LRAS)
      - Key Measures
        
        Education and training to improve labor productivity
        
        Deregulation and privatization to boost competition
        
        Tax cuts to incentivize work, investment, and enterprise
        
        Subsidies for research and development (R&D)
    - - Measurement
        
        Real Gross Domestic Product (Real GDP): Total value of goods/services adjusted for inflation
        
        GDP per capita: Real GDP / Total population
      - Causes of Growth
        
        Short-run: Increase in Aggregate Demand utilizing idle capacity
        
        Long-run: Increase in Aggregate Supply / Productive Capacity
      - Recession
        
        Definition: Two consecutive quarters (6 months) of falling Real GDP
        
        Consequences: Rising unemployment, lower tax revenues, business failures
    - - Measurement & Types
        
        Unemployment Rate: (Number of unemployed / Total labor force) x 100
        
        Frictional Unemployment: Temporary transition between jobs
        
        Structural Unemployment: Long-term mismatch of skills due to industry decline
        
        Cyclical Unemployment: Caused by lack of demand during economic recessions
        
        Seasonal Unemployment: Demand varies with seasons (e.g., tourism, agriculture)
      - Costs of Unemployment
        
        Costs to Individuals: Loss of income, reduced mental health, skill depreciation
        
        Costs to Economy/Government: Lost output, lower tax revenues, higher welfare spending
    - - Inflation
        
        Definition: Sustained increase in the general price level
        
        Causes: Demand-pull (Excess AD exceeding supply); Cost-push (Rising input costs like wages or raw materials)
        
        Measurement: Consumer Price Index (CPI) based on a weighted basket of goods
        
        Consequences: Reduced purchasing power, menu costs, shoe-leather costs, loss of international competitiveness
      - Deflation
        
        Definition: Sustained decrease in the general price level
        
        Causes: Demand-side (Collapsing consumer demand, causing recession); Supply-side (Increased output/tech, positive)
        
        Consequences: Deferred consumer spending, rising real value of debt, economic stagnation
  - - - Indicators of Living Standards
        
        Real GDP per capita: Measures average output per person
        
        Human Development Index (HDI): Composite measure combining Income (GNI per capita), Life Expectancy, and Education (Literacy & Schooling)
        
        Limitations of Real GDP: Ignores income inequality, unpaid labor, environmental degradation, and quality of life
    - - Types of Poverty
        
        Absolute Poverty: Inability to afford basic necessities needed for survival (food, clean water, shelter)
        
        Relative Poverty: Living on an income significantly below the average in a given society
      - Causes and Policies
        
        Causes: Low education levels, lack of healthcare, unemployment, low wages
        
        Policies: Progressive taxation, minimum wage implementation, free state healthcare/education, welfare transfer payments
    - - Factors Affecting Population Growth
        
        Birth rate, Death rate, Net migration (Immigration minus Emigration)
      - Demographics
        
        Dependency Ratio: (Dependent population: under 15 + over 65) / Working-age population (15–64)
        
        Optimum Population: Population size that maximizes output per head with available resources
        
        Overpopulation / Underpopulation: Excess or deficit of population relative to available natural resources
    - - Differences & Classification
        
        Developed Economies: High tertiary sector share, high HDI, low birth/death rates, advanced infrastructure
        
        Developing Economies: High primary sector share, low HDI, rapid population growth, capital scarcity
  - - - Concept
        
        Countries specializing in producing goods where they possess a production advantage
      - Pros and Cons
        
        Benefits: Higher global efficiency, lower average costs via economies of scale, greater choice
        
        Drawbacks: Risk of over-dependence on primary commodities, vulnerability to global demand shocks
    - - Globalisation
        
        Definition: Increasing worldwide integration and interdependence of goods, services, labor, and capital
      - Protectionism
        
        Definition: Government measures to restrict international trade to protect domestic industries
        
        Protectionist Methods: Tariffs (tax on imports), Quotas (physical limit on import volume), Embargoes (complete bans), Subsidies to domestic producers
        
        Reasons for Protectionism: Protect infant/sunrise industries, prevent dumping, protect jobs, correct trade deficits
    - - Exchange Rate Systems
        
        Floating Exchange Rate: Value set solely by market demand and supply of currency
        
        Fixed Exchange Rate: Currency value pegged to another currency or gold by central bank intervention
      - Exchange Rate Changes
        
        Appreciation / Revaluation: Increase in currency value; Exports become more expensive, imports cheaper
        
        Depreciation / Devaluation: Fall in currency value; Exports become cheaper, imports more expensive
    - - Structure of the Current Account
        
        Trade in Goods (Visible trade: exports - imports)
        
        Trade in Services (Invisible trade: tourism, banking, shipping)
        
        Primary Income (Net profit, dividends, interest earned from abroad)
        
        Secondary Income (Net current transfers: foreign aid, remittances)
      - Current Account Deficit vs Surplus
        
        Deficit: Outflows exceed inflows (Imports > Exports); Causes: Overvalued exchange rate, high inflation, uncompetitive domestic industries
        
        Surplus: Inflows exceed outflows (Exports > Imports)