Chapter 2

• Resources and rewards,

  • land -> rent
  • Labour -> wage
  • Capital -> interest
  • Enterprise -> profit
• Factor and production refers to quantity and quality which in turn, shows how wealthy a country is
• When income is higher, demand is higher
• Contraction: when graph moves downward

  Expansion: when graph moves upwards

  Too much expansion can lead to contraction
• Taxes are used to regulate the economic boom, so retention doesn't occur
• Common phases of the business cycle: peak, contraction, trough, expansion. Recession is two consecutive quarters of negative GDP growth
• Negative GDP growth: when the GDP grows less than how much it grew the previous time, so it is still growth, however, economies are supposed to continuously grow.
• Circular economy: consists of leakages and injections
• Individual leakages include:

  Expenditure on goods and services

  Savings

  Taxes

  Imports

  Individual injection includes being rewarded with income

  Savings -> financial institutions

  Taxes -> governments

  Imports -> international flows

  All of these get injected into the economy through businesses/corporations/firms

  The injection methods include:

  Financial institutions -> investments

  Governments -> expenditure

  International funds -> exports
• The circular flow of the economy:

  
• Businesses: investments in this sector are the most volatile
• Financial institutions: savings are managed where they can further invest into businesses to keep injections flowing
• International imports and exports, covers all the transactions the country makes, exports are considered as injections since we get value from it into the economy, imports are considered as leakages since we spend to get value into the economy
• Equilibrium, when the sum of all leakages are equal to the sum of all injections
• When leakage is high, injection is low

  When injection is high, leakage is low
• Government taxes individuals who earn more since they don't provide much economic value or growth since they typically less on G&S
• for equilibrium:

  STM = IGX

  Savings = Investments

  Taxes = Expenditure

  Imports = Exports
• Modified economies are both government controlled and market controlled
• Centrally planned a fully government controlled
• There is no example of a pure market or a pure planned economy
• The more market like an economy becomes the more the difference in the wealthy and the poor are and the cycle in more volatile
• Price becomes important, as consumer want the lowest possible price meanwhile firms and businesses want the highest possible price
• Price mechanisms conveys the wishes of consumers to producers, this includes price changing to sustain equilibrium
• Product market is where goods and services are sold
• Factor market for factors of production, price mechanism influences this since resources are allocated for the economy