1. WHAT IS ECONOMI ECON OMICS CS ABOUT? ABOU T? Opportunity Cost •
Opportunity cost is the alternative want that we have to forgo when we satisfy another want. Note: This is not the monetary a!ue o" that #ant $ut the a%tua! #ant In&ii&ua!s: individual consumers have limited resources resources (limited income) and example may be that she has to choose between a holiday and a car. If she choose the car, her opportunity cost is the overseas travel she had to forgo. Businesses: businesses make choices when allocating scarce resources. The opportunity cost of using particular resources to produce shoes is the alternative option of using those resources to make furniture. 'oernment: the government has limited resources to satisfy community wants. If the government allocates resources resources to build a new motorway, the opportunity cost may be the construction of a new hospital.
The (ro&u%tion (ossi$i!ity )rontier •
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production possibility possibility frontier is a curve depicting the maximum output possibilities for two goods or services, assuming that all resources are used e!ciently, the "uantity of resources remains constant and the state of technology is unchanged.
ll points on the frontier itself (, # $ %) respresent points at which resources are fully employed and the economy is operating at full productive capacity. point inside the curve (&) signi'es that resources are unemployed and the economy is producing less than its maximum possible output. oint cannot be attained with the given input. n outward shift of the * signi'es that a higher "uantity of goods are produced. This can occur with the application of new te%hno!o*y + this may lead to more e!cient methods of production, leading to an increase in output using the same resources. The in%rease in inputs aai!a$!e "or pro&u%tion, such as the discovery of new resources, the expansion of the population through immigration, leading to an increase in the number of people available for work. The * would be drawn concave concave to the origin origin in real real life as it is unlikely unlikely that there there will be no loss of productive capacity as resources are moved from the production product to product # (as a straight line * suggests that the opportunity cost of producing product over product # is constant).
E%onomi% )a%tors Un&er!yin* Choi%es In&ii&ua!s: Individuals must make a choice about how much of their income to spend and how much to save. Individuals may choose to spend more if they are %on+&ent a$out the
"uture and the future of the economy. ersonality factors such as an individual-s willingness to em$ra%e ris, or pre"er se%urity will also inuence economic choices. eople receiving unemployment bene'ts may be re!u%tant to #or, as they may be worse o/ 'nancially if they do since there are expenses associated with working (eg. Travel, clothing) and they may lose privileges associated with unemployment bene'ts. The decision to undertake education is to be reward with a higher income and a more satisfying 0ob. 1owever, the opportunity cost is the foregone income. Individuals- choices are inuenced by economic considerations when otin* in e!e%tions economic policy issues were the ma0or priorities in government programs and electoral campaigns, and sound economic performance by a government would ensure its political success. Businesses: #usinesses seek to maximise pro'ts but minimise costs, so may choose the highest price to ensure that pro't is maximi2ed but the level of sales will not be greatly a/ected when pricing products. #usinesses may decide to increase the price of a product when there is an increasing demand but reduce the price when there is lower demand. The level of production is also inuenced+ when there is low demand, the business will likely reduce production and expand production in a booming economy. The pricing decisions are also based on their marketing strategy whether the product is aimed at a mass market or an exclusive group of consumers. roduction levels will determine resource use, as will the relative price of resources. *or example, lower production levels will lead to reduced use of resources. lso, if the price of labour increases relative to the price of capital e"uipment, fewer labour resources will be used. 3thical issues may be considered, eg. business deciding on whether it should pay a higher cost for recycled paper rather than non4recycled paper. #usinesses also decide how to manage industrial relations issues, eg. In times of high unemployment, the relative bargaining position of employers will improve in relation to that of workers+ employers will be less inclined to grant larger wage increases and accommodate the demands of unions and workers. 'oernment: 5overnments can make it less or more expensive to make certain choices, eg. Taxing cigarettes heavily to discourage smoking. 5overnments can also inuence economic behavior by prohibiting certain activities and imposing heavy penalties on those who break the law, eg. #usinesses operating in the same industry are prohibited from meeting together and setting prices for their industry because this would harm the interests of consumers. 5overnments may desire to encourage certain economic activities by providing incentives, eg. To encourage individuals to 0oin a private health insurance scheme, the government provides tax rebate to low and middle income earners for private health insurance payments and imposes tax penalty on high income earners who do not take out private health insurance. nother example is when the government wants to encourage individual and business spending, 6# may adopt a policy of lowering interest rates and the government may increase its spending.
-. HOW ECONOMIES O(EATE The (ro&u%tion o" 'oo&s an& Seri%es )a%tor o" (ro&u%tion /esour%e0 7atural 6esources 8abour %apital 3nterprise •
e#ar& 6ent 9ages Interest ro't
factor of production is any resource that can be used in the production of goods and services, ie. resource.
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Natura! esour%es: all the resources provided by nature that are used in the production process. Includes soil, water, forests, mineral deposits and 'shing areas. The reward to owners (individuals) of natural resources is called rent. 6ent covers all the income rewards from the productive use of natural resources. a$our: 8abour is human e/ort, both physical and mental, used to produce goods and services. The si2e of a country-s population determines how much labour is available. *actors that inuence the availability and "uality of labour resources is school leaving age, social attitudes towards women in the workforce, amount of on4the40ob training, retirement age, educational standards and availability of childcare. 9ages are the reward to owners of labour (workers). Capita!: the produced means for production capital goods are produced to be used in the production of other goods and services and are not used for immediate consumption. This includes machinery, tools, factories and computers. These types of capital goods are generally owned privately by individuals or 'rms. Infrastructure is another form of capital that is owned by the community as a whole. %apital e"uipment can increase the level of production from the existing workforce and natural resources, enabling the satisfaction of more wants. 9hen entrepreneurs borrow money that has been stored in a bank as savings by consumers to invest in capital goods, they pay interest. The owners of capital are reward by earning interest . Enterprise: enterprise involves organi2ing all the other factors of production for the purpose of producing goods and services. It brings the production process together. 3ach of the four resources are limited: the amount of natura! resour%es are 'nite (land, fossil fuels)+ supply of !a$our is limited due to population si2e, labour market skills, and willingness to work+ %apita! is limited by the extent to which the private sector and governments are willing to invest, as well as the level of domestic (or overseas) savings available for investment+ supply of entrepreneuria! s,i!!s are limited by the population si2e and individuals- willingness and ability to innovate and embrace risk.
The 2istri$ution an& E3%han*e o" 'oo&s an& Seri%es The 'ross 2omesti% (ro&u%t /'2(0 is the total market value of all 'nal goods and services produced in an economy over a period of time. ;arket 3conomies rovide people with income as a reward for their contribution to the production process. The price that is paid for inputs depend on how scarce or highly demanded their resources are, eg. 8abour of a highly skilled manager involves a larger sum of money as sophisticated management skills are in high demand and scarce supply. ;arket economies do not attempt to distribute output e"ually within society. 9orkers will not receive the same level of wages as income received is dependent on how much they work, educational "uali'cations, skills and expertise, and bargaining power in wage negotiations with employers. #ene'ts of this distribution: unfair for people who are unable to contribute to the production (ill, disabled, age) and those with less bargaining power 5overnment intervention to e"uitably distribute income and goods and services: taking money from higher income earners through taxation and redistributing it to lower income earners through social welfare payments. • •
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The Business Cy%!e The business cycle refers to uctuations in economic activity due to either domestic or international factors.
cyclical pattern that an economy usually experiences: period of strong growth economic slowdown economy stay weak faster level of economic growth peak etc.
=I73== %%83 e%ession *alling production levels of goods and services 6ising unemployment *alling income levels *alling consumption levels and investment *alling "uality of life
The Cir%u!ar )!o# o" In%ome
Boom Increasing production levels of goods and services *alling unemployment 6ising income levels 6ising consumption levels and investment 6ising "uality of life
Sain*s represents a leakage as it involves money that is put aside and withdrawn from the circular ow of income. The leakage of savings fall in expenditure on goods and services fall in production decreasing demand for resources fall in income to owners of those resources rising unemployment. This cycle is counteracted by the in0ection of inestment . =avings are essential for investment to occur. Inestment in capital goods means that 'rms have to make a capital expenditure now in order to gain pro'ts in the future from the output the capital goods will help produce. Investment increase demand for capital goods rise in production levels in the 'rms that produce those capital goods increase demand for resources increase in incomes of the owners of those resources rising employment etc. Individuals, businesses and 'nancial institutions make up the priate se%tor in the economy. The government imposes ta3es on individuals and businesses and uses this tax revenue to undertake *oernment e3pen&itures . Ta3ation is a leakage as individuals will have less money to spend on goods and services and businesses will have reduced funds available to pay for resources. 'oernment e3pen&iture is an in0ection as when the government spends money on collective goods and services, it provides income to government employees and the employees of private businesses from which it purchases goods and services from. lso, the government uses part of the tax revenue for transfer payment?social welfare payments. The government sector represents the pu$!i% se%tor . #oth the public sector and the private sector together make up the &omesti% se%tor in the economy. Imports are goods and services that are produced overseas but sold in ustralia. ayments for imports are leakages as money is withdrawn from the ustralian economy is paid to businesses overseas. E3ports are goods and services that are produced in ustralia but sold to overseas customers. ayments for exports are in0ections as money is paid to ustralia businesses from overseas consumers.
E4ui!i$rium 8eakages @ In0ections =avings A Taxation A Imports @ Investment A 5overnment expenditure A 3xports =ATA;@IA5A&
2ise4ui!i$rium
9hen total leakages are greater than total in0ections, there will be an economic downturn. s economic activity falls, the total leakages will also fall as individuals will have less income to save, pay tax and spend on imports. Therefore, leakages will eventually e"ual in0ections, but at a lower level of income in the circular ow. 9hen total in0ections are greater than total leakages, there will be an economic upturn. s the level of economic activity increases, the total leakages also increase as consumers have more income to invest, to have collected as taxes (and be used for government expenditure), and spend on imports. Therefore, leakages will eventually e"ual in0ections, but at a high level of income in the circular ow. The government has great inuence on the circular ow as it can alter its contribution to leakages (changes to taxation) and in0ections (levels of government expenditure).
5. HOW ECONOMIES 2I))E The Mar,et E%onomy •
;ost economic resources are owned by the private sector and people are able to seek wealth without the government intervening
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product market is a market for outputs for production, i.e. goods and services. In a market economy, price mechanism brings supply and demand to determine the market price at which goods and services are sold, and the "uantity produced. %hanges in demand and supply in the product market will also inuence supply and demand in the factor market, which is the market for factors of production. 3g. If there is an increased consumer demand for sunglasses, then producers will need more factors of production (inputs including plastic, lens, etc.) in order to increase supply of sunglasses. Thus the manufacturer will increase the prices of factors of production in order to attract these resources away from other areas of production. =o price mechanism inuences the way resources are allocated in an economy.
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rivate ownership of property: individuals have the right to own the means of production (resources) and can use these to derive income and wealth. They have the right to sell their property and transfer ownership to someone else.
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%onsumer sovereignty plays a ma0or role in a market economy+ businesses will produce whatever goods and services are in demand, so consumers determine what is produced and the "uantity of production.
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*reedom of enterprise individuals have the right to use their resources as they choose, so entrepreneurs can choose what goods and services to produce and how they will undertake production. 9orkers are free to choose their occupation and whether they work or not.
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%ompetition the pressure on business 'rms in a market economy to lower prices or increase the "uality of outputs in order to increase sales of goods and services to consumers.
Centra!!y6(!anne&7Comman& E%onomy •
5overnment determines what, how, and for whom goods and services are produced.
Austra!ia as a Mi3e& E%onomy •
=ome necessary goods and services may not be provided under a free market system, so the government provides those goods that are bene'cial to the whole community as the private sector will often not provide collective goods and services.
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It is sometimes better for certain goods and services to be provided by the government rather than being privately owned. 3g. *or reasons of security, it is safe for the defence force to be managed by the government rather than private armies. ;arkets do not always operate competitively and in the best interests of the economy as a whole. =o the government provides regulations to prevent producers from exploiting consumers with misleading information or by agreeing to raise prices. The government can also prohibit certain illegal products (eg. Illicit drugs) to ensure ade"uate safety standards. The government also intervenes in the distribution of output (income) through making so%ia! #e!"are payments to those who do not contribute to the production process. The government also uses a progressive income tax system that works in that high4income earners pay proportionately more tax than low4income earns, leading to a more e"uitable sharing of produced output.
8. CONSUMES IN THE MA9ET ECONOM Consumer Soerei*nty • •
2e%isions to Spen& or Sae •
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fter receiving their income and paying tax, consumers either spend or save their disposable income.
; C < S @ disposable (after tax) income % @ consumption expenditure = @ =avings verage propensity to consume (%) is the proportion of total income that is spent on consumption. verage propensity to save (=) is the proportion of the total income that is not spent, but save for future consumption. C
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s income rise, people tend to save a higher proportion of their income, i.e. = rises, but % falls. %onsumption will tend to rise as income rises, but income will still grow faster than their consumption levels, which is why % falls. Sain*s =ust in%rease re!atie to %onsumption. ;arginal propensity to consume (;%) is the proportion of each extra dollar of income that goes to consumption. ;arginal propensity to save (;=) is the proportion of each extra dollar of income that is saved. ∆ C
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s income rises, ;% falls but ;= rises.
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oung people tend to have lower levels of income because they lack skills, experience and education. They tend to spend most of their income and save very little they often tend to dis4save or borrow to 'nance their eduation. Once people start working, especially middle age, they would tend to save more and consume a smaller proportion of their income as they are accumulate assets for retirement. In retirement, people no longer earn income for labour, so will start dissaving as they consume out of past savings or rely on government pension bene'ts.
)a%tors In>uen%in* In&ii&ua! Consumer Choi%e The !ee! o" in%ome The pri%e o" the *oo& or seri%e itse!" goods that are necessities may not see changes in demand as people will purchase them regardless of price changes. 1owever, consumers are likely to reduce their demand for other goods as price increases. The price of substitute or complement goods eg. #utter and margarine are considered close substitutes, so if the price of margarine increases, the demand for butter will increase. Other goods are considered complements, meaning consumers tend to purchase them together, eg.
6eturn to *actors of roduction •
9ages from labour
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6ent from land consumers that own land and rent it out will earn income. Interest from capital ro't from entrepreneurial skills
So%ia! We!"are 3xamples of transfer payments include: • • • •
ssistance to the aged (for those over DE years and retired from working) *amily payments (for families with children) nemployment bene'ts
