Yea Yearr 11 Intr Introd oduc ucti tion on Econ Econom omic ics s Notes Chapter 1 1.1 1. 1 The econ econom omic ic prob problem lem and and the the role role of of Choic Choices es •
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li mited, resources are scarce and thus The Economic Problem: our wants are limited, we cannot satisfy our wants. We must choose between them by rankin our preferences, foroin some choices. Opportunity Cost! represents the alternati"e use of resources. #ften referred to as the real cost or economic cost, it represents the cost of satisfyin one want o"er an alternati"e want. community. %ro"ide Wants: $aterialist oods desired by indi"iduals or the community. pleasure or satisfaction &utility'. ( Needs )asic wants essential for human sur"i"al i.e. food, water ( Indi"idual Wants( desires of each person dependent on personal preferences, ability to purchase oods, le"el of income ( Collecti"e Wants( wants of the whole community, usually pro"ided by o"ernment such as parks, libraries, local supportin facilities, de fence force ( Wants chane o"er time by chanes of ae, income, technoloy and fashion. Income increases mean that you can a*ord more lu+ury oods and technoloy alters what people can satisfy.
Key Economic Questions 1. What to produce -. ow much to produce /. ow to produce &allocate resources in the production process e0cienty' . ow to distribute production &income determines how much oods and ser"ices people can by( economies must decide between e2uitable or ine2uitable &which is usually more e0cient' distribution' Production Possibility Frontier ( is a raphical representation of all possible combinations of two oods or ser"ices that the economy can produce at any i"en time. ( 3ome resources are better suited to one type of production and we can4t simply e+pect to mo"e resources from one production without any loss of producti"e capacity, thus in the real world it is a cur"e conca"e to oriin. WI55 %I6#T 7% #N TE 6E8T #8 #8I9#NT:5 :;I3 IETE8 I
at full capacity, less wants are satis?ed and there is ine0cient allocation of resources.
1./. The future implications of choices •
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Consumer Goods and Services ! items produced for the immediate satisfaction of indi"idual and community needs and wants Capital Goods: items that ha"e been produced for immediate consumption but will be used for the production of other oods. If a country chooses to foro some consumer oods for capital oods, in the short term less immediate wants will be satis?ed but in the lon run the country will be able to produce at a hiher capacity. ndividual @ foro present want by sa"in(A sa"ins to satisfy future wants e.. sacri?ce pleasurable lifestyle now, ?nancial security in future !usiness @ limited resources (A focus on products likely to ha"e future success e.. in"ested in communications technoloy 1B years ao more successful than those who didnt Government @ satisfy immediate wants &popularity' ( A lon term lower economic rowthD e.. increase welfare bene?ts and health care (A less fundin for education, infrastructure
1. The economic factors underlyin choices •
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ndividuals ( :e, income, e+pectations, future plans, family circumstances, personality factors, how much they want to sa"e and spend, plans in relation to education, work, family and retirement. E.. : couple plannin to ha"e a baby will sa"e more. To retire in"ol"es adustin to a lower income at a time when free leisure time may i"e an indi"idual more opportunity to consume. 3ome more willin to take risks ( 6otin( economic issues ha"e been key factors in electoral process. !usinesses ( %ricin decisions are based on market stratey, whether they are tryin to sell to mass market &lower price' or e+clusi"e roup &hiher price'. ( Will seek to minimise costs, but need to strike balance between 2uality o"er cost. ( >enerally choose cheapest a"ailable resources, but if not reliable may choose hiher priced. ( Ethical issues play a role for e+ample the role of the natural en"ironment( whether the company is willin to pay more for recycled paper. I ( Industrial relations issue( choosin to employ on wae le"els set by industrial awards, neotiate wae areements with whole workforce or indi"idual contracts or whether to encourae union representation and in"ol"ement in decision makin.
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Government ( has a sini?cant inFuence on choices e.. makin it less or more e+pensi"e to make some choices such as ta+in ciarettes hea"ily. $ay also prohibit certain acti"ites and impose hea"y penalties to those who break toether such as companies meetin to set prices for whole industry. $ay also pro"ide incenti"es to encourae certain economic acti"ities i.e. /BG ta+ rebate on pri"ate health insurance and $edicare 5e"y 3urchare on non(insured hih income earners.
Chapter -.1 The production of oods and ser"ices •
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Factors o" Production: any resources used in production of Hs abundant, hih( 2uality resources (A hiher standard of li"in Public sector: The o"ernment sector Private sector: indi"iduals, businesses and ?nancial institutions. Income deri"ed from ownership or control of natural resources in production process # rent Income deri"ed from ownership of labour # $a%e 3upply of labour depends on! • • • • •
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Income deri"ed from capital, deri"ed from the borrowin of loans # nterest n"rastructure& social overhead: capital owned by community as a whole e.. roads, railways, brides, schools, telecommunication le"els Capital ( increases producti"ity i.e. how much output per factor of productionK unit of time nvestment: purchase of capital oods Income as a return of enterprise L Pro't &includes re"enue minus e+penses, waes, interest, rent. Is earned because entrepreneur sets up and runs a successful business despite considerable risk of failure. 7ses di*erent combinations of resources' Entrepreneur: •
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siJe of population school lea"in ae le"el of education retirement ae role of women
combines land, labour, capital (A produces a product, earns remainin pro?t makes manaement decisions of all aspects of production bears risk of makin rihtK wron decisions, successK failure
Problem o" scarcity in resources 1 /
limits to land fossil fuels, clean air, water labour( population siJe, labour market skills, willinness capital( o"ernmentsH pri"ate sectorH domestic willin to in"est &sa"ins'
siJe of population, ability and willinness of indi"iduals to inno"ate and take risks
&ow scarce resources are allocated in production is larely determined by consumers spendin patterns( e0cient industries that face rowin consumer demand will be able to attract resources, or if they are cheaper they are more attracti"e to pro?t(ma+imisin ?rms.'
-.- The distribution and e+chane of oods and ser"ices •
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G(P )Gross (omestic Product*: total "alue of oods and ser"ices produced in an economy in a period of time =istribution and e+chane of >M3 in an economy is throuh income, which indi"iduals can then e+chane with other to obtain >M3. &medium for e+chanin oods and ser"ices' In market economies it is a reward for their contribution to the production process( as workers, owners or entrepreneurs. This income is dependent on how scarce or hihly in demand their resources are. E.. rent of land in the city or labour of hihly skilled manaer would in"ol"e a larer sum of money. Workers income le"els are inFuenced by how much they work, their skill and e+pertise, educational 2uali?cations and barainin power in wae neotiations. !ene't of the system is that it pro"ides incenti"es for people to obtain better skills, work harder, de"elop entrepreneurial skills, and start a business. This will impro"e resource base and encourae inno"ation and technoloical ad"ancement. (isadvanta%es are that it can cause ine2uality as those who are unable to contribute to production &elderly, disabled, ill' and those with less barainin power may be unable to secure a fair return for their labour input.
-./ The )usiness Cycle. •
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The !usiness Cycle: periodic Fuctuations of le"el of rowth in an economy +eal G(P: >=%H e*ect of inFation Economy Gro$th: measure of increase in Hs produced from one year to ne+t +ecession: the stae where there is decreasin economic acti"ity, de?ned by two consecuti"e 2uarters & months' of neati"e economic rowth i.e. fall in >=%
mpacts o" a recession •
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mpacts o" a !oom
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Increased in"estment, production and labour &ob opportunities' leadin to more disposable income for consumers to spend and thus economy e+pands and po"erty le"els fall.
mpacts o" the !usiness Cycle +ecession
!oom
Increasin production of oods and ser"ices
8isin le"els of consumption and in"estment
8isin 2uality of life
8isin income le"els
8isin unemployment
Cycle! • • •
upswinK reco"ery, prosperityKboomKpeak! rapid rowth of output downswinK contraction, recession! stanation or decline o"ernments main role( smooth out, reduce Fuctuations
Pohn $aynard Qeynes • •
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>eneral Theory! cause and solution for the depression scared to spendHin"est(A lack of demand(A unemployment so better spend rather than sa"e >o"ernment has to step in and spend &borrow if not enouh, pay back later' H encourae spendin
3pendin and borrowin by consumersH businesses &No o"ernment' Qeynes thinks this is )3, should be up to o"ernment 3pend too much (A publicKso"erein debt ayek said should let economy contract
,ea-a%e: 8emo"es money from circular Fow. =ecreases total income M eneral le"el of economic acti"ity n.ection: :dds money to circular Fow. Increases areate income and eneral le"el of economic acti"ity
-. Circular
Indi"iduals • owners of resources
income oes to spendin on consumption of locally produced oods, sa"ins, payin ta+ or purchasin imports )usinesses • depend on indi"iduals to supply resources and consume Hs • indi"iduals depends on business to produce Hs, income to buy o"ernments • ta+es on indi"iduals and businesses • uses ta+ re"enue for o"ernment e+penditure • ta+ation! reduces money to spend on Hs, reduces funds for resources • fallin income, output, employment • spends re"enue on collecti"e Hs (A income to o"ernment employeesH pri"ate employees who pro"ide Hs • on transfer payments( pensions, unemployment bene?ts International trade and ?nancial Fows • International money Fows( ?nancial transactions between :us and world • import! money withdrawn from :us economy and paid to businesses o"erseas • e+port! money paid to :us business by o"erseas =ise2uilibrium • leakaes A inections (A decrease in economic acti"ity (A leakaes fall as consumers ha"e less income to sa"e, spend on imports, pay ta+ • leakaes and inections will e"entually be e2ual but at lower le"el of income • inections A leakaes (A increase in economy acti"ity (A leakaes increase as consumers ha"e more to spend, spend on imports, pay ta+ • e"entually be e2ual but at hiher le"el of income •
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Chapter / $ethods of measurement •
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G(P per capita: not an accurate measure of li"in standards( >=% di"ided by population &:us 1/, 73 1, China -' Quality o" li"e: measure of welfare based on >=%, 2uality of health care, educational opportunities, climate &:us is amon hihest in world' &:us R, 5u+embur 1, 73 1R, China SB' /uman (evelopment nde0 )/(*: narrow measure of 2uality of life based on account income &>=% per capita', life e+pectancy, adult literacy, educational
le"els &:us -, Norway 1, 73: , China 1B1' •
G1: >ross National Income L >=%
/.1 2ar-et Economy •
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Economic decisions made by indi"iduals and pri"ate ?rms without o"ernment inter"ention :lso known as capitalist, free market, laisseJ(faire weakness! • those who controlled means of production became e+tremely wealthy • Those who make decisions are motivated by sel"3interest • maority e+ploited, po"erty • "ulnerable to "olatile cycle of boom and bust 2ar-et: network of buyers and sellers, seekin to e+chane a product at a certain price Product mar-et: market for Hs buyers( constitute demand, want to buy at lowest possible price to satisfy more wants businesses @ output decisions make up supply, want to sell at hihest price to make more pro?t 4llocation or resources determined by Price mechanism: the interaction between the forces to determine the price of each Hs • i.e. the in"isible hand L shortaeK e+cess demand (A increase price &inFation' • Demand > supply • Therefore, income is worth less, want hiher waes • Supply > demand L surplusK e+cess supply (A lower price • Settles on equilibrium where there is no tendency to change • Consumers will want to buy at the lowest price possible while sellers want to sell at hihest prices possible to make a pro?t. Economy: any oranisationK nation which attempts to sol"e the economic problem of scarcity by decidin what to produce, how to produce, how much to produce, how to distribute Factor mar-et: market for factors of production are bouht and sold Private o$nership: riht to own and sell resources, deri"e income from this Consumer soverei%nty: consumers determine what to produce and how much should be produced Freedom o" enterprise: riht to use resources as choose • e.. entrepreneurs can set up businesses, and sell Hs • workers free to choose occupations, work or not Competition: the pressure on ?rms in a market economy to lower prices or impro"e the 2uality of output to increase their sales. Ensures no one business has reat inFuence.
Planned Economy •
CharacteriJed by o"ernmental control o"er economic decisions
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5ittle input or inFuence by indi"iduals@ thus ine0cient in followin economic, little inno"ation as no 4reward4, standard of life doesn4t row as fast.
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%ublic ownership of factors of production, with o"ernment playin a central role in allocatin resources.
/.- Why does the :ustralian economy choose to inter"ene in the free market •
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8esource allocation ( social welfareK transfer payments, proressi"e income ta+ ( pro"ide important thins that would not otherwise be pro"ided by pri"ate sector ¬ pro?table' such as merit oods &education, health, art' ( restrict production of harmful oods ( reulations to pre"ent producers from e+ploitin consumers e.. safety standards ( Income distribution( %roressi"e Ta+, 3ocial Welfare )ene?ts create a fairer society and look after people ( social welfareK transfer payments, proressi"e income ta+ Economic stability ( smooth out sharp Fuctuations in the economic cycle ( ensure stability in the economy and ?nancial system !y 2acro3economic policies (
ow a mi+ed economy aims to sol"e the economic problem What to produce ( can be producer itself ( can pro"ide collecti"e oods and ser"ices e.. schools, roads, brides, defence force ( can compete with pri"ate enterprise, pro"ide Hs ( can limitK prohibit production of undesirable Hs e.. illicit drus ow much to produce ( can limit production of some oodsK deli"ery of some ser"ices e.. reulate no. of ta+i dri"ers ( can encourae reater pro"ision of desirable Hs, but would otherwise be under( pro"ided i.e. merit oods, e.. o". subsidies for arts, education, art allery, museum
( ow ( ( ( ( (
can encourae :us producers to compete with foreiners to increase output e.. tari*, subsidies to produce inFuence cost of factors of production e.. min. wae le"els, workin conditions, laws reulatin beha"iour of ?rms ow to distribute production hiher income earners pay more of their income in ta+ (A this oes to lower income as welfare inter"ene in factor markets e.. min. wae in labour market inter"ene in factor markets e.. min. wae in labour market
