Fundamentals of Economics

The Nature of Economics

• Economics studies how society uses scarce resources to produce and distribute goods and services.

Microeconomics and Macroeconomics

• Microeconomics studies individual and business behavior in decision-making and spending allocation.
• Macroeconomics studies the economy as a whole, focusing on inflation, unemployment, and economic growth.

The Economic Problem

• The economic problem involves efficiently allocating limited resources to satisfy unlimited needs and wants.
• Needs are essential for human survival, such as food and shelter.
• Wants are material desires that provide pleasure when satisfied.

Opportunity Cost

• Opportunity cost is what one misses out on when choosing something else; it represents the alternative given up.
• Choosing an eraser over a pen means the pen is the opportunity cost.

Production Possibility Frontier (PPF)

• The PPF graphically represents all possible combinations of two goods/services an economy can produce at a given time.
• It illustrates the maximum production potential of an economy.

Assumptions of the PPF

• The PPF model assumes only two goods are produced.
• The state of technology remains constant.
• All resources are fully employed.
• The quantity of available resources remains unchanged.

Opportunity Cost Calculation

• The unit cost for opportunity cost = units given up / units obtained.

Future Implications of Choices

• Allocative efficiency maximizes returns from resources by allocating them to societal preferences for certain goods and services.

Goods and Services Explained

• Consumer goods and services immediately satisfy individual and community needs and wants, and can be single-use (haircut) or durable (washing machine).
• Capital goods are not for immediate consumption but are used to produce other goods; they are subject to depreciation and may need replacement.

Individual Choice

• Individual spending patterns with a limited income reflect the desire to maximize satisfaction of needs and wants through utility-maximizing purchases.

Business Choice

• Businesses with limited inputs must utilize resources effectively and focus on goods/services that lead to higher gains long-term.

Government Choice

• An economy must tradeoff between producing goods for immediate consumer demand and goods that will increase future productive capacity.

Factors Underlying Decision-Making: For Individuals

• The macroeconomic relationship between income (Y), consumption (C), and saving (S) is Y = C + S.
• As income increases, absolute consumption may increase, but the relative proportion consumed tends to fall.
• Low-income consumers spend more of their income and may save very little or none due to lack of surplus income.
• High-income earners can save more easily after buying both necessities and luxuries.

Motives for Saving

• Transactionary motive: Saving to finance cash purchases of goods and services in the present.
• Precautionary motive: Saving to hold money for unforeseen expenses.
• Speculative motive: Saving to invest in assets like shares, bonds, or real estate to earn a return.

For Businesses

• Firms must economize to maximize profits, which equals total revenue minus total costs.
• Total Revenue (TR) = Price × Quantity Sold

Pricing Strategies

• Value-based pricing determines prices based on what consumers are willing to pay.
• Cost-plus pricing includes a markup for the entrepreneur's return (Price = Costs + Mark Up).
• Competitive pricing sets prices in reference to competing products in the market.
• Businesses charge the highest price the market will bear, based on production costs, demand responsiveness to price, and the level of competition.

Resource Use

• Businesses must decide on the most efficient combination of capital and labor.
• Industries like agriculture, mining, and manufacturing tend to be more capital intensive, while service industries employ more labor.

Ethical Considerations

• Businesses are considering ethical issues, such as environmental impact and willingness to pay more for recycled materials.

Managing Labor

• With labor costs representing over 70% of production costs, businesses must manage labor costs and maximize employee productivity.

Government Role

• Governments control the economy through policies influencing decisions and by providing public goods and services.

Government Regulations

• Regulations include price controls, frameworks for commercial dealings, competition policies, minimum wage laws, and environmental protections.

Operations of an Economy

• How resources are used and allocated depends on their type and quantity.

Factors of Production

• Land includes natural resources, with rent being the reward.
• Labour includes worker effort and time, with wages as the reward
• The labour force is the percentage of the population employed plus those unemployed but actively seeking work.
• Capital includes manufactured goods used in production, such as machinery, with interest as the reward.
• Enterprise (entrepreneurship) is the ability to organize all factors efficiently, with profit as the reward.

Scarcity

• Economies face scarcity of factors of production, which need to be used to maximize society's satisfaction.
• An economy is how society organizes the economic problem of scarcity in relation to consumer wants.

Distribution of Goods and Services

• The 6 economic objectives are environmental sustainability, income distribution, economic growth (GDP growth rate), economic development (HDI, Health), unemployment rate, and inflation.
• Gross Domestic Product (GDP) represents the total value of goods and services produced in an economy in a year.
• GDP also measures the total income (Y) of a society received for goods' and services' production.
• Market economies reward contributions to the production process instead of attempting to distribute output equally.

Market Economy

• Earning ability depends on factors such as education, skills, and opportunities.

Exchange in a Market Economy

• Exchange of goods and services occurs via money, streamlining transactions.
• Individuals or firms concentrate on producing goods and services they are best at due to differing resources.
• Money allows labor specialization to thrive, as individuals contribute and exchange services.
• Exchange involves markets, where prices act as a rationing device.
• Private property rights provide a foundation for the price system.

Private Ownership

• Rights include enforcing the law, transferring them, or buying them at agreed price and excluding non-paying users.
• Prices are essential in communicating relative value; they are monetary indicators of goods and services' relative value.

Price Signals

• Prices match output with consumer demand, ration limited resources, prevent wastage, and signal producers and consumers about market conditions.

The Functions of Prices

• Prices adjust to show needed or unneeded resources, communicating market changes.

Price Signals

• Rising prices signal for suppliers to expand production, while excess supply leads to price falls.
• The choices consumers make provide info to producers about changing needs.

Rationing

• Prices ration scarce resources when demand surpasses supply. Increasing price means the supply does not run out immediately.

Fluctuations in Economic Growth

• The business cycle fluctuates with domestic or international growth factors, where the goods and services produced (GDP) are not constant in market economies like Australia.
• While economies generally grow long-term, the cycle has ups and downs, where strong growth is followed by an economic slowdown. Impacting the overall performance of market economies.