Introduction to Economics

The Nature of Economics

• Economics involves using scarce resources to produce and distribute goods and services among members of a society.

Microeconomics and Macroeconomics

• Microeconomics studies decision-making and spending allocation of individuals and businesses.
• Macroeconomics studies the economy as a whole, focusing on economic growth, inflation, and unemployment.

The Economic Problem

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

Opportunity Cost

• Opportunity cost is what is missed out on when choosing something else.
• It represents the alternative foregone when a decision is made.
• An example of opportunity cost is choosing an eraser over a pen, the pen is the opportunity cost.

The Production Possibility Frontier (PPF)

• The PPF graphically represents all possible production combinations of goods or services in an economy at a given time.
• It shows the maximum production potential of the economy.
• The PPF assumes that only two goods are produced, technology stays constant, all resources are employed, and the quantity of available resources remains unchanged.
• The unit cost for opportunity cost is calculated as: Units Given Up / Units Obtained.

Future Implications of Choices

• Engaging in economic activity aims to maximize returns from available resources.
• Allocative efficiency is when resources are allocated to match the preferences of society for certain goods and services.
• Consumer goods satisfy immediate needs and wants, classified as single-use (haircut) or durable (washing machine).
• Capital goods are used for production, are not for immediate consumption, and are subject to depreciation.

Factors Underlying Decision-Making

• Individual spending patterns with a limited income or budget seeks to maximize satisfaction of needs and wants.
• Businesses with limited inputs, such as labor, capital, and enterprise, focus on goods and services to gain higher returns
• Economies trade off between producing goods that satisfy immediate consumer demand and goods that increase future productive capacity.
• The relationship between income (Y), consumption (C), and saving (S) is Y = C + S.
• Spending and savings decisions are influenced by an individual's income level.
• As income increases, consumers may increase their absolute level of consumption, but the relative proportion of income consumed tends to fall.
• Consumers on low incomes spend more of their income than people on higher incomes, referred to as a higher average propensity to consume.
• High-income earners have a greater ability to save as they can afford necessities and luxuries.
• The three main motives individuals have for saving is transactionary, precautionary, and speculative
• The Transactionary motive of consumers is to finance immediate purchases of goods and services.
• The Precautionary motive of consumers is to hold money for unforeseen expenses.
• The Speculative motive of consumers is to invest to earn a return.
• Businesses must economize to maximize profits, where profit is defined as total revenue less total costs.
• Total Revenue (TR) = Price × Quantity Sold

Pricing

• Value-based pricing is determined by how much consumers are willing to pay.
• Cost-plus pricing includes a markup for the entrepreneur's return and profit.
• The Price is based on the Costs + Mark Up (profit margin).
• Competitive pricing occurs when producers set prices relative to the competition/market.
• Businesses set prices dependent on production costs, responsiveness of demand to price changes, and the level of industry competition.

Resource Use

• Businesses decide on the efficient mix of capital and labor.
• Australian industries like agriculture, mining, and manufacturing tend to be more capital intensive, while service industries employ more labor.
• Businesses must consider ethical issues like the environment, choosing recycled over non-recycled materials.
• To manage labour effectively, industrial relations and the negotiation of wages and working conditions between management and workers is important.
• Labour costs (wages and salaries) represent over 70% of production costs for most businesses.

Role of Governments

• Governments control the economy through policies and directly providing goods and services.
• Examples of government regulations are price control, law and order, national competition policy, minimum wage legislation, and environmental controls.

Operations of an Economy

• Resources and Factors of Production help produce goods and services for needs and wants.
• Resources are also called factors of production, and their quantity and quality affect a nation's standard of living.
• The for factors of production are: land, labour, capital, entrepreneurship

Land

• Land refers to all natural resources, like forests and agricultural land.
• The income reward for land is rent, covering property renting and income from productive use of natural resources.

Labour

• Labour refers to the work, time, and effort of people to produce.
• Labour defines human effort.
• The labour force is the percentage of the population that is employed plus those unemployed but available and actively seeking work.

Capital

• Capital refers to manufactured goods used in production, such as machinery and tools.
• The amount of capital available significantly effects the future earning capacity of an economy.

Enterprise (Entrepreneurship)

• Organises all other factors efficiently to maximize production.
• The main problem economies face is the scarcity of production factors, which are used to maximize benefit to society.
• Economy refers to how society organizes to solve problems of resource scarcity relating to consumer wants.

Resource and Reward

• Resource, Reward*
• Land-Natural Resources Rent
• Labour Wages
• Capital Interest
• Enterprise Profit.

Distribution of Goods and Services

• The six economic objectives are environmental sustainability, income distribution, economic growth (GDP), economic development (HDI, Health), unemployment rate, and inflation.
• Gross Domestic Product (GDP) is the total amount of goods and services produced in an economy in a given year.
• GDP measures the total income of a society (Y), received for the production of goods and services.
• The income mechanism determines how goods and services are distributed and exchanged in the economy.
• Market economies do not attempt to distribute output equally because individuals are free to accumulate wealth.
• Income is provided for contributions to the production process.
• The ability to earn income depends on skills, education, experience, employment type, and opportunities to participate.

Exchange of Goods and Services

• Money streamlines transactions for exchanging goods and services.
• Individuals and firms should focus on producing what they are best at.
• Money allows individuals to specialize in production, because they can exchange
• Goods are produced through markets where prices act as a rationing device
• Private ownership of resources allows individuals to enforce them through a court
• This allows trading to be done with people who pay the market price

Role of Prices

• Prices perform an important function in the economy as markets rely on prices to convey economic information
• Prices match output with consumer demand, ration limited supplies, prevent resource wastage, and signal producers and consumers to adjust behavior.
• Prices play three important functions: signalling, transmission of preferences, and rationing.
• Signalling function: Prices show where resources are needed; reflecting the balance between supply and demand
• Transmission of preferences: Consumer choices inform producers about changing needs and higher prices are an incentive to increase output.
• Rationing function: Prices rations scarce resources, increase price so people use less of the scarce resource.

The Business Cycle

• Refer to fluctuations in economy due to domestic or international factor.
• Over time, there is typically an overall trend, but is broken up different phases.
• The different cycle phases are upswings, downturns, troughs, and peaks

Impacts of the Business Cycle

• Recession, Boom*
• Falling production of goods and services, Increasing production of goods and services
• Falling levels of consumption and investment, Rising levels of consumption and investment
• Rising unemployment, Falling unemployment
• Falling income levels, Rising income levels
• Falling quality of life, Rising quality of life

Government Actions to Improve Economic Conditions

• The government uses discretionary measures like tax rates and expenditure changes.
• The government uses automatic stabilizers such as social securities and marginal taxation.
• The government attempts to sustain economic growth long term.

The Circular Flow of Income

• Involves a model shows economic activity among different parts of the economy.
• The model shows that Saving, taxation and spending on imports represent leakages decrease
• It shows that Investment, government spending and export revenue represent injections.

Circular Flow Sectors

• The five-sector model involves private, public, and international sectors.
• It shows how the Australian economy can be divided into individuals, businesses, financial institutions, governments and international trade

Individuals and Households

• Earn and spend money on goods and services.
• Considered the consumer in society.
• Provide the labour for business

Business

• Are engaged in the production and sale of goods and service
• Sells goods and services to individuals.

Financial Institutions

• Engaged in borrowing and lending of money.
• Savings represent a leakage in economy as it stops the circular flow of money.

Investments

• Spending/ expidenture that will bring future benefit.
• Injections into the model will then result the leakages by producing a larger aggregate income and stronger general economic activity.
• This result in increased demand for capital goods leads to increased output with cycle of high demand.

Government

• All levels and activity of the sector relate to the provision of public goods and services with the use collection of taxes
• Taxation is thus consider and leakage because it reduces incomes and economic
• Government spending is also a injection

International Trade Sector

• Represents flow of goods, services and money
• Exports inject more money into the country by bringing in money from overseas
• Imports leak money from county as it involves spending money on goods and services
• The circular model emphasizes the interconnectedness between each sector.

Equilibrium and Disequilibrium

• Equilibrium occurs when injections equals the leakages.
• Disequilibrium occurs when injections did not equal to the leakages.
• Three injections: Investment, government spending and exports.
• Three leakages: Savings, taxation and imports.
• Total Leakages > Total Injections results economic downturn
• Total Injections > Total Leakages results economic upturn

Classification of Economies

• Economies classify themselves based on how well they attempt to solve the economic problems.
• Economies vary based on what to produce, how much, how to produce, and how to distribute.

Traditional Economies

• Focuses on tradition and custom.
• Are typically second or third world countries.
• Are close knit in society, rely on trade and don't typically use money.

Command Economics

• It's controlled by dominant centralized power and planning.
• The governments usually decides decisions for production.
• An example of country that has this economic system is North Korea.

Pure Market Economy

• Relies on purely free market that discourages government involvement.
• Decision making is based on self interest.
• All sources of resources are controlled under private industry with no regulations
• Had historically bad wealth distributions between society.

Mixed Economy

• Involves a mixture of of market and command.
• Mixes pros and cons in each type.
• The level of governments can vary in the economy.
• Market is where sellers and buyers connect for a particular products.
• The Market in product produces will see factors.

Product Market

• Buyers in it are consumers.
• Sellers are usually the firms providing the goods.
• Price mechanism affects the demand from consumers

Price mechanism

• Consumers aim to buy at lowest for maximum.
• Firms want to sell at highest profit.
• Is then the process where supply meet demand.
• An effect in demand can be conveyed back.
• Factor market is any input within production.
• Derived Demand in the factor market results influences supply and demand.
• More demand cause for increase
• To attract resources for production, wage must increase

Private Ownership

• Individuals have the means/rights and ability to generate wealth
• Are entitled to sell or transfer ownership.
• Consumer Sovereignty are free to set the prices.

Market Dynamics

• Through the market, the consumer demands the quantity of the product (what/how much)
• Freedoms for enterprise allows production to undertake the production
• Competition makes the process
• This ensures no influences of pricing can be had from individual

Market Structures

• Competitive Market Involves free markets with perfect conditions.
• Non Competitive market can raise costs.
• The result is too much profit for too little goods

Role of consumers in economy

• Need needs and wants.

Consumer Sovereignty

• Consumers ultimately decide what goods are produced by purchasing
• Business firms attempt to maximize profits by producing goods that consumer want

Definition

• refers to concept that consumers determine the production patterns and volume of goods
• consumers determine the types on production

Impacts

• creates production efficiency and long term economic growth
• Allocative efficiency ability economy shifting resources, ability output with input

4 issues

• marketing, behavior
• misleading or deceptive can buy wanted
• planned product wear out quickly
• anti competitive low quality limited elsewhere.

To save for consume or save

• D = consumer + savings
• Formula: P(average) = C/Y
• S(average) = S/Y
• S(marginal) = 55/
• C(marginal) ==C/

Income Levels

• Income can influence decision when buying for consumer level.
• Some necessities regardless of income and price
• Preference: similar good is okay

Resource

• Wages: major force of income for consumers
• rent: land can be some sort of income
• capital: ongoing.
• skills/Entrepreneurship: small buis income
• Social Security sign from security or welfare assistance 65+

Types of Business

• Business must include factors of production to combine
• Industries are making competition with individual.
• Primary industries: get natural with 11%
• Secondary industries: natural resources
• tertiary: cells final to consumers
• quat: involves communication sector
• quin: service

Decision from firm

• skills an expertise of operator
• demand to future
• capital required to make business

Firms

• Asses demand
• uses past trends
• process includes income

Growth of Business

• Economic state
• Growth to develop and regional economic
• increase produce capacity

Goal of firm

• maximise
• is the business to profits and reduce

Shareholders

• Directors responsilibty
• pay mangers
• advert and change
• to max and invest and improve all goals return decent state some
• conflict - and max dividend for long, invest some by get geographic with expense and effect ability bus to growth