Introduction to Economics

Introduction to 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 examines the economy as a whole, focusing on inflation, unemployment, and economic growth.

The Economic Problem

• The economic problem is how to efficiently allocate limited resources to satisfy society's unlimited needs and wants.
• Needs are essential for survival like food and shelter.
• Wants are material desires that provide pleasure.

Opportunity Cost

• Opportunity cost is what one misses out on when choosing something else i.e. an alternative given up when making a decision.
• Choosing an eraser over a pen, the opportunity cost is the pen.

Production Possibility Frontier (PPF)

• The PPF graphically represents all possible combinations of producing two goods/services with the economy's resources at a given time.
• It also shows the maximum production potential of the economy.
• Assumptions of the PPF are only two goods are produced, technology is constant, all resources are fully employed, and the quantity of resources available remains unchanged.
• The unit cost for opportunity cost = units given up / units obtained

The Future Implications of Choices

• Allocative efficiency will maximize returns, allocating resources to society's preferences for certain goods and services.
• Consumer goods and services are for immediate satisfaction, like a haircut (single-use) or washing machine (durable use).
• Capital goods are used for producing other goods.
• Capital goods are subject to depreciation and may need replacing.

Factors Underlying Decision-Making

• Individual choice reflects desires to maximize satisfaction by purchasing goods/services that maximize utility.
• Business choice means businesses must use limited inputs effectively, focusing on goods/services yielding higher gains.
• Government choice means the economy trades off satisfying consumer demand immediately with goods increasing future productive capacity.

Factors Underlying Decision-Making: For Individuals

• Macroeconomic relationship between income (Y), consumption (C), and saving (S) is Y = C + S
• Spending and saving depends on income level.
• As income increases, absolute consumption may increase, but the relative proportion of consumption decreases.
• Low-income consumers spend more of their income and may save very little.
• High-income earners can save more easily by affording necessities and luxuries.
• Transactionary motive is holding money for immediate purchases.
• Precautionary motive is saving for unforeseen expenses.
• Speculative motive is investing to earn a return.

Factors Underlying Decision-Making: For Businesses

• Firms must save money in many aspects of their operations.
• Businesses maximize profits, which equals the total revenue (price x quantity sold) less total costs.
• Total Revenue (TR) = Price × Quantity Sold

Pricing

• Value-based pricing is based on what the consumer would pay.
• Cost-plus pricing includes a "markup" for profits.
• Price = Costs + Mark Up (profit margin)
• Competitive pricing references competing products.
• Businesses charge the highest price the market will pay, based on production costs, demand responsiveness, and competition level.

Resource Use

• Businesses decide on capital and labor combination.
• Australian agriculture, mining, and manufacturing industries tend to be more capital intensive than service industries.

Ethical Issues

• Businesses may consider ethical issues like the natural environment.
• Paying more for recycled paper is better than using non-recycle paper.

Managing Labor

• Labor costs (wages/salaries) represent over 70% of production costs.
• Industrial relations/wage negotiations between workers and management is crucial for controlling labor costs and increasing employee productivity

Role of Governments

• Governments control the economy through policies and direct provision of merit/public goods.
• Examples of government regulations are price controls, commercial law framework, national competition policy, and minimum wage legislation.
• Legislation is also used to control pollution, alongside fines, fees, taxes, and licenses.

Operations of an Economy: Resources and Factors of Production

• Resources in production are also called factors of production.
• The quantity and quality of resources affect a country's living standards.
• The four factors of production are land, labor, capital, and enterprise.
• Reward for land is rent.
• Reward for labour is wages.
• Reward for capital is interest.
• Reward for enterprise is profit.
• The main problem is the scarcity of factors of production.
• An economy is the way society organizes to solve the problem of scarcity in relation to consumer wants.

Distribution of Goods and Services

• The six economic goals are environmental sustainability, income distribution, economic growth (GDP), economic development (HDI, Health), unemployment rate, and inflation.
• Gross Domestic Product (GDP) is the total goods/services produced in an economy in a year and the total income of society
• The income mechanism distributes and exchanges goods/services.
• Market economies provide income as payment for contribution to production.
• The ability to earn income relies on education, skills, experience, and opportunities.

Exchange of Goods and Services

• Money streamlines exchanges, needing only one party interested in the offer.
• Individuals/firms should produce goods/services they are best at producing because resources differ.
• Money allows individuals to specialize, exchanging contributions to production.
• Prices in markets serve as a rationing device in the distribution process.
• Private property rights underpin price system in market economies, which lets owners transfer resources at an agreed price, excluding non-payers.
• Prices are essential in a market economy to provide information of the relative value of goods
• Prices are monetary indicators of relative value.
• Prices match output with consumer demand, ration limited supply, prevent resource wastage, and signal adjustments to producers/consumers.

Functions of Market Price

• Signaling function - Prices adjust to show where resources are needed, informing producers/consumers via market changes.
• Transmission of preferences - Consumers communicate changing needs/wants through their choices.
• Higher prices gives businesses incentive to make more as suppliers' profit increases.
• When demand is low during recessions, supply decreases as producers reduce output.
• Rationing function - Prices ration scarce resources when demand outstrips supply, increasing price until supply runs out.

The Business Cycle

• The business cycle describes economic growth level fluctuations due to international or domestic factors.
• The amount of goods/services produced (GDP) isn't constant, and market economies experience cycles of ups and downs is known as the business cycle.
• Economies generally grow in output over time.
• Economies go through strong growth and also slowdowns, where economic activity decreases.
• Growth stabilizes for some time before peaking and slowing again.
• The performance of an economy varies greatly, but the cyclical growth pattern keeps recurring.

Impacts of the Business Cycle

• Recession includes falling production, decline in consumption/investment levels, rising unemployment, falling income levels and falling quality of life.
• Boom is rising production, increase in consumption/investment, falling unemployment, rising income levels and rising quality of life.
• Governments stimulate growth during recessions to recover and create employment opportunities.
• Stimulus is achieved through discretional measures and automatic stabilizers
• Governments ensure long term sustainable economic growth to avoid a major economic downturn

The Circular Flow of Income

• The circular flow of income will model how economic activity occurs between groups in an economy.
• Savings, taxation and spending all act as leakages.
• Investment, government spending and export revenue act as injections.
• The five-sector circular flow model illustrates the economy based on five sectors (private/public/international).
• A sector may be a part of the economy where the participants are engaged in a similar type of economic activity.
• The Australian economy divides into individuals, businesses, financial institutions, governments, and international trade/financial flows.
• Individuals supply factors like labor/enterprise and households earn income and consume services.

2/3/4/5 Sector Models

• Businesses (2-sector model) consist of production/sale of goods/services with activity related to producing/selling goods.
• Businesses rely on consumption of goods/services & individuals rely on businesses for goods/services.
• No leakages and injections occur in this closed system.
• Financial institutions (3-sector): They act as intermediaries between borrowers/savers.
• Institutions examples are banks, credit unions and superannuation funds.
• Savings are a leakage in this sector.
• Investment refers to any current expenditure in order to obtain benefits in the future
• Goverments (4-sector) include all levels of government and activities related to public goods, collection and redistribution of tax.
• Governments collect tax, provide public income and engage in fiscal policy.
• Businesses/individuals paying income tax reduces their disposable income, which is a leakage,
• Taxation reduces economic activity with falling output and government spending.
• Government spending is an injection by government employees through collective goods and services.
• International Trade ( 5-sector): Money and goods go between different countries, exports will act as an injection and imports act as a leakage.
• Exports are an injection and imports act as a leakage.

Equilibrium and Disequilibrium

• The circular flow of income model demonstrates the independence and interconnectdness of different sector, influenced by international trade, governments and financial institutions.
• Equilibrium - Circular flow of income is in effect when sum of all leakage is equal to all the injections . -S+T+M=I+G+X , leakage : saving tax and imports, injections : investment , export, goverment spending.
• Disequilibrium is unequal, trend continues toward that balance and a change in the level of income will occur, where level will always head toward equilibrium.
• Total Leakages > Total Injections, will result in a down turn in income.
• Total Injections > Total Leakages: results in a upturn , rising income, higher productivity , and increasing unemployment.

Types of Economies

• Economies answer what/how many/how and to who to produce to decide which is best, thus being classified differently.
• Traditional economy is focused on beliefs, customs and traditions in rural area or third world countries, characterized by barter exchange with roles being social stratified.
• Command economy is controlled by a dominant centralized power commonly found in communist countries.
• This system does not allow for free economic markets.
• Pure market is defined by free markets and does not allow any government control regulated by supply and demand, economic decisions are made by individual firms/sectors , also know as a laissez-fair system.
• It has a volatile cycle requiring the need for mixed economies or centrally planned ones to support market ones.
• Mixed economy, combining the advantages of both command and market economies which helps most western nations.
• A market is a network between buyers and sellers, the price is the product that is exchanged.

Economies: Market Characteristics

• Free market economy are made up of both product and factor markets.
• Product market buyers are consumers, who are the supply and demand of this product market.
• Seller are businesses who supply for the products output.
• Price can effect both costumer demand and supply.
• Consumers will want low prices and sellers want hig returns/profit, this can greatly effect economic output.
• In order to attract recourses a manufacturer needs to offer high prices such as high wages. -This way the price mechanic affect the allocation of resources in an economy.
• Private ownership of property; individuals are able to own the resources, while being able to sell them for chosen conditions
• Consumer sovereignty; product demands are collectively determined by consumers.
• This is opposite to advertising , freedom of enterprise which allows for free product control.
• This freedom ensures that there is a high level of buyers and sellers/competition, preventing monopolies.

Topic 2 - Consumers and Business: The Role of Consumers in the Economy

• Consumers want to earn enough to satisfy their needs, but business firms are looking to maximise profits via the goods they supply.
• Consumer sovereignty is defined by consumer determined production and quantitates of goods/services created through out the economy.
• This is vital for economic growth and stability.
• Economic efficiencies are: Allocative, technical and dynamic. -Factors affecting consumer sovereignty are: marketing, competition, deceptive conduct and planned obsolescence.

Decisions to Spend or Save

• Disposable Income= Consumption Expenditure + Savings, can be simplified to formula Y=C+S.
• Average Propensity to Consume (APC) which is proportion of income that is used, and propionate to expenditure. APC=C/Y.
• Average Propensity to Save (APS) ⊃ : The proportion of income that is saved, and propionate to savings. APS=S/Y
• The Marginal Propensity to Save (MPS), which is also measured in MPS = AS / ΔΥ.

Marginal Propensity to Consume/Influences of Consumer Choice

• Marginal Propensity to Consume MPC =ΔC /ΔY ,
• Factors effecting decision making; Income, price ,price of substitutes/compliments and tastes/preferences.
• Consumers tend to maximise taste and prefences toward a product to purchase. Thus effecting choice as more better/newer products are always created.
• Advertising leads to higher decision making and higher influence of new products.

Social Security

• Sources of both income and return of recources with some being: Wages from Labour ( income source for wages consumers).
• Rent from land consumers own can also be a source.
• Interest from capital and their ownership.
• Profit from entrepreneurial skills.
• Social Security is another for that include income from social/welfare.
• Aged assistance which are provided to those over 65/retired.
• Those seeking employment but cannot find it are provided with unemployment benefits.
• Those Unable to work are awarded with disabilitys and family allowence.

Business/Industries and their Production

• A Business firm is an organization that is able to use entrepreneurial skills, thus being able to combine factor of production to produce goods/services.
• An Industry involves firm with a range or making similar items , commonly competing with each other.
• Industries in Australia that extract recourses account fro 11.6% of GDP, some of which can be Mining which contribute to growth amid mining booms.
• Secondary are involved in products which use recourses to make primary production.

Industries & production

• Tertiary are made up of consumers/businesses that include retailing , education,health etc.
• Information technology firms make up quaternary , while other firms and service individuals make up quinary.
• Determing on how what to produce is determined on firms, skills/experience levels . where there is strong consumer base and those that have capital requirements.
• Research demand price effects assessing resource levels.
• Resources can be combined for a wide range to produce goods/services. The firms depends upon the effectiveness of the four factors of production.

Businesses & Economic

• A source for Economic Growth and has a huge factor determining individuals performance and can even reduce and eliminate un employment.
• Improves road, and increase transportation etc. Individual firm increase productivity also shifts in productivity.
• This means to improve nations productivity is for one or many will lead in an improvement to living standard.
• Governments offer encourage to help develop to contribute to economic growth and a wide range of different services programs.

Firms and Goals

• Firms Maximise profit for most businesses; and set the lowest cost combination toward the use of recources and high prices.
• Maximising of assets allows for high productivity and high levels of profits.
• Satisficing firms look to satisfy all goals (satisfactory)rather than focusing solely on one goal. This to ensure high returns for share holders, decent market shares and environmental goals from the enterprise.
• Conflicting goal such as increase market share at the same as maximising returns: which commonly occurs when managers look to decrease price in order to increase revenue, and maximising growth between longterm and increasing opportunity. As growth increases in a negative manner, decreasing profits.

Production & Efficiencies

• Productivity is how much you have that is given at any specific time. An increase also signifies that the value has increased.
• MFP = production of combined factors , where as SFP describes factors based on productivity over time.
• In order to increase the level of production, production itself has to increased by a better rate then the inputs.

Productivity with Specialisation

• Occurs when factors/processes of production are used at a high intense rate for a smaller amount of production. -DOl (Division of labor) :Occurs while looking to breaking out the different number in to sub process with line approach for assembly. -Localized production by way of gathering business for goods and services at the same localized area to reduce cost via sharing.
• LS production: High specialization large businesses and very specialise capital for their production process.

Internal/External

• Fixed costs is when there is no change with in amount
• Variable costs, which do very with each level/change of production.
• Average (per unit): TC / Average
• Extra cost of item / additional output (Margianal)

Revenue & Econimies

• TR: Total/Output
• Revenue-Cost
• TR- TC
• (Average revenue x quantity)-(Average Quantity x Average Costs)
• Marginal revenue and marginal costs at equal will yield maximum for profit
• Econimies: The reduction in Cost to output , higher production will signify low cost for a singel item or unit.
• The cost saving advantage that result from large expansive are known as internal.

Advantages and Desecomimes

• The better and high utilization of labor allows breaking up process in to steps.
• Bulk raw means decreases cost per unit or input , high investment is what will help expand for those skilled workers. With the added advantage of a larger firm, this will help to add capital, which will greatly help human output. Which accrues over larger period of time as a result from production increase/decease as well a supplies.
• Private Enterprise provide promote industry EG the CSIRO is a help in wheat industry
• Lower Costs as they help help promote and better compete

internal/ External diseconomies

• Over management can cause touch or control running out (which in turn affects costs).
• Large means there is higher costs as there become duplication or additional worker tasks, which in turn affect productivity. +Worker issues, from not personally knowing them can reduce production.

###External Disconomies

• These happen outside of your operation. They have no control as operation cant be summarized with the effects of growth industrys, thus leadig to pollution due the production. +High industry concentration leads to high transport/limited supplys.