Micro and Macroeconomics Principles

• These notes cover key concepts in microeconomics and macroeconomics, including scarcity, opportunity cost, production possibility diagrams, circular flow models, business cycles, and consumer and business behavior.

Microeconomics vs. Macroeconomics

• Microeconomics studies individual firms, specific industries, and individual markets.
• Macroeconomics studies the operation of the circular flow model of an economy and the role of aggregate demand.
• An issue of an industry being uncompetitive involves microeconomic issues.
• Issues like waterfront or aviation reforms exemplify microeconomic studies.

Scarcity and Choice

• Scarcity and choice arise because resources are limited relative to unlimited wants.

Physical Capital Resources

• Physical capital includes manufactured items used by firms in production, like artificial snow-making capacity and power lines/generators.
• A household washing machine is not generally considered a physical capital resource in economics.

Production Possibility Frontier (PPF) & Opportunity Cost

Questions 4 - 10 are based on the following:

• The opportunity cost of increasing machine production can be determined using a production possibility table.
• If a country is on its PPF, producing more of one good requires decreasing production of another.
• If located on the PPF any combination is an efficient allocation of resources.
• Access to extra natural resources and increased labor productivity shift the PPF outwards, increasing productive capacity.
• High unemployment places a country inside the PPF.
• Events like skilled immigration, foreign investment, or completion of infrastructure projects affect the PPF differently than disasters like severe flooding.
• Economic growth and expanding the PPF often involve trade-offs like increased pollution and resource depletion.
• A production possibility diagram can easily show unattainable output combinations, and rises in productivity and economic growth.

Circular Flow Model

• The simple three-sector circular flow model includes households, firms, and the public sector.
• The model assumes the flows are equal in value and interdependent.
• The three sector model does not show the effects of spending on foreign goods and services, as well as household savings.
• A decrease in household and government spending would lead to a decline in national production, incomes, and increased unemployment.
• A rise in total spending leads to economic expansion, potential income increase for households, and possible acceleration of inflation.

Consumer Behaviour

• The traditional view of consumer behaviour assumes consumers are rational and make informed decisions to satisfy needs and wants.
• Consumers are not unpredictable when they make purchases, in the traditional view.
• Marginal utility suggests that satisfaction decreases with increased consumption of the same item.
• The concept of utility may not be applicable to individuals with compulsive behaviors.

Weaknesses of a Pure Market Economy

• A pure market economy is likely to create income inequality.
• Economic activity is likely to be unstable in a pure market.
• A free market does not allocate resources efficiently always.

Economic Systems

• All economic systems address basic economic questions due to scarcity.
• Mixed economies combine market strengths with government intervention.
• Traditional economies do not always ensure relatively high living standards.

Business Behaviour

• Business behavior is traditionally directed towards minimizing costs, lifting efficiency, and maximizing profits.

Government Intervention in a Mixed Economy

• Governments stabilize economic activity. In a boom, the government should raise taxes.
• The government redistributes incomes. Progressive taxes are those where the tax rate varies directly with income.
• The rich are normally not excluded from receiving welfare benefits to maximize effectiveness.
• Countercyclical policies respond to economic slowdowns with increased government spending.

Micro vs. Macro (Essay Question)

• Microeconomics examines individual economic agents (e.g., consumer, firms, industries). Examples: supply and demand for cars, a firm's production costs.
• Macroeconomics examines the economy as a whole (e.g., national income, unemployment, inflation). Examples: Australia economy's GDP, unemployment rate for the country

Positive vs Normative Economics

• Positive economics deals with testable statements about how the economy works.
• Normative economics expresses value judgments about what the economy should be like.
• Lower interest rates will push up house prices is a positive statement.
• The unemployment benefit is too low is a normative statement.

Opportunity Cost (Essay Question)

• Opportunity cost is the value of the next best alternative forgone when making a choice.
• Opportunity costs of the moon landing included other potential government programs like education, healthcare, or infrastructure.
• Potential benefits included scientific advancements, technological spin-offs, and national prestige.

Production Possibility Diagram (Essay Question)

• Total output for each combination in North Korea's hypothetical production:
  • A: 0+5 = 5
  • B: 25+4 = 29
  • C: 32.5+3 = 35.5
  • D: 40+0 = 40
• Factors that could shift North Korea’s PPF outward: increased resources, technological advancements, improved education/skills. This shift could increase living standards, with more goods and services being produced.

Three-Sector Circular Flow Model (Essay Question)

• In a three-sector circular flow model, households supply resources (labor) to firms, and firms supply goods and services to households. Government collects taxes and provides public services.
• A slowdown in household spending would lead to decreased demand for goods/services, lower production, reduced income for households, and potential unemployment.

The Business Cycle (Essay Question)

• The business cycle refers to the periodic fluctuations in economic activity, measured by GDP, around its long-term growth trend.
• A boom differs from a recession:
  • Boom: High levels of production, employment, and consumer spending; rising inflation.
  • Recession: Lower levels of production, employment, and consumer spending; falling inflation.

Consumer Behavior (Essay Question)

• Key factors influencing consumer decisions:
  • Rationality
  • Needs/wants prioritization
  • Information on advantages/disadvantages of choices.
• Incentive: encourages behavior (e.g., a sale on jeans).
• Disincentive: discourages behavior (e.g., high price of designer jeans).
• Government could discourage underage drinking: Increase taxes on alcohol.
• Government encourages charity support: Tax deductions for donations.
• Strategies an employer might use:
  • Bonuses for meeting targets
  • Reprimands for lateness.
• Schools use prizes and detentions as incentives and disincentives, based on reward and punishment.

Business Behavior (Essay Question)

• Traditional viewpoint driving key business decisions: Profit maximization.
• Government could discourage BHP from harming the environment: Impose carbon tax.
• Government could encourage BHP to employ young unemployed workers: wage subsidies.
• Tobacco plain packaging: Disincentive, as it reduces the appeal of the product.
• Government subsidy for older workers: Incentive, encourages employment
• Community awards certificates awarded to businesses: Incentive, as recognition.