Scarcity, Wants, and the Economic Problem

• Scarcity exists because resources are limited relative to individuals' demands, meaning not everyone's needs can be fully met.

Basic Wants

• Basic wants are essential for survival, including necessities like water, food, clothing, and shelter
• Recurring wants are those that need regular satisfaction, such as shampoo
• Substitute wants are interchangeable, like butter and margarine
• Luxury wants are desires beyond basic needs, such as entertainment or holidays
• Complementary wants are derived from other wants and used together, such as cars and petrol
• Individual wants are specific to each person, based on preference and income
• Collective wants are those shared by a community, like healthcare and transport

Goods and the Economic Problem

• Consumer goods provide immediate satisfaction, including single-use items (food, petrol) and durable items (electronics, cars)
• Capital goods are used to produce more goods in the future, like machines and equipment

Factors of Production

• There are four main factors of production: land, labor, capital, and enterprise
• Land includes all natural resources, with rent being the factor income return
• Labor refers to human capital, with wages as the factor income return
• Capital is investment in capital goods, with interest as the factor income return
• Enterprise is the ability of entrepreneurs to take risks, with profit as the factor income return

Scarcity and Choices

• Scarcity forces choices at individual, community, and national levels regarding which needs and wants to satisfy first
• Choices must be made about what to produce (consumer vs. capital goods), how much to produce (based on resource availability and technology), how to produce (based on resource availability and technology), and to whom to distribute (based on factor incomes and welfare)

Opportunity Cost

• Opportunity cost is the value of the next best alternative forgone when making a decision
• The Production Possibility Curve (PPC) visualizes opportunity cost, showing maximum production potential with fixed resources
• The PPC assumes only two goods can be produced, all resources are fully employed, technology is constant, and resources are transferable between goods
• The Marginal Rate of Substitution (MRS) is the rate at which one good can be exchanged for another while maintaining utility

MRS Examples

• If increasing food production by 50 units requires decreasing car production by 50 units, the MRS is 1:1
• If gaining 25 units of rice means losing 20 units of wheat, the MRS of producing wheat is 1.25 rice, and the MRS of producing rice is 0.8 wheat

Investment Choices

• Investing in consumer goods early may hinder future economic effectiveness
• Investing in capital goods can improve the future economy by enhancing consumer goods production
• Allocative efficiency refers to the optimal allocation of resources to maximize utility
• Gross Domestic Product (GDP) - the total value of goods and services in the economy

Economic Growth

• Economic growth is the increase in aggregate productivity, GDP, and the value of goods and services over time

Implications

• Allocative efficiency involves resources being allocated to maximise utility
• Choices made can impact living standards positively or negatively
• Individuals may choose immediate wants over future luxury wants, or vice versa
• Businesses face opportunity costs in resource allocation
• Governments have limited budgets for infrastructure and services, leading to opportunity costs

Business Decisions

• Firms face the opportunity cost of producing g/s over others due to limited resources
• Profit can be distributed or reinvested to improve productivity and competitiveness

Savings

• Australians don't save much income and there is a lack of labourers

Factors Influencing Decisions

• Individuals' decisions are based on spending and saving, work, education, retirement plans, and voting habits
• Businesses aim to maximize profits (Total Revenue - Total Expenses)
• Governments collect taxes and reinvest in public goods, influencing decisions through resource allocation, macroeconomic policy, taxation, and consumer protection

Economic Systems

• Market economies allocate resources through markets and prices, with private property rights and freedom of enterprise
• Planned economies involve government ownership of resources allocated by state planning

Production Questions

• What to produce is based on demand; how much depends on resource availability; how to produce depends on technology and resources; to whom to distribute depends on income

Production Details

• Societies must prioritize production since resources are limited
• Economic systems respond to societal preferences, guiding production
• Efficient resource allocation and profit indicate allocative efficiency
• Production quantity depends on resource availability and demand
• Insufficient resources lead to unsatisfied consumers, while surplus leads to waste

Production Method

• Production method relies on technology and resources
• Market economies prioritize cost-efficiency to maximize profits
• Scarce resources raise production prices

Production method (labour vs capital)

• Labor-intensive production occurs in developing countries with low labor costs
• Capital-intensive production is common in developed nations where labor is expensive

Distribution

• Distribution depends on income, which is based on productivity and contribution
• Higher contribution = Higher income = higher living standards
• Free market economies have unequal income distribution

Planned Economies

• North Korea and Cuba dictate income distribution
• Political elites often have higher incomes
• Consumer goods are scarce and rationed
• Prices act as the rationing device between consumers and producers

Price Functions

• Match output with consumer demand
• Ration limited resources
• Prevent resource wastage
• Signal adjustments in economic behavior

Markets

• Factor market deals with land, labor, capital, and enterprise
• Goods market deals with the sales of businesses to consumers and government

Factors of Production (refined)

• Land: environmental elements used for production; factor income is rent
• Labor: workforce knowledge and skills; factor income is wage
• Capital: produced means of production; return is interest

Capital Accumulation

• Capital accumulation requires saving, which leads to investment
• Interest is the cost of borrowing money for investment

Formulas

• Real Interest Rates = Nominal Interest Rates - Inflationary Expectations
• Final Income = Gross Income - Taxation + Social Wage - Indirect Taxes

Income

• Households provide to Firms and Gov through factor markets which then give factor incomes in return
• Quality of economy relies on balance on both material and non-material goods and services

Business Cycle

• Upswing: expenditure, output, income, and employment rise
• Boom: upswing peaks; shortages may cause inflation
• Downswing: economic activity declines
• Recession: government uses deflationary measures to stimulate growth

Circular Flow Model

• Households: provide resources to firms and purchase goods and services
• Firms: produce and distribute goods, paying factor incomes
• Finance: financial institutions facilitate borrowing and lending
• Government: collects revenue and provides public goods
• Overseas: includes exporters and importers

Circular Flow Model (Equilibrium)

• Y=E=O means all income spent equals the output of firms which in return is the payment that productive resources that firms purchase from household sector

Sector Model (leakages and injections)

• In the three-sector model, saving (S) is a leakage and investment (I) is an injection
• Saving can lead to recession unless balanced by investment
• Disequilibrium occurs when S does not equal I
• S>I leads to recession and higher unemployment
• If injections are less than leakages, deflation occurs

Injections

• Gov expenditure
• Exports

Consumption and Savings

• Income influences consumption and saving patterns
• If consumption (C) = 50 + 0.5Y consumption rises with income
• As income increases, dissaving decreases

Income and consumption

• High-income households save more relative to income versus low-income households

Factors Influencing Consumer Choice

• Factors which influence individual include
  • Income
  • Price
  • Price of Substitutes
  • Price of Complements
  • consumer tastes

Role of Business within an Economy

• The role of business is to produce goods and services to satisfy consumer needs and wants while maximizing profits
• Firms employ resources and create income and employment
• Firms classified by Industry and Legal Structure
• Businesses classified as unincorporated (sole traders, partnerships) or incorporated (private/public companies)

Market Economy

• Market economies use prices to determine production and allocate resources efficiently
• What to produce determined by consumer with the use of the price mechanism
• How to produce determined by the cheapest method
• To whom to distribute determined by factor incomes
• Key features
  • Private Ownership of property
  • Freedom of enterprise
  • Motivations of individual
  • Consumer Sovereignty

Role of Government

• Limited role of the government in economic life through infrastructure and social welfare

Mixed Market Economy

• Private sector and government both make economic decisions
• mixed economies involve governments providing collective goods, redistributing income, and regulating private sector activities
• Newly Industrialising Economies (NIEs) experienced rapid growth through domestic saving, foreign investment, and government coordination

Planned Economy

• Planned economies use government planning to allocate resource based on planning authority
• They focus on achieving production targets
• Governments control production, distribution, and prices, often leading to corruption
• This type of economy has public ownership of property and resources
• Key Features of economy
  • public ownership of property and resources (means of production)
  • limited personal economic, political freedom and a standard of living
  • motivation of individual may be from coercion, state propaganda and national goals
  • absence of freely operating product and factor markets and market determined prices
  • production largely depends on state owned enterprises (SOE’s)
  • gov closely intertwined with economic, military, political and cultural life.

Economies

• Economy in transition are transitioning from communism to capitalism

Economies (BRICs)

• BRICs have higher growth rates than advanced economies

Australia and Indonesia

• Provides us with interesting comparison of economic systems (Emerging vs AIE)
• Australia focuses on legislative changes to ensure efficiency