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Topic 1 The nature of economics The economic problem: The economic problem is that our wants are unlimited and our means of satisfying these wants (resources) are limited. What to produce? Decide which wants are most important to consumers How much to produce? Allocate resources efficiently to maximize satisfaction of wants How to produce? An economy must allocate resources in the production process. It must look for the most efficient method of production that uses the least amount of resources. How to distribute? Distribution amongst the population depends on your total share of production ‘e) income.
Each economy must decide to be equitable or inequitable. Wants Wants are divided up between needs (essential items for survival) and individual wants (make their live easier, or give them pleasure) Resources, scarcity The resources we have are scarce; the resources we have to satisfy our wants are limited. The need for choice by: Individual wants: Individual wants are the desires of each person. What is desired will depend on personal preferences.
How much an individual will be able to satisfy their wants will depend on their level of income. Collective wants: Are the wants of the whole community?
What is desired will depend on the community as a whole. Collective wants are provided by the government using tax revenue. Opportunity cost Opportunity cost basically means if you satisfy one want you can’t satisfy another want. Individuals: May have to choose between satisfying there desire (car) and foregoing a holiday. Business: Must make a choice in the allocation of resources is they decide to produce shoes.
They give up the opportunity to produce something else egg) furniture. Government: Governments has limited resource that it can use for community wants egg) constructing a new motor-way, at the expense of a new school.
Production possibility frontiers Con be used to demonstrate how opportunity cost arise when individuals and the community make choices. O The economy only produces two goods – food, cloths o The state of technology is constant o The quantity of resources remains unchanged o All resources are fully employed Food 200 150 100 500 Cloths 0 4080120 160 Economics Preliminary Notes – Topic One By Stephens produce at a given point in time, when resources are fully employed. The frontier does not always stay the same with the application of new technologies we can develop more efficient methods of production.
New Technology: using new technology we can develop more efficient methods of production – This allows us to produce more with the same resources. The frontier can be changed by anything that increases the inputs available for production – Because of new inputs we could produce more of both goods Unemployment and the frontier: If any of our resources are not fully employed we would be producing at a point within the APP. – The total output of is less than it could be, there is an inefficient allocation of resources. Future implications of current choices by individuals, businesses and governments
Consumer goods: An economy as a whole can choose between producing goods that satisfy consumer demanding immediately. Capital Goods: Goods that will increase our productive capacity in the future. It is better for the economy to produce capital goods because it will increase its productive capacity and experience a higher level of economic growth. Individual: may choose to forego an overseas holiday or extravagant lifestyle and take out a mortgage and purchase a house Business: may decide to focus on an area or businesses already experiencing success and enter the market late.
Or if they are residing enter the market early and make a killing. Government: May choose to increase welfare benefits and healthcare and provide less funding for other areas of expenditure. The following factors effect the decision making process: Individual Business Government age sex occupation income expectation future plans pricing products minimizing costs ethical issues manage industrial relations managing development- pricing prohibition and banning certain activities encourage certain activities The operation of an economy Factors of production: is any resource that can be used in the production of goods ND services.
The quantity/quality of an economy’s FOP or (resources) can influence is limited. There is an opportunity cost in deciding how to use resources in the production process. 1. Natural resource/land: Includes all resources provided by nature in the production process egg) soil, water, forests, minerals deposits and fishing areas. 2. Labor: Labor is human effort used to produce goods and services. The supply of labor depends on a number if factors: Population size, birth rates, death rates and immigration. 3.
Capital: Is the produced means of production means the capital goods are not produced for immediate consumption, but to be used in the production of other goods and services egg) machinery, tools, factories and computers. 4. Enterprise: Enterprise involves organizing the other factor of production (natural resources, labors and capital) for the purpose of producing goods and services. This makes the management decision for aspects of production. L L Goods and services Demanding by Consumers C The business must decide which combination of a resource to use and products it can process.
Distribution of goods and services: In a market economy such as Australia goods and services are distributed to individuals in exchange for their income. Workers are paid according to the value of their labor- higher the value ?higher income. Positive Negative They do not all receive the same level of income Provide incentives to obtain a better sell and work harder – More work = more pay – Its unfair, for people who are unable to contribute to production because of illness, age or availability Provision of income A person’s income will determine his/her proportion of the total output produced.
The income or money paid is then used as a medium for exchanging goods and services. Exchange goods and services: People generally use money as a medium of this exchange. It makes it easier for people to conduct transaction when only one party is interested in what the other has to offer. The business cycle The Business cycle shows the ups and downs in the level of economic activity. It is measured by GAP- the total amount of goods and services produced in an economy in a giver time (year). The government aims for 3-4% growth over a 7 year period.
Impacts of the business cycle Recession Boom Falling production of goods and services Increased production of goods and services investment. Rising unemployment Falling unemployment Falling income levels Rising income levels Falling quality of life Rising quality of life. The circular flow of income (pap) The five sectors, Circular flow of income. 1. Individuals: Is concerned with their activities in earning and income, and spending it on to goods and services. Supply factors of production to receive income (rent, wages, interest and profit).
Income goes to saving, tax, imports and expenditure on Goods and Services. 2. Businesses: Consists of all the business firms engaged in the production and sale of goods and services. They buy factors of production and supply goods and services. Individuals and businesses need each other. 3. Financial institutions; Savers 4% -0 Bank 0 Borrowers 6% Consists of all institutions that are engaged in the borrowing and lending of money. These financial institutions perform the function of embroiling savings so they can be used for investment. Individuals and business). Savings (leakages) Investment (injection) savings ?money Reduction to the size of the circular flow of income. Reduction level of economic activity Expenditure goes down Production goes down Income could go either up or down Unemployment goes up All this = collapse of economy. Current expenditure that is made to obtain benefits in the future – Effects of measuring the size of the circular flow of income. Increased Investment Increased demand for resources Increased demand for goods and services 4.
Government increased income The effect of a budget deficit on the government would be for the government to increase taxes or decrease there expenses in order to reduce the expenses below revenue or increase revenue over expenses. Taxes 0 Government 0 Spend Revenue (expenditure) Taxation Expenditure Taxation represents a leakage from the circular flow. Causes reduction in the level of economic activity. The majority tax revenue comes from individuals – Expenditure is an example of an injection into the circular flow. – Government expenditure increases the level of economic activity. . International trade and financial flows Export: Goods and services produced in Australia and sold overseas Import: Goods and service produced overseas and sold in Australia. Imports Exports Payment for imports are know as a leakage from the circular flow- Money is withdrawn from the Australian economy and bayed overseas. – Imports result in a decrease in the amount of economic activity. Payments for imports are know as n injection from circular flow. – Australian businesses receive income from other countries. – Export result in an income in the amount of economic activity.
Equilibrium: Savings = Investment Taxation = Government expenditure Leakages Injections Disequilibrium occurs when there is an inequality between: Leakages > Injections Injections > Leakages Turn down in the level of economic activity Falling incomes Falling production and rising unemployment Economy will fall as consumers have less income to save, spend on imports or to have collected. Upturn in the level of economic activity with rising incomes, reduction and employment. – As the level of economic activity increase so will total leakages.
Due to more money being saved, spent or collected as tax. Role of Government: – Government will intervene to control leakages and if it is unhappy with economic outcome. – It can stimulate the economy by increasing injections in relation to leakages, or vice-visa. Also it can increase/decrease taxation, change the fiscal policy. Economies: their similarities and differences Economic Growth Australia Other economies small economy national output Just in top 20 GAP per capita. Australia ranked 12th Growth (change in GAP) -14 years of economic growth. 0′ 02′ average of 3. 8% growth. Biggest economy US (China by 2025)- Luxemburg and Norway richest GAP per capita NZ, Europe and Ireland (7. 8% growth), Singapore (6. 7% growth). Employment and Unemployment Ass generally high unemployment Now however good =5. 1% Regional area have much higher unemployment Youth unemployment is low Only 5% of workforce in primary industry- Greece/loyalty have higher levels of unemployment- Women have higher levels of unemployment Quality of life Quality of life based on healthcare, education, climate Australia ranked 3rd
Australia 2nd Multicultural Use high level of technology 2nd Australian work hard 41% over forty hours Luxemburg most multicultural US most technological country Japan and US work longest Norway ranked 1st -US only 8th Australia large coal, gold, diamond, uranium, copper, iron, aluminum. – Agriculture able to feed 80-100 million people Sustainability big issue 13% National park Singapore no national protected parks or forests – 26% of US ?National parks 30% of Jape = National Parks The role of government in health care, education and welfare payments. Australia Other economies Anglo-American market economy.
Basic healthcare, education and welfare – Australia 9th most free market economy 36. 2% GAP on welfare and government spending Public health very important Free primary/secondary education Universities are publicly owned 6% GAP on education Been welfare stats. Coalition been reducing welfare payments – Continental Europe = Government provides many services and government role is essential in maintaining an adequate standard of living. – Canada, Germany, Japan more centrally planned Sweden 57. 9% GAP on welfare Private universities in US Europe has much better social welfare policy.
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