Economics Key Concepts: Micro, Macro, and Market Systems

Economy

The entire system within a country, region, or even a family, that deals with the production, distribution, and consumption of goods and services.

Economics

Examines the role of consumers and other organisations in the decision making about:

- allocation of resources

- production of goods and services

- effect that these decisions have on material and non-material living standards.

Scarcity

Endless wants and needs with limited resources (=/ shortage), always exis

Shortage

When the demand outweighs production

Resource

anything useful

Limited resources

Time, Money, Energy

Material Living Standard

population's access to tangible goods and services.

Measured by economic indicators like GDP per capita, which reflects purchasing power

Non-material living standards

intangible aspects of well-being and quality of life not captured by economic measures

Measured using OECD Better Life Index or Human Development Index

GDP

Gross Domestic Product- the total market value of all final goods and services produced annually in an economy

GDP per capita

GDP divided by population

Microeconomics

The study about the behavior of individual economic units, such as individuals, families, companies and the markets in which they run.

Macroeconomics

Takes a wider look at the whole economy and the larger flows affecting overall economic conditions in the country: booms, when the economy is growing too fast, or recessions, when there is a downturn in the economy.

Problem of Relative Scarcity

Having unlimited human needs and wants but limited resources to satisfy them

4 Key participants in Australian Economy

Consumers (households)

Producers

Government

Financial Institutions (banks)

Consumers (households

Buy goods/services

Earn wages/salaries. Pay taxes

Receive gov benefits

Save

Provide factors of production

Producers

Produce goods and services

Aim to make profit

Pay wages/taxes

Borrow money

Import/export goods/services

Government

Charge taxes, pay wages

Spend on goods and services → building infrastructure, paying wages, etc

Provide benefits, payments, services to Australians

Borrow money

Government Demand

Financial Institutions (banks)

Hold savings

Lend money

Aim to make a profit

Pay taxes

What are the factors of production?

Land, Labor, Capital, Entrepreneurship

What does 'Land' refer to in the factors of production?

All natural resources

What is 'Labor' in the context of production?

Physical and intellectual input that contributes to making goods

What is meant by 'Capital' in the factors of production?

Manufactured resources such as machines and factories

What role does 'Entrepreneurship' play in production?

Funds and runs small businesses

What is opportunity cost?

The value of the next best alternative use of resources that is foregone whenever a decision is made. Doesn't have to be abt money, also the next best alternative use of time, money, energy, etc. The potential benefit of the next best alternative is lost with every choice.

What does opportunity cost require?

A judgement on the relative merits of each alternative.

three basic economic questions

What to produce? How to produce? For whom to produce?

Marginal utility

The extra satisfaction gained from consuming additional quantities of a good or service at a point in time. Marginal thinking compares the marginal benefit and marginal cost of the next decision (marginal meaning small change).

Law of diminishing marginal ultility

Each additional (Or marginal) unit of a good or services that is consumed generates less utility (Satisfaction) that the previous one. Total utility grows less rapidly with each additional unit consumed.

economic system

Economy vs Economic system

Economy =

Economic system = how you organise that economy

Free Market Economy

an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. E.g Sungapore

Planned Economy

An economic system where a government or a ruler makes all the important decisions about the production and distribution of goods and services in the society. E.g North Korea

TLDR : Economic Dictatorship

Mixed Economy

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion.

Market Economy (Strength)

increased efficiency, production and innovation

Market Economy (Weaknesses)

- rewards only productive resources

-must guard against market failures

-poor working conditions and unemployment

Planned Economy (Strength)

Prices are kept under control

There is less inequality of wealth.

Low unemployment

Planned Economy (Weakness)

Consumers cannot choose and only those goods and services are produced which are decided by the government.

Lack of profit motive may lead to firms being inefficient.

pure market economy VS mixed economy

Pure market economy = relies entirely on supply and demand with no government intervention.

Mixed economy combines free markets with government regulation to correct market failures.

Need for government intervention in Economy

To fix problems that markets alone cannot efficiently solve, like public goods, externalities, and inequality.

Examples of issues in market capitalist societies and government solutions:

Overproduction of harmful goods

Negative externalities

Under production of beneficial goods

Exploitation of workers

High levels of market power

Recessions and depressions

High levels of consumer and business debt

Example of Each Economic System

Planned : USSR (historically), North Korea, China

Free Market : US, Japan

Mixed : France, Sweden

Why is Aus a mixed economy?

Australia combines private enterprise with government policies that regulate markets and provide social services.

What is a market?

A place or system where buyers and sellers come together to exchange goods and services.

Types of markets

Physical Markets

Virtual : Purchase goods/services thru the internet

Auction : Seller sells their goods to the highest bidder

Market for immediate Goods : Seller sells raw materials (goods) required for final product of other goods

Black Market : Illegal goods

Knowledge Market :Exchange of info based products

Financial market : Exchange of liquid assets (money)

Law of Demand

That as price rises, demand falls and as price falls, demand rises.

Demand

Willingness + ability of the buyer to pay the actual asking price for the goods or service. Demand for a good or service is a want backed up by the money to purchase it.

Supply

quantity of that good or service that will be provided by the producer at a particular price. It is a planned supply not what is actually sold.

Law of Supply

The law of supply says that as prices rise, quantity supplied increases, and as prices fall, quantity supplied decreases.

Non-price factors + demand

Consumer income, tastes/preferences, prices of related goods, expectations, population changes.

Non-price factors + supply

production costs, technology, number of sellers, taxes/subsidies, natural conditions.

Equilibrium

Where quantity demanded equals quantity supplied, setting the market price. Demand ↑, equilibrium price and quantity ↑; if demand ↓, both f↓.

If supply ↑, equilibrium price ↓ and quantity ↑; if supply ↓, price ↑ and quantity ↓

Supply curve

Looks like the opposite of a demand curve

Movement up the line is expansion

Movement down the line is contraction

However graph only work if things are constant