Topic 1

Goods

a good is a physical product capable of being delivered to a purchaser

Service

the service is an intangible act that benefits us.

Factors of Production

a resource that is used to produce a good or service.

natural resources (rent)

Labour (wages)

Capital (interest)

Enterprise (profit)

Factor Market

a market for any input into the production process including capital, enterprise, land, and labour.

Product market

The interaction of demand for supply and the outputs of production, that is the market for goods, and services.

Gross Domestic Product (GDP)

is the total value of goods and services produced in an economy in one year

Market System

the distribution of goods and services is determined by incomes and prices.

income is generated based on the returns from ownership of factors of production

Prices are determined by the interaction of buyers and sellers in the competitive market.

Advantages of a Market economy

it provides motives for people to work hard, take risks, and find better ways of producing

Disadvantages of Market Economy

it can be unfair, businesses can mislead consumers, prices can sometimes provide misleading signals, and in some situations fail to provide goods or services needed.

Role of Goverment

to redistribute income (taxation, social welfare), regulating the behaviour of firms, intervening when markets do not take some of the positive or negative effects of some goods and services into account, and at times providing goods/services that the market does not provide.

Role of Money

enables specialisation in the production process

reduces the inefficiency of bartering

management of the value of money (payments) is the responsibility of the reserve Bank of Australia (RBA)

The economic problem

Our wants are infinite, but our resources are finite, therefore we must choose between them.

Wants

the material desires of individual or the community. they are items that provide some pleasure or satisfaction when they are consumed.

individual wants

desires of each person

collective wants

the wants of a whole community (e.g a park)

Unlimted Wants

as soon as one want is satisfied, we will seek to satisfy another

Recurrent wants

we will have to satisfy this want over and over again.

Complementary wants

wants that go with another want (e.g car + petrol)

what questions do we have to ask in regard to the economic Problem

What to produce?

How to produce?

How much to produce?

how to distribute production?

Opportunity Cost

the alternative use of resources that is, foregoing one want to satisfy another.

Individual factors

limited income (resources), to choose between many wants (in the form of goods and services)

Business factors

a firm has the opportunity to produce an alternative good when they make the choice to produce something else with its scarce resources.

Government factors

limited resources to satisfy community (collective wants)

Production Possibility Frontier (PPF)

the concept of opportunity cost can be shown in a model called the PPF.

The model is a graph which shows all combinations of goods and services that can be produced by an economy given the available resources and technology.

Calculating the PPF

To calculate the opportunity cost of a good (one unit), e.g produce the unit of good B = good A/Good B

What are consumer goods and services?

Items produced for the immediate satisfaction of individual and community needs and wants.

What are capital goods?

Items that have not been produced for the immediate consumption but will be for the use of production for other goods.

Future implications of current choices

producing more consumer goods in the present will satisfy consumer demand immediately

producing more capital goods in the present will increase our future productive capacity and promote long economic growth.

Leakages

items that remove money from the circular flow of income = decreased demand = lower economic growth

- savings (S), taxation (T), imports (M)

Injections

flows of money into the circular flow of income = increased demand = higher economic growth

- investment (I), Government expenditure (G), exports (X)

what happens if the leakages are greater than the injections

if leakages are greater than injections, income will tend to fall. until equilibrium is regained.

what happens if the injections are greater than the leakages

if injections are greater than the leakages, income will tend to rise until equilibrium is regained.