Economics Unit 1 AOS 1

Microeconomics and Macroeconomics

Microeconomics and Macroeconomics

The two main branches of economics

Microeconomics

- The operations of a particular firm
- the nature of a single industry
- the output, employment and prices in an individual market
(examines 1 specific industry)

Macroeconomics

- the total value of national spending
- the total value of national production
- the national level of unemployment
- the nation's inflation rise
(examine all industries combined in an economy)

Types of productive Resources

Natural, Labour and Capital Resources.

Natural resources

any naturally occurring (raw) things that humans use
- Are used in the production of many types of goods and services
- examples include rainfall and climatic conditions, mineral deposits and forests

Labour resources

people that produce and make things
- are needed to produce particular goods and services
- examples include the skills and knowledge of doctors, builders and business people

Capital resources

machines that use raw materials to produce goods
- are used in the production of many goods and services
- examples include the electricity grid system, commercial building, highways, schools, machinery, dams and ports

Relative Scarcity

people's unlimited wants and needs often exceed their limited resources.

Needs

something that is essential for our survival. for example, water, food, shelter.

Wants

something that is not essential for our survival. for example, video games, luxury items.

Blooms Taxonomy (How to answer an exam/test question)

define - economic terminology
explain - elaborate the question
Apply - diagrams (if there are any in the question)
analysis - from explanation and diagram what can you infer.
Evaluate - Pros, cons, conclusion

Non-Material living conditions

are factors that affect a person's quality of life irrespective of income. Examples includes things such as: crime rates, public health facilities and pollution levels.

Opportunity Cost

Next best alternative forgone
- relates to the value of production or consumption that is given up (ie. forgone) when resources are allocated to their next best alternative use.
- it is the value of the benefits you give up when you choose one thing over another
- individuals, government and businesses all face opportunity costs as they make decisions between alternative choices.

Identify the points of the PPF that would illustrate the following scenarios

- unemployment
- underutilisation of resources
- maximum efficiency in the use of resources
- unachievable output - combinations
growth of an economy

Trade-Offs VS Opportunity Cost

Trade-offs occur whenever choices are made about how to use scarce resources. while there are benefits from a decisions, there is also a cost.
Whilst this sounds like opportunity cost, trade-offs can involve sacrificing multiple benefits/alternatives whereas opportunity cost only considers up giving up one alternative.
For example, the following scenarios may contribute trade-offs:
the trade-off between saving money for future use or spending on immediate wants.
the trade-off between earning more money or having less stress and spending time with family and friends.

Cost-Benefit Analysis

to fully understand trade-offs, economic agents (ie. governments, businesses, individuals) may use cost-benefit analysis.
a cost- benefit analysis involves analysing the anticipated direct and indirect costs and benefits over a certain period to identify the best course of action.
Sometimes a benefit to cost ratio is calculated to determine if there is a new cost or net benefit.

Definition of the 3 basic economy questions

all countries face the basic economic problem or relative scarcity. this forces societies to make choices and answer the three basic economic questions

The 3 basic economic questions

1. what and how much to produce?
2. how to produce?
3. for whom to produce?

Economic activity and living standards

the main purpose of economic activity is to help satisfy society's many needs and wants using the limited resources available.
Typically a positive correlation between economic activity and living standards, because an increase in economic activity often leads to increased living standards.

Material Living Standards

our access to physical goods and services. e.g. Cars, homes and health services.

tangible
- income per person
- level of consumption of goods and services per person
- the purchasing power of incomes (pp - purchasing power)

Non-material Living Standards

intangible
- the quality of daily life
- happiness
- life expectancy
- mental and physical - health
- freedom
- the state of the environment
- leisure time
- crime rates
- literacy rates
- quality of relationships

The three-sector circular flow model

money flows from households and businesses to the government in the form of taxes. The government pays back in the form of government expenditures through subsidies, benefit programs and public services.

productive efficiency

max production at minimum cost

allocative efficiency

meeting the needs and wants of consumers by maxing their utilityal

dynamic efficiency

how fast you can divert resources to another good or service

intertemporal efficiency

produces goods and services now without tampering future production

direct taxes

Taxes paid directly to the government

direct taxes are levied on the profit or taxable income of firms
for large businesses, the current rate is 30% and for small/medium enterprises, it is 25% of their taxable income

Indirect taxes

Taxes levied on spending to buy goods and services

indirect taxes are levied on selected goods and generally target those that have social costs for the wider community.
these taxes make production more expensive
for example, excise taxes on the production and sale of cigarettes

market economies

economic systems in which individuals own and operate businesses rather than government intervention

planned economies

an economic system directed by the government

mixed economies

some allocation of resources is made by the market and some by the government

traditional economic systems

people produce only what they must have in order to exist

two forms of economic analysis

positive economics and normative economics

positive economics

• based on facts

• can be proven

normative economics

• based on opinion (what should be done)

• predictions

economic agents

decisions makers, include consumers, producers, governments and the RBA

public sectors

part of economy involving government production of goods and services

private sectors

small, medium and large businesses owned by individuals that produce goods and services

economic stabilization

• combats market instability

• sustainable rate of GDP growth is 3% p.a