Studied by 0 people
Economics
The study of how people choose to use their limited resources to satisfy their unlimted needs and wants.
it studies how individuals (micro), business, governments and nations (macro) make choices on how to best allocate resources to satisfy their wants and needs
also determines how these groups should organises to coordinate their efforts to achieve maxium output
microeconomics
explains the behaviour of individuals and the choices they make
attempts to understand how consumers and producers make decisions
involves the study of how markets and prices work to allocate resources between all the competing industries in the economy
macroeconomics
concerned with the whole economy of a country
focuses on total economic activity in terms of total production, employment and overall price level
the three most important concepts are growth, inflation, and unemployment
positive economics
testing and developing economic theory
essentially is concerned with ‘what is’ in the economy
positive economic statements can be tested objectively (can be proven true or false), they are testable using economic data
e.g. what effect will sales tax have on the wine industry? what is the current unemployment rate
normative economics
involves personal opinion and judgement and also involves economic policy (even though it is based on economic theory)
is concerned with ‘what should be’ in the economy
reflects opinions rather than facts and cannot be tested objectively
involves a value judgement: an opinion that one situation is preferable to another
e.g. is the unemployment rate too high? should the government tax carbon emissions?
Opportunity cost
the value of the next best alternative forgone
in satisfying a need or want, a resource once used cannot be put directly to an alternative use
one of the major costs of using a particular resource to produce a good or service is the loss in the production of something else that could of used the same resource
relative scarcity means we are constantly choosing between alternative uses, meaning there is always an opportunity cost monetary or not.
Economic Problem
how to satisfy virtually unlimited needs and wants through the use of limited resources. It is a problem of relative scarcity and a problem of choice.
it is a problem of scarcity because there are simply not enough resources to satisfy unlimited needs and wants. Anything that has a price is relatively scarce, meaning it is limited relative to societies unlimited needs and wants.
it is a problem of choice because scarcity exists for all people and society must decide which wants they will satisfy.
Types of resources
Natural: resources that are supplied from the natural environment. E.g. air, water, minerals, etc
Human: the quantity and quality of the labour force. Labour is the physical and mental effort applied to production of goods and services while enterprise is the coordination and management of production by an entrepreneur
Capital: man-made resources which assist human resource in the production of goods and services
Rational self interest
the assumption that assumes that economic decisions are based on people following a logical process in order to compare the costs and benefits of a decision
a decision is considered rational as long as the benefit exceeds the costs
a rational person is therefore someone who compares the costs and benefits of decisions before acting.
Allocating scarce resources
to allocate scarce resources an economists compares the benefits of using a resource against the costs
as you consumer more of something the extra benefit you get declines, this is known as the principle of decreasing marginal benefit
marginal benefits will eventually start to decline as a resource being allocated to the production of a good or service that are not best suited.
marginal analysis
marginal cost (MC): the cost of producing the next item of a good or service
marginal benefit (MB): the benefit of producing the next item of a good or service
economists maintain that as long as MB > MC producers should keep producing that thing thing or once the net benefits reaches its highest point
the optimal stopping point is therefore the point at which net benefits are maximised
This is the point at which the opportunity cost of choosing this good or service is minimised.
Economic models
a simplified representation of economic reality showing the relationship between certain economic variables
though economists cannot conduct controlled experiments we do use logical set of processes to identify the principles that govern economic behaviour in society
centeris parabis
An assumption that meanings ‘all other things constant’
though economists cannot control controlled experiments, they can use logical sets of processes to identify the principles that govern economic behaviour is society
however, their hypothesis are only valid if all other independent variables are kept constant.
therefore centeris parabis assumption allows economists to construct models which allow them to create theories about how an economy works.
Production possibility frontier (PPF) model
an important economic model that economists use to illustrate the economic problem and the concept of opportunity cost. It illustrates the basic economic problem - scarcity and choice.
it shows all combinations of goods and services that can be produces by an economy given the available resources are the level of technology.
it only shows what can be produced, bot what would be consumed.
the combination of the two products that maximise net benefits for a society is known as the economically efficient point.
PPF assumptions
resources are fixed
technology is fixed
the economy produces only two goods
resources are fully and efficiently used.
law of increasing opportunity cost
as you increase the production of one good, the opportunity cost of producing the other increases. In other words, the more you produce of one good, the more of the other you lose out on
removing the assumption that there is no changes in technology on the PPF
the changing of curvature represents how it is easier to produce one of the goods and therefore more of it can be made. The frontier will shift outward on the axis of the good that is now easier to produce.
removing the assumption that the quantity / quality of resources are fixed
an outward shift in the PPF illustrates the level of resources that ca be used to produce both capital and consumer goods.
an outward shift in the PPF represents economic growth
this can occur due to an increase in either the quality of quantity of resources
Sustainability
economic growth occurs when the quality or quantity of resources improves. This allows more goods and services to be created, which increases standard of living which is all economy’s objective.
However, economic growth involves a trade off, between present of future consumption
it we use most of our resources today then potentially there will be less resources to use tomorrow. Therefore it is important than an economy grows sustainably
This can be done by sacrificing some current consumption in order to use those resources in the future. This generates savings which allows for future investments
investment is often seen as the ‘engine of economic growth’ as it generates a new more efficient capital
economic systems
economic system: the way in which a country’s resources are allocated to deal with the economic problem
It manages the needs and wants of the collective with include: education, healthcare and public transport.
It includes institutions such as law and order, rules and regulations, and accepted practices for the production and distribution of goods and services
the key to any economic system is to answer the four key economic questions which determine the allocation of resources in the economy and the distribution of income.
market economy
all resources are owned by private individuals who make decisions based on their own self interest. These characteristics describe a free enterprise or capitalist economy.
business owners want to make a profit
in this system, the consumer is sovereign as what consumers demand will determine the goods and services produced.
planned economy
the government controls the economy, and all factors of production are state owned. These characteristics describe a socialist economy.
Mixed or modified economy
has elements of both planned and market economies
governments own and control some of the resources but there is also private ownership of resources
In australia, the private sector accounts for 75% of production.
market
a market is said to exists when buyers and sellers voluntarily exchange goods, services or resources
markets are one way to coordinate economic activity.
they help to allocate scarce resources in order to satisfy the many competing wants in an economic system
markets are efficient because they do not require any resources to run
characteristics of a market
markets contain 3 elements: buyers (demand), sellers (supply) and something to exchange (goods, services, resources)
markets provide incentives for both consumers and producers
do not require resources to run. Therefore they are an efficient way to deal with the economic problem
voluntary exchange. this can be face to face or online
market competitiveness
the ideal market is one that is competitive
non-competitive markets however involve either oligopolies or monopolies
monopoly: one dominant firm
oligopolies: a few dominant firms. For example, the supermarket industry (Coles, Woolworths, IGA, and Aldi) or the telecommunications industry (Telstra, Optus, and Vodafone)
Product market
exchanges goods and services
consumers are the demand
producers or firms are the supply
factor market
factors of production / resources are the items exchanged
firms or producers are the demand
households are the supply
competitive market
large number of buyers and sellers
firms are ‘price takers’
no individual buyer or seller can influence the market price
very similar (homogenous products)
easy entry into the market (no barriers to entry or exist)
non-competitive market
small number of firms
product differentiation
firms are price setters - they have market power
entry to the market is restricted
price mechanism
the way in which price influences the allocation of resources as well as supply and demand
it helps to answer the 4 economic questions.
the question of how and how much to produce are answered by producers: to operate profitably, firms must operate efficiently and minimise costs to maximise profits
the question is answered by price: the rewards of production reflect the price which the market is willing to pay for resources. The amount of income received by resource owners generally reflect the scarcity of the resource they have provided.
