Comprehensive Introduction to Economic Principles and Markets

Foundation and Definition of Economics

• Definition of Economics: Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.
• Economic Activity: This occurs because humans live in a world characterized by limited resources but unlimited wants.
• The Study of Economics: It is specifically the study of how people, businesses, and governments make choices regarding the use of limited resources to satisfy those unlimited wants.

The Fundamental Economic Problem

• Scarcity: This is the key economic problem. It occurs because there are not enough resources available to satisfy everyone's wants.
  • Resource Examples: Finite resources include oil, coal, and trees.
  • Budgetary Example: If an individual has $30$ and wants a new book, bubble tea, and movie tickets, they cannot buy all three because of scarcity.
• Resource Allocation: Because resources are finite while wants are unlimited, they must be allocated appropriately to allow the world to function.
• The Three Main Choices: To balance resources and wants, societies must answer three fundamental questions:
  1. What to produce?
  2. How to produce?
  3. From whom to produce?

Needs, Wants, and Products

• Needs: The resources required for survival.
  • Examples: Food, water, shelter, and clothing.
• Wants: Things we desire that improve the quality of life but are not strictly necessary for survival.
  • Examples: Designer shoes, phones, jewelry, and gaming consoles.
• Goods: Physical products that can be touched or felt.
  • Examples: Cars, phones, and shoes.
• Services: Actions or physical labor performed for people.
  • Examples: Haircuts, teaching, and medical care.

Factors of Production (CELL)

Factors of production are the inputs mixed to produce goods and services. They are categorized by the acronym "CELL":

1. Capital: The assets, machinery, tools, and equipment used in the production process to transform resources into goods. It refers to the running of the business.
   • Examples: Tractors, computers, and machinery.
2. Enterprise (Entrepreneurship): The ability to organize resources, including decision-making and risk-taking when combining the other factors to produce goods. These are viewed as business actions.
   • Examples: Business owners and entrepreneurs.
3. Labour: The physical and mental human effort put in to transform resources into goods.
   • Examples: Skills and attributes such as craftsmanship; specific roles like teachers, farmers, and builders.
4. Land: The primary resources involved in production that come from nature. It refers to anything derived from the Earth.
   • Examples: Water, trees, coal, and iron ore.

Economic Agents and Incentives

• Economic Agent: A decision-maker who recognizes that different factors influence and motivate different economic groups. The allocation of resources depends on their choices.
• Types of Economic Agents:
  1. Consumer: One who consumes a produced good or service, generally for a non-financial purpose. Examples include high street shoppers and stockbrokers.
  2. Firm: An agent whose role is to transform factors of production into goods and services to sell. These can be public, private, or voluntary.
  3. Government: An agent that provides rules for how firms and consumers should interact. This is particularly evident in developed economies; economies with higher income levels typically have better service sectors.
• Incentives: Factors that motivate an economic agent to behave in a particular way. These can be based on religion, financial promise, or moral/ethical beliefs.
  • Example: If a firm sees a product has a higher profit margin due to high demand, it has an incentive to produce more of that specific product.

Institutions and Economic Systems

Economic problems are dictated by organizations called institutions.

• The Three Main Institutions:

  1. Public Sector: Organizations (governments) that use taxation to provide services like education and health.
  2. Private Sector: Organizations primarily motivated to make financial profit that are not run by the government. Example: Microsoft.
  3. Voluntary Sector: Organizations where charitable work is conducted with less intention of profit. Examples: Non-profit organizations (NPPs) like Unicef or The Salvation Army.

• The Three Types of Economies:

  1. Free Market Economy: An economy where all decisions are made by the private sector with limited state control. Example: Capitalist nations like the U.S.A.
  2. Command Economy: An economy where all decisions are dictated by the state. Example: Communist reigns such as North Korea.
  3. Mixed Economy: An economy where decisions are made by a combination of the private sector, public sector, and voluntary organizations. Example: France and some other capitalist nations.

Positive and Normative Economics

• Value Judgement: A subjective statement based on personal views or opinions.
• Positive Statement: An approach that seeks to be objective using scientific research. These are statements that can be proved or disproved by reference to evidence or numerical data.
• Normative Statement: An approach using value judgements to explain what "ought" to be done. These are subjective and cannot be proved or disproved.

Opportunity Cost and Production Possibility Diagrams

• Opportunity Cost: The value lost when giving up a choice for the next best alternative.
  • Example: Choosing movie tickets instead of a book means the book is the opportunity cost.
• Production Possibility Diagram (PPD): A diagram showing all possible combinations of goods produced by an economy when all factors of production are used efficiently. It is also known as the Production Possibility Frontier (PPF).
• What PPDs Show:
  1. Opportunity costs.
  2. Trade-offs (moving from Point A to Point B).
  3. Changes in the standard of living.
  4. Use or underuse of factors of production.
• Graph Points:
  • On the Curve: Representation of the maximum amount of goods produced using resources efficiently.
  • Inside the Curve (Point A): Represents underuse of resources.
  • Shift to the Right: Allows for the production of even more of both goods, often driven by technology or training.

Markets and Prices

• Market: A place where buyers and sellers interact to exchange goods and services.
  • Physical Markets: Farmers' markets, shopping centers.
  • Online Markets: Online stores, auction websites.
• Purpose of Markets: To determine prices, supply, demand, and the allocation of resources.
• The Invisible Hand: A concept explaining the force that naturally drives markets to operate via the self-interest of economic agents. It separates what society "can" and "can't" do.
  • Example: Two shops sell the same product. Shop 1 sells for $5$ and Shop 2 for $4$. Consumers naturally go to Shop 2 to save money. If Shop 1 then offers free drinks, the consumer’s self-interest migrates back to Shop 1. Sellers manipulate self-interest to get the best deal.

Demand

• Definition: The quantity of a product consumers are willing and able to buy at a fixed price in a given time period.
• The Demand Rule: There is an inverse relationship between price and demand.
  • Price $\uparrow$ Demand $\downarrow$
  • Price $\downarrow$ Demand $\uparrow$
• The Demand Curve: Slopes downwards on a Price ($P$) vs. Quantity ($Q$) graph.
• Shifts in Demand: Occurs when the curve moves entirely to the right (increase) or left (decrease).
  • Causes of Increase: Good weather, advertising, population growth, higher incomes, fashion trends.
  • Causes of Decrease: Negative reviews, falling incomes, out-of-trend products, bad publicity.
• Calculating Demand Formula:     $Q_D = a - bP$
  • $Q_D$ = Quantity Demanded.
  • $a$ = Interest level/quantity if the price is $0$.
  • $b$ = The rate at which demand decreases as price increases.
  • $P$ = Price.

Supply

• Definition: The amount producers are willing and able to sell.
• The Supply Rule: There is a direct relationship between price and supply.
  • Price $\uparrow$ Supply $\uparrow$
  • Price $\downarrow$ Supply $\downarrow$
• The Supply Curve: Slopes upwards. A higher price leads to higher supply.
• Shifts in Supply:
  • Causes of Increase: Better technology, good weather, lower production costs, more businesses entering the market.
  • Causes of Decrease: Drought, natural disasters, increased costs, fewer workers.

Market Equilibrium and Clearing

• Market Equilibrium: The point at which supply and demand are equal and balanced. Buyers and sellers are both satisfied.
• Market Clearing: The process by which changes in the price of a good bring about equilibrium.
• Excess Supply (Surplus): Occurs when supply is greater than demand. Unsold goods remain, and prices usually fall.
  • Example Calculation: Price is set at $50$. Demand is at $40$ units, but supply is at $80$ units. Surplus = $80 - 40 = 40$.
• Excess Demand (Shortage): Occurs when demand is greater than supply. Customers are left unsatisfied, products sell quickly, and prices usually rise.
  • Example Calculation: Price is set at $13$. Demand is at $80$ units, but supply is only at $40$ units. Shortage = $80 - 40 = 40$.

Elasticity and Relationships Between Goods

• Unitary Elasticity: A situation where a change in one variable causes an equally proportional change in another.
• Substitute Goods: Products that can replace each other.
  • Examples: Coke and Pepsi; Xbox and Playstation.
  • Rule: If the price of Pepsi $\uparrow$, the demand for Coke $\uparrow$.
• Complementary Goods: Products used together.
  • Examples: Car and Petrol; Printers and Ink.
  • Rule: If the price of Petrol $\uparrow$, the demand for Cars $\downarrow$.

Specialization and Productivity

• Specialization: When individuals or businesses focus on one specific task or product.
  • Example: Factory worker A installs wheels; Factory worker B installs seats.
  • Advantages: Increased productivity, faster production, better quality, workers become highly skilled.
  • Disadvantages: Repetitive work leads to boredom; dependence on others.
• Productivity: The amount of output produced in a certain period.
  • Factors Increasing Productivity: Technology, Education and Training, Better equipment.

Government Economic Rules and Taxation

• Roles of Government: Helping markets operate fairly by making laws, protecting consumers and workers, and providing services.
• Tax: Money collected by the government used for schools, hospitals, roads, and police.
• GST (Goods and Services Tax): In Australia, this is set at $10\%$.