The basic economic problem (IEP)

there is an unlimited amount of wants and needs, but a limited amount of resources

terms

• income

  money that is made from supplying a good or service

• basic economic problem

  there is an unlimited amount of wants and needs, but a limited amount of resources

• expenses

  money spent

• net profit

  the overall income after it has undergone taxation

• inventory

  stock or assests of a business, that could be sold or used.

• market

  an environment in which goods and services are exchanged

• demand

  the amount of people willing to pay for a good or service

• supply

  the amount of goods and services that are able to be purchased by the general public

• price mechanism

  the influence of demand and supply on the price or cost of a product or service

• competitive advantage

  something that one company has that another company doesn’t

  • economics

    the study of the exchange of goods, services, and money

• price

  the point at which you are prepared to transact

• macroeconomics

  relationship between australia and other countries in terms of economical and financial status, as well as competitive advantage.

• microeconomics

  the day to day basis for the average citizen and consumers involving in the economy. also applies to producers, households, etc. looking at individual aspects of the economy.

• opportunity cost

  the next best alternative foregone

• relative scarcity

  the demand for something compared to the amount there is of it.

• superannuation

checklist

• define the basic economy problem

• define supply and demand

• identify demand side factors affecting economic decision making

• identify supply side factors affecting economic decision making

• discuss how a business can make it’s products more desirable

• define the circular flow of income model.

• draw the Circular Flow of Income Model (all 5 sectors).

• identify the flows between the sectors.

• identify equilibrium in the model.

• discuss the impact of a change in leakages in the model.

• discuss the impact of a change in injections in the model.

• Draw a demand and supply diagram.

• Demonstrate changes in demand and supply on the diagram and their impact on market equilibrium.

• Explain how a market will clear a shortage.

• Explain how a market will clear a surplus.

when starting a business, ask yourself:

1. what to produce?

2. how to produce it?

3. how much to produce?

4. for whom to produce?

factors of production:

1. natural/land

2. labour

3. capital

4. enterprise/management

• notes - week 1

  • economics is more to do with finance rather than directly money

  • inflation - 2-3% rate normally

    • spending power of money decreases with inflation, but the costs increase - thats why banks need to use interest rates, employers raises, etc.

    • banks try to slow down / hjack inflation by increasing the interest rates

  • living standards should increase over time, but if the price rapidly rises, then the standards will drop, and this is why inflation is gradual but still happens a lot

  • micro economics & macro economics are the 2 types of economics/economical study

  • economics - creates a market to allocates scarce resources.

  • choices must be made - therefore there is an opportunity cost.

  • the opportunity cost is the sacrifice you make when you spend money in one manner but another

  • relative scarcity - relationship between wants and resources

    • something is finite by degrees, but wants are unlimited

    • depending on how much demand there is, and how much there of something, it defines its relative scarcity and it’s costs

  • __scarcity/relative scarcit__y - there is not enough of what we want, so the price goes up.

    • if demand is still there, and the supply does down, the price goes up.

  • factors of production

    • land / natural - does it require land, natural effects, etc.

    • labour - who is going to work for you and how much is it going to cost

    • capital - human capital, people that can do things which makes themselves a wealth

    • enterprise/management - what it takes to run a business properly and manage everyone

  • demand - the quantity of a good or service that people are willing and able to purchase for a given price in a given time period.

  • law of demand - as the price decreases, the demand usually increases

  • determinants of demand:

    • income:

      • normal goods - as income rises, the demand for that product or good will also rise

      • inferior goods - as the demand for the good decreases and the income increases, the substitutes or replacements for that product will become more popular

    • the price of other products

      • substitutes - for example, the price of chicken lowers, the demand for beef lowers too

      • complementary goods - e.g. DVD players and DVDs. if the price for one lowers, then the demand for both will rise.

    • tastes - the population’s preferences may change

    • other factors:

      • population

      • demographics

      • income distribution

      • government policies

      • seasonal changes

• notes - week 2

  • circular flow of income - the flow of money through an economy

  • two sector model:

    • consists of two sectors; households and firms

    • there is no financial, government, or overseas sector

    • households spend their income on goods and services, and all of the firms provide the households with the goods and services

    • the households provide firms with labour and in return they receive their income to spend on the firms

    • endless cycle of exchange

  

  “along the way, firms make profits and so do households, and use it to pay their employees, and the employees on the other hand use it to buy things from other brands or firms”

• equilibrium - there point where there is no tendency for the leves of income and output to change // Y = O = E

  • income is equivalent to the output and that is equal to the expenditure

  • ‘perfect flow of money’ ‘ideal model’

• the 2 sector model is a closed system

• exchange of labour for price (calculated in hours/rate per hour)

• notes - week 3

  how can money leak out or enter a circular flow?

  

  • instead of the money flowing in a two way closed system, there is now a third sector

    • financial sector - savings, investments, banks

  • leakages and injections - money leaving and entering

  • savings from the households are leakages as it leaves the 2 sector model

  • money entering firms from investments is an injection as it is coming back into the original 2 sector model

  • there will always be leakage or injections, but the equilibrium must still be maintained to an extent

  how is the government involved?

  new injections and leakages

  new sector - government sector

  • the government takes the people’s money, and then spends it on things that are necessary for everyone - publics goods (education, hospitals, toilets, roads

  

  • the money spends money on things that everyone needs, and that makes it easier for people to generate even more income, growing the economy

  how does this connect internationally?

  

  • new sector - international sector

  • new injections from firms - exports

  • new leakages from households - imports

theory of demand

• humans make decisions based on the facts, and that helps them make a reasonable decision

  • a market must remain stable, which allows the buyers to develop a sense of security in their expenditure and spending

• demand is defined as the amount of goods and services consumers are willing and able to buy in a given period of time at a given price, ceteris paribus

• ceteris paribus - all things remain constant

  • a consumer cannot buy something if the prices fluctuate.

• The Law of Demand states that in a given time period, the quantity demanded to a product is inversely related to its price, ceteris paribus.

  • this means that if the price grows, the demand lowers, and vice versa.

  factors affecting demand

  1. change of demand of price of related goods

  2. change in future expectations

  3. change in taste or preference

  4. change in consumers income

  5. change in seasonal factors

  6. change in demographics

  7. change in government policies

  

substitutes and complements

• a substitute is another product that can act as a replacement for another, due to satisfying the same need

  • for substitutes, if the price or demand of one product changes, then the price or demand will also change in the same direction for the substitute

• a complement is a product that must be used at the same time wiht a different goods to satisfy the human want - for example, coffee and sugar, toothpaste and toothbrush

  • this is also known as a joint demand

changes in consumers

• when the income of the consumers income changes, the demand will change in the same direction.

  • if the income drops, then the demand for the goods will drop, as people will afford less.

• awareness campaigns, advertising, pop star appeal, age, and peers can help affect the consumers preferences

• the more desirable is the good to the consumer, the higher is the demand

• seasonal factors can also affect the consumers demand, for example bikinis are going to be in low demand during the winter

theory of supply

why do suppliers decide to produce certain products over the others?

• number of reasons - interest, expertise, wanting to make a profit.

  • people look at what sells and what does not

• supply of a good refers to the amount of a good a producer is willing and able to sell in a given period of time at a given price, ceteris paribus

  • revenue - costs = profit

• supply can easily be plotted on graphs on which one axis has supply and the other has cost - this is called a supply curve

• demand curve - the demand that was plotted on a graph

• the perfect spot for supply and demand - where the demand and supply is equal

  • equilibrium - income = output = expenditure

• why supply more? if supplied more, the amount of revenue grows, and so does the profit

non-price factors that affect supply:

1. change of factor inputs

2. change in related goods

3. change in technology

4. change in weather conditions

5. change in government policy

• when non-price factors affect supply, the curve may move right or left depending on the conditions

price factors that affect supply:

• factor prices refers to the price of the prices of production - e.g. wages, rent, technology/puts the cost in the in the “revenue - cost = profit”

1. land

2. labour

3. capital

4. enterpreneurship

• factor prices increase → cost of production increases → more expensive to produce goods and services → producers have to cut down on production

• when a product is in competitive supply, a product uses some of the supplies necessry to produce another product. for example, milk and cheese, wood and tables vs chairs, etc.

• when a product is in joint supply, when a product increases in supply, another product also increases in supply. for example, leather and beef

• changes in state of technology

• notes - week 4

  • slide 2

  • bring together free market force of demand and supply to determine price

    • the market determines the price

    • Qe or Pe - equilibrium quantity, equilibrium price combine to make market equilibrium

  • equilibrium refers to a position of balance - it is a position from which there is no inherent tendency to move away from

  • market equilibrium refers to the state of a market that has no tendency to change

    • quantity that consumers want to buy = quantity that producers offer to sell

    • in equilirbium, there is no surplus or shortage.

  • when equilibrium price =/= market price - disequilibrium

    • surplus or shortage

  • when the market is at disequilibrium, the. marked forces of demand and supplyu will tend to move price towards equilibrium - price mechanism

    • market clears

  • once equilibrium price is reached

  • no surplus or shortage

  • no pressure for price to change

  • stable market equillibrium

• review questions