Year 11: Topic 1 Introduction to Economics

The Nature of Economics the economic problem- wants, resources, scarcity * Needs are goods and services essential for survival. * Wants are goods and services that aren’t essential for survival but make our lives easier. * Individual ants are desires of each individual person and depend on preference. * Collective wants are reflected on choices of the community. * Concurrent are wants that are satisfied over and over again. * Complementary are wants that naturally follow the initial satisfaction of another want. * Factors that effects wants changing overtime include age, income, technology and fashion.

* Resources are used in the production process to produce goods and services. * The four factors of production are: * Land: natural resources create rent. * Labour: human effort in production and creates wages. * Capital: refers to goods that are used to produce more goods and services in the future and creates interest. * Enterprise: ability of entrepreneurs to take risks in organising other factors of production and creates profits. * Scarcity of resources is an economic problem. * Choices need to be made on how resources will be used n production. * What to produce: due to limitation of resources, does not satisfy all individual and collective wants. Must decide which to satisfy first, decision has to be made. * How much to produce: Allocate limited resources efficiently and maximise satisfaction of wants. If too many goods are made, resources will be wasted and producing too little will leave individuals unsatisfied. * How to produce: how to allocate its resources in the production process. Most efficient method of production that uses the least amount of an economies resource so the greatest numbers of wants are satisfied. * How to distribute production: people with higher incomes can afford more than people on lower incomes and therefore receive a bigger share of total production. Must decide a more equitable (even) or a more inequitable (uneven) distribution.
The need for choice by individuals and society - Opportunity is the cost of the alternative want is foregone. * Society that places a higher value on current living standards and production of consumer goods might allocate more resources on food, clothing, cars and loss on production on capital goods such as factories, shops and offices.
Opportunity cost and its application through production- possibility frontier - Production possibility frontier refers to the maximum use of resources. * Demonstrates how opportunity costs arise when individuals or community make choices.

Future implication of current choices by individuals, businesses and governments - Main objective of engaging in economic activity is maximizing the returns from using resources that are available (allocative efficiency). Resources are allocated according to preferences of consumers and society for certain goods and services. * Consumers: choices made by consumers are the opportunity cost of buying essential goods and services and foregoing luxuries. * Businesses: opportunity cost of producing some goods and services and not others with same resource. May distribute profit to satisfy wants or retain business in order to invest in capital goods. * Governments: receive revenue from taxation and spend money on community infrastructure. If government spends more that they receive it is called budget deficit and in present, may face higher debt and low spending levels in the future. * Budget slurpus: extra money
Economic factors under-lying decision making
CONSUMERS
* Spending and saving: as income increases, consumers increase consumption. * INCOME (Y)= CONSUMPTION OF GOODS (C) + SAVINGS (S) * Work: higher level of skills the higher the income earned. * Education: higher level of education will increase a person’s income * Retirement: government encouraging more people to make voluntary contributions to superannuation (saving more than spending) * Voting and participation in political process: believed that highly paid and skill professionals vote for Liberal believing in more business opportunities for the self-employed. Many are swinging voters, depending on which party is more likely to make promises they will keep.
BUSINESSES
* People aim to maximise profits. * Wages and salaries account for 70% of production costs, aim to minimise these payments to employees.
GOVERNMENT
* Using tax paid by individuals and businesses and allocating resources through spending of infrastructure and collective services. * Distribute higher tax from high income earners and pay welfare payments to the aged, unemployed, sick and low income families. * Use the monetary policy (interest rates) and fiscal policy (budget deficit and slurpuses) to increase or decrease economic activity. * Monetary policy is aimed to influence the cost and supply of money in the economy in order to influence economic outcomes such as economic growth and inflation. The Reserve Bank of Australia administers the monetary policy by influencing the level on interest rates. * Fiscal Policy influences resource allocation, redistribute income and reduce the fluctuations of the economic cycle. It includes government spending, taxation and the budget income.

The operation of an economy
Income

HOUSEHOLDS

Investment (I) BUSINESS FIRMS
Spending on goods and services

Govern. Spending (G)
L
E
A
K
A
G
E
S
I
N
J
E
C
T
I
O
N
S FINANCIAL
Savings (S)

Taxation (T)

Exports (X) INTERNATIONAL
Imports (M)
GOVERNMENT

* Solve economic problem by doing economic activities such as resource allocation, production and distribution. THE TWO BROAD TYPES OF ECONOMIC SYSTEM: * Market economy is a network of buyers and sellers seeking to sell a certain product at a certain price (buyers and sellers interact). * Planned economy is based on government ownership. * What to produce: based on demand and choice * How much to produce: based on consumer demand and resources. * How to produce: based on availability of revenue and new technology. * To whom to distribute: based on income and contribution to production.
PRODUCTION OF GOODS AND SERVICES: * Due to scarcity of resources, decision need to be made. * Resources allocated efficiently to increase satisfaction of consumer. * Determine how to produce based on level of technology and availability of resources. Developed countries have more capital intensive production methods. Whilst places like China see labour intensive production method more common.
DISTRIBUTION OF GOODS AND SERVICES: * Market economy has a more uneven distribution of incomes. * Planned economy have incomes that are determined by government, thus more even distribution of income prices are subsidised.
EXCHANGE OF GOODS AND SERVICES: * Market economy has prices which will fluctuate and prices based on demand by buyers. * Planned economy has prices that are constant due to government supplying most of the goods.

PROVISION OF INCOME: * The higher the demand for land resources then the higher the price changed to use them. * Wages are the income from using labour resources. * Interest is income from capital resources, based on interest rates. * Entrepreneur combines land, labour and profit to produce goods and services and get an income called profit.
PROVISION OF EMPLOYMENT AND QUALITY OF LIFE: * Businesses provide most jobs for wage and salary earners. * Primary Sector: extracting land resources. * Secondary Sector: using labour resources to convert land resources into goods. * Tertiary Sector: Businesses provide goods and services to consumers employ most of the labour force. * Quality of life depends on level of income.
CIRCULAR FLOW OF INCOME: * Household Sector: * Earn an income and spends on goods and services. * Supplies labour and enterprise to businesses. * Incomes go to spending, savings or pay for tax/imports. - Firms Sector: * Engaged in production and sale of goods and services. * Involved with buying factors of production. * Individuals depend on business to produce goods and services demanded. - Financial Sector: * Engaged in borrowing and lending of money. * Savings and leakages causes fall in expenditure. - Government Sector: * Three levels: commonwealth, state and local. * Satisfy collective wants. - Overseas Sector: * Transactions with rest of the world. * International money flows is borrowing, lending and income payments between the rest of the world.