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(Half-Yearly) Introduction To Economics
(Half-Yearly) Introduction To Economics
(Half-Yearly) Introduction To Economics
What to produce? It must decide which wants it will satisfy first and which it will leave unsatisfied.
How much to produce? By producing too much of a good, resources will be wasted and by producing too
little, the wants of some individuals will be left unsatisfied.
How to produce? An economy must look for the most efficient method of production that uses the least
amount of an economys resources so that the greatest number of wants are satisfied at any one point in time.
How to distribute production? Each economy must decide whether it wants a more equitable (even)
distribution of production or a more inequitable (uneven) distribution. This is a difficult question because
there is often a conflict between equity and efficiency more efficient systems may produce less equitable
outcomes.
The PPF (also known as the Production Possibility Curve) is used to demonstrate how opportunity costs arise
when individuals or the community makes choices. With the application of new technology there may be an increase
in production, which would cause an outswing of the PPF. This might allow us to produce a higher quantity of a
good with the same resources. Also, with the discovery of new resources the PPF will experience a shift.
Return
Rent
Wages
Entrepreneurial Resources
Interest
Profit
Each of the four resources is limited in its supply, reflecting the problem of scarcity:
Natural Resources
Availability
Renewable resources take long periods of time to renew themselves
Non-renewable resources need to be used in a sustainable way so that our current
societys use does not affect the use of future generation (sustainability)
Labour
Population size the larger the population the greater amount of labour available
Skills depending on the level of skills (both physical skills and educational levels)
this will limit supply of labour needed in particular sectors
Willingness to work the social attitude towards employment will affect peoples
willingness to work
Capital
The private sector and governments willingness to invest
Entrepreneurial
There may be a limited amount of people willing to take risks associated with
Resources
entrepreneurship
Population size
Provision of Employment and Quality of Life through the Business Cycle
The business cycle is a graphical representation of economic growth within an economy. It is a cycle of ups and
downs in market economies. Refers to fluctuations in the level of economic growth due to either domestic or
international factors.
The level of economic growth is measured by the percentage change in GDP (Gross Domestic Product total
production)
An upswing in the business cycle is when economic growth is growing at a faster rate than it previously was and
occurs when injections are greater than leakages. When an upswing peaks this is known as a boom, as is where the
growth rate of economic growth peaks. This rise in economic growth will have many beneficial effects on the
economy. A boom in economic growth is associated with increased investment and production.
A downswing in the business cycle is when economic growth is growing at a declining rate than it previously was
and occurs when leakages are greater than injections. When a downswing reaches its lowest point this is the trough
of the business cycle. This decline in economic growth can have many negative effects on the economy. A recession
is the stage of the business cycle where there is decreasing economic activity, defined as two consecutive quarters
(six months) of negative economic growth i.e. a fall in GDP.
Boom
Increasing production of goods and services
Rising levels of consumption and investment
Falling unemployment
Rising income levels
Rising quality of life
Businesses
Financial Institutions
Government
International Flows
The circular flow of income is an economic model that in a very simple way explains how the economy operates. It
assumes the economy has five sectors that interact with each other to ensure goods and services flow through the
economy.
Leakages are flows of money out of the two-sector economy (individuals and businesses). Leakages include:
Savings (S)
Taxation (T)
Imports (M)
Injections are flows of money into the two-sector economy (individuals and businesses). Injections include:
Investment (I)
Government Expenditure (same as spending) (G)
Exports (X)
Investment in the economic sense refers to spending on capital equipment such as machinery, factories or any goods
used to make an income.
Market
Economy
(e.g. USA)
Mixed
Economy
(e.g.
Australia)
Planned
Economy
(e.g. North
Korea)
Economic System
Market Economy
(e.g. USA)
Ownership of Resources
Private ownership of
resources
Mixed Economy
(e.g. Australia
Private ownership of
resources
Market allocation of
resources
Substantial government
intervention
Planned Economy
(e.g North Korea)
Government ownership of
resources
Government planning of
resource allocation
Market Economy
In a pure market economy, all major economic decisions are made by individuals and private firms. Under this
system, most economic resources are owned by the private sector and people are able to seek wealth without the
government intervening or affecting their business activities.
Other names used to describe a market economy are capitalist, free enterprise and laissez-faire. Laissez-faire means
an almost complete absence of government intervention in economic activity. It can be translated to let things be.
The essential features of a market economy are:
Emphasis on private ownership of property and private enterprise. Private enterprise is the system by
which privately owned (rather than community-owned or government-owned) resources are used in
production.
The price mechanism in the market is the basis of the economic system.
A monetary system operated by private enterprise, but regulated by the government.
A high degree of specialization and interdependence (dependent on each other) at all levels
Consumer sovereignty refers to the manner in which consumers collectively through market demand determine
what is produced and the quantity of production.
Freedom of Enterprise individuals have the right to use their resources as they choose. This means that
entrepreneurs are free to set up profit-making activities and have the right to determine what goods and services they
produce and how they will undertake that production. Workers are free to choose their occupations or, for that
matter, whether they work or not.
Price mechanism is the process by which the forces of supply and demand interact to determine the market price at
which goods and services are sold, and the quantity produced. The price that consumers are willing to pay for goods
indicates their preferences.
The price mechanism has shown what to produce. The lower price will reduce the suppliers profits so they
will use the resources to produce other goods which consumers prefer and for which they will pay more.
Producers decide how to produce, or which combination of resources to use to get the output they want, by
comparing prices of the various resources. To prevent the increase of the producers cost, producers will try
to substitute a more plentiful, and therefor less expensive resource. In this way, the prices of resources
indicate the most efficient combination of resources.
The price mechanism has shown how much to produce.
Prices also provide the means of distributing the goods in a free enterprise economy. The price mechanism
is one of rationing the limited number of goods among those who want to consume them.
Mixed Economy
A mixed economy is an economic system where the decisions concerning production and distribution are made by a
combination of market forces and government decisions. The government intervenes in production because the free
market does not always provide the most efficient allocation of resources for the economy as a whole. There are
three considerations here:
Some necessary goods and services may not be provided under a pure market system. Governments provide
those goods that are beneficial to the whole community and for which it would not be practical to charge on
an individual basis (e.g. railway system, parks, roads, national defence)
It is sometimes better for essential goods and services to be provided by government, rather than being left to
private individuals. For example, for reasons of security and internal stability, it is safer to have a defence
force in the hands of the government than to have a system of private armies.
The government provides regulations to prevent producers from exploiting consumers with misleading
information or by agreeing to raise prices. The government may also legislate to ban the production of
undesirable goods and services (e.g. illicit drugs) and ensure adequate safety standards for all products sold
on the market.
The government intervenes in the distribution of output (income) because the free market will not necessarily
provide a socially desirable or fair distribution. The government intervenes in two ways:
Social Welfare Payments under the price mechanism alone, there would be no income earned by those
who did not contribute to the production process. In other words, there would be no provision made for the
elderly, the unemployed and the chronically sick. In Australia, the government overrides the market forces
and redistributes income by taxing people on higher incomes more heavily, and making social welfare
payments to the members of society who do not contribute to the production process (the economically
weak old, disabled, unemployed). Examples of social welfare payments include disability pensions, age
pensions and unemployment benefits.
Progressive Income Tax The government also causes an overall redistribution of income in order to
achieve a more equitable (even) sharing of produced output. It does this though the use of a progressive
income tax system. Under such a system, high-income earners pay proportionally more tax than low-income
earners. This leads to a more even distribution of income.