Economics Notes from Tutoring and general notes for year 11.

Economic Problem: How society can satisfy UNLIMTED WANTS with LIMITED RESOURCES Opportunity cost It represents the alternative use of resources, it represents the cost of satisfying one want over an alternative want, and its known as the economic cost Wants: Are the material desired by the communities or the individual Utilities: The satisfaction or pleasure from the consumption of goods and services Needs: The basic necessities of life Individual wants: They are the desire of each individual. This will depend on personal preference and level of income Collective wants: The wants of a whole community or group. The local government usually provides this. Roles of different high Archies: - Local: provides basic local good such as garbage pick up and parks - State: provides wants to a wider community, examples include hospital and police - Federal: satisfying the wants of the whole government, examples include army

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Key economic issues: 1. WHAT TO PRODUCE? We need to decide what goods and services will satisfied first and which will be unsatisfied 2. HOW MUCH TO PRODUCE? Dont waste resources!! Determine how much to produce, to allocate limited resources efficiently and maximize the satisfaction of wants. Find most efficient methods of production that uses the least amount of resources so that the greatest number of wants is satisfied. How to distribute the product: Each economy needs to decide on ether equitable or inequitable distribution. - Equitable meaning distributing product equally to all areas - Inequitable meaning not distributing products equally in all areas rather distribution being done to gain most profit and in the most suitable economical manner

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Production Possibility frontier (P.P.F) It is a graphical representation of all the possible combinations of the production of two goods or services that an economy can produce at any given time. Rules of the (P.P.C.) if production is on the line - The economy can only produce 2 good - The state of technology is constant (the technology isnt faulty and is working to its full potential) - The quantity of resources available remains unchanged - All resources are fully employed (all labor is constant and no unemployment is occurring)

If the production is one the blue line it mean the economy is producing perfectly. Economy cant produce outside the line of resource unless resources are increased

New technology may be able to develop more efficient methods of production so you may produce a higher quantity of goods with the same resources.

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Consumer goods: These are items produced for immediate satisfaction of individual and community wants Capital goods Items used for production of other goods to increase future productive capacity - An economy focusing of capital good production will experience greater long term economic growth Economic factors underlying choices and decisions Individuals - Preference - Income - Age Business - Production quantity - Price of product - Allocation of resources A business will allocate resource to a manner which gains most profit and is most efficient Government - Influenced by the choice of individuals and businesses Encourages disenable activities thought providing rebates Providing public transport Helping to determine the cost of products through tax example of this include alcohol

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THE FACTORS OF PRODUCTION - Four main resources in an economy LAND/natural resources Land is made up of all the resources provided by nature that is used to in the production process, examples include soil, water, forest and mineral deposits. - RENT is the return on LAND (monetary reward to owners of land derived from their productive use. LABOUR Human effort both physical and mental used to produce goods and services The supply and quantity of labour depends on our population size Labour force include 16-75 year old - WAGE is the monetary reward to owners of labour CAPITAL These are item used in the production of other goods and services Capital can be owned by individuals or firms these are know as pristine goods Machinery, public infrastructure including roads and tele-communication are examples of capital - The return in capital is INTEREST, the monetary reward of capital: the price of borrowing savings to interest in capital goods ENTERPRISE Involves bringing together the other factors of production (land, labour, capital) for the purpose of producing goods and services. Enterprise makes the critical management decisions concerning all the factors of Production - The reward for enterprise in PROFIT

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Problem of scarcity Natural resources are limited by what is available in the surrounding environment. Gross Domestic Product: Total market value of all final goods and services produced in an economy over a period of time (total income of society) MARKET economies dont attempt equitable distribution output, instead they reward people with income based on the value of their input contribution to production process through providing incentive to obtain better skills and to encourage laborers to work harder, another advance of this is it improves your resource by encouraging technological advancement and innovation. It can be unfair to those with disability and those who are unable to contribute to the workforce Those with less bargaining power may be unable to secure a fair return for there labour input, examples include factory worker inputting equal workload yet the person with the highest bargaining power and social skills may be proficient to receive a bonus or a higher placement Governments may influence change to distribution if an inequitable market and help the disadvantaged

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THE BUSINESS CYCLE The fluctuation in the level of economic growth over time due to either domestic or international factors, levels of activity in an economy are never constant. - Economies usually experience an overall trend of growth. In output however the business cycle in characterized by alternative periods of strong growth and economies slow down. Business cycle graph
1. The peak is know as a boom 2. The trough is referred as a bust/recession

Recession: the stage of the business cycle where there is decreasing economic activity - Two consecutive quarters of negative growth Doom: Increasing economic activity and growth Impacts of a recession - Increase in unemployment - Falling production of goods and services due to a decrease in the demand due to the decrease to consumption altered by a decrease in income. - Falling quality of life and standard

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CIRCULAR FLOW OF INCOME The cyclic flow of activity causes major disruptions, the government aims to smooth this out by - Stimulating the economy activity during period of recession and hard-ship to assist growth and recovery, example of this was K. Rudd providing $1000 to Australians to encourage them to spending altering recirculation back to the economy. - Insure the economy can sustain long term growth to avoid any major economic down turns.

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Circular flow of income basics Individuals receive income from businesses through work Businesss receive profit through individual Savings (S) Finical providers Investment (I) (S)avings of individuals are processed through financial firms and savings are often (I)nvested back into businesses Taxation (T) Government Expenditure (G) Individuals pay (T)axation to the Government, which is further distributed back into Businesses as Expenditure (G) Import (M) International Export (X) Individuals shops online and buy foreign goods, which is known as importing (M), and international businesses provided export (X) to domestic businesses. Leakages: S+T+M Is the flow that result in money being removed from the circular flow of income. It causes a decrease in aggregate income and general level of economical activity. Injections: I+G+X These are flows that result in money being added to the circular flow of income. These cause an increase in aggregate income and general levels of income activity.

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FIVE SECTORS OF THE CIRCULAR BUSINESS FLOW Individuals: - This consists of all individual people in Australias population. It concerns their activities in earning an income and spending it on goods and services. They are main consumers in an economy, also the owners of production as inputs to businesses and are rewarded by receiving incomes. Income goes toward spending on consumption of goods. S, T, M. The business: - These consist of all business firms engaged in producing and selling goods and services. Concerns their activity in buying and using factors of production in the production process. Businesses and individuals interdepend, they need each other to survive. Financial firms: - This consist of all organizations engages in borrowing and lending of money. These include banks, building societies, financial companies, super funds etc. they act an intermediaries between individuals and businesses looking to save and borrow money. Government: - This consists of the state government and the federal government. They impose taxes (leakages) on individuals and businesses that reduce the level of economic activity. Government expenditure (injection) on prevision collective wants and transferpayment as income (pension and unemployment benefits). Increase the level of economic growth. International Trade: - Consists of all transition occurring between Australia and other nations. SECTOR classification: - Individuals, Businesses and financial sectors are all private. - Government sector are private - International sector can vary but is foreign trade

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EQUILIBRIUM: This occurs in the economy when sum of all leakages is equal to the sum of all injections. Disequilibrium: Occurs when there is an inequality between total leakages and total injections. - When leakages exceed injections it results in down turn in the level of economic activity. - When injections exceed leakages the opposite occurs resulting in raising level of economic activity and growth. - Economies will usually balance themselves out and move to equilibrium. - Governments can interfere directly by changing levels of taxation and government expenditure.

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How economies differ: A market economy: This is an economy where all economic decisions are made my individuals and private firms; there actions are motivated by self-interest. People are able to seek wealth without government interference, interference such as taxation and levies. Most economics resources are owned by the private sector (by individuals) it is also known as capitalist free enterprise or laissez-faire system. - Characteristics of a market economy: market system is a network of buyers and sellers seeking to exchange product at certain price. Centrally planned economy: This is an economy where government makes economic decisions. There is little scope for individuals choices to influence the economy. Public ownership of factors of production allows governments (usually communist) to allocate resources at will. Nether pure market not fully planned economies exist meaning there are none that are fully run as market nor centrally planned. Product market: Market for goods and services that are the output for products Factor market: This is the market for input resources that are factors of production.

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MIXED ECONOMY: Its an economic system where decision concerning productions and distribution are made by a combination of elements where both market forces (MARKET based economic system) and government intervention (Centrally planned system). - Some necessary goods and services may not be provided over a pure market system (a economy run only by individuals), as there may be no profit derived. - It is better for an economy to be a mixed economy as free economies (market) cant provide the most efficient way to allocate resources for the economy as a whole - It is sometime better for some goods and services to be provided by government rather than individuals due to security reason, examples including military. - Free market usually dont provide collective wants - The free market economy s also subject to fluctuation due to the business cycle government intervenes to smoothen the cycle and counter-act threats of insufficient or excessive economic activity.

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AUSTRALIAS MIXED ECONOMIC SYSTEM: Essentially operates under the operation of: - Market forces: o Private ownership: freedom of enterprise, Consumer sovereignty - Government intervention: o Public ownership o Social welfare o Progressive taxation How governments in a mixed economy aims to solve the economic problem: What to produce - Governments can greatly influence what to produce; they provide collective wants (pubic/community wants) as well as. They can encourage the production of some subsidies (money given through grants and promotions to encourage sales) while limited or prohibiting others such as drugs. How to produce: - Governments can influence the scale of production - They can regulate production and delivery of some goods and services to insure long term viability - Merit goods: goods and services not produced in sufficient quantity by the private sector because although desirable individuals dont place sufficient value of them o An example of a merit good is education - Assists local producers competing with foreign businesses by placing import restrictions) How to produce Government can influence cost and allocation and use of factors of production: - Industrial relation laws set out minimum wage and working conditions in different industries. Regulations on firms may prevent them from choosing the cheapest method of production
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How to distribute: Government affects how production is distributed. Redistribution of income (social welfare payments), it isnt only determined by markets forces. Governments intervene in the factor market and also regulates minimum wage for labour.

PRICE MECHINISM: The process of which forces of SUPPY AND DEMAND INTERACT to determine the market price at which good and service are sold and the quantity of goods. - Influences interaction between buyers and seller in both markets

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Consumer SOVEREIGNTY: Definition of sovereignty: Highest power This is the manner in which consumers will ultimately decide what goods and services will be produced as they are consumer and buyers of the goods and services and only due to their contribution and satisfaction will the economy progress thus it is the businesses responsibility to satisfy the consumer which therefore gives the consumer the highest power. Private ownership: Individuals have a right to own factors of products. They can use them to derive income and acquire wealth, they also have a right to sell these resources and transfer their ownership. Examples of this is stock ownership, it is an individuals ownership of a factor of product and this can be exchanged if desired. Freedom of enterprise: This is where individuals (owner/managers of enterprise) have the right to use their resources as they chose, they are free to establish profit and determine what goods and services they use.

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Competition: This is the presence of multiply firms in an economy selling similar goods and services - A fluctuation of buyers and sellers (TRADE) places pressure on businesses to lower prices (to encourage sales), this often also encourages them to improve the quality of output and service to influence there sales to consumers. - It also creates a more level playing and allows price mechanism to work effectively Social welfare payments: These over ride market forces by taxing people (individuals) on higher income (the wealthy) and redistributing the taxation received to those who dont/cant contribute to the economy, examples include disabled, elderly etc. Progressive income taxation: This aims to achieve a more equitable distribution of output (usually of income); high-income earners earn proportionally more tax compared to lower income earners.

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Comparing economies: Consumers in the market economy: Consumers and business: - Consumer sovereignty is the concept that consumers ultimately determining the type and quantity of production by exercising there freedom of choice in what goods and services they purchase. - Business firm motivated by profit will produce WHATEVER good and service is in demand. - Consumer income levels can influence the allocation of products in an economy. Example: A 5 star restaurant will only chose to open in a high income earning area as there would not be a high demand unless the area is suitable Business practices that can reduce consumer sovereignty (practices that can help business buy products they may normally not): - Marketing: advertising can exert a powerful influence over consumer spending patterns. o Most firms marketing strategies aim to manipulate the behavior of consumers for profit. o Marketers product expensive research into there target consumers using this as a basis to mass and direct market (marketing to mass and direct to the most manipulative consumers)

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Misleading or deceptive conduct: Consumers (consumption) can be decreased false or dishonest claims about a product leading them unnecessary purchase, an item they dont really want or need but are bought into buy due to misleading information about the product. Example: A phone being bought for $1000 because apparently it has a built in gun when it really is a cheap low quality phone. Planned obsolesce: When goods are sometime deliberately designed to ware out quickly or go out of date in order to encourage consumers to make further repeat purchase. - Keeping up with trends can manipulate people to buy more than they would otherwise Anti-competitive behavior: Businesses who hold a monopoly (control of market supply) towards a market or have few competing sellers can greatly diminish consumer ability to chose what they really want. Examples of this would be electricity firm who can increase their prices without the will of the consumer, as only they may be able to provide electricity to that house. Firms may deliberately restrict their products or provide a poorer consumer experience as not matter what their level of quality the consumer may still need the product.

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Decisions to spend or save: - All income is the economy must either be saved or consumed Y=c+x Y: income C: consumption/expenditure X: Well X APC: Average propensity to consume - This is proportion of ones total income spent on consumption APC equation/gradient: (consumption/expenditure) over Income after tax APS: Average propensity to save - The proportion of ones income that is saved APS equation/gradient equaling: saving over income Note on DECISIONS to spend or save: - Every dollar of an individuals disposable much be spent or saved - APC + APS = 1 e.g. if APC = 69% therefore APS must equal 31%. Factors influencing decisions on whether to spend or save: - Future expectation: what the individual is aim to save or not save for - Personality factors: whether the individual is reluctant to save or to spend and his willingness towards money - Cultural factors: Asians will save more than Africans - Tax policies: Many people may chose to spend as the money not spent may be taxed - The equation is also the gradient = Rise/Run Individuals can be influenced by policies which make it more attractive to save, example include government taxes or superannuation savings or spending through consumer taxes
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Availability of credit: - The higher income earners tend to save more than lower income earners as income increase APC (to consume) fall and increases propensity to save Graph showing consumption over income

- An individuals income stream or propensity to consumer and save changes - Individuals and households tend to smoothen their consumption after saving and spending patterns to maintain a constant standard of living even if income changes

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LIVE CYCLE THEORY OF CONSUMPTION

- Blue line: Consumption As a youth children spend money, which is dis-saving although as they proceed into the workforce they begin to save and as there saving accumulate there spending increases again leading to dissaving leading into the retirement. At retirement individuals have no income and dissaving again occurs as they are forced to consume there past savings and rely on government social welfare payments. - Younger people receive a lower level of income as they lack skills and experience and often spend less money than their elders

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Factors affecting consumer expenditure choices: - Level of income, those at higher income can buy things at higher prices - Personal preference - Technological progress as one may need to keep up with technology such as computers and phones as everyone* needs a computer and phone. - Advertising: o It aims to create or increase a demand for a good and service and aim to further promote the product to seem to superior to its competition o The price itself: people will need to buy products as daily - Consumers are likely to reduce their demand for more essential luxury item as price exists* - Availability of substitute (a good that can be used as a substitute for the good or service) or complementary goods (goods that can be used with the product such as earphones or cover for phone or item such as electricity and petrol which is need for the service) o If the price of one good increases the demand for its substitute increases.

Have

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Industry is a collection or competition in the production of a similar good or service Production decision business opportunities: Individual entrepreneurs may find a specific market economy attractive, as it may be beneficial for them to operate there Nieste* market: A market that caters for highly specific demand taste and characteristics of its target costumers Transfer payments: - Money collected through taxation and distributed to those in need - Aged pension - Unemployment/disability payments Businesses in the market economy: - Organizations involved in utilizing entrepreneur skills to combine factors of production of production and thus produce a finished goods or service. They are the major production units of our economy and influence our over all productive capacity

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Benefits of Skills and experience: - Likely to be more successful in a industry - Have a better perspective and understand of the industry - Minimum risk for the employer to hire an experienced individual - More likely to be attracted to industry and can show a general interest - Experience STARTING A BUSINESS - Business should appearance to derive rapid growth - Understanding and knowing the start up capital needed to start a business and have to the skills and experience to do so - Entrepreneurs should look to start a business in a industry which is most in demand Economic issues businesses face: 1. How much to produce: - This is based on levels of consumer demand and a firms ability to convert demand into sales if its product or service o Most difficult to determine product demand and price when a new business is started or introduced into a new product line. 2. How to produce: - Demand on relative efficiency of factors are determined by current market resource; E.g. Samsung looking over apples iPhone pricing to determine the price and production quantity of their own line of mobile phones.

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One current market resource Pro: New technological advance or the discovery of new resources can improve productivity Con: Can be diminished through unattainable exploitation Labour Pro: Investment in education and training can boost productivity of the nations workforce Con: a decline in birthrate or aging of the population will reduce the available labour Capital: Pro: businesses encourage economies productive capacity through investment in capital goods Cons: Old capital deprecates/wears out or become obsolete overtime Enterprise: Pro: entrepreneurship provides ingenuity and innovation to provide the world with goods and services that may benefit it in an immense manner Con: Individual are less willing to risk innovation in an certain political economic environment*** Goals of the firm: - Maximizing profits o Profit motive its recognized the primary motivate of the business - Total revenue = (outputs sold X price) - total cost of production - Is the same thing as total revenue - You aim for the cheapest combination of productive resources - Meeting share holder expectations o The main responsibility of excutives.. Legally obgiled to maximize shareprices and dividends in order to satisfy the expectation of shareholders o Maximizing short term profit for investors may conflict with measures with long term growth

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Increasing market shares: Firms aim to get ahead of compteting sellers by insuring consumers purchase more of there own product thus increasing there total sales in the market. Maximizing growth A larger asset base allow higher profits to be achieved, how ever long term growth and expantion may occur at the expense of short term profits. Satisficing behavior Attempting to achieve a satisfactory level of attainment balance across all business goal as apose to simlily mazing achievement in one particular adjective Benifts firms in the long term: there may be scope to inprove iffienfly and increase prfoits Efficiency and production Productivity, it is an economies quanity of production per unit of time with given amount of inputs Production its the total quantity of goods and services produced in an economy. Increase in productivity: It means a increase in quanltiy of output per factor of production per unit of time It requires more than just an increase in total production you need to increaseproduction quantity proportationatily more than the corresponding increase in the quantity in the input resources. Increasing an economies contributes to improvements to overall standards of living. - Less wastage of resources Lower production costs Greater international competitiveness Specialization:

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