TOPIC 1 - Introduction to Economics

Chapter 1: What is Economics About?

1. Economics is concerned with addressing the economic problem of satisfying unlimited wants with our scarce resources. 2. The economic problem means that we must make choices about how to allocate limited resources. Therefore, we must give priority to some wants over others. 3. Each economy must answer the following four basic questions: What to produce? How much to produce? How to produce? How to distribute production? 4. Whenever we choose to produce or consume one product, we miss out on the alternative products that could have been produced using those resources. This is known as the opportunity cost. 5. The production possibility frontier is a simple way of explaining opportunity cost. Assuming that only two goods are produced, it shows that producing more of one good requires us to produce less of the other. 6. Improvements in technology will cause the production possibility frontier to shift outwards. 7. Changes in the levels of resources will change the position of the production possibility frontier, moving it outwards (when a level of available resources increases) or inwards (when the level decreases). 8. If an economy is producing at a point below the production possibility curve it is experiencing unemployment or resources. 9. Today's economic choices affect tomorrow's economic outcomes. If we choose to satisfy a want today, we may not be able to satisfy a want in the future. 10. In choosing between satisfying present or future wants: Individuals must make choices between spending or saving. Spending satisfies present wants while savings raises future living standards. Businesses must make choices about price, how much to produce, what resources to use and how to manage their employees. Governments can influence the choices of individuals and businesses by affecting the cost of choices and other factors underlying their decision making processes.

Chapter 2: How Economies Operate

1. Business firms combine factors of production to produce goods and services. Goods are tangible items for consumption, whereas services are intangible acts that are of benefit to consumers.

2. The four main factors of production are: natural resources or land, which earn rent labour, which earns wages capitol, which earns interest enterprise, which earns profit 3. Market economies distribute goods and services based on the individual's contribution to the production process: the larger the contribution, the greater amount of output received. 4. Modern market economies use money to exchange goods and services between people. Non-cash exchange can also take place where a good or service is directly traded for another good or service. This transaction is called bartering. 5. Market economies are subject to recurring fluctuations in the level of economic activity known as the business cycle, which affects income levels, employment opportunites and quality of life in an economy. Despite this cycle, the overall trend over time in an economy is generally towards increased output. 6. The circular flow of income model is a theoretical model that describes the operation of the economy and linkages between the main sectors in the economy. 7. The five sectors in the circular flow of income model are: individuals businesses financial institutions governments international trade and financial flows 8. The private sector consists of individuals, businesses and financial institutions. The government sector represents the public sector in our economy, and combined with the private sector, makes up the domestic sector. 9. Leakages represent all the outflows from the economy (savings, taxation, and imports) and injection represents all the inflows into the economy (investment, government spending and exports). When the sum of all the leakages in our economy is equal to the sum of all injections we say that the economy is in equilibrium. 10. Wherever there is disequilibrium there will be a change in the level of economic activity. It will increase when injections exceed leakages and decrease when leakages exceed injections. Therefore, by altering its contribution to leakages and injections, the government has a large degree of influence over the level of economic activity.

Chapter 3: How Economies Differ

1. In a market economy, most economic decisions are made by private individuals pursuing their self-interest. The market economy is characterized by private ownership of property, freedom of enterprise, consumer sovereignty and a system of competitive markets. 2. Economies can be placed at some point along the spectrum between the extremes of a

centrally planned economy and a pure market economy. However, most economies are closer to the market economy model than to the centrally planned model. 3. The main differences in market economies relate to the extent of government intervention in the economy and the degree to which corporations take into account wider social interests in their decision making. 4. Australia is a mixed economy, where the decisions concerning production and distribution are made by a combination of market forces and government decision making. 5. Government intervention occurs in a market economy for three main reasons: to reallocate resources, to redistribute income and to stabilize the economy from the effects of the business cycle. 6. Economic growth is measured by changes in Gross Domestic Product (GDP). Gross Domestic Product (GDP) per capita measures the total value of goods and services produced by a nation, divided by its population. Australia has a high standard of living compared with most economies in Asia. 7. The quality of life in an economy is commonly measured by the Human Development Index, which measures income, life expectancy, adult literacy and education levels. Australia ranks second in the world by this index. 8. The distribution of income in Australia is relatively unequal compared with other industrialized Asian economies such as Japan and Korea, but more equal than many developing economies in Asia. 9. In recent decades, governments have paid greater attention to the issue of environmental sustainability, which involves using resources at a rate that can be maintained over the long term without depleting the natural environment. 10. Government in Australia has traditionally played a major role in providing health care, education and welfare. Although the role of government in each of these areas has to some extent been reduced in recent years, it remains greater than in many Asian economies.

TOPIC 2 - Consumers and Business

Chapter 4: Consumers in the Market Economy
1. In a market economy, consumers decide what goods and services will be produced by exersizing their freedom to choose their purchases. This concept is known as consumer soverignty. 2. Consumer soverignty can be reuced by certain forms of buisness behaviour including marketing, misleading or deceptive conduct, planned obsolescence or monopolistic behaviour. 3. All income in the economy must be saved or consumed. This is shown by the realtionship: Y = C + S.

4. The pattern of consumer savings can be influenced by a variety of factors including culture, personality, expectations, future spending plans, tax policies and availibility of credit. However, the two most important influences are income and age. 5. Higher income earners tend to save proportionally more than lower income earners they have a higher average propensity to save (APS) and a lower average propensity to consume (APC). As income in the economy increases, the level of both savings and consumption tend to rise, but savings usually rise faster than consumption. 6. The consumption function diagram shows the relationship between consumption and income for an individual. The slope of consumption function gives the marginal propensity to consume (MPC), the proportion of each extra dollar of income that goes to consumption. 7. The life-cycle theory of consumption states that consumers save according to their stage of life cycle, where the bulk of savings that occur during the working age. Dissavings occur before work begins and after retirement. 8. Individual demand is defined as the demand of each consumer for a particular good or service. Factors influencing individual consumer choice include the level of income, the price of the good itself and the price of substitutes or complements, consumer tastes and preferences and advertising. 9. Income is derived from the sale of the four factors of production: natural resources, labour, capitol and entrepreneurship. Thier respective returns are rent, wages, interest and profits. 10. The government may provide social welfare to supplement an individual's income or provide basic standards of living in the absence of any income. These are called social welfare payments.

Chapter 5: Business in the Market Economy

1. A business firm is an organisation that uses entrepreneurial skills to combine the factors of production to produce goods and services. An industry consists of those firms involved in making a similar range of items that usually compete with each other. 2. The firm, like an economy, has to answer the following questions: What to produce? How much to produce? How to produce? 3. In a market economy, the questions of what to produce and how much to produce are determined by the level of consumer demand in the economy for each individual product. The problem of how to produce is typically determined by a comparison between the cost and efficiency of the factors of production in producing that good or service. 4. Although maximising profits is a firm's major objective, the firm also has other objectives including meeting shareholder expectations, increasing market share and maximising growth. In some cases, a firm may not seek to maximise any particular objective, but

simply engage in satisficing behaviour. 5. To acheive maximum profit, the firm must combine resources at the lowest cost. Increasing productivity and efficiency will further reduce costs. 6. Increased profits can be acheived through specialisation, where the factors of production are used more intensively to complete a narrow range of tasks in the production process. 7. A firm may reduce costs by increasing its level of output and acheiving economies of scales. On the other hand, diseconomies of scale may result if increasing output levels begin to raise average production costs. 8. Internal economies and diseconomies of scale result from changes in production levels for the individual firm, whereas external economies and diseconomies of scale result from changes in production levels or size of an entire industry. 9. Investment and technological change can affect the costs and competitiveness of firms by improving production methods, lowering prices, reducing staffing requirements, increasing output, raising profits, expanding product variety and fostering globalisation. 10. Ethical decision-making influences businesses when questions such as what to produce and how to produce are considered against social and environmental outcomes beyond the objectives of the individual's firm.

TOPIC 3 - Markets
Chapter 6: Demand
1. Demand is the quantity of a particular good or service that consumers are willing and able to purchase at various price levels, at a given point in time. 2. The law of demand states that as the price of a good increases, the quantity demanded will decrease. 3. The demand for a good depends on a number of factors: the price of the good itself, the price of other goods and services, expected future prices, consumer preferences, level of income, size of population and age distribution. 4. In economic analysis, the ceteris paribus assumption states that all factors (apart from the one under analysis) remain constant. 5. Movements along the demand curve are caused by changes in price and are called expansions or contractions in demand. All other factors cause shifts of the demand curve. These are called an increase or decrease in demand. 6. The price elasticity of demand measured the responsiveness or sensitivity of quantity demanded due to changes in price. The more elastic the demand, the greater its response to changes in price.

7. Demand elasticity varies from perfectly elastic (a change in price will totally eliminate demand for the good), to perfectly inelastic (a change in price has no effect on quantity demanded). 8. Business firms and governments need to understand price elasticity of demand so that can set prices and taxes that maximise their respective revenues. 9. The total outlay method measures price elasticity of demand by examining changes in the total revenue earned by the producer. If price increases and total outlay also increases, this is called inelastic demand. If price increases and total outlay decreases, this is called elastic demand. If price changes have no impact on total outlay, this is called unit elastic demand. 10. Factors that affect the elasticity of demand include the type of good, the existence of substitutes, the proportion of income spent on the good, the length of time since a price change and whether the product is habit-forming or addictive.