Topic 1: Introduction to EconomicsThe Nature of Economics

The Economic ProblemWants and Scarcity

Material desires whereby Individuals derive utility (satisfaction) over the consumption of g/s

o Types of wants Basic: Necessities required for survival (food, water, shelter

etc.) Individual: Desires of each person

Depends on preferences (type of goods desired) and ability (income level)

Collective: Wants of the whole community Government revenue (Taxation)

o Parks, Libraries, Hospitals Scarcity: Limited resources in an economy

o What to produce: Limited resources unsatisfied wantso How to produce: Govt. must find ↑ efficient production methodo How much to produce: Resources must be allocated efficiently and

maximise satisfaction of wantso Distribution of production: Equitable/Inequitable distribution,

dependent on income level (↑ Income = ↑ consumption of g/s) The need for choice by individuals and society

Both individuals and society are limited by scarcity (limited economic resources, unlimited human needs and wants)

o People want more than what they can haveo We need to make choices, i.e. people need to pick which of their

desires they will satisfy and which they will leave unsatisfiedOpportunity cost and production possibility frontiers

Definition: Alternative use of resources (next best alternative foregone)o Examples:

Individuals: Choice between buying a car or going on an overseas holiday

Businesses: Choice between producing shoes or furniture Govt: Local = parks, State = Schools, Federal = Defence

Forceo Production Possibility Frontier: Graphical

representation of all possible combinations two goods/services (or two types) produced at any given time (maximum output)

Assumptions of the PPF:

Topic 1: Introduction to Economics

Economy only produces two goods State of technology is constant Quantity of resources remains

UnchangedAll resources are fully employed

o Factors affecting PPF: New technology: More output with same resources New resources: More input More output (e.g. immigration

population expansion) Unemployment: Under-utilised resources total output <

max output (Maximum satisfaction of wants is not achieved with minimum opportunity costs)

o Real life model: PPF is concave to origin (resources are better suited for the

production of one good compared to another good loss of productive capacity)

Future implications of current choices by individuals, businesses

and governments Definitions

o Allocative Efficiency: Resources are allocated according to preferences of society for certain goods and services

o Consumer goods: G/s produced for the immediate satisfaction of individual/community wants

o Capital goods: G/s utilised in the production of future g/s (↑ future productive capacity)

Economic factors underlying decision-making by groups Individuals

o Spending and Saving Consumers can choose to either spend or save ↓ Y = ↓ Consumption, ↓ Savings. ↑ Income = ↑ C + S Motives

Transactionary: Finance cash purchases Precautionary: Unforeseen expenses Speculative: Investing in shares/bonds/cash for returns

Worko 4 Types of Employment: Professional/Trade/Semi-skilled/Unskilledo ↑ Skills = ↑ Income ↑ Consumption and saving

Topic 1: Introduction to Economics

Educationo Education Level increases individual’s professional work opportunity

↑ Professional work ↑ Income Retirement

o Employers must make 9% contribution (of wage) to superannuationo ↑ Income ↑ Compulsory super ↑ Potential voluntary super

Voting Patterns and Participation in politicso Pattern: Upper class = Liberal, Working class = Labouro Political Participationo Dependent on economic policies

Keeping the economy strong Managing budget policy Delivering ↓ RATES of Unemployment/Inflation/Interest

Businesseso Pricing: ↑ Mark-up = ↑ Profito Production: Involves use of labour and capitalo Resource use: Producers try to maximise productivity (efficiently

allocating resources)o Industrial Relations:

Safety Net System: Govt enforces minimum wage Enterprise Bargaining: Employers working with employees to

negotiate wages Governments

o Taxes both individuals and businesses to fund its expenditureo Influencing decisions

Resource Allocation: Funds the provision of labour Transport/Schools/Hospitals/Roads

o Economy Stabilisation Use of fiscal/monetary policy (e.g. raising interest rates if

high inflation and vice versa) Redistribution: Individuals are taxed dependent on income

o Regulation of economic behaviour Price control Provision of a law framework National competition policy Minimum wage Pollution legislation

Topic 1: Introduction to EconomicsThe Operation of an EconomyProduction of goods and services from resources

Factors of Production (Resources used in production of goods and services)

F.o.P Capital Entrepreneurship

Land Labour

Definition

Items used for production of other goods, increases productivity

Individual who organises other F.o.P’s to produce g/s

Natural resources used in the production process

Physical/mental human effort used to produce goods and services

Reward

Interest: Bank interest rates, profit margins

Profit: interest, wages

Rent: All income earned from productive use

Wages: Commissions, superannuation, sick pay, annual leave

Scarcity

Limit of willingness to invest, level of savings

Population size, ability and willingness to take risks

Limits to amount of resources available

Population size, school leaving age, retirement age, on-the-job training, childcare

Examples

Machinery, tools, roads, networks (telecommunication)

Bakeries, Cafes, Restaurants

Soil, forests, mineral deposits, fishing areas

Distribution of goods and services Individuals contribute to production process Market economy provides

them with income Income is used to obtain goods and serviceso Factors influencing income

Scarcity of resource and level of demand How much they work Skills and expertise Educational qualifications Bargaining power with employers

o Income is redistributed by government through taxation (social welfare)

Exchange of goods and services Money is used as a medium of exchange Prices are indicators of the relative value of goods and services Exchange occurs in a market economy

Topic 1: Introduction to EconomicsProvision of income

Individuals are paid rewards for their contribution (Wages, Rent, Interest, Profit)

Final Income = Income – Taxation (Direct and indirect) Government redistributes income

Provision of employment and quality of life through the business cycle Definitions

o Recession: Negative economic growth in two consecutive quarterso Boom: Positive economic growth in two consecutive quarters o Business Cycle: Fluctuations in level of economic growth occurring

over a period of years in a regular cyclical pattern, overall trend of growth in output

Recession BoomFalling production of goods and services

Increasing production of goods and services

Rising Unemployment Falling unemploymentFalling income levels Rising income levelsFalling levels of consumption and investment

Rising levels of consumption and investment

Falling quality of life Rising quality of life

High level of specialisation Interdependence between individuals, businesses, and governments

Employment (Private and Public Sector)o Primary: Raw material extraction (mining)o Secondary: Manufacturing of products (Factories)o Tertiary: Provision of services

Circular Flow of income (Sectors of economic activity) Individuals

o Supplies factors of production (labour/entrepreneurship) to businesses

o Receives incomes as reward (Interest, profit, rent, wages) o Individuals either consume (local/overseas), save, or pay tax with

income Businesses

o Spends profit earned on investment, could obtain government subsidies

o Depends on individuals for supply of resources and consumption for the produced goods and services

Financial institutions (engaged in borrowing and lending of money)o Accepts savings from individuals and lends them out to businesseso Savings are essential if investment is to occur

Topic 1: Introduction to Economics

Forgoing current consumption: increases future productive capacity

International trade and financial flowso Exports: G/S produced in AU, sold to overseas consumers

Money is paid to Australian businesses Inflow of income Stimulates production and employment opportunities

o Imports: G/S produced overseas, sold to local customers Money is withdrawn from AU economy, paid to overseas

businesses Lower economic activity (↓ income/output/employment

opportunities)o International money flows

Injection: Foreigners lending or paying income to Australians Leakage: Locals lending or paying income overseas to

foreigners

Equilibrium: Sum of all leakages is equal to sum of all injections Disequilibrium: Inequality between total leakages and total injections

o Leakages > Injections: Downturn in level of economic activity Falling incomes Falling production Rising Unemployment Less leakages (consumers have less to spend on

imports/taxes) Leakages = Injections (Lower level of income in

circular flow)o Injections > Leakages: Upturn in level of economic activity

Rising incomes Rising production Rising employment More leakages (consumers have more to spend on

imports/taxes) Leakages = Injections (Higher level of income in

circular flow)

Topic 1: Introduction to Economics

Economies: their similarities and differencesBackground Information

Australia’s trading relationships are mainly with Asian economieso Half of our exports destined for Japan, China, and South Korea

Relatively strong performance through 2000 global downturno AU’s economic fortunes are linked with Asian economies’ fortunes

Diverse group of economieso Large/Powerful (China/Japan) vs. Small/Rel. poor (Tonga/Vanuatu)o Wealthy (South Korea) vs. less-developed (Timor Leste)o Fast-growing (India) vs. slow-growing (Japan)o Former centrally planned (Vietnam) vs pro-market (Singapore/Hong

Kong)Rank Country 2014 GDP ($US

billion)1 China 10,3602 Japan 4,6013 India 2,0674 Australia 1,4545 Republic of Korea 1,4106 Indonesia 8897 Thailand 3748 Malaysia 327

Topic 1: Introduction to Economics

9 Singapore 30810 Hong Kong 291

Economic growth and the quality of life 4th largest economy when compared to Asian economic region Top 6 = Group of 20 Asian economic region = Fastest growing economic region since WWII

o 1st Phase: 1950s and 1960s = Japan’s rapid industrialisation o 2nd Phase: 1970s and 1980s = South Korea, Singapore, Hong Kong,

Taiwan Pursued growth strategies (competitive labour costs +

growing export markets, particularly for manufactured goods)o 3rd Phase: Emerging and developing economies

Average annual economic growth of 7.5% (China, Indonesia, India)

Newly industrialised economies: 5.7% (SK, Singapore, HK, Taiwan)

Developed economies = 1.8% (Japan) Industrialisation = V. rapid economic growth, slows down

once finished Australia’s average economic growth = slower than most Asian economies

o Achieved industrialisation + high living standards before WWII (3.3%)

Quality of life: Measure of welfare based on more than just economic output per capita

o Human Development Index: A measure that takes into account income, life expectancy adult literacy and educational levels

HDI Rank

Country

GDP/capita (2014, $US)

HDI value (2014

)

Life expectancy (years

, 2014)

Mean school

ing years (2012

)

2 Australia

61,219 0.933 82.5 12.8

7New Zeala

nd43,83

7 0.910 81.1 12.5

9 Singapore

56,319 0.901 82.3 10.2

15

Hong Kong

39,871 0.891 83.4 10.0

15 Korea 28,10

1 0.891 81.5 11.8

Topic 1: Introduction to Economics

17 Japan 36,332 0.890 83.6 11.562 Malaysia 10,804 0.773 75.0 9.591 China 7,589 0.719 75.3 7.5

108 Indonesia 3,534 0.684 70.8 7.5121 Vietnam 2,053 0.638 75.9 5.5135 India 1,627 0.586 66.3 4.4

o Australia: highly favourable social conditions Temperate climate, relaxed lifestyle High degree of cultural diversity (25% born overseas) Political and religious freedoms

Employment and Unemployment Australia’s unemployment rate = 6.2%

o Lower than unemployment rates of Indonesia and Philippineso Higher than rates of fast-growing economies (Japan, Korea,

Singapore) AU’s employment patterns: similar to most advanced economies

o Majority (<75%) employed in services industries (retail, business, real estate)

o Manufacturing and construction = Substantial number of jobs

o Agricultural sector: smaller than previous decades (<5%)

Less developed economies: Large proportion of workforce in agriculture (Indonesia: 51%)

o Process of mass urbanisation

People moving from rural to urban areas for work

Distribution of income Pure market economies:

Unequal distribution of incomeo People who own resources/have most skills > People who lack

resources Agricultural developing economies: Unequal distribution

o Divisions between urban and rural populationso Concentration of land ownership amongst wealthier groups

Mixed economies: More equal distribution of incomeo Government intervenes for redistributing income (progressive tax)

General industrialised economies: Relatively equal distribution (Japan, NZ, AU)

Fiercely pro-market economies: Skewed distribution (Singapore, Hong Kong)

Topic 1: Introduction to Economics

Other Asian economies: Relatively unequal (poor and rural/wealthier urban areas)

Environmental sustainability AU: ↑ Environmental qualities (↓ water/air pollution, ↑ efficient industrial

processes)o Poor record of preserving biodiversity ( 1

17 megadiverse, ↑ species

than others) >50 birds/mammals have become extinct over the past 2

centuries, one third of the global total 1700 animals/plants at risk of extinction

o Low water productivity ($US of economic output/m3) AU = $38, relatively low compared to Japan ($53) and South

Korea ($47) Higher than NA ($27) and avg. East Asia and Pacific region

($13) China: V. ↑ air/water pollution, widespread health problems (pollution,

toxic chemicals) Climate change: Emission of greenhouse gases (CO2, NO, CH4)

o 14/15 warmest years = 21st centuryo Ice thickness has decreased 40% since 1960so Extreme weather events occurring with greater frequencyo Avg. global temperature = ↑ between 1.0 and 5.4 degrees in this

centuryo Consequence of rising temperatures: Rising sea levels, ↑ harsh

weather events, ↑ threats to economic health, food security, human health

Difficult to achieve international agreement on how to reduce greenhouse gas emission

o 2009: Copenhagen Convention (confine global temp increases to <2 degrees Celsius)

o No binding international agreement to reduce greenhouse gas emissions

Previous = Kyoto Protocol, 1997-2012 Australia: Reduce carbon emissions to 26-28% of 2005 levels by 2030

o Direct Action Initiatives: Grants for businesses for project that lower carbon emissions

o 17 tonnes of CO2/person (>50% than Japan/Korea, >70% average adv. economies)

Asian economies also face unique problemso Indonesia: Significant

contributor to climate change (deforestation)

o China’s CO2 emissions: Major impact on climate

Topic 1: Introduction to Economics

o India: Poor urban planning, outdated infrastructureo Domestic policies + greater global cooperation required

The role of government in health care, education and social welfare Asian economies

o Market economies: East Asia, e.g. Japan, Korea, Singapore, Indonesia

Promote development of competitive export sectors and rapid industrialisation

o Planned economies: Asian continent e.g. China, Vietnam, India, Cambodia

Reduced govt. control over economic decision-making Australia: Market forces in agriculture, mining, construction, and

manufacturing. Government for telecommunications, aviation, banking, and insurance

o Recent decades: Reduced role through deregulation and privatisation policies

Health careo Australia: Well-established system of universal health care

(Medicare) 6.3% of GDP spent on health care

o Developing economies: Rel. undeveloped public health systems, reliance on private health care

Diseases of poverty: poor water and sanitation Lifestyle diseases: obesity, diabetes, and cardiovascular

diseases Serious respiratory disease problems (high rate of smoking)

20% (AU) vs 50% (China, Indonesia, Korea) Education

o Australia: Universal free education for primary and secondary (1/3 attend private schools), HECS for repaying student loans

Above average fundingo Asia: Compulsory primary school, most schools being run and

funded. Schools become voluntary during high school years (increased private funding)

Education = Culturally significant (Intl. surveys of maths/science = strong education systems in Singapore, Korea, Japan, other East Asian countries)

o Low govt. spending reflects larger reliance on private contributions, e.g. Korea/Japan

o Dev. countries: Low govt. spending = greater competition for scarce govt. resources

Topic 1: Introduction to Economics

Social Welfareo Australia

Greater assistance level: Min. living standard for people unable/looking for work

Un-employment benefits, pension, disability/family payments, paid maternity leave

Trend = restricting social welfare by tightening eligibility ‘means’ test, limiting benefits for people w/other

sources of income Aging population: Govt. faces growing pressure to sustain

social welfare (providing other priorities, e.g. health care, education, and infrastructure)

o Asian economies Demands for social welfare will increase