Economics Notes- Tutoring
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Economics Note: Tutoring 1
Economics Notes from Tutoring and general notes
for year 11.
Economic Problem:How society can satisfy UNLIMTED WANTS withLIMITED RESOURCES
Opportunity costIt represents the alternative use of resources, itrepresents the cost of satisfying one want over analternative want, and its known as the economiccost
Wants:Are the material desired by the communities or theindividual
Utilities:The satisfaction or pleasure from the consumption ofgoods and services
Needs:The basic necessities of life
Individual wants:They are the desire of each individual. This will depend onpersonal 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 pickup and parks
- State: provides wants to a wider community,examples include hospital and police
- Federal: satisfying the wants of the wholegovernment, 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 toproduce, to allocate limited resources efficiently andmaximize the satisfaction of wants. Find mostefficient methods of production that uses the leastamount of resources so that the greatest number ofwants is satisfied.
How to distribute the product:Each economy needs to decide on ether equitable orinequitable distribution.
- Equitable meaning distributing product equally to allareas
- Inequitable meaning not distributing productsequally in all areas rather distribution being done to
gain most profit and in the most suitable economicalmanner
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Production Possibility frontier (P.P.F)It is a graphical representation of all the possiblecombinations of the production of two goods or servicesthat 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 un-
changed- All resources are fully employed (all labor is constant
and no unemployment is occurring)
If the production isone the blue line itmean the economyis producingperfectly.
Economy cantproduce outside theline of resourceunless resourcesare increased
New technology may be able to develop moreefficient methods of production so you may producea higher quantity of goods with the same resources.
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Consumer goods:These are items produced for immediate satisfaction ofindividual and community wants
Capital goodsItems used for production of other goods to increasefuture productive capacity
- An economy focusing of capital good production willexperience 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 mannerwhich 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 throughtax 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 naturethat is used to in the production process, examplesinclude soil, water, forest and mineral deposits.
- RENT is the return on LAND (monetary reward toowners of land derived from their productive use.
LABOURHuman effort both physical and mental used to producegoods and services
The supply and quantity of labour depends on ourpopulation size
Labour force include 16-75 year old- WAGE is the monetary reward to owners of labour
CAPITALThese are item used in the production of other goods andservices
Capital can be owned by individuals or firms theseare 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 tointerest in capital goods
ENTERPRISE
Involves bringing together the other factors of production(land, labour, capital) for the purpose of producing goodsand 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 scarcityNatural resources are limited by what is available in thesurrounding environment.
Gross Domestic Product:Total market value of all final goods and servicesproduced in an economy over a period of time (totalincome of society)
MARKET economies dont attempt equitable distributionoutput, instead they reward people with income based onthe value of their input contribution to production processthrough providing incentive to obtain better skills and to
encourage laborers to work harder, another advance ofthis is it improves your resource by encouragingtechnological 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, examplesinclude factory worker inputting equal workload yet
the person with the highest bargaining power andsocial skills may be proficient to receive a bonus or ahigher placement
Governments may influence change to distribution ifan inequitable market and help the disadvantaged
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THE BUSINESS CYCLEThe fluctuation in the level of economic growth over timedue to either domestic or international factors, levels ofactivity in an economy are never constant.
- Economies usually experience an overall trend ofgrowth. In output however the business cycle incharacterized by alternative periods of strong growthand economies slow down.
Business cycle graph
1. The peak isknow as a boom
2. The trough isreferred as abust/recession
Recession: the stage of the business cycle where there isdecreasing economic activity
- Two consecutive quarters of negative growthDoom: 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 toconsumption altered by a decrease in income.
- Falling quality of life and standard
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CIRCULAR FLOW OF INCOMEThe cyclic flow of activity causes major disruptions, thegovernment aims to smooth this out by
- Stimulating the economy activity during period ofrecession and hard-ship to assist growth andrecovery, example of this was K. Rudd providing$1000 to Australians to encourage them to spendingaltering recirculation back to the economy.
- Insure the economy can sustain long term growth toavoid any major economic down turns.
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Circular flow of income basics
Individuals receive income from businesses throughwork
Businesss receive profit through individualSavings (S) Finical providers Investment (I)(S)avings of individuals are processed through financialfirms and savings are often (I)nvested back intobusinessesTaxation (T) Government Expenditure (G)Individuals pay (T)axation to the Government, which isfurther distributed back into Businesses as Expenditure
(G)Import (M) International Export (X)Individuals shops online and buy foreign goods, which isknown as importing (M), and international businessesprovided export (X) to domestic businesses.
Leakages: S+T+MIs the flow that result in money being removed from the
circular flow of income. It causes a decrease in aggregateincome and general level of economical activity.
Injections: I+G+XThese are flows that result in money being added to thecircular flow of income. These cause an increase inaggregate 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 anincome and spending it on goods and services. Theyare main consumers in an economy, also the ownersof production as inputs to businesses and arerewarded by receiving incomes. Income goes towardspending 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 ofproduction in the production process. Businesses andindividuals interdepend, they need each other tosurvive.
Financial firms:- This consist of all organizations engages in borrowing
and lending of money. These include banks, buildingsocieties, financial companies, super funds etc. they
act an intermediaries between individuals andbusinesses looking to save and borrow money.Government:
- This consists of the state government and the federalgovernment. They impose taxes (leakages) onindividuals and businesses that reduce the level ofeconomic activity. Government expenditure(injection) on prevision collective wants and transfer-payment as income (pension and unemployment
benefits). Increase the level of economic growth.International Trade:
- Consists of all transition occurring between Australiaand 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 isequal to the sum of all injections.
Disequilibrium:Occurs when there is an inequality between total leakagesand total injections.
- When leakages exceed injections it results in downturn in the level of economic activity.
- When injections exceed leakages the opposite occursresulting in raising level of economic activity andgrowth.
- Economies will usually balance themselves out andmove to equilibrium.
- Governments can interfere directly by changinglevels 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 aremotivated by self-interest. People are able to seek wealthwithout government interference, interference such astaxation and levies. Most economics resources are ownedby the private sector (by individuals) it is also known ascapitalist free enterprise or laissez-faire system.- Characteristics of a market economy: market system isa network of buyers and sellers seeking to exchangeproduct at certain price.
Centrally planned economy:This is an economy where government makes economicdecisions. There is little scope for individuals choices toinfluence the economy. Public ownership of factors ofproduction allows governments (usually communist) toallocate resources at will. Nether pure market not fullyplanned 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 forproducts
Factor market:This is the market for input resources that are factors ofproduction.
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MIXED ECONOMY:Its an economic system where decision concerningproductions and distribution are made by a combination ofelements where both market forces (MARKET based
economic system) and government intervention (Centrallyplanned system).
- Some necessary goods and services may not beprovided over a pure market system (a economy runonly by individuals), as there may be no profitderived.
- It is better for an economy to be a mixed economyas free economies (market) cant provide the mostefficient 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 individualsdue 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 governmentintervenes 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 ownershipo Social welfareo Progressive taxation
How governments in a mixed economy aims to solve theeconomic problem:
What to produce- Governments can greatly influence what to produce;
they provide collective wants (pubic/communitywants) as well as. They can encourage theproduction of some subsidies (money given throughgrants and promotions to encourage sales) whilelimited 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 becausealthough desirable individuals dont place sufficientvalue of them
o An example of a merit good is education- Assists local producers competing with foreignbusinesses by placing import restrictions)
How to produceGovernment can influence cost and allocation and use offactors of production:
- Industrial relation laws set out minimum wage andworking conditions in different industries.
Regulations on firms may prevent them fromchoosing the cheapest method of production
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How to distribute:Government affects how production is distributed. Re-distribution of income (social welfare payments), it isntonly determined by markets forces. Governments
intervene in the factor market and also regulatesminimum wage for labour.
PRICE MECHINISM:The process of which forces of SUPPY AND DEMANDINTERACT 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 powerThis is the manner in which consumers will ultimatelydecide what goods and services will be produced as they
are consumer and buyers of the goods and services andonly due to their contribution and satisfaction will theeconomy progress thus it is the businesses responsibilityto satisfy the consumer which therefore gives theconsumer the highest power.
Private ownership:Individuals have a right to own factors of products. Theycan use them to derive income and acquire wealth, they
also have a right to sell these resources and transfer theirownership. Examples of this is stock ownership, it is anindividuals ownership of a factor of product and this canbe 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 andservices they use.
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Competition:This is the presence of multiply firms in an economyselling similar goods and services
- A fluctuation of buyers and sellers (TRADE) placespressure on businesses to lower prices (to encouragesales), this often also encourages them to improvethe quality of output and service to influence theresales to consumers.
- It also creates a more level playing and allows pricemechanism to work effectively
Social welfare payments:These over ride market forces by taxing people
(individuals) on higher income (the wealthy) andredistributing the taxation received to those whodont/cant contribute to the economy, examples includedisabled, elderly etc.
Progressive income taxation:This aims to achieve a more equitable distribution ofoutput (usually of income); high-income earners earn
proportionally more tax compared to lower incomeearners.
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Comparing economies:
Consumers in the market economy:Consumers and business:
- Consumer sovereignty is the concept thatconsumers ultimately determining the type andquantity of production by exercising there freedom ofchoice in what goods and services they purchase.
- Business firm motivated by profit will produceWHATEVER good and service is in demand.
- Consumer income levels can influence theallocation of products in an economy. Example: A 5
star restaurant will only chose to open in a highincome earning area as there would not be a highdemand unless the area is suitable
Business practices that can reduce consumer sovereignty(practices that can help business buy products they maynormally not):
- Marketing: advertising can exert a powerful influenceover consumer spending patterns.
o Most firms marketing strategies aim tomanipulate the behavior of consumers for profit.
o Marketers product expensive research intothere target consumers using this as a basis tomass and direct market (marketing to mass anddirect to the most manipulative consumers)
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Misleading or deceptive conduct:Consumers (consumption) can be decreased false or dis-honest claims about a product leading them unnecessarypurchase, an item they dont really want or need but are
bought into buy due to misleading information about theproduct. Example: A phone being bought for $1000because apparently it has a built in gun when it really isa cheap low quality phone.
Planned obsolesce:When goods are sometime deliberately designed to wareout quickly or go out of date in order to encourageconsumers to make further repeat purchase.
- Keeping up with trends can manipulate people to buymore than they would otherwise
Anti-competitive behavior:Businesses who hold a monopoly (control of marketsupply) towards a market or have few competing sellerscan greatly diminish consumer ability to chose what theyreally 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 thathouse.
Firms may deliberately restrict their products orprovide a poorer consumer experienceas not matter whattheir level of quality the consumer may still need theproduct.
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Decisions to spend or save:- All income is the economy must either be saved or
consumed
Y = c + xY: incomeC: consumption/expenditureX: Well X
APC: Average propensity to consume- This is proportion of ones total income spent on
consumptionAPC 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:
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Every dollar of an individuals disposable much bespent or saved- APC + APS = 1 e.g. if APC = 69% therefore APS
must equal 31%.
Factors influencing decisions on whether to spendor save:
- Future expectation: what the individual is aim tosave or not save for
- Personality factors: whether the individual isreluctant to save or to spend and his willingnesstowards 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 itmore attractive to save, example include government
taxes or superannuation savings or spending throughconsumer taxes
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Availability of credit:- The higher income earners tend to save more than
lower income earners as income increase APC (toconsume) fall and increases propensity to save
Graph showing consumption over income
- An individuals income stream or propensity toconsumer and save changes
- Individuals and households tend to smoothen theirconsumption after saving and spending patterns tomaintain a constant standard of living even if incomechanges
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LIVE CYCLE THEORY OF CONSUMPTION
- Blue line: ConsumptionAs a youth children spend money, which is dis-saving
although as they proceed into the workforce they begin tosave and as there saving accumulate there spendingincreases again leading to dissaving leading into theretirement. At retirement individuals have no income anddissaving 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 asthey 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 aseveryone* needs a computer and phone.
- Advertising:o It aims to create or increase a demand for a
good and service and aim to further promotethe product to seem to superior to itscompetition
o The price itself: people will need to buyproducts as daily
- Consumers are likely to reduce their demand formore essential luxury item as price exists*
- Availability of substitute (a good that can be used asa substitute for the good or service) orcomplementary goods (goods that can be used withthe product such as earphones or cover for phone oritem 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 productionof a similar good or service
Production decision business opportunities:
Individual entrepreneurs may find a specific marketeconomy attractive, as it may be beneficial for them tooperate there
Nieste* market:A market that caters for highly specific demand taste andcharacteristics 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:
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Organizations involved in utilizing entrepreneur skillsto combine factors of production of production andthus produce a finished goods or service. They arethe major production units of our economy andinfluence 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 anexperienced individual
- More likely to be attracted to industry and can showa general interest
- ExperienceSTARTING 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 andexperience to do so
- Entrepreneurs should look to start a business in aindustry 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 serviceo Most difficult to determine product demand and
price when a new business is started orintroduced 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 todetermine 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 newresources can improve productivityCon: Can be diminished through unattainable exploitation
LabourPro: Investment in education and training can boostproductivity of the nations workforceCon: a decline in birthrate or aging of the population willreduce the available labour
Capital:Pro: businesses encourage economies productive capacity
through investment in capital goodsCons: Old capital deprecates/wears out or becomeobsolete overtime
Enterprise:Pro: entrepreneurship provides ingenuity and innovationto provide the world with goods and services that maybenefit it in an immense manner
Con: Individual are less willing to risk innovation in ancertain political economic environment***
Goals of the firm:- Maximizing profits
o Profit motive its recognized the primarymotivate of the business
- Total revenue = (outputs sold X price) - total cost ofproduction
- Is the same thing as total revenue- You aim for the cheapest combination of productiveresources
- Meeting share holder expectationso The main responsibility of excutives.. Legally
obgiled to maximize shareprices and dividendsin order to satisfy the expectation of
shareholderso 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 insuringconsumers purchase more of there own product thusincreasing there total sales in the market.
Maximizing growthA larger asset base allow higher profits to be achieved,how ever long term growth and expantion may occur atthe expense of short term profits.
Satisficing behaviorAttempting to achieve a satisfactory level of attainmentbalance across all business goal as apose to simlily
mazing achievement in one particular adjectiveBenifts firms in the long term: there may be scope toinprove iffienfly and increase prfoits
Efficiency and productionProductivity, it is an economies quanity of production perunit of time with given amount of inputsProduction 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 ofproduction per unit of time
It requires more than just an increase in total productionyou need to increaseproduction quantity proportationatilymore than the corresponding increase in the quantity in
the input resources.Increasing an economies contributes to improvements tooverall standards of living.
- Less wastage of resourcesLower production costs
Greater international competitiveness
Specialization: