ECONOMICS BOOKLET 1: TERM 1 YR 11

Basic economic problem:

1. Our wants our unlimited2. There is a scarcity of resources

The Production Possibility frontier:

Represents the opportunity cost between two products being produced

Structure of PPF:

1. Maximum utilisation: the full satisfaction and utilisation of employment and resources which is represented on the diagonal line

2. Under utilisation: anything below the diagonal line represents the under utilisation of employment and resources

3. Opportunity cost: Trade off/ alternative foregone e.g whilst we are at school we are forgoing the opportunity to procure a full-time job

4. What causes the PPF to shift to the right: Immigration- increases employment New and improved technology/ more technology- increases the possibility of

more products being produced

4 Basic economic problems:

1. What to produce?2. How much to produce?3. How to produce?4. How to distribute product?

Agrigate demand formula:

C + I + G + (X – M)

CIRCULAR FLOW OF INCOME CHART:

What happens to the demand for apples if a cyclone wipes out the banana crop?

The demand for bananas would decrease as the price would go higher and consumption would decrease

The demand for substitutes e.g apples would increase as the price would be less and consumers would seek substitutes, would be higher in demand and consumption levels would increase

4 BASIC RESOURCES:

1. Land: Forestries Fisheries Abattoir Agriculture Mining

Return from land: investment property generates income when is rented

2. Labour: is the contribution for an individual’s mental and physical effort

Return from labour= wages and salaries

3. Capital: Money Financial flows Machinery

Return from capital= is the produced means of production, returns from

Ownership of capital Interest from account or bonds People who own shares= dividends

4. Enterprise

Profits n return for:

Innovation Risk Managerial expertise

MARKET STRUCTURES:

1. MONOPOLY: e.g mining One seller Extremely hard to enter Extremely expensive to enter Inelastic product Goods/ service is expensive

2. OLIGOPOLY: e.g energy suppliers, steel producers and car manufactureres Only a few sellers Inelastic product Relatively expensive product Collusion Homogenous product

3. MONOPOLISTIC: e.g toothpaste and cereal Very competitive- aggressive marketing via product differentiation Homogenous product Easier entry Millions of buyers

4. PERFECT COMPETITION: e.g lawn mowing Very competitive Is at a cost price; any price above or below people won’t buy must stay at

a particular price Easier entry into market Easier to fail Homogenous product/ service

Market structure graphs:

Consumer sovereignty: consumers’ buying habits dictate to producers what is to be produced and how much is to be produced

1. Marketing: Advertising and direct marketing- a powerful influence over consumers’

spending patterns Attempts to manipulate behaviour of consumer via product

differentiation

2. Misleading and deceptive conduct: diminishes consumer sovereignty Consumers can be deceived by false or dishonest claims about a

product leading them to buy a product that they DID NOT really want to buy e.g

Weight loss programs and baldness treatment

3. Planned obsolence: Firms sometimes produces products that wear out quickly or go out of

date – to encourage consumers to make further purchases in the future E.g cars- keeping up with latest fashions

4. Monopoly behaviour: Firms that have monopoly power over good or service can restrict

production costs through raising the price of product Diminishes consumer sovereignty E.g Sydney water- water restrictions

DECISIONS TO SPEND OR SAVE:

Y= Disposable Income

C= Consumption

S= Savings

MPC= Marginal propensity to consume- the proportion of a consumers’ income that is spent

MPC= Marginal propensity to save- the proportion of a consumers’ income that is saved

MPC + MPS = 1

DECISIONS WHETHER TO SPEND OR SAVE:

1. Cultural factors: regarded as cultural

Chinese save 40% of their income Australians save 5% of their income

2. Personality factors- some people are cautious and prefer to save for a rainy day while others enjoy the immediate benefits

e.g to save for the future- for today you have low living standards for the future you have high living standards

to spend for today- you have a high living standard for today but for the future you have low living standard

3. Expectations of the future: people who expect their income to increase in the future are less likely to worry about savings today

4. Any specific future spending plans- individuals might save more if planning a major expense in future e.g holiday

5. Tax policies- can alter an individual’s consumption and savings e.g decrease superannuation- save more

6. Availability of credit- spending is likely to be higher if credit available

Individual less likely to save if they can access credit

1. INCOME:

As income rises: people save a higher proportion

MPS increases while MPC decreases

The consumption function diagram: shows the relationship between income and consumption, as income rises- so does level of consumption

2. AGE- plays a role in savings and consumptions An individual’s MPC and MPS change throughout their life

E.g if in 30’s or 40’s will earn higher income than when they were teenagers

“LIFE CYCLE THEORY OF CONSUMPTION”- shows the interaction between an individual’s consumption and saving patterns

Equilibirum: the point where supply and demand interact

Factors which cause an increase in demand:

1. Prices of other goods and services – a rise in the price of substitute goods will cause more consumers to demand your product but there will be a decrease in demand for substitutes e.g if the price of thongs and sandals increased there would be an increase in demand for shoes (if the price stayed the same)

2. A fall in the price of a complementary good will increase demand- e.g if the price of petrol fell there would be an increase in demand for cars

3. Expected future prices- if consumers expect that the price of a pair of new shoes will increase because of govt tax they will forward their purchases- leading to an increase in demand

4. Consumer tastes and preferences- if a particular type of shoe becomes more fashionable this will increase demand more people will want to buy it

5. Consumer income:

Rise in income- consumers can buy more than before Change in income distribution- poorer people earn more money can

increase MPC Improved consumer expectations- future employment prospects

6. The size age distribution of population: An increase in size age distribution will increase demand Change in age distribution will lead to an increase in demand for

certain types of shoes e.g babies

Factors which cause a decrease in demand:

1. A fall in the price of substitute goods

2. A rise in the price of complementary goods

3. Expected future prices- expected decline in price of product

4. Consumer taste and preferences: Product becoming less fashionable Technological process- good superseded by another

5. Consumer incomes: A fall in income- lower MPC A change in income distribution Deteriorating consumer expectations about future economic prospects

6. The size and age of the distribution- decrease in overall size of the population and a change in age distribution e.g decrease in birth rate declines demand for baby shoes

Supply:

A fall in the price of other goods such as sandals, makes production more profitable , because there is more competition so there is a decrease in price and higher quantity demanded

Factors that cause an increase in supply:

1. A fall in the price of other goods- as it is competitive you too would lower your prices- will be more profitable and there will be an increase in demand

2. An improvement in technology

3. A fall in the costs of production

4. An increase in quantity of resources available

5. Climatic conditions or seasonal changes more favourable to you

Factors that cause a decrease in supply:

1. A rise in the price of other goods- because there is more competition so you will raise your prices- there will be a decrease in demand

2. A certain technology no longer available

3. A rise in the production costs

4. A decrease in resources available- making them more expensive

5. Regulations restricting the sale of a good e.g carbon, mining tax

6. Natural disasters/ war Climatic conditions- such as a seasonal change, drought, less favourable to the production of a good

e.g banana disaster: because there is a scarcity of resources – cost push inflation – there is less demand so supply decreases & demand consumption decreases

ELASTICITIES OF SUPPLY & DEMAND: elasticity demand formula

INELASTIC:

A greater change in proportionate changes will lead to a less than change in proportionate quantity demanded/ supplied

An increase in price for an inelastic good will lead to an increase in sales revenue

Examples:1. Cigarettes2. Electricity3. Alcohol4. Drugs

Example lag time period for electricity:

Short run- price will be more inelastic- sales revenue will have increased In long run- product will become less inelastic as consumers would

decrease consumption and cut down on usage and seek an alternative e.g solar energy

ELASTIC:

A small proportionate change in price will lead to a greater change in proportionate, decrease in quantity demanded/ supplied

An increase in price for an elastic good will lead to a decrease in sales revenue

There are a lot of substitute goods: e.g

Complements

Lag time periods

FACTORS AFFECTING PRICE ELASTICITY OF DEMAND:

1. Whether the good is a luxury or necessity2. Whether the good has any substitutes3. If the price has lower costs- has higher inelasticity/ lower elasticity4. The length of time subsequent to a price change5. Whether it is addictive or not

Total outlay= price x quantity

CHINA STUDY CASE:

China is:

1. A transitional economy2. Went from purely socialistic/ communistic to mixed market economy3. Is a developing country on a per capita basis

China’s characteristics:

1. 1978 China became mixed market economy under Deng Xiao Ping’s radical reforms, became integrated with the world

2. Pump priming economy- Agrigate demand:

Increase consumption + increase investment + increase exports

3. Special economic zones: give tax concessions and subsidises to factories to decrease production costs and increase revenue- increase economic activity and increase capacity to compete on a global level- GDP becomes wealthier

4. Since joining WTO in 2001, trade increased by 300%

5. Foreign direct investment within market- increase investment within factories- increase GDP

6. Is a part of the APEC- known was the fastest growing economies of the world that seem intent on increasing their economic growth and development

7. China wants to increase trade flow- imports and exports

8. When china was communistic everything was owned by State owned enterprise

9. Comparative advantage- China invests in production where opportunity cost is lower makes machinery exports to Australia and imports Australia’s services

10.China= massive saving capacity they save 40% of their income

11.Has a fixed exchange rate- artificially pegged China’s Yuan to America’s dollar

12.China is prioritising industrialisation

Australia’s economy:

Is a mixed market economy- most economic decisions are made by private market forces, government intervention – glass floor/ ceilings, pump-priming market failure, stimulus package, dirties the float

Advanced industrialised economy/ developed country

Characteristics of Australia’s economy:

1. Australians save only 5% of their income

2. High income and living standards

3. High trade orientation

4. Exporter of agricultural goods and raw materials

5. Industrialised with a manufacturing base

6. High levels of saving and investment

7. High quality of human development- widespread access to:

Education Health Social welfare services

LAW OFDEMAND:

1. At an increase in prices- will lead to a decrease in QD2. A decrease in price- will lead to an increase in QD

LAW OF SUPPLY:

1. Producers at a higher price- greater quantity will be supplied for demand2. Producers at a lower price- lower quantity will be supplied for demand

INTERNAL ECONOMIES OF SCALE- producing as many goods and services at a minimum cost- increases efficiency and productivity

INTERNAL DISECONOMIES OF SCALE- cost of production will rise because of the disadvantages of becoming too big, decreases efficiency and productivity

EXTERNAL ECONOMIES OF SCALE- cost saving advantages that accrue to a firm because of external influences

EXTERNAL DISECONOMIES OF SCALE: external influences that lead to cost disadvantages with a firm because of the growth of the industry within which the firm is operating within

PRICE MECHANISM- the flowing forces of supply and demand which determines the prices at which commodities are bought and sold

Market equilibrium- the situation where at a certain price level quantity demanded and quantity supplied are equal an interact

Changes in EQUILIBIRUM= changes in supply and demand not price changes

Government interventions:

Price ceilings- represent the maximum price that can be charged for a particular commodity

Price floors- represent the minimum price that can be charged for a particular economy

Price mechanism with a price ceiling:

Price Mechanism with a price floor:

Award Wage= unemployment

1. If the price is above the market equilibrium: this will = the award wage

2. If the price is above market equilibrium- there will be less demand= PRICE FLOOR

3. The quantity supply is greater than the quantity demanded

QS > QD= SURPLUS ,

1. If the price is below the market equilibrium this will = a greater quantity demanded and less quantity supplied

2. If the price is below the market equilibrium there will be more demand= PRICE CEILING

Units= QD > QS = shortage

Total outlay= price x quantity

At price $7, consumers demand 40 units

Total outlay= $7 x 40= $280

Price rises to $8, consumers demand 40 units

Total outlay= $8 x 40= $320

Therefore the product is inelastic

At higher prices demand= elastic At lower price demand= inelastic

MARKET FAILURE: negative implications of the price mechanism

1. Business cycle- boom and slump= recession on downturns, govt intervention pump-priming the economy still unemployment

2. Pollution- negative externality on local residents- incurs respiratory diseases – unable to work

3. Collusion ACCC4. Decrease unemployment and aged pensions5. Physical/ mental merit goods- perks