Topic 1: Introduction to Economics

The Nature of Economics

The Economic Problem

Wants 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 wants
o How to produce: Govt. must find ↑ efficient production method
o How much to produce: Resources must be allocated efficiently and maximise
satisfaction of wants
o 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 have
o We need to make choices, i.e. people need to pick which of their desires they will
satisfy and which they will leave unsatisfied

Opportunity 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 Force
o 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:
 Economy only produces two goods
 State of technology is constant
 Quantity of resources remains
Unchanged
All resources are fully
employed
Topic 1: Introduction to Economics
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
 Work
o 4 Types of Employment: Professional/Trade/Semi-skilled/Unskilled
o ↑ Skills = ↑ Income  ↑ Consumption and saving
 Education
o Education Level increases individual’s professional work opportunity
 ↑ Professional work  ↑ Income
 Retirement
o Employers must make 9% contribution (of wage) to superannuation
o ↑ Income  ↑ Compulsory super  ↑ Potential voluntary super
Topic 1: Introduction to Economics
 Voting Patterns and Participation in politics
o Pattern: Upper class = Liberal, Working class = Labour
o Political Participation
o Dependent on economic policies
 Keeping the economy strong
 Managing budget policy
 Delivering ↓ RATES of Unemployment/Inflation/Interest
 Businesses
o Pricing: ↑ Mark-up = ↑ Profit
o Production: Involves use of labour and capital
o 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 expenditure
o 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 Economics
The Operation of an Economy
Production of goods and services from resources

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

F.o.P Capital Entrepreneurship Land Labour

Items used for Individual who Natural resources Physical/mental
production of other organises other used in the human effort used
Definition
goods, increases F.o.P’s to produce production process to produce goods
productivity g/s and services
Interest: Bank Profit: interest, Rent: All income Wages:
interest rates, profit wages earned from Commissions,
Reward margins productive use superannuation,
sick pay, annual
leave
Limit of willingness to Population size, Limits to amount Population size,
invest, level of ability and of resources school leaving age,
Scarcity savings willingness to take available retirement age,
risks on-the-job
training, childcare
Machinery, tools, Bakeries, Cafes, Soil, forests,
Examples roads, networks Restaurants mineral deposits,
(telecommunication) 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 services
o 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

Provision of income

 Individuals are paid rewards for their contribution (Wages, Rent, Interest, Profit)
 Final Income = Income – Taxation (Direct and indirect)
 Government redistributes income
Topic 1: Introduction to Economics
Provision of employment and quality of life through the business cycle

 Definitions
o Recession: Negative economic growth in two consecutive quarters
o 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 Boom
Falling production of goods and services Increasing production of goods and services
Rising Unemployment Falling unemployment
Falling income levels Rising income levels
Falling 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 businesses
o Savings are essential if investment is to occur
 Forgoing current consumption: increases future productive capacity
 International trade and financial flows
o 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
Topic 1: Introduction to Economics
 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 differences
Background Information

 Australia’s trading relationships are mainly with Asian economies

o Half of our exports destined for Japan, China, and South Korea
 Relatively strong performance through 2000 global downturn
o AU’s economic fortunes are linked with Asian economies’ fortunes
 Diverse group of economies
o 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)

Economic growth and the quality of life

Rank Country 2014 GDP ($US billion)

1 China 10,360
2 Japan 4,601
3 India 2,067
4 Australia 1,454
5 Republic of Korea 1,410
6 Indonesia 889
7 Thailand 374
8 Malaysia 327
9 Singapore 308
10 Hong Kong 291
 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 3 Phase: Emerging and developing economies
rd

 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
Topic 1: Introduction to Economics
HDI GDP/capita HDI value Life expectancy Mean schooling
Country
Rank (2014, $US) (2014) (years, 2014) years (2012)
2 Australia 61,219 0.933 82.5 12.8
7 New Zealand 43,837 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 28,101 0.891 81.5 11.8
17 Japan 36,332 0.890 83.6 11.5
62 Malaysia 10,804 0.773 75.0 9.5
91 China 7,589 0.719 75.3 7.5
108 Indonesia 3,534 0.684 70.8 7.5
121 Vietnam 2,053 0.638 75.9 5.5
135 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 Philippines
o 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 income
o People who own
resources/have most skills >
People who lack resources
 Agricultural developing economies: Unequal distribution
o Divisions between urban and rural populations
o Concentration of land ownership amongst wealthier groups
 Mixed economies: More equal distribution of income
o 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)
 Other Asian economies: Relatively unequal (poor and rural/wealthier urban areas)
Topic 1: Introduction to Economics
Environmental sustainability

 AU: ↑ Environmental qualities (↓ water/air pollution, ↑ efficient industrial processes)

1
o Poor record of preserving biodiversity ( megadiverse, ↑ species than others)
17
 >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 century
o Ice thickness has decreased 40% since 1960s
o Extreme weather events occurring with greater frequency
o Avg. global temperature = ↑ between 1.0 and 5.4 degrees in this century
o 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 problems
o Indonesia: Significant
contributor to climate change
(deforestation)
o China’s CO2 emissions: Major
impact on climate
o India: Poor urban planning,
outdated infrastructure
o 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 care
Topic 1: Introduction to Economics
o 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 funding
o 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

 Social Welfare
o 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