The Nature of Economics



The Nature of EconomicsThe Economic ProblemWants and ScarcityMaterial desires whereby Individuals derive utility (satisfaction) over the consumption of g/sTypes of wantsBasic: Necessities required for survival (food, water, shelter etc.)Individual: Desires of each personDepends on preferences (type of goods desired) and ability (income level)Collective: Wants of the whole communityGovernment revenue (Taxation)Parks, Libraries, HospitalsScarcity: Limited resources in an economyWhat to produce: Limited resources unsatisfied wantsHow to produce: Govt. must find ↑ efficient production methodHow much to produce: Resources must be allocated efficiently and maximise satisfaction of wantsDistribution of production: Equitable/Inequitable distribution, dependent on income level (↑ Income = ↑ consumption of g/s) The need for choice by individuals and societyBoth individuals and society are limited by scarcity (limited economic resources, unlimited human needs and wants)People want more than what they can haveWe 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 frontiersDefinition: Alternative use of resources (next best alternative foregone)Examples:Individuals: Choice between buying a car or going on an overseas holidayBusinesses: Choice between producing shoes or furnitureGovt: Local = parks, State = Schools, Federal = Defence Force348932516446500Production 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 goodsState of technology is constantQuantity of resources remainsUnchangedAll resources are fully employedFactors affecting PPF: New technology: More output with same resourcesNew 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)Real life model:283527546291500right47726600PPF is concave to origin (resources are better suited for the production of one good compared to another good loss of productive capacity)14622783530600left4064000Future implications of current choices by individuals, businesses and governmentsDefinitionsAllocative Efficiency: Resources are allocated according to preferences of society for certain goods and servicesConsumer goods: G/s produced for the immediate satisfaction of individual/community wantsCapital goods: G/s utilised in the production of future g/s (↑ future productive capacity) Economic factors underlying decision-making by groupsIndividualsSpending and SavingConsumers can choose to either spend or save↓ Y = ↓ Consumption, ↓ Savings. ↑ Income = ↑ C + SMotivesTransactionary: Finance cash purchasesPrecautionary: Unforeseen expensesSpeculative: Investing in shares/bonds/cash for returnsWork4 Types of Employment: Professional/Trade/Semi-skilled/Unskilled↑ Skills = ↑ Income ↑ Consumption and savingEducationEducation Level increases individual’s professional work opportunity↑ Professional work ↑ Income RetirementEmployers must make 9% contribution (of wage) to superannuation↑ Income ↑ Compulsory super ↑ Potential voluntary superVoting Patterns and Participation in politicsPattern: Upper class = Liberal, Working class = LabourPolitical ParticipationDependent on economic policiesKeeping the economy strongManaging budget policyDelivering ↓ RATES of Unemployment/Inflation/InterestBusinessesPricing: ↑ Mark-up = ↑ ProfitProduction: Involves use of labour and capitalResource use: Producers try to maximise productivity (efficiently allocating resources)Industrial Relations: Safety Net System: Govt enforces minimum wageEnterprise Bargaining: Employers working with employees to negotiate wagesGovernmentsTaxes both individuals and businesses to fund its expenditureInfluencing decisionsResource Allocation: Funds the provision of labour Transport/Schools/Hospitals/RoadsEconomy StabilisationUse of fiscal/monetary policy (e.g. raising interest rates if high inflation and vice versa)Redistribution: Individuals are taxed dependent on incomeRegulation of economic behaviourPrice controlProvision of a law frameworkNational competition policyMinimum wagePollution legislationThe Operation of an EconomyProduction of goods and services from resourcesFactors of Production (Resources used in production of goods and services)F.o.PCapitalEntrepreneurshipLandLabourDefinitionItems used for production of other goods, increases productivityIndividual who organises other F.o.P’s to produce g/sNatural resources used in the production processPhysical/mental human effort used to produce goods and servicesRewardInterest: Bank interest rates, profit marginsProfit: interest, wagesRent: All income earned from productive useWages: Commissions, superannuation, sick pay, annual leaveScarcityLimit of willingness to invest, level of savingsPopulation size, ability and willingness to take risksLimits to amount of resources availablePopulation size, school leaving age, retirement age, on-the-job training, childcareExamplesMachinery, tools, roads, networks (telecommunication)Bakeries, Cafes, RestaurantsSoil, forests, mineral deposits, fishing areasDistribution of goods and servicesIndividuals contribute to production process Market economy provides them with income Income is used to obtain goods and servicesFactors influencing incomeScarcity of resource and level of demandHow much they workSkills and expertise Educational qualificationsBargaining power with employersIncome is redistributed by government through taxation (social welfare)Exchange of goods and servicesMoney is used as a medium of exchangePrices are indicators of the relative value of goods and servicesExchange occurs in a market economyProvision of income Individuals are paid rewards for their contribution (Wages, Rent, Interest, Profit)Final Income = Income – Taxation (Direct and indirect)Government redistributes incomeProvision of employment and quality of life through the business cycleDefinitionsRecession: Negative economic growth in two consecutive quartersBoom: Positive economic growth in two consecutive quarters Business Cycle: Fluctuations in level of economic growth occurring over a period of years in a regular cyclical pattern, overall trend of growth in outputRecessionBoomFalling production of goods and servicesIncreasing production of goods and servicesRising UnemploymentFalling unemploymentFalling income levelsRising income levelsFalling levels of consumption and investmentRising levels of consumption and investmentFalling quality of lifeRising quality of lifeHigh level of specialisation Interdependence between individuals, businesses, and governmentsEmployment (Private and Public Sector)Primary: Raw material extraction (mining)Secondary: Manufacturing of products (Factories)Tertiary: Provision of servicesCircular Flow of income (Sectors of economic activity)IndividualsSupplies factors of production (labour/entrepreneurship) to businessesReceives incomes as reward (Interest, profit, rent, wages) Individuals either consume (local/overseas), save, or pay tax with incomeBusinessesSpends profit earned on investment, could obtain government subsidiesDepends on individuals for supply of resources and consumption for the produced goods and servicesFinancial institutions (engaged in borrowing and lending of money)Accepts savings from individuals and lends them out to businessesSavings are essential if investment is to occurForgoing current consumption: increases future productive capacityInternational trade and financial flowsExports: G/S produced in AU, sold to overseas consumersMoney is paid to Australian businesses Inflow of incomeStimulates production and employment opportunitiesImports: G/S produced overseas, sold to local customersMoney is withdrawn from AU economy, paid to overseas businessesLower economic activity (↓ income/output/employment opportunities)International money flowsInjection: Foreigners lending or paying income to AustraliansLeakage: Locals lending or paying income overseas to foreignersEquilibrium: Sum of all leakages is equal to sum of all injectionsDisequilibrium: Inequality between total leakages and total injectionsLeakages > Injections: Downturn in level of economic activityFalling incomesFalling productionRising UnemploymentLess leakages (consumers have less to spend on imports/taxes)Leakages = Injections (Lower level of income in circular flow)Injections > Leakages: Upturn in level of economic activityRising incomesRising productionRising employmentMore leakages (consumers have more to spend on imports/taxes)Leakages = Injections (Higher level of income in circular flow)1225550381000 -38100405130Economies: their similarities and differencesBackground InformationAustralia’s trading relationships are mainly with Asian economiesHalf of our exports destined for Japan, China, and South KoreaRelatively strong performance through 2000 global downturnAU’s economic fortunes are linked with Asian economies’ fortunesDiverse group of economiesLarge/Powerful (China/Japan) vs. Small/Rel. poor (Tonga/Vanuatu)Wealthy (South Korea) vs. less-developed (Timor Leste)Fast-growing (India) vs. slow-growing (Japan)Former centrally planned (Vietnam) vs pro-market (Singapore/Hong Kong)RankCountry2014 GDP ($US billion)1China10,3602Japan4,6013India2,0674Australia1,4545Republic of Korea1,4106Indonesia8897Thailand3748Malaysia3279Singapore30810Hong Kong291Economic growth and the quality of life4th largest economy when compared to Asian economic regionTop 6 = Group of 20Asian economic region = Fastest growing economic region since WWII1st Phase: 1950s and 1960s = Japan’s rapid industrialisation 2nd Phase: 1970s and 1980s = South Korea, Singapore, Hong Kong, TaiwanPursued growth strategies (competitive labour costs + growing export markets, particularly for manufactured goods)3rd Phase: Emerging and developing economiesAverage 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 finishedAustralia’s average economic growth = slower than most Asian economiesright10751000Achieved industrialisation + high living standards before WWII (3.3%)Quality of life: Measure of welfare based on more than just economic output per capitaHuman Development Index: A measure that takes into account income, life expectancy adult literacy and educational levelsHDI RankCountryGDP/capita (2014, $US)HDI value (2014)Life expectancy (years, 2014)Mean schooling years (2012)2Australia61,2190.93382.512.87New Zealand43,8370.91081.112.59Singapore56,3190.90182.310.215Hong Kong39,8710.89183.410.015Korea28,1010.89181.511.817Japan36,3320.89083.611.562Malaysia10,8040.77375.09.591China7,5890.71975.37.5108Indonesia3,5340.68470.87.5121Vietnam2,0530.63875.95.5135India1,6270.58666.34.4right237490000Australia: highly favourable social conditionsTemperate climate, relaxed lifestyleHigh degree of cultural diversity (25% born overseas)Political and religious freedomsEmployment and UnemploymentAustralia’s unemployment rate = 6.2%Lower than unemployment rates of Indonesia and PhilippinesHigher than rates of fast-growing economies (Japan, Korea, Singapore)AU’s employment patterns: similar to most advanced economiesMajority (<75%) employed in services industries (retail, business, real estate)Manufacturing and construction = Substantial number of jobsAgricultural sector: smaller than previous decades (<5%)Less developed economies: Large proportion of workforce in agriculture (Indonesia: 51%)right29654500Process of mass urbanisation People moving from rural to urban areas for workDistribution of income Pure market economies: Unequal distribution of incomePeople who own resources/have most skills > People who lack resourcesAgricultural developing economies: Unequal distributionDivisions between urban and rural populationsConcentration of land ownership amongst wealthier groupsMixed economies: More equal distribution of incomeGovernment 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)Environmental sustainabilityAU: ↑ Environmental qualities (↓ water/air pollution, ↑ efficient industrial processes)Poor record of preserving biodiversity (117 megadiverse, ↑ species than others)>50 birds/mammals have become extinct over the past 2 centuries, one third of the global total1700 animals/plants at risk of extinctionLow 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)14/15 warmest years = 21st centuryIce thickness has decreased 40% since 1960sExtreme weather events occurring with greater frequencyAvg. global temperature = ↑ between 1.0 and 5.4 degrees in this centuryConsequence of rising temperatures: Rising sea levels, ↑ harsh weather events, ↑ threats to economic health, food security, human healthDifficult to achieve international agreement on how to reduce greenhouse gas emission2009: Copenhagen Convention (confine global temp increases to <2 degrees Celsius)No binding international agreement to reduce greenhouse gas emissions Previous = Kyoto Protocol, 1997-2012Australia: Reduce carbon emissions to 26-28% of 2005 levels by 2030Direct Action Initiatives: Grants for businesses for project that lower carbon emissions17 tonnes of CO2/person (>50% than Japan/Korea, >70% average adv. economies)Asian economies also face unique problemsright13843000Indonesia: Significant contributor to climate change (deforestation)China’s CO2 emissions: Major impact on climateIndia: Poor urban planning, outdated infrastructureDomestic policies + greater global cooperation requiredThe role of government in health care, education and social welfareAsian economiesMarket economies: East Asia, e.g. Japan, Korea, Singapore, IndonesiaPromote development of competitive export sectors and rapid industrialisationPlanned economies: Asian continent e.g. China, Vietnam, India, CambodiaReduced govt. control over economic decision-makingAustralia: Market forces in agriculture, mining, construction, and manufacturing. Government for telecommunications, aviation, banking, and insuranceRecent decades: Reduced role through deregulation and privatisation policiesHealth careAustralia: Well-established system of universal health care (Medicare)6.3% of GDP spent on health careDeveloping economies: Rel. undeveloped public health systems, reliance on private health careDiseases of poverty: poor water and sanitationLifestyle diseases: obesity, diabetes, and cardiovascular diseasesSerious respiratory disease problems (high rate of smoking)20% (AU) vs 50% (China, Indonesia, Korea)EducationAustralia: Universal free education for primary and secondary (1/3 attend private schools), HECS for repaying student loansAbove average fundingAsia: 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)Low govt. spending reflects larger reliance on private contributions, e.g. Korea/JapanDev. countries: Low govt. spending = greater competition for scarce govt. resources11786764374200Social WelfareAustraliaGreater assistance level: Min. living standard for people unable/looking for workUn-employment benefits, pension, disability/family payments, paid maternity leaveTrend = restricting social welfare by tightening eligibility‘means’ test, limiting benefits for people w/other sources of incomeAging population: Govt. faces growing pressure to sustain social welfare (providing other priorities, e.g. health care, education, and infrastructure)Asian economiesDemands for social welfare will increase ................
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