The Australian Economy

Questions to considerQuestions to consider

3.Who is effected by economics?3.Who is effected by economics?

4. Why is economics important?4. Why is economics important?

1. What is economics? 1. What is economics?

2. What do we mean by economise? 2. What do we mean by economise?

1. What is economics?1. What is economics?

EconomicsEconomics is a term that is generally used is a term that is generally used to refer to how a nation tries to satisfy to refer to how a nation tries to satisfy people’s people’s needs needs (such as clean water, food, (such as clean water, food, shelter and health care) and shelter and health care) and wantswants (non- (non-essential goods and services) with limited essential goods and services) with limited resourcesresources. .

Satisfaction of Individual Satisfaction of Individual Human ‘wants’Human ‘wants’

Q: How do people satisfy their material Q: How do people satisfy their material wants?wants?

Satisfaction of collective Satisfaction of collective Society ‘wants’Society ‘wants’

Q: How does Society satisfy its needs & Q: How does Society satisfy its needs & wants?wants?

INSATIABLE WANTS + LIMITED RESOURCES =

THE NEED TO ECONOMISE

Gmeee,Gmeee,Gmeee

More More More!More More More!

Can people’s wants be Can people’s wants be satisfied in the long run?satisfied in the long run?

Can we have everything we Can we have everything we want? Why not?want? Why not?

2. What do we mean by 2. What do we mean by EconomiseEconomise

Best case scenario:Best case scenario: Maximise our satisfaction with our limited resources;Maximise our satisfaction with our limited resources;

i.e. choose how to use our resources to our greatest i.e. choose how to use our resources to our greatest advantageadvantage

ECONOMISE

Concept of scarcityConcept of scarcity

How to best use limited resources How to best use limited resources (SUPPLY)(SUPPLY)

VSVS

How to best satisfy the unlimited wants How to best satisfy the unlimited wants of society (DEMAND)of society (DEMAND)

SUPPLY: How to best use SUPPLY: How to best use limited resourceslimited resources

Natural resources – Land Natural resources – Land

Human resources – LabourHuman resources – Labour

Capital resources – Machinery & buildingsCapital resources – Machinery & buildings

Enterprise resources – ManagementEnterprise resources – Management

DEMAND: How to best satisfy DEMAND: How to best satisfy the unlimited wants of societythe unlimited wants of society

Households - To Maximise their satisfaction through the Households - To Maximise their satisfaction through the consumption of goods and servicesconsumption of goods and services

Businesses - To maximize profits. Keeping production Businesses - To maximize profits. Keeping production cost low can help to maximise profitscost low can help to maximise profits

Governments - To lower unemployment, keep prices Governments - To lower unemployment, keep prices stable (i.e. low INFLATION); increase economic growth; stable (i.e. low INFLATION); increase economic growth; raise living standards; regulate income distribution; keep raise living standards; regulate income distribution; keep Australia economically viable.Australia economically viable.

Scarcity & choiceScarcity & choice

Scarcity of resources forces the need for Scarcity of resources forces the need for individuals and society to make choicesindividuals and society to make choices

SUPPLY

DEMANDINSAIABLE WANTS &

NEEDS

SUPPLYLIMITED

RESOURCES

Satisfying Wants & Needs

Choice & Opportunity CostChoice & Opportunity Cost

Choice Results in opportunity costChoice Results in opportunity cost

Opportunity cost is the cost of undertaking Opportunity cost is the cost of undertaking one economic activity instead of another one economic activity instead of another that is the best alternative. that is the best alternative.

The aim of economising is to minimise The aim of economising is to minimise opportunity cost; that is, they put their opportunity cost; that is, they put their resources to the best use possible.resources to the best use possible.

"Economic problems arise as the individual or the community has to make the most efficient use of its limited resources and is confronted with the problem of choice. Economics is accordingly concerned with the arrangements that are made to most efficiently use of scarce resources"

The economic problem?The economic problem?

3. Who is Effected by Economics?3. Who is Effected by Economics? Economics &YouEconomics &You

All people are touched by economic All people are touched by economic decisions on multiple occasions every decisions on multiple occasions every day.day.

Economic decisions taken by Economic decisions taken by individuals, groups, businesses and individuals, groups, businesses and governments have effects on the governments have effects on the welfare of nations and regions; today welfare of nations and regions; today these effects are increasingly global in these effects are increasingly global in their impact. their impact.

Society’s Economic ChallengeSociety’s Economic ChallengeA major challenge facing A major challenge facing

societies in the twenty-first societies in the twenty-first

century is how to balance century is how to balance

further growth of living further growth of living

standards and improvement in standards and improvement in

the distribution of the world’s the distribution of the world’s

income and wealth, with income and wealth, with

protection of the environment protection of the environment

and the maintenance of liberal and the maintenance of liberal

democratic government. democratic government.

SUPPLYDEMAND

INSAIABLE WANTS & NEEDS

SUPPLYLIMITED

RESOURCES

Satisfying Wants & Needs

Taking ResponsibilityTaking Responsibility

As a citizen, everyone has to make As a citizen, everyone has to make decisions on a wide variety of economic decisions on a wide variety of economic problems of personal, local, state, national problems of personal, local, state, national and international significance. and international significance.

4. Why is Economics Important? 4. Why is Economics Important?

The Need for Economic Understanding!The Need for Economic Understanding!

The extensive media coverage of The extensive media coverage of economic issues, problems and events economic issues, problems and events has, in recent years, highlighted the has, in recent years, highlighted the need for increased community need for increased community awareness of the economic environment awareness of the economic environment in which we live and the economic forces in which we live and the economic forces that act upon our lives.that act upon our lives.

The Benefits of Economic The Benefits of Economic LiteracyLiteracy

By studying Economics at school you have By studying Economics at school you have

the opportunity to take on this challenge & the opportunity to take on this challenge &

manage resource scarcity and address the manage resource scarcity and address the

requirements for human survival and requirements for human survival and

economic sustainability. economic sustainability.

The study of Economics is a huge asset to The study of Economics is a huge asset to a student’s education as it develops life a student’s education as it develops life long learning skills crucial to their success long learning skills crucial to their success in the real world. in the real world.

Core Economic knowledgeCore Economic knowledge

to understand how goods and services are produced and to understand how goods and services are produced and distributed distributed to recognize themselves as producers and consumers of to recognize themselves as producers and consumers of goods and services goods and services to analyse the interaction of economic policy and to analyse the interaction of economic policy and economic activity and how decisions on these matters economic activity and how decisions on these matters impact on individuals and broader society impact on individuals and broader society make rational economic choices both in their own lives make rational economic choices both in their own lives and in their participation in policy decisions as citizens of and in their participation in policy decisions as citizens of a city, state, nation, and the world a city, state, nation, and the world interpret local, national and global economic events and interpret local, national and global economic events and their likely impact on the wellbeing of themselves and their likely impact on the wellbeing of themselves and others others appreciate the interdependency of individuals and appreciate the interdependency of individuals and nations for having needs met and the disparities nations for having needs met and the disparities between individuals and nationsbetween individuals and nations

AdvantagesAdvantages Students who develop their economic literacy Students who develop their economic literacy are in a better position to:are in a better position to:

act rationally and ethically when making economic and act rationally and ethically when making economic and personal financial decisionspersonal financial decisions

influence others to do likewiseinfluence others to do likewise

appreciate the complexity of economic decision-making and appreciate the complexity of economic decision-making and to better understand the economic decisions made by othersto better understand the economic decisions made by others

manage their personal affairs better manage their personal affairs better

be more effective and productive members of society as they be more effective and productive members of society as they are capable of making reasonable judgments on public policy are capable of making reasonable judgments on public policy issues that have a bearing on their personal prospects and issues that have a bearing on their personal prospects and those of the nation those of the nation

Career PathwaysCareer PathwaysCareer pathways for students intending Career pathways for students intending to pursue a career in this area include: to pursue a career in this area include:

Economist Economist

Statistician Statistician

Commerce Teacher Commerce Teacher

BankingBanking

Small Business OwnerSmall Business Owner

Stock market Stock market

Investment advice Investment advice

PoliticsPolitics

Government and Government and

international tradeinternational trade

Careers FoundationsCareers Foundations

Economics provides a foundation for Economics provides a foundation for careers in:careers in:

AccountingAccounting

BusinessBusiness

Government and politicsGovernment and politics

Finance and insuranceFinance and insurance

Information technologyInformation technology

LawLaw

ManagementManagement

Marketing and tourismMarketing and tourism

Public policyPublic policy

Teaching and educationTeaching and education

Markets & Economics

• The study of economics involves looking at the nature of markets.

• Through a market economic view we look at how:

• goods and services are produced and consumed • income is earned and spent on a national basis

• It uses price signals (Price Mechanism) to indicate what products consumers do or do not want to see produced

Introduction to Markets

• A market does NOT have to be a physical place like a shop, it can also be a virtual one, like the money market.

• The market place consists of all those who have items/services for sale and all those who are interested in buying those items/services

• Many businesses have global markets because of the developments in technology

Introduction to Markets

• The range of markets:– Organised markets – commodities e.g. rubber, oil,

sugar, wheat, gold, copper, etc.

– Financial markets – stocks, shares, currencies, financial instruments

– Goods markets – the supply and demand of goods and services in general, food, clothing, leisure, houses, cars, etc.

– Factor markets – the supply and demand of factors of production – land, labour and capital

What is a market?

• A market – is any place or process that brings together buyers and sellers with a view to agreeing a price

• The basis of how an economy operates – through production and subsequent exchange

• A market is - what our economy uses to answer the three basic economic questions– 1. What to produce?– 2. How to produce?– 3. For whom to produce?

The Economic Problem

• 1. What goods and services should an economy produce? – should the emphasis be on agriculture, manufacturing or services, should it be on sport and leisure or housing?

• 2. How should goods and services be produced? – labour intensive, land intensive, capital intensive? Efficiency/Management?

• 3. Who should get the goods and services produced? – even distribution? more for the rich? for those who work hard?

Production Possibility Frontiers

Capital Goods

Consumer Goods

Yo

Xo

A

BY1

X1

Assume a country can produce two types of goods with its resources – capital goods and consumer goods

If it devotes all resources to capital goods it could produce a maximum of Ym.

If it devotes all its resources to consumer goods it could produce a maximum of Xm

Ym

Xm

If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods

If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods.

Production Possibility Frontiers

Capital Goods

Consumer Goods

Yo

Xo

A

.B

CY1

X1

Production inside the PPF – e.g. point B means the country is not using all its resources

It can only produce at points outside the PPF if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards.

Price Mechanism

• Price mechanism is a system where by producer supply and consumer demand interact in the marketplace to set the prices for goods and services

• Consumer demand is the and of the buyer to pay the actual asking price for the good

• Supply is the quantity of that commodity that will be provided by the buyer at a particular price

Prices

• Prices help consumers decide which of their wants is the most important and a desire for profit stimulates efficient resources use by each supplier and helps to smooth out imbalance over in oversupply and undersupply

• The price mechanism also plays a role in the distribution of wealth, through the generation profits wages for successful suppliers in markets where there is demand

Controlling The Market Economy

DEMAND SUPPLY DEMAND SUPPLY

– reflects the degree of value consumers place on items – price and satisfaction gained from purchase (utility)

– the amount consumers desire to purchase at various alternative prices

– the amount producers are willing to offer for sale at various prices

– reflects the cost of the resources used in production and the returns/profits required

• Market demand – consists of the sum of all individual demand in the market

• Represented by a demand curve

• At higher prices, consumers generally willing to purchase less than at lower prices

• *RULE* Demand curve – negative slope, downward sloping from left to right

The Law of demand

• The demand curve slopes downwards from left to right indicating a negative relationship between demand and price. As price rises, this discourages buyers to buy more whereas a fall in price would lead to the quantity demanded to ______

Factors of Demand

Price of substitutes

Price of

complementary

products

Income

Expectations

Price of the

product itself

Preferences

Factor affecting Demand

Changes in the DEMAND CURVE

• Two (2) types of physical changes:

1. Movement along the curve is caused by ONLY a: change in price of the product

2. Shift in the curve is caused by a change in any of the factors other than the price of that particular product such as: Level of disposable income Preferences and tastes Change in the Price of a Complementary product Change in the Price of a Substitute product Consumer’s expectations Size of the market

These factors cause the demand curve to shift either:– Left (Less demanded at each price) D2 – Right (More demanded at each price) D1

see example on graph

1. Movement along the DEMAND curve

Movement along the DEMAND curve is caused by a change in the:

• Price of the product itself

The Demand Curve - For Lollipops

Price ($)

Quantity (000s)

Demand

$10

$5

100 150

The demand curve slopes downwards from left to right (a negative slope) indicating the relationship between price and the quantity demanded. Demand will be higher at lower prices than at higher prices.

As price falls, demand rises. P then D

As price rises, demand falls. When P then D

The starting price of Lollipops was $10

The price of Lollipop was then decreased to $5

At $10 the quantity demanded is 100

At $5 the quantity demanded is increased to ???

PRICE CHANGE IN ACTION

Exercise task

• Draw the same demand curve for lollipops as the last slide. Label it as (D)

• Label the two axis.

• The initial price is $10 and the quantity demanded is 100. Mark this as point (a)

• There is a change in price to $15. Does the quantity demanded rise or fall? Approximate the quantity demanded.

2. Shift of the demand curve

Shifts of the demand curve are caused by the following factors:

• Level of disposable income• Preferences and tastes• Change in the Price of a Complementary product• Change in the Price of a Substitute product• Consumer’s expectations• Size of the market

The Demand Curve 2

Changes in any of the factors other than price causes the demand curve to shift either:

• Left (Less demanded at each price) or• Right (More demanded at each price)

The Shift Of Demand Curve – Hamburger

Price (S)

Quantity

Demand

S10

100

D1

D2

10 200

Changes in any of the factors affecting demand other than price cause the entire demand curve to shift to the left (less demanded at each price) or to the right (more demanded at each price).

SHIFT OF DEMAND CURVE IN ACTION

Action: Substitute Product ‘pizza’ went down significantly in price

Reaction: More people buy ‘pizza’ instead of hamburgers

Resultant Shift: Less Demand for hamburgers which results in a shift to the left

Decrease demand from 100 -10

Factors of supply

The supply curve slopes upwards from left to right indicating a positive relationship between supply and price. As price rises, it encourages producers to offer more for sale whereas a fall in price would lead to the quantity supplied to fall.

Factors of Supply

Price of the

product

Price of other

products

Price of

inputs

Changes in the SUPPLY CURVE

• Two (2) types of physical changes:

1. Movement along the curve is caused by ONLY by a change in price.

For eg. A price rise will see an in supply because producers will anticipate large profits. Producers will suddenly want to produce those goods or services.

2. Shift in the curve is caused by a change in any of the factors that will change the level of supply such as:

Expectations Preferences Income Price of complementary product Price of Substitute product

These factors causes the demand curve to shift either:– Left (Less demanded at each price) D2 – Right (More demanded at each price) D1

see example on graph

1. Movement along the SUPPLY curve

Movement along the SUPPLY curve is caused by a change in the:

• The price of the product itself- assuming the cost remain the same the higher, the price, the greater the profit on each item, meaning that the producer is willing to supply higher quantities the higher the price

Movement along the Supply Curve

Price $

Quantity (000s)

Supply

$3

200

$7

800

The supply curve slopes upwards from left to right indicating a positive relationship between supply and price. As price rises, it encourages producers to offer more for sale whereas a fall in price would lead to the quantity supplied to fall.

2. Shift of the SUPPLY curve

Shifts of the supply curve are caused by the following factors:

• The price of inputs – the lower the price of inputs the more profit per unit and so the greater the quantities producers are willing to supply

• The price of other products – for example if the price of other products rises and there is a perception of increased profits, then the producers may switch to supplying more of those products and less of the original

The Supply Curve

• Changes in any of the factors OTHER than price cause a shift in the supply curve

• A shift in supply to the left – the amount producers offer for sale at every price will be less

• A shift in supply to the right – the amount producers wish to sell at every price increases

• HINT: Be careful to not confuse supply going ‘up’ and ‘down’ with the direction of the shift!

SHIFT of The Supply Curve

Price $

Quantity (000s)

Supply

$4

400

S1

100

S2

900

Changes in any of the factors affecting supply other than price will cause the entire supply curve to shift. A shift to the left results in a lower supply at each price; a shift to the right indicates a greater supply at each price.

The Market

Price ($)

Quantity Bought and Sold (000s)

S

D

$5

600

D1

300

Surplus

$3

450

A shift in the demand curve to the left will reduce the demand to 300 from 500 at a price of £5. Suppliers do not have the information or time to adjust supply immediately and still offer 600 for sale at £5. This results in a market surplus (S > D)

In an attempt to get rid of surplus stock, producers will accept lower prices. Lower prices in turn attract some consumers to buy. The process continues until the surplus disappears and equilibrium is once again reached.

The Market

Price ($)

Quantity Bought and Sold (000s)

S

D

$5

600

S1

100

Shortage

$8

350

A shift in the supply curve to the left would lead to less products being available for sale at every price. Suppliers would only be able to offer 100 units for sale at a price of £5 but consumers still desire to purchase 600. This creates a market shortage. (S < D)

The shortage in the market would drive up prices as some consumers are prepared to pay more. The price will continue to rise until the shortage has been competed away and a new equilibrium position has been reached.

Factors of Demand

Test your memory…..

Factors of Demand

Price of SPrice of C

I

E

Price of the

PPr

Factors of supply

• Test your memory….. What are the 3 factors that affect supply?

Factors of Supply