Economics Study Notes

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The Nature of Economics

Economic Problem
The economic problem is about the need to make choices due to unlimited wants on the economy’s limited supply of goods and services due to scarce availability of resources. Due to scarce resources, individuals, businesses and governments must prioritise between wants leaving some wants unsatisfied in order to solve the economic problem.

Types of Wants
Basic-
Recurring
Substitute- Can be used instead of another
Luxury
Complementary- Works with another good
Individual- One person can use it
Collective- Group of people can use it

What goods and services to be produced?
Consumer Sovereignty - Consumers determine through purchase power what is produced and how much is produced in a market economy. Business – Businesses are motivated through profit and seek a point where revenue minus expenses is greatest. Government- Australian government plays a major intervention as a consumer, employer, business and regulator. Governments can limit supplies of certain goods deemed inappropriate for society as well as create a demand for goods and services they consider society should have.

How much to produce?
Businesses must consider over-supply meaning a waste in scarce resources and using limited resources means less availability of resources and output in the future. The government may decide to regulate the quantity supplied with either a quota, limit on production or number of suppliers.

How they will be produced?
Businesses will consider how these goods and services will be produced based on cost and production possibilities of the resource they will use. The government may regulate hours of work or zoning of land which could alter a businesses decision.

How to distribute goods?
The allocation of these goods and services in a market economy is based on income. The value of resources you contribute to the economy largely determined the income and in accordance with that, your share of goods and services. The government also decides that certain goods and services should be produced in the interest of society, in which case taxes are used to redistribute income and resources to these areas.

Opportunity cost and its application through production possibility frontiers Opportunity cost (or real cost) - alternative forgone when choosing to consume or produce one product over that alternative. Businesses have to consider opportunity cost as they cannot have an unlimited output due to scarce resources. The business has to consider which goods and services to produce and how much to produce with the limited resources available. Production Possibilities- A business must consider its alternative levels and types of output that it can produce with the limited resources available. Economic Growth- An increase in income levels, GDP and GDP per capita Consumer Goods- are used to immediately satisfy the consumer wants. Single use goods cease to exist once they are consumed and have to be produced again. Eg, food. Durable consumer goods may be used over and over again, such as computers and cars. Capital Goods- goods that have been produced for the purpose of creating other goods in the future e.g. factories and machinery.

As resources are scarce, we need to limit our consumption of consumer goods now to allow for the production of capital goods what will supply consumer and capital goods in the future.

Shifting the Production Possibilities Frontier outwards
PPC shows possible production possibilities
Moving from one possibility to another involves Opportunity Cost Any increase in quality or quantity of resources will increase the production possibilities frontier. -Land: Finding new land or improving the land (fertilisers/irrigation) -Labour: Improving supply or quality (more skilled workforce) -Capital: Quantity but also quality (improved machinery)

-Entrepreneurs: Improved training in managerial ability

Future Implications of Current...
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