The Australian Economy Questions to consider 1

The Australian Economy

Questions to consider 1. What is economics? 2. What do we mean by economise? 3. Who is effected by economics? 4. Why is economics important?

1. What is economics? Economics is a term that is generally used to refer to how a nation tries to satisfy people’s needs (such as clean water, food, shelter and health care) and wants (nonessential goods and services) with limited resources.

Satisfaction of Individual Human ‘wants’ Q: How do people satisfy their material wants?

Satisfaction of collective Society ‘wants’ Q: How does Society satisfy its needs & wants?

INSATIABLE WANTS + LIMITED RESOURCES = THE NEED TO ECONOMISE

More! Can people’s wants be satisfied in the long run? Can we have everything we want? Why not? Gmeee, Gmeee

2. What do we mean by Economise Best case scenario: Maximise our satisfaction with our limited resources; i. e. choose how to use our resources to our greatest advantage ECONOMISE

Concept of scarcity How to best use limited resources (SUPPLY) VS How to best satisfy the unlimited wants of society (DEMAND)

SUPPLY: How to best use limited resources Natural resources – Land Human resources – Labour Capital resources – Machinery & buildings Enterprise resources – Management

DEMAND: How to best satisfy the unlimited wants of society Households - To Maximise their satisfaction through the consumption of goods and services Businesses - To maximize profits. Keeping production cost low can help to maximise profits Governments - To lower unemployment, keep prices stable (i. e. low INFLATION); increase economic growth; raise living standards; regulate income distribution; keep Australia economically viable.

Scarcity & choice Scarcity of resources forces the need for individuals and society to make choices DEMAND INSAIABLE WANTS & NEEDS SUPPLY LIMITED SUPPLY RESOURCES Satisfying Wants & Needs

Choice & Opportunity Cost Choice Results in opportunity cost Opportunity cost is the cost of undertaking one economic activity instead of another that is the best alternative. The aim of economising is to minimise opportunity cost; that is, they put their resources to the best use possible.

The economic problem? "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"

3. Who is Effected by Economics? Economics &You All people are touched by economic decisions on multiple occasions every day. Economic decisions taken by individuals, groups, businesses and governments have effects on the welfare of nations and regions; today these effects are increasingly global in their impact.

Society’s Economic Challenge A major challenge facing societies in the twenty-first century is how to balance further growth of living standards and improvement in the distribution of the world’s income and wealth, with protection of the environment and the maintenance of liberal democratic government. DEMAND INSAIABLE WANTS & NEEDS SUPPLY LIMITED SUPPLY RESOURCES Satisfying Wants & Needs

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

4. Why is Economics Important? The Need for Economic Understanding! The extensive media coverage of economic issues, problems and events has, in recent years, highlighted the need for increased community awareness of the economic environment in which we live and the economic forces that act upon our lives.

The Benefits of Economic Literacy By studying Economics at school you have the opportunity to take on this challenge & manage resource scarcity and address the requirements for human survival and economic sustainability. The study of Economics is a huge asset to a student’s education as it develops life long learning skills crucial to their success in the real world.

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

Advantages Students who develop their economic literacy are in a better position to: act rationally and ethically when making economic and personal financial decisions influence others to do likewise appreciate the complexity of economic decision-making and to better understand the economic decisions made by others manage their personal affairs better be more effective and productive members of society as they are capable of making reasonable judgments on public policy issues that have a bearing on their personal prospects and those of the nation

Career Pathways Career pathways for students intending to pursue a career in this area include: Economist Stock market Statistician Investment advice Commerce Teacher Politics Banking Government and international trade Small Business Owner

Careers Foundations Economics provides a foundation for careers in: Accounting Law Business Management Government and politics Marketing and tourism Finance and insurance Public policy Information technology Teaching 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 Ym Yo A If it devotescountry Assume a all If the country is resources to capital If it reallocates its can produce the at pointcould two resources (moving round goods it A on types can to B) the PPF from maximum A PPF It ofagoods it can produce more consumer with its the of Ym. produceresources goods but only at the – capital goods combination of Yo expense of fewer capital If it devotes all its and The opportunity goods. consumer and resources to capital goods cost of producing anit consumer goods extra Xo X 1 consumer Xo – consumer goods could produce a is Yo – Y 1 capital goods maximum of Xm B Y 1 Xo X 1 Xm Consumer Goods

Production Possibility Frontiers Capital Goods C Y 1 Yo . A It Production can only produce at points outside the PPF inside the PPF if it finds a way of – e. g. its expandingpoint B resources or improves means the productivity of country is not those resources it using all its already has. This will resources push the PPF further outwards. B Xo X 1 Consumer Goods

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 – the amount consumers desire to purchase at various alternative prices – the amount producers are willing to offer for sale at various prices DEMAND SUPPLY – reflects the degree of value consumers place on items – price and satisfaction gained from purchase (utility) – 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 price. As price rises, this discourages buyers to buy more whereas a fall in price would lead to the quantity demanded to ______ Expectation s e of Pric entary plem com oducts pr Price o f substi tute s Factors of Demand Prefer ences Income Factor affecting Demand Price o f the produc t itself

Changes in the DEMAND CURVE • Two (2) types of physical changes: 1. Movement along the curve is caused by ONLY a: ü 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: ü ü ü 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) D 2 – Right (More demanded at each price) D 1 see example on graph

1. Movement along the DEMAND curve is caused by a change in the: • Price of the product itself

The Demand Curve - For Lollipops PRICE CHANGE IN ACTION 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. Price ($) $10 The starting price of Lollipops was $10 As price falls, demand rises. P then D As price rises, demand falls. When P then D $5 The price of Lollipop was then decreased to $5 Demand 100 At $10 the quantity demanded is 100 150 Quantity (000 s) At $5 the quantity demanded is increased to ? ? ?

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 SHIFT OF DEMAND CURVE IN ACTION 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). Price (S) S 10 Action: Substitute Product ‘pizza’ went down significantly in price Reaction: More people buy ‘pizza’ instead of hamburgers D 1 Demand D 2 10 100 Decrease demand from 100 -10 200 Quantity Resultant Shift: Less Demand for hamburgers which results in a shift to the left

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. r f othe rice o cts P produ Factors of Supply Price of inputs Price o f the produc t

Changes in the SUPPLY CURVE • Two (2) types of physical changes: 1. Movement along the curve is caused by ONLY by a Ø 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: Ø Expectations Ø Preferences Ø Income Ø Price of complementary product Ø Price of Substitute product These factors causes the demand curve to shift either: – Left (Less demanded at each price) D 2 – Right (More demanded at each price) D 1 see example on graph

1. 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 $ Supply $7 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. $3 200 800 Quantity (000 s)

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 $ S 1 Supply S 2 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. $4 100 400 900 Quantity (000 s)

The Market S Price ($) A shift in the demand In an attemptleft get rid curve to the to will of surplus stock, reduce the demand to producers will accept 300 from 500 at a lower prices. Suppliers price of £ 5. Lower prices inhave the do not turn attract some consumers to buy. information or time to The process continues adjust supply until the surplus still immediately and disappears for sale at offer 600 and equilibrium is once a £ 5. This results in again reached. (S > market surplus D) Surplus $5 $3 D 1 300 450 600 D Quantity Bought and Sold (000 s)

The Market S 1 Price ($) A shift in the supply curve to the left the The shortage in would lead to less market would drive products being up prices as some available for sale at consumers are every price. pay prepared to Suppliers would will more. The price only be ableriseoffer continue to to until 100 shortage has at the units for sale a price of £ 5 but been competed consumers still away and a new desire to purchase equilibrium position 600. been reached. has This creates a market shortage. (S < D) $8 $5 S Shortage D 100 350 600 Quantity Bought and Sold (000 s)

Factors of Demand Test your memory…. . E e Price o f. S of C Factors of Demand Pr P I Price o f the

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