What is Economics?

From the Syllabus: Introduction to Economics Students learn to: Examine economic issues Identify* the opportunity costs involved in economic decisions made by individuals, businesses and governments at local, state and national levels Examine* the ways that the economic problem affects individuals at different income levels Examine* the implications of unemployment and technological change using production possibility frontiers Compare* and contrast* the ways that different economies deal with specific problems or issues Apply economic skills Construct* and interpret* production possibility frontiers Distinguish* between equilibrium and disequilibrium situations in the circular flow of income model Explain* how an economy might return to an equilibrium situation from a disequilibrium situation Identify* bias in media items on economic issues affecting the local, state and national economies * = Key HSC words

From the Syllabus: Introduction to Economics Students learn about - The Nature of Economics the economic problem: wants, resources, scarcity (1.1.1) the need for choice by individuals and society (1.1.2) opportunity cost and its application through production possibility frontiers (1.1.3) future implications of current choices by individuals, businesses and governments (1.1.4) economic factors underlying decision-making by: (1.1.5) individuals — spending, saving, work, education, retirement, voting and participation in the political process business — pricing, production, resource use, industrial relations governments — influencing the decisions of individuals and business

What is Economics? J M Keynes: regarded as the founder of modern economic theory –’Keynesian Revolution’ “Economics is an apparatus of the mind” - J M Keynes

The Nature of Wants 1.1.1 There exist basic , which are essential for survival (e.g. food, clothing & shelter) – often called wants. Individual and communities as a whole also have wants, which are material desires for goods & services that give us satisfaction or . Wants may be classified a number of ways: wants are the wants that each person has for the type of food, clothing & shelter they desire. wants are the wants that the community possesses equally and that often cannot be satisfied individually e.g. education, defence, police & justice.

The Nature of Wants 1.1.1 Human ensures that our wants are unlimited .Features that contribute to them being unlimited include that wants are: Recurring , where they must be continually satisfied at regular intervals e.g. food. , where once a want has been satisfied, it creates other wants e.g. buying a car means we then want petrol. changing , where seasons, fashions, income, age and stage of life influence our wants.

Resources 1.1.1 Resources or factors of production are needed to produce the goods & services to satisfy wants. The quantity & quality of a country’s resources will influence how many wants are satisfied (i.e standard of living) There are four factors of : , which refers to all natural resources, such as forests, minerals, fish and agricultural land – the income return is called rent. Labour, refers to human effort both physical and intellectual – the income return is called . , called capital goods it includes machinery, plant or anything that aids production that is produced by man – the income return is called interest. , refers to that special type of labour that can organise the other resources – the income return is called profit.

The Economic Problem 1.1.1 The economic problem exists because: we have unlimited wants and yet there are relatively scarce resources (when compared to unlimited wants) with which to satisfy wants and because we cannot satisfy all our wants, a choice must be made as to which wants are going to be satisfied and which go unsatisfied finally, a decision has to be made about who amongst us gets to satisfy their wants and who may go unsatisfied – .

The Economic Problem 1.1.1 The economic problem means a number of decisions have to be made. The way in which a society is organised to make these choices is known as the economic . An economic system must make decisions about: What to produce, including the mix of and consumer goods How much to produce How to produce How to share or distribute production amongst members of society

So! What is Economics? Ideally, a suitable definition of economics should include that it is a study of the way a country or economy: uses limited resources for the production of goods & services for the satisfaction of unlimited wants and the way is which goods & services are shared which is known as distribution.

What is Economics? What is your definition of Economics?

Focus Questions Define Economics. Explain why Economics is a social science. Distinguish between needs and wants. Outline why wants are unlimited. Distinguish between individual wants and collective wants. Identify the main factor determining standard of living. Identify the different resources available to satisfy wants. Explain why resources are regarded as relatively scarce. Explain what is meant by the economic problem. List the economic decisions that must be made by an economic system.

Need for Choice by Individuals & Society 1.1.2 Recognising that not all wants can be satisfied, individuals and society need to make choices about which to satisfy and when. When a decision is made to satisfy a particular want this creates an economic cost in addition to its cost (i.e. the price paid for the good or service). The real or opportunity cost (or economic cost) of satisfying a particular want is the alternative goods & services that could be produced with those resources. Choices for individuals and society to make include: the mix of consumer goods to be consumed the mix of individual wants and collective wants to be satisfied the mix of consumer & capital goods to produced (i.e. current consumption versus future consumption)

Opportunity Cost through Production Possibility Curves 1.1.4 Production Possibility Curves (PPC) enable greater analysis of the concept of opportunity cost. The assumptions on which production possibility curves are based are: Only goods are produced by the economy can be switched to the production of either good Technology is fixed/constant Guns 100 Illustrative Example 75 Guns 25 50 75 100 Butter 120 90 60 30 50 25 0 30 60 90 120 Butter

Opportunity Cost through Production Possibility Curves 1.1.4 Features of production possibility curves are: Production at any point on the line or frontier, such as point aa, represents full employment of resources. Production at any point inside the line or frontier, such as point B, represents some unemployment of resources. Production at any point beyond the frontier, such as point C, is not achievable with the current state of technology and level of resources. Guns 100 Illustrative Example 75 Guns 25 50 75 100 Butter 120 90 60 30 50 25 0 30 60 90 120 Butter

Opportunity Cost through Production Possibility Curves 1.1.4 Production beyond the PPC line or frontier is only possible if: there is technological progress in the production of: one product, such as guns or both products there is an increase in resources available Guns 100 75 50 25 0 30 60 90 120 Butter Outward movements in the PPC line or frontier represents economic growth.

Future Implications of Current Choices by Individuals, Businesses & Government 1.1.4 Decisions by all these groups are designed to provide the maximum satisfaction from the resources available – this is known as allocative efficiency. Consumer choices not only involve decisions about which current needs & wants to satisfy but also how much of present income to save for future consumption, such as for a house or retirement – overall Australians are poor savers. Business choices involve deciding what & how many products to produce, to maximise profits, and how much investment to undertake. Government choices involve deciding how much to collect in taxes & revenue, knowing it will reduce private sector activity, to maximise , and what collective wants to satisfy with these funds.

Focus Questions Define real or opportunity cost. Outline the assumptions on which production possibility curves are based. Based on the production possibility schedule, answer the following questions. What is the opportunity cost of producing the first 20 units of clothing? What is the opportunity cost of producing the last 20 units of clothing? Draw a production possibility curve and label: a point of production where there is some unemployment of resources a point of production where there is maximum use of resources a point of production that is currently unattainable Outline the factors underlying the decision making of consumers. (pp14 -16) Outline the factors underlying the decision making of business. (page 16) Outline the factors underlying the decision making of governments. (page 17) Food 20 40 80 100 Clothing 150 110 70