Topic 1: Introduction to

Economics

The nature of economics

● The economic problem – wants, resources, scarcity
○ The economic problem is that people have unlimited wants but resources are
scarce. The 4 economic questions are used to determine how resources should be
used.
○ The 4 economic questions are based on the factors of production available.
● The need for choice by individuals and society
○ The 4 economic questions:
■ What to produce?
■ How to produce?
■ How much to produce?
■ For whom to produce?
● Opportunity cost and its application through production possibility frontiers
○ Opportunity cost is the loss of the other alternative when one alternative is
chosen.
○ Opportunity cost = what is foregone/what is gained
○ Production possibility frontier is a tool used to help understand the concept of
opportunity cost. Shows us the production possibilities of 2 goods.
○ Assumptions on which PPF’s are based on:
■ Only 2 goods or services can be produced at a time
■ Resources can be switched between the production of either
■ Technology is fixed or constant
■ All of the economy’s resources are being used.
○ In reality the PPF is always a PPC. Example of a PPF:
● Future implications of current choices by individuals, businesses and governments
○ Allocative efficiency is used to maximise returns from using the resources that
are available.
○ Consumer goods are goods that satisfy our wants immediately.
○ Capital goods are goods that will increase our productive capacity in the future.
 ○ Individuals:
■ Individuals will be saving less if they are spending more in the short
term.
■ It may take longer for individuals to spend a larger expense or they may
go into debt.
■ Saving in the short term increases an individual’s potential to spend in
the medium-long term.
○ Businesses:
■ Businesses must choose to produce one good or service over others. They
will specialise in one form to best use their resources.
■ If they are a public company and have shareholders, they must decide
whether they want to distribute their profits or invest in capital goods.
○ Government:
■ Governments receive income in the form of taxation revenue, the sale of
government-run businesses, industries or services (public trading
enterprises) to private companies and any profits made from public
trading enterprises.
■ The government must prioritise its spending based on whether the budget
is surplus or deficit.

● Economic factors underlying decision-making by:

○ Individuals – spending, saving, work, education, retirement, voting and
participation in the political process
■ Spending and saving
 ● Individuals must make a choice of their income they save and
how much they spend.
■ Education/Work
● Continuing education or working
■ Retirement
● Self funded retirement, age at which retirement occurs.
■ Elections, voting and other political processes
● Voting depends on an individual's preferences and traditional
beliefs.
○ Business – pricing, production, resource use, industrial relations
■ Price and availability of resources
● They aim to maximise sales and minimise costs
● Cost of production uses the factors of production
● A business must decide if it is more cost effective if it uses capital
or labour.
■ Ethical, Environmental and Social considerations
● A business may choose to use or not use certain resources due to
their prices.
● Some businesses change how they produce goods or services to
reduce their environmental footprint.
■ Regulations
● Industrial relations (negotiation of working conditions and pay) is
crucial for workplaces that are labour- intensive.
● Any award, contract or enterprise agreement cannot outline
conditions that are less than those set out in these standards set
by fair work Australia.
○ Governments – influencing the decisions of individuals and business
■ Influencing Individuals and businesses
● Governments allocate resources through their spending decisions
- primarily infrastructure and collective services.
● The government influences decisions using hte fiscal policy
● This may include making it less or more expensive to make some
choices.
● Equally, governments may wish to encourage certain economic
activities and may provide incentives for them.

The operation of an economy

● Production of goods and services from resources – natural, labour, capital and
entrepreneurial resources
○ Factors of productions are classified into 4 types:
■ Land:
 ● Talks about the resources nature gives us
● Income is rent.
■ Labour
● Refers to human effort, mental and physical.
● Income is wages
● Labour force includes the people who are employed +
unemployed.
● Employed people are those who work for at least 1 hour a week
while getting paid for it.
● Unemployed people are those who currently don't have a job and
are looking for a job. If they don’t look for a job then they aren’t
counted in the workforce.
■ Capital
● The goods used to produce more goods
● Income is interest
● Saving → Investment → Capital-accumulation
■ Enterprise:
● The factor of production that organises all other factors of
production into a production unit.
● The entrepreneur combines land, labour, capital to produce final
goods and services.
● Income for enterprise is profit.
● Distribution and exchange of goods and services
○ The distribution of produced goods and services depends on individual income.
○ Productivity is an economic measure of output per unit of input.
○ Production is a process of combining various factors of production to make a
good or service.
○ There are different types of economies:
■ Mixed-market economies
■ Planned economies
● Provision of income and employment
○ Final income = Gross Income - Taxation + Social Wage-Indirect taxes.
○ In Australia there are three main industries:
■ Primary Industry
● Businesses selling raw materials. Eg: Farming and coal mining
● In 1990 7.0% were employed, this reduced to 4.5% now due to
reduced overtime caused by the development of technology.
■ Secondary Industry
● Businesses that manufacture final products using the raw
materials.
● In 1990 15.4% were employed, this fell drastically to 7.4% which
was reduced due to capital and automation.
■ Tertiary industry
● Businesses that distribute or sell quinary and quaternary G
● 88.4% of the workforce employed in Australia.
○ Higher Income → Greater ability to buy → Improved living standards.
● Quality of life through the business cycle

○ Expansion/Upswing
■
○ Peak/Boom
■
○ Contraction/Downswing
■
○ Recession/Trough
■
 ● The circular flow of income
○ Individuals, businesses, financial institutions, governments, international trade and
financial flows
■ Closed economy is one in which there is no overseas sector
■ Open economy is characterised by the inclusion of an overseas sector &
international trade & money flows.

■ Equilibrium is achieved when S+T+M = I+G+X

■ The economy contracts when leakages exceed injections and
S+T+M>I+G+X
■ The economy is expands when injections exceed leakages and
S+T+M<I+G+X

Economies: Their similarities and differences

● Examine similarities and differences between Australia and at least one economy in Asia
in relation to:
○ Economic growth and the quality of life
 ■ By world standards Australia is a middle-sized, open economy with a
relatively small population (25.61 million as of 23rd February 2020), with
GDP just outside the world’s top 10 economies – within the Asian region
Australia is more significant, being the 5th largest economy.
■ Australia’s growth performance is very different to that of Asia as
Australia achieved industrialisation and high living standards before
WW2. Average annual economic growth was 3.3% over the past 3
decades – slower than most Asian economies but faster than most other
advanced economies
■ Individuals in advanced economies have living standards that are, on
average, eight or nine times higher than the average citizen in other
Emerging & Developing Asia countries, where GDP per capita is US$5,636
a year.
■ Australia was ranked 8th in the HDI.
■ Australia also has favourable social conditions, a temperate climate and
relaxed lifestyle, a high degree of cultural diversity and more political
and religious freedoms than most Asian countries.
■ Statistics:

○ Employment and unemployment

■ Employment patterns in Australia similar to most advanced economies –
majority employed in services industries (retail trade, real estate, business
services), fewer in manufacturing and construction and a small
percentage of <5% in agriculture. Most Asian countries have a huge
agriculture industry.
■ Stats:
○ Distribution of income
■ In general, industrialised economies in Asia like Korea, New Zealand and
Australia have a relatively equal distribution of income (with a role for
government).
■ Fiercely pro-market economies – Singapore, Hong Kong – have a small
role for the government in redistributing income and therefore a very
unequal distribution of income.
■ Countries such as China and Sri Lanka also have relatively unequal
societies explained in part due to the large divisions between poorer
rural areas and wealthier urban areas
■ Stats:

○ Environmental sustainability
■ Australia has a very poor record of preserving biodiversity despite being
one of only 17 ‘megadiverse’ nations in the world – over the past 200
years, 50 birds and mammals have become extinct (1/3 of the global
total) and a further 1700 plant and animal species are listed as being at
risk of extinction.
■ Australia does not make good use of its water resources.
■ Australia has a high dependency on fossil fuels for its energy use –
approximately 96% of energy comes from non-renewable fossil fuels
which creates air pollution.
■ Some Asian economies are more vulnerable to these threats because they
have extensive low-lying coastal areas and regularity of extreme
weather events (e.g. the Philippines).
■ Australia is implementing domestic policies to reduce greenhouse gas
emissions, with the ultimate goal of reducing carbon emissions to 26-28%
on 2005 levels by 2030. o At almost 5.34 tonnes of carbon dioxide per
person Australia’s emissions are amongst the highest in the world – over
50% more than Japan and Korea and over 500% more than the average in
the world.
■ In general Australia has less water and air pollution, more national parks
and more efficient industrial processes compared to Asian economies. o
■ The process of industrialisation in China has created enormous
environmental damage – severe levels of air pollution, poisoned rivers,
widespread health problems due to exposure to toxic chemicals and
pollution.
■ All economies in Asia also face unique environmental problems –
● Indonesia is a significant contributor to climate change due to
destruction of forests
● China’s emissions of carbon dioxide will have a major impact on
world climate in coming decades
● India has some of the most polluted cities in the world.
■ Stats:
○ The role of government in health care, education and social welfare
■ The 2019 Index of Economic Freedom rated Australia as the 5th ‘free–est’
economy in the world behind Hong Kong, Singapore, New Zealand and
Switzerland. The 2022 Index rated Australia as the 12th ‘free-est’
economy, with Singapore, Switzerland, Ireland, New Zealand and
Luxembourg making up the top 5.
■ Australia has a well-established system of universal health care –
Medicare
■ This is in stark contrast to most developing economies in Asia, public
health systems are relatively underdeveloped, they struggle with the
diseases of poverty caused by poor water and sanitation as well as
emerging ‘lifestyle’ diseases such as obesity, diabetes and cardiovascular
diseases.
■ Universal free education in Australia at a primary and secondary level.
● One-third of students attend private (Independent or
religious-based) school.
● Government provides most educational services in Australia. A
majority of universities are public, but students now pay a
substantial share of the cost of their education.
● If they cannot afford the cost upfront, they take out a HECS-HELP
loan (indexed to rate of inflation) which is repaid once a person
begins earning above a threshold.
■ Asian economies have compulsory primary schooling with most schools
run and funded by the government. Schooling is usually voluntary in
high school years. High level of education is culturally significant in
many Asian countries – Singapore, Korea, Japan.
■ Australia’s social welfare system provides a level of assistance much
greater and more extensive than most Asian economies.