The Australian Economy

1. The Australian Economy Introduction to economics

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

3. 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 (non-essential goods and services) with limited resources.

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

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

6. INSATIABLE WANTS + LIMITED RESOURCES = THE NEED TO ECONOMISE

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

8. 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

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

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

11. 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.

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

13. 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.

14. 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"

15. 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.

16. SUPPLY LIMITED RESOURCES DEMAND INSAIABLE WANTS & NEEDS SUPPLY Satisfying Wants & Needs 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.

17. 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.

18. 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.

19. 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.

20. 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

21. 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

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

23. Careers Foundations Economics provides a foundation for careers in: • Accounting • Business • Government and politics • Finance and insurance • Information technology Law Management Marketing and tourism Public policy Teaching and education

24. 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

25. 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

26. 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

27. 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?

28. 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?

29. Production Possibility Frontiers 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 If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods Assume a country can produce two types of goods with its resources – capital goods and consumer goods Capital 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. Ym A Yo B Y1 Consumer Goods Xo X1 Xm

30. Production Possibility Frontiers 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. Production inside the PPF – e.g. point B means the country is not using all its resources Capital Goods C Y1 A .B Yo Xo X1 Consumer Goods

31. 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 willingness ability

32. 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

33. Controlling The Market Economy DEMAND DEMAND SUPPLY 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 – reflects the cost of the resources used in production and the returns/profits required – the amount producers are willing to offer for sale at various prices

34. 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

35. Price of substitutes Price of complementary products Income Expectations Price of the product itself Preferences Factors of Demand 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 ______ Factor affecting Demand

36. Changes in the DEMAND CURVE • Two (2) types of physical changes: 1. Movement along the curveis caused by ONLY a: • change in price of the product 2.Shift in the curve is caused by a change in any of the factorsother than the price of that particular product such as: • Level of disposable income • Preferences and tastes • Change in the Price of a Complementaryproduct • 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

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

38. 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. As price falls, demand rises. P then D As price rises, demand falls. When P then D Price ($) $10 The starting price of Lollipops was $10 $5 The price of Lollipop was then decreased to $5 Demand 100 150 At $5 the quantity demanded is increased to ??? Quantity (000s) At $10 the quantity demanded is 100 150

39. 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.

40. 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 Complementaryproduct • Change in the Price of a Substitute product • Consumer’s expectations • Size of the market

41. 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)

42. 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) S10 Action: Substitute Product ‘pizza’ went down significantly in price D1 Demand D2 Reaction: More people buy ‘pizza’ instead of hamburgers Resultant Shift: Less Demand for hamburgers which results in a shift to the left 10 100 200 Quantity Decrease demand from 100 -10

43. 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. Price of the product Price of other products Price of inputs Factors of Supply

44. Changes in the SUPPLY CURVE • Two (2) types of physical changes: 1.Movement alongthe 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

45. 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

46. 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. $3 800 200 Quantity (000s)

47. 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

48. 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!

49. SHIFT of The Supply Curve Price $ S1 Supply S2 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 (000s)

50. The Market S Price ($) 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. Surplus $5 $3 D1 D 300 600 Quantity Bought and Sold (000s) 450