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Understanding the Economy Fundamentals

Learn how an economy functions and the factors of production. Explore the circular flow of income, role of government, taxation effects, factors of production, and economic systems. Connect with relevant resources for deeper insights.

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Understanding the Economy Fundamentals

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  1. Learning Intentions At the end of this unit I will: • Be able to explain how an economy works • Know about factors of production

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  3. BEFORE WE BEGIN #04AFEF Do this exercise individually or in pairs. Tick whether you agree or disagree with the statements. Revisit it after the unit to see if you have changed your mind about any of them.

  4. Websites Wonderful Worthwhile Websites www.businesseducation.ie www.economicsonline.co.uk www.tutor2u.net/economics 5

  5. Circular Flow of Income The circular flow of income shows how money flows through our economy. We are assuming two groups: An economy is a system of organisations involved in the production and distribution of goods and services. • Households • Firms (businesses) 6

  6. Flow of Income 1 Labour Households Firms Income 7

  7. Flow of Income 2 Buy goods/services Households Firms Provide goods/services 8

  8. Flow of Income 3 Buy goods/services Savings Households Firms Banks Lend/loans/capital Interest 9

  9. Flow of Income 4 Labour Households Firms Land Rent 10

  10. Flow of Income 4 Economic resources are the human and non-human resources used in producing goods or providing services. They are also known as the factors of production. Remember, natural resources won’t last for ever and many can’t be replaced. Oil is non-renewable, whereas you can plant crops, so they are renewable. 11

  11. Government The government can add to the flow of income by spending on infrastructure. For example: Taxation takes money out of the economy. • Wages to state employees • Social welfare payments The government can reducethe flow of income by taxation. 12

  12. Taxation • Income tax • Reduces the income of households • Reduces the amount a household can spend on goods and services • VAT • Increases the price of goods and services • Reduces the purchasing power of households • Corporation tax • Reduces firms’ profits • Reduces the factors of production firms can buy • Firms will pay less wages 13

  13. The Factors of Production • Our country must produce goods and services to grow economically • The more goods and services produced, the more jobs are created • Make the best use of our economic resources or factors of production • Four factors of production: • Land • Labour • Capital • Enterprise 14

  14. Example Factors of production for baking bread.

  15. Factors of Production in Different Countries • Ireland • Fertile agricultural land • Highly educated, English-speaking labour force Remember, whoever provides the factor of production usually receives an income. • Saudi Arabia • Lots of oil 16

  16. Summary The circular flow of income connects different sectors of the economy. Incomes are generated Businesses produce goods and services Households have income to spend Goods or services purchased 17

  17. Leakages from the Circular Flow Not all income will flow directly from households to businesses. • Savings • Households may decide to save money • Government • Raises taxation, e.g. income tax and national insurance • Imports • Buying foreign goods and services 18

  18. Time to think If you were to set up a business producing smartphones, you would find it challenging to compete with giant organisations like Apple in terms of unit cost (the cost of producing one item). Why would it be challenging?

  19. Injections into the Circular Flow These are additions to investment, government spending or exports, which boost the circular flow of income, leading to greater output. • Businesses • Capital expenditure, for example on new technology • Government • Expenditure, for example on health • Exports • Foreign countries buying Irish goods and services 20

  20. Economies of Scale Unit Cost Production 21

  21. Economies of Scale Large for-profit organisations can: • Afford the capital expenditure for mass production • Invest in large trucks – reduce transport costs Diseconomies of scale is when the unit cost increases as the organisation expands. • Divide labour and have specialised workers • Buy in bulk, attract discounts, so they can sell cheaper • Get loans from financial institutions as a lower risk • Spend more on marketing 22

  22. Economic Systems An economic system is the way a government organises a country’s economy. It is used to control the factors of production: land, labour, capital and enterprise. Economic systems are divided into three types: • Free Economy – citizens are free to make all the economic decisions. The USA is an example. • Centrally Planned Economy – the government or state makes all economic decisions. North Korea is an example. • Mixed Economy – a combination of privately owned and state-owned enterprises. Ireland is an example. 23

  23. The Irish Economy The Irish economy is moving towards free enterprise, with: • Privatisation - selling off of state enterprises • Entrepreneurship - encouraged More services are being provided by the private sector. Despite this, there are always not-for-profit organisations to help the less well-off and underprivileged. 24

  24. Semi-State/State-Sponsored Bodies • Ireland is a mixed economy • The Irish government runs business, sometimes known as semi-state or state- sponsored bodies • These businesses are set up and funded by the government • The government employs managers to run the businesses 25

  25. WORKING WITH OTHERS #04AFEF Working together, either as pairs or squares (two pairs), look at the logos on page 418. Name each organisation and say what it does. Name as many more state-sponsored bodies as you can. Page 418

  26. Time to think Why State-Owned? • Some necessary businesses need a lot of funding to get started • Some businesses develop our natural resources • Some businesses supply essential services • Some businesses promote our country in terms of trade and entrepreneurship • Some businesses promote Irish tourism Can you think of other semi-state businesses that charge for their services? 27

  27. CHECKING IN • Can you identify four factors of production for DESIGN K, a modern wooden kitchen designer and manufacturer? Copy and complete the table on page 419. • Copy the grid on page 419 and match each function (1–5) with the correct semi-state body (A–E). • Copy the table on page 420 and insert a tick to indicate whether each statement is true or false. • What do the following acronyms stand for? CIÉ RTÉ DART EPA VHI • Write a short, informative note on a semi-state body of your choice for a local newspaper.

  28. Privatisation Privatisation is the transfer of ownership and control of government or state assets, firms and organisations to private investors. • The enterprise may be sold to another company • The government may issue shares and list the enterprise on the stock exchange • A business on the stock exchange will have PLC (or plc) after it’s name • PLC stands for public limited company • An example of an Irish PLC is Aer Lingus plc 29

  29. Reasons to Sell • The semi-state body may be losing money • The business may have potential for growth but needs additional investment (finance) • The government needs finance Examples of semi-state bodies that were privatised are Eircom and Aer Lingus. • The government may have no interest in a particular service and therefore it makes sense to sell. 30

  30. Time to think Who benefits from the privatisation of semi-state bodies? The government receives money for the sale. Who else might benefit?

  31. 3.2 CIRCULAR FLOW OF INCOME • Which of the following forms of taxation increases the price of goods and services? Quick Quiz Corporation tax Income tax VAT

  32. 3.2 CIRCULAR FLOW OF INCOME • Which of the following forms of taxation increases the price of goods and services? Quick Quiz Corporation tax Income tax VAT

  33. 3.2 CIRCULAR FLOW OF INCOME • Which of the following forms of taxation increases the price of goods and services? Quick Quiz Corporation tax Income tax VAT

  34. 3.2 CIRCULAR FLOW OF INCOME • Which of the following forms of taxation increases the price of goods and services? Quick Quiz Corporation tax Income tax VAT

  35. 3.2 CIRCULAR FLOW OF INCOME • Corporation tax is tax paid on a company’s profits. It reduces profits and the factors of production it can buy. Quick Quiz: Review • Income tax is tax paid on income. It decreases the total income of a household. • VAT is a tax on spending. It increases the price of goods and services and reduces purchasing power of households.

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  37. Free economy • Capital • Centrally planned economy • Income tax • Circular flow of income • Injections • Corporation tax • Labour • Economic systems • Land • Leakages • Economics of scale • Mixed economy • Economy • Privitisation • Entrepreneur • Factors of production • VAT

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