ECONOMICS

MACROECONOMICS

MICROECONOMICS

MACROECONOMICS IS THE STUDY OF THE ECONOMY AS A WHOLE AND THE WAY IT FLUCTUATES AND EXPANDS OVER TIME. IT LOOKS AT THE BIG PICTURE OF WHAT IS HAPPENING IN THE NATIONAL AND INTERNATIONAL ECONOMY, RATHER THAN THE INDIVIDUAL BEHAVIOUR OF A CONSUMER OR FIRM.
6

MICROECONOMICS IS THE STUDY OF THE DECISIONS OF INDIVIDUAL HOUSEHOLDS AND FIRMS. IT INCLUDES THE STUDY OF INDIVIDUAL INDUSTRIES AND PRICES OF INDIVIDUAL GOODS AND SERVICES.

 Our wants for goods and services

exceed the productive capacity of the resources used to produce these goods and services.

 The resources that are used to produce

goods and services are:

Labour

Land
Capital Entrepreneurship - (Enterprise)

 Labour The physical and mental effort we devote to

producing goods and services.

Land The gifts of nature we use to produce goods

and services natural resources.

 Capital
The goods we use to produce other goods and services. Includes physical capital buildings, machinery, PCs, and other equipment and human capital the knowledge and skill that people obtain from education and on-the-job training

 Entrepreneurship

The resource that organises labour, land,

and capital to produce goods and services. The entrepreneur takes the risk to start up a business.

 Our wants are insatiable. Humans, by nature, would like to have more
of those things they find desirable.

 We have limited resources. We have unlimited wants.

This leads to scarcity

Scarcity exists when there are insufficient resources to satisfy peoples wants.

Economics is the study of the choices

people make to cope with scarcity.

 THERE

ARE SCARCE RESOURCES AND UNLIMITED WANTS. A RESULT OF THE SCARCITY OF RESOURCES, THERE ARE 4 BASIC QUESTIONS THAT HAVE TO BE ANSWERED. ARE:-

AS

THEY

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 1.

What goods and services are to be produced ?

Seeing

resources are scarce an economy has to make choices about what to produce and what not to produce. In economies, like Australia, this is basically determined by consumer demand, the profit motive with some government intervention.

2. How much will be produced?

Again

limited resources limit output. Over production means resources are wasted. The more resources used now the less there may be in the future, eg oil, coal. The Price Mechanism allocates resources, with some government intervention for essential services.

 3.

How are these goods and services to be produced?

This

decision is made by businesses, who generally consider the least cost combination of resources to produce the quantity of goods and services that they plan to sell. The government may set certain controls on resource use, eg pollution, land zoning, minimum award wages and conditions.

 4.

How are these goods and services to be distributed among the population? People can not have all that they want so output is rationed. The distribution mechanism in Australia is a persons income and wealth. The greater the income the more goods and services can be purchased. The government intervenes to care for those on low incomes or to provide basic services, eg. health, education, law and order.

 The

Production Possibilities Curve (frontier) sets out what can be produced with the available resources in the firm or the economy. Some important concepts and issues that can be derived from the PPC are:
SCARCITY AND CHOICE

1.

 The production possibility frontier for the

whole economy can be illustrated by looking at the production of two goods - Cola and DVDs. It is not possible to produce an unlimited quantity of either product as resources are limited.

DVDs
(millions

Cola
(millions of bottles per year)

Possibility

per year)

a b c d e f

0 1 2 3 4 5

and and and and and and

15 14 12 9 5 0

Cola (millions of bottles per year)

15

10

4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

10

4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

10

4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

b c

10

4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

b c

10

4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

b c

10

4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

b c

10

f
0 1 2 3 4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

b c

10

f
0 1 2 3 4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

b c

Unattainable
d

10 Attainable

f 0 1 2 3 4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

b c Unattainable d Attainable

10

5 z

4 5 DVDs (millions per year)

 In

this case the firm or economy can produce 15 million cans of cola or 5 million DVDs or a combination of each. The firm/country can not produce outside the production possibilities frontier due to limited resources. If the firm or country produces inside the frontier- Z, resources are not being used efficiently. This firm/country faces increasing opportunity costs. More cans of cola has to be given up each time to get an extra million DVDs.

The Production Possibilities Curve is usually concave in shape. This demonstrates that the country faces INCREASING OPPORTUNITY COSTS. If we start from point A an increasing amount of capital goods need to be sacrificed, for each extra consumer good produced. Increasing opportunity costs occur because not all resources are the same kind or quality. Some resources are more efficient at producing consumer goods, while others are better at producing capital goods.

Cola (millions of bottles per year)

15

b c

Increasing opportunity cost of DVDs...

10

f 0 1 2 3 4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

b c

Increasing opportunity cost of DVDs...

10

f 0 1 2 3 4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

b c

Increasing opportunity cost of DVDs...

10

f 0 1 2 3 4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

b c

Increasing opportunity cost of DVDs...

10

f 0 1 2 3 4 5 DVDs (millions per year)

Cola (millions of bottles per year)

15

b c

Increasing opportunity cost of DVDs...

10

f 0 1 2 3 4 5 DVDs (millions per year)

5 Marginal cost ( bottles of cola per tape) 4 3

means increasing marginal cost of DVDs.

2
1

4 5 DVDs (millions per year)

MC

5 Marginal cost ( bottles of cola per tape) 4 3

means increasing marginal cost of DVDs.

2
1

4 5 DVDs (millions per year)

3. INVESTMENT Vs CONSUMPTION
Economies

must make choices regarding the proportion of resources devoted to capital goods V consumer goods. Greater production of capital goods in the present will lead to higher growth and more output in the future. But who is willing to forgo consumption now???

Economic Growth in Australia and Singapore

Since 1965, Singapore has grown more
rapidly than Australia Singapore has devoted a bigger fraction of its
resources to accumulating capital.

Capital goods ( per person)

Economic Growth in Australia and Singapore

Australia in 1965 Singapore in 2008

b
Singapore in 1965

c Australia a
in 2008

Consumption goods (per person)

 The

allocation of scarce resources in an economy such as Australia is basically determined by the MARKET, with limited Government intervention.

A market is any arrangement that enables buyers and sellers to get information and to do business or trade with each other.

MARKETS

GOODS MARKETS

FACTOR MARKETS

FINANCIAL MARKETS

THE GOODS MARKET This is made up of the market for consumer goods and services.

Households,

firms, the government and the overseas sectors purchase goods and services.

 THE

FACTOR MARKET In the factor market households sell factors of production, eg. labour, land, capital to the firms sector. THE FINANCIAL MARKET The financial market mobilises savings from households and overseas and lends the money to firms, the government and overseas.