What is scarcity?
Refers to as an economic problem.
Unlimited wants, limited needs.
Impossible to satisfy every need.
Scarce resource and production
- Land - land can be defined as any resource that is provided by nature.
a) Renewable resources – basic inputs that nature can automatically replace. For example, lakes, animals, air.
b) Non-renewable resources – basic inputs that nature will not automatically replace. For example, coal, oil, copper, iron - Labour – labour is the mental and physical capacity of human workers to produce goods and services.
- Capital – capital items which are produced by humans to assist in the production of another good and service. For example, machinery and equipment.
- Entrepreneurship – individuals who start a business and combine three factors (land, labour and capital) to generate more goods and services to make profit.
Economics
Economics is the study of how society chooses to allocate its scarce resources to the production of goods and services to satisfy needs and wants.
a) What goods and services will be produces?
b) How will they be produced?
c) Who receives the goods and services once they are produced?
1. Microeconomics – this is the branch of economics that studies the decision-making and behaviour of an individual, a household, or a particular industry.
2. Macroeconomics – is the study of the performance of the economy as a whole.
Opportunity cost
Because of the nature of scarcity, every time a person makes a choice, a cost is incurred. Once one option is chosen, another option is given up or forgone.
Marginal analysis
Examines the effects of additions to or subtractions from a current situation to find the best outcome. It involves assessing the “extra benefit” compared to the “extra cost” of a decision.
“Marginal” simply means on-the-margin, which in economics usually just means ‘add one more unit and see what happens.’
Production possibilities frontier
A graph that demonstrates the various combinations of output that the economy can possibly produce given the available factors of production and technology.
1. The quantities and qualities of all resource inputs remain the same during the period of time.
2. All the factors of production are fully used and producing to its greatest possible capacity without any waste.
3. Fixed technology creates limits in the amounts and types of goods and services any economy can produce.
Economic growth is the ability of an economy to produce at greater levels of output.
Markets
A market is a group of buyers and sellers of a particular good or service.
- A market price is the price prevailing in a competition market.
- A competitive market is a market with many buyers and sellers and is not controlled by any one person/firm.
Law of demand
Demand represents the choice-making behaviour of consumers. The law of demand states that there is a negative relationship between the prices of a good or service and the quantity buyers are prepared to buy in a certain period of time.
Factors that influence demand
When price of a good or service changes, the quantity demanded changes. This in turn will cause movement along the demand curve.
There are also factors apart from price that can influence the demand of a good or service.
- These variables are called non-price determinants for example number of buyers, tastes and preferences.
A change in the quantity demanded occurs when a change in the market occurs which has the effect of altering the price. A change in demand curve occurs whenever there is a change to any one of the non-price determinants.
Non-price determinants
- Number of buyers: increase in buyers will shift the market demand curve for a good or service to the right. A decrease will shift demand curve to the left.
- Tastes and preferences: when a product is popular, the demand curve will shift to the right. Once it decreases in popularity the demand curve will shift back to the left.
- Income: can have a huge effect on demand.
a) Normal goods- is any good or service for which there is a direct relationship between changes in income and its demand. Increase in income causes buyers to purchase more at any possible price. The demand curve shifts to the right for normal goods.
b) Inferior goods- any good or service for which there is an inverse relationship between changes in income and its demand. A rise in income results in reduced purchases at any possible price. - Expectation of buyers: this determinant looks at the effect on demand in the present when consumers anticipate future changes in prices, income or any other relevant factors.
- Prices of related goods: a substitute is a good that competes with another good for a consumer purchase. Here is a direct relationship between a price change for one good and the demand for its competitor good. A complementary good is a good that is jointly consumed with another good.
Law of supply
The law of supply states that there is a direct positive relationship between the prices of a good and the quantity sellers are willing to offer for sale in a defined period of time.
Factors that influence supply
As with demand, there are other factors apart from price that can shift the supply curve’s position.
- A change in quantity supplied is a movement between points along a stationary supply curve whereas a change in supply is an increase or a decrease in the supply at each possible price point.
Non-price determinants
- Number of sellers: the popularity of law courses decreases, and the supply of lawyers decreases.
- Technology: new and more efficient technology means that it is possible to manufacture more products at any possible selling point.
- Input prices: Natural resources, labour, capital and entrepreneurship are all required to produce products, and the prices of these resources affect supply. Supply is also affected by the prices of other inputs such as raw material and semi-finished goods.
Gross domestic product
Gross domestic product is the most widely used measure of a country’s economic performance. Gross domestic product (GDP) is the market value of all goods and services produced within a country’s geographical borders during a particular period of time.
a) GDP counts only new domestic production.
b) GDP counts only final goods.
c) GDP only counts the final goods and services produced.
- Second hand transactions are not included in the GPD.
- Non-productive financial transactions are also not included in the GDP.
Circular flow model
The circular flow model is a diagram that demonstrates the flow of products from businesses to households and the flow of resources to businesses.
Calculation fo GDP
Production method - this method adds up the value of all goods and services produced by industries in the economy in a year.
Expenditure method - this method adds up the total expenditure on goods and services by households, businesses, governments.
Income method - this method adds up- the total income earned by employees and businesses.
Inflation
Inflation can be defined as the increase in the average price level of goods and services in the economy. Deflation is the decrease in the average price level of goods and services in the economy.
How is inflation measured?
Using consumer price index. CPI is an index that measures the changes in the average prices of goods and services.
Consequences of inflation
Inflation has a significant effect on the country’s consumers, income and subsequent purchasing power.
- Reduces real income
- Can affect the real interest rates for borrowers and savers
- Affects future investment decisions
Difference between REAL and NOMINAL
A REAL figure means that the measurement has been adjusted for inflation. Nominal simply means that the figure has not been adjusted for inflation.
Unemployment
One of the main aims of every economy is to achieve high employment rates. The unemployment rate is the percentage of people in the labour force who do not have a job and are actively seeking work. Employment is measured by the ABS.
Types of unemployment
- seasonal unemployment
- frictional unemployment
- structural unemployment
- cyclical unemployment
