ECONOMICS BOOKLET 1: TERM 1 YR 11

Basic economic problem:

1. Our wants our unlimited
2. There is a scarcity of resources
The Production Possibility frontier:
Represents the opportunity cost between two products being produced
Structure of PPF:
1. Maximum utilisation: the full satisfaction and utilisation of
employment and resources which is represented on the diagonal
line
2. Under utilisation: anything below the diagonal line represents the
under utilisation of employment and resources
3. Opportunity cost: Trade off/ alternative foregone e.g whilst we are at
school we are forgoing the opportunity to procure a full-time job
4. What causes the PPF to shift to the right:
Immigration- increases employment
New and improved technology/ more technology- increases the
possibility of more products being produced

4 Basic economic problems:

1.
2.
3.
4.

What to produce?
How much to produce?
How to produce?
How to distribute product?

Agrigate demand formula:

C + I + G + (X M)
CIRCULAR FLOW OF INCOME CHART:

What happens to the demand for apples if a cyclone wipes out the banana
crop?

The demand for bananas would decrease as the price would go

higher and consumption would decrease

The demand for substitutes e.g apples would increase as the price
would be less and consumers would seek substitutes, would be
higher in demand and consumption levels would increase

4 BASIC RESOURCES:
1. Land:
Forestries
Fisheries
Abattoir
Agriculture
Mining
Return from land: investment property generates income when is rented
2. Labour: is the contribution for an individuals mental and physical
effort
Return from labour= wages and salaries
3. Capital:
Money
Financial flows
Machinery
Return from capital= is the produced means of production, returns from

Ownership of capital
Interest from account or bonds
People who own shares= dividends

4. Enterprise
Profits n return for:

Innovation
Risk
Managerial expertise

MARKET STRUCTURES:
1.

MONOPOLY: e.g mining

One seller
Extremely hard to enter
Extremely expensive to enter
Inelastic product
Goods/ service is expensive

2. OLIGOPOLY: e.g energy suppliers, steel producers and car

manufactureres
Only a few sellers
Inelastic product
Relatively expensive product
Collusion
Homogenous product
3. MONOPOLISTIC: e.g toothpaste and cereal
Very competitive- aggressive marketing via product
differentiation
Homogenous product
Easier entry
Millions of buyers
4. PERFECT COMPETITION: e.g lawn mowing
Very competitive
Is at a cost price; any price above or below people wont buy
must stay at a particular price
Easier entry into market
Easier to fail
Homogenous product/ service
Market structure graphs:

Consumer sovereignty: consumers buying habits dictate to producers

what is to be produced and how much is to be produced
1. Marketing:
Advertising and direct marketing- a powerful influence over
consumers spending patterns
Attempts to manipulate behaviour of consumer via product
differentiation
2. Misleading and deceptive conduct: diminishes consumer sovereignty
Consumers can be deceived by false or dishonest claims
about a product leading them to buy a product that they DID
NOT really want to buy e.g
Weight loss programs and baldness treatment
3. Planned obsolence:
Firms sometimes produces products that wear out quickly or
go out of date to encourage consumers to make further
purchases in the future
E.g cars- keeping up with latest fashions
4. Monopoly behaviour:
Firms that have monopoly power over good or service can restrict
production costs through raising the price of product
Diminishes consumer sovereignty
E.g Sydney water- water restrictions

DECISIONS TO SPEND OR SAVE:

Y= Disposable Income
C= Consumption
S= Savings
MPC= Marginal propensity to consume- the proportion of a consumers
income that is spent
MPC= Marginal propensity to save- the proportion of a consumers income
that is saved
MPC + MPS = 1

DECISIONS WHETHER TO SPEND OR SAVE:

1. Cultural factors: regarded as cultural
Chinese save 40% of their income
Australians save 5% of their income
2. Personality factors- some people are cautious and prefer to save for
a rainy day while others enjoy the immediate benefits
e.g to save for the future- for today you have low living
standards for the future you have high living standards
to spend for today- you have a high living standard for today
but for the future you have low living standard
3. Expectations of the future: people who expect their income to
increase in the future are less likely to worry about savings today
4. Any specific future spending plans- individuals might save more if
planning a major expense in future e.g holiday
5. Tax policies- can alter an individuals consumption and savings e.g
decrease superannuation- save more
6. Availability of credit- spending is likely to be higher if credit available

Individual less likely to save if they can access credit

1. INCOME:
As income rises: people save a higher proportion
MPS increases while MPC decreases
The consumption function diagram: shows the relationship between
income and consumption, as income rises- so does level of consumption

2. AGE- plays a role in savings and consumptions

An individuals MPC and MPS change throughout their life
E.g if in 30s or 40s will earn higher income than when they
were teenagers
LIFE CYCLE THEORY OF CONSUMPTION- shows the interaction
between an individuals consumption and saving patterns

Equilibirum: the point where supply and demand interact

Factors which cause an increase in demand:

1. Prices of other goods and services a rise in the price of substitute
goods will cause more consumers to demand your product but there
will be a decrease in demand for substitutes
e.g if the price of thongs and sandals increased there would be an
increase in demand for shoes (if the price stayed the same)
2. A fall in the price of a complementary good will increase demande.g if the price of petrol fell there would be an increase in demand
for cars
3. Expected future prices- if consumers expect that the price of a pair
of new shoes will increase because of govt tax they will forward
their purchases- leading to an increase in demand
4. Consumer tastes and preferences- if a particular type of shoe
becomes more fashionable this will increase demand more people
will want to buy it
5. Consumer income:

Rise in income- consumers can buy more than before

Change in income distribution- poorer people earn more
money can increase MPC
Improved consumer expectations- future employment
prospects

6. The size age distribution of population:

An increase in size age distribution will increase demand
Change in age distribution will lead to an increase in demand
for certain types of shoes e.g babies

Factors which cause a decrease in demand:

1. A fall in the price of substitute goods
2. A rise in the price of complementary goods
3. Expected future prices- expected decline in price of product
4. Consumer taste and preferences:
Product becoming less fashionable
Technological process- good superseded by another
5. Consumer incomes:
A fall in income- lower MPC
A change in income distribution
Deteriorating consumer expectations about future economic
prospects
6. The size and age of the distribution- decrease in overall size of the
population and a change in age distribution e.g decrease in birth
rate declines demand for baby shoes

Supply:
A fall in the price of other goods such as sandals, makes production more
profitable , because there is more competition so there is a decrease in
price and higher quantity demanded
Factors that cause an increase in supply:
1. A fall in the price of other goods- as it is competitive you too would
lower your prices- will be more profitable and there will be an
increase in demand
2. An improvement in technology
3. A fall in the costs of production
4. An increase in quantity of resources available
5. Climatic conditions or seasonal changes more favourable to you

Factors that cause a decrease in supply:

1. A rise in the price of other goods- because there is more competition
so you will raise your prices- there will be a decrease in demand
2. A certain technology no longer available
3. A rise in the production costs
4. A decrease in resources available- making them more expensive
5. Regulations restricting the sale of a good e.g carbon, mining tax
6. Natural disasters/ war Climatic conditions- such as a seasonal
change, drought, less favourable to the production of a good
e.g banana disaster: because there is a scarcity of resources cost
push inflation there is less demand so supply decreases & demand
consumption decreases

ELASTICITIES OF SUPPLY & DEMAND: elasticity demand formula

INELASTIC:

1.
2.
3.
4.

A greater change in proportionate changes will lead to a less than

change in proportionate quantity demanded/ supplied

An increase in price for an inelastic good will lead to an increase

in sales revenue

Examples:
Cigarettes
Electricity
Alcohol
Drugs

Example lag time period for electricity:

Short run- price will be more inelastic- sales revenue will have
increased
In long run- product will become less inelastic as consumers
would decrease consumption and cut down on usage and seek an
alternative e.g solar energy

ELASTIC:

A small proportionate change in price will lead to a greater change

in proportionate, decrease in quantity demanded/ supplied

An increase in price for an elastic good will lead to a decrease in

sales revenue

There are a lot of substitute goods: e.g

Complements

Lag time periods

FACTORS AFFECTING PRICE ELASTICITY OF DEMAND:

1.
2.
3.
4.
5.

Whether the good is a luxury or necessity

Whether the good has any substitutes
If the price has lower costs- has higher inelasticity/ lower elasticity
The length of time subsequent to a price change
Whether it is addictive or not

Total outlay= price x quantity

CHINA STUDY CASE:
China is:
1. A transitional economy
2. Went from purely socialistic/ communistic to mixed market economy
3. Is a developing country on a per capita basis
Chinas characteristics:

1. 1978 China became mixed market economy under Deng Xiao Pings
radical reforms, became integrated with the world
2. Pump priming economy- Agrigate demand:
Increase consumption + increase investment + increase exports
3. Special economic zones: give tax concessions and subsidises to
factories to decrease production costs and increase revenueincrease economic activity and increase capacity to compete on a
global level- GDP becomes wealthier
4. Since joining WTO in 2001, trade increased by 300%
5. Foreign direct investment within market- increase investment within
factories- increase GDP
6. Is a part of the APEC- known was the fastest growing economies of
the world that seem intent on increasing their economic growth and
development
7. China wants to increase trade flow- imports and exports
8. When china was communistic everything was owned by State
owned enterprise
9. Comparative advantage- China invests in production where
opportunity cost is lower makes machinery exports to Australia and
imports Australias services
10.
China= massive saving capacity they save 40% of their
income

11.
Has a fixed exchange rate- artificially pegged Chinas Yuan to
Americas dollar
12.

China is prioritising industrialisation

Australias economy:

Is a mixed market economy- most economic decisions are made

by private market forces, government intervention glass floor/
ceilings, pump-priming market failure, stimulus package, dirties
the float
Advanced industrialised economy/ developed country

Characteristics of Australias economy:

1. Australians save only 5% of their income
2. High income and living standards
3. High trade orientation
4. Exporter of agricultural goods and raw materials
5. Industrialised with a manufacturing base
6. High levels of saving and investment
7. High quality of human development- widespread access to:

Education
Health
Social welfare services

LAW OFDEMAND:
1. At an increase in prices- will lead to a decrease in QD
2. A decrease in price- will lead to an increase in QD

LAW OF SUPPLY:
1. Producers at a higher price- greater quantity will be supplied for
demand
2. Producers at a lower price- lower quantity will be supplied for
demand

INTERNAL ECONOMIES OF SCALE- producing as many goods and

services at a minimum cost- increases efficiency and productivity
INTERNAL DISECONOMIES OF SCALE- cost of production will rise
because of the disadvantages of becoming too big, decreases
efficiency and productivity
EXTERNAL ECONOMIES OF SCALE- cost saving advantages that
accrue to a firm because of external influences
EXTERNAL DISECONOMIES OF SCALE: external influences that
lead to cost disadvantages with a firm because of the growth of
the industry within which the firm is operating within

PRICE MECHANISM- the flowing forces of supply and demand

which determines the prices at which commodities are bought
and sold
Market equilibrium- the situation where at a certain price level
quantity demanded and quantity supplied are equal an interact
Changes in EQUILIBIRUM= changes in supply and demand not
price changes
Government interventions:
Price ceilings- represent the maximum price that can be charged
for a particular commodity
Price floors- represent the minimum price that can be charged for
a particular economy
Price mechanism with a price ceiling:

Price Mechanism with a price floor:

Award Wage= unemployment

1. If the price is above the market equilibrium: this will = the
award wage
2. If the price is above market equilibrium- there will be less
demand= PRICE FLOOR
3. The quantity supply is greater than the quantity demanded
QS > QD= SURPLUS ,
1. If the price is below the market equilibrium this will = a
greater quantity demanded and less quantity supplied
2. If the price is below the market equilibrium there will be
more demand= PRICE CEILING
Units= QD > QS = shortage

Total outlay= price x quantity

At price $7, consumers demand 40 units
Total outlay= $7 x 40= $280
Price rises to $8, consumers demand 40 units
Total outlay= $8 x 40= $320
Therefore the product is inelastic

At higher prices demand= elastic

At lower price demand= inelastic

MARKET FAILURE: negative implications of the price mechanism

1. Business cycle- boom and slump= recession on downturns, govt

intervention pump-priming the economy still unemployment
2. Pollution- negative externality on local residents- incurs respiratory
diseases unable to work
3. Collusion ACCC
4. Decrease unemployment and aged pensions
5. Physical/ mental merit goods- perks