Lecture 1: Introduction: Australia a market

economic system 1
 Lecture Outline
 What is Economics about?
 People’s unlimited needs and wants
 Limited supply of resources available for use
in production
 Choices and concept of opportunity cost
 Four possible types of economics systems
 Distinctive features of Australia’s economic
system
 Recommended textbook
 Richard Morris., ‘Economics Down Under’,
VCE Economics, Units 1 and 2, 9th Edition,
Jacaranda.
 Reading for lecture 1: Chapter 1
 What is Economics about?
 Economics is the study of how to use our
limited resources wisely and in ways that help
to make individuals and society better off
materially, so that living standards increase.
 The two branches of economics - economic
issues can be examined at two different levels
 Microeconomics
 Macroeconomics
 What is Economics about?
1) Microeconomics
Microeconomics often looks at the factors that influence
the small bits, units or various parts making up the overall
Australian economy.
For instance, it concerns the things that affect the
operations, production costs, prices received by and
profitability of a particular firm (e.g. National Australia
Bank, BHP-Billiton, Woolworths), industry (e.g. the
childcare, fashion, car, egg and woodchip industries), a
market (e.g. oil, barley, uranium, property, labour, wool)
or a sector in the economy (e.g. financial, export and
government sectors).
 What is Economics about?
2) Macroeconomics
Macroeconomics, takes a look at the whole economy and the
larger flows affecting overall economic conditions in the
country: boom times, when the economy is growing too fast,
or recessionary periods, when there is a downturn in the
economy.
Macroeconomics, looks at the bigger picture, particularly
whether the economy is experiencing inflation (where average
prices are rising), or unemployment (where those willing to
work cannot find it).
It is concerned about levels of national spending, national
production (i.e. measured by gross domestic product or GDP)
and national incomes, as well as the country’s overall
unemployment and inflation rates.
 What is Economics about?
 Individuals and countries constantly face a range of
problems, many of them economic in nature. These
include:
 whether to continue with schooling or go out and look for
work
 whether to save or spend pocket money
 whether businesses should produce iPhones, hamburgers,
jeans, uranium or wool
 whether to build new childcare centres, parks or roads
 whether to provide more foreign aid to poor countries or
increase national defence
 whether to allow mining in national parks or on sacred
Aboriginal sites, or preserve them as they are.
 What is Economics about?
 We can’t do all of these things, as individuals
and as a country, and so we must make a
choice, why?
 Because our resources are limited , e.g. our time
and money, relative to the things we want to do.
So we must make a choice of where to put our
limited resources to satisfy some of our needs or
wants. How we make this choice is the story of
economics.
 Lets look more closely at this problem.
 People’s unlimited needs and wants
 All of us have both needs and wants.
 In order to live, we need a certain quantity of
essential food, shelter, healthcare and clothing.
 In addition, all of us want, or would like to
have, many other less essential things to make
life more pleasant.
 Overall, we say that our wants are virtually
unlimited.
 People’s unlimited needs and wants
 People’s wants appear to be unlimited because:
 as one want is satisfied, another appears (e.g. food every
few hours)
 the more material things people have, the more they
want and expect, owing to the impact of advertising,
fashions and the spread of materialism
 the world’s population is growing
 planned obsolescence by manufacturers ensures that
things date, wear out quickly and cannot be repaired
 some people try to keep up materially with their friends
by owning the latest things.
 Limited supply of resources available
for use in production
 Resources are the ‘inputs’ used in the production or
supply of goods or services.
 Without resources (also called factors of production),
no goods and services can be produced.
 There are two things that limit or determine a nation’s
potential level of output, or the economy’s productive
capacity:
1. the volume or quantity of resources available for use
2. how efficiently the available resources are being employed
 Limited supply of resources available
for use in production
 There are three main types of resource or
productive inputs supplied or made available in
the economy
 Natural resources,
 Labour resources (including entrepreneurship)
 Resources that involve capital equipment
 Limited supply of resources available
for use in production
Natural resources
Natural resources are the gifts of nature (e.g. land for
agriculture, minerals, forests, oceans, climate, rivers, and clean
air and environment).
Labour resources
Labour resources are the various intellectual talents, as well
as the physical power, provided by the labour force (e.g. a
doctor, mechanic, retail attendant, banker).
Capital resources
Capital equipment or capital resources involve manufactured
producer goods. This includes physical plant and machinery
(that may incorporate new technology) that is used by firms to
help make other finished goods and services.
 Problem of relative scarcity
 Scarcity is the basic economic problem or assumption
in Economics.
 It arises because the volume (i.e. quantity) and/or
efficiency (i.e. quality) of resources available is finite or
limited, relative to people’s needs and wants — which
are virtually unlimited.
 In other words, people demand more goods and
services than firms or businesses can supply or
produce from the limited resources available for use.
 Unfortunately, most material things we want have a
price because they are scarce, relative to our unlimited
wants.
Problem of relative scarcity
 Choices and concept of opportunity
cost
 Given the basic economic problem of relative scarcity, there are
limits on the quantity of goods and services that a country can
produce.
 As a result, we are forced to make choices between the
production of one particular type of good or service and the
production of another.
 For instance, countries using or allocating resources to the
production of defence cannot devote those same resources to
childcare, education, health or public transport.
 At the personal level, if you choose to devote your time and
money to go surfing or to buy an ice-cream, you cannot then
use those same resources to have a holiday or go to the
cinema.
 Clearly, choices must be made based on your priorities.
 Choices and concept of opportunity
cost
 Unfortunately, making these choices usually
involves sacrificing one thing to have something
else. That is, there is an opportunity cost.
 Thus, opportunity cost arises whenever choices are
made between alternative types of production.
 Opportunity cost relates to the value of production
foregone (i.e. given up) when resources are used
for one purpose rather than another.
The economic problem

18
 Four possible types of economic
systems
 Because resources are scarce there is a need to use
them wisely if people are to enjoy good living standards.
 For this reason, all countries have an economy or
economic system.
 Economic systems are needed to help organise the
production and distribution of goods, services and
incomes.
 There are two main features that are used to describe
all economic systems:
1. The system of ownership
2. The system used for economic decision making.
 Four possible types of economic
systems
1) The system of ownership
All economies have a system of ownership for resources

and businesses (i.e. the means of production

There is a choice between the extremes of capitalism

and socialism.
On one extreme, a dominance of capitalism means that

most enterprises - farms, mines, banks, factories, retail

outlets and so on, are privately owned.
At the other extreme, there is socialism. Here, there is a

dominance of state-owned enterprise.

Four possible types of economic
systems
The system of ownership
 Four possible types of economic
systems
2) The system used for economic decision making.
There are three big questions to be answered.

1. What and how much to produce? - This question relates to

deciding the type and quantity of each particular good (e.g.
chocolate bars, tourist accommodation, butter, guns) or service (e.g.
transportation, education, health, recreation) to be produced.
2. How to produce? - This question refers to the method of
production to be selected by firms and individuals for making each
particular good or service — for example, this could involve deciding
what combination of labour and physical capital (technology) should
be used in production.
3. For whom to produce? - This question refers to how the income
created from the production of goods and services, should be
shared. For instance, the nation’s ‘income cake’ could be divided up
between individuals evenly, or distributed unevenly.
 Four possible types of economic
systems
The system used for economic decision making.
 The pure capitalist system
 This system is now extinct. Perhaps an example is England in
the late 19th and early 20th centuries.
 This is an economic system in which all or most of the means
of production and distribution, such as land, factories,
communications, and transportation systems, are privately
owned and operated in a relatively competitive environment
through the investment of capital to produce profits.
 Decisions are largely based on changing market price signals
which indicates to the owners of resources what things
consumers want or do not want to see produced. The price
system also largely decides people’s income levels.
 Private enterprise and the market system dominates the
economy. There is a minimal role for the government in the
regulation of the economy and it only provides some basic
services such as law and order, schools and defence.
 The market capitalist system
 This system is used today in most countries including
Australia, the United States, France, Germany, Malaysia,
Japan, the United Kingdom and South Africa.
 Generally, in the market system changing price signals
indicates to the owners of resources what things consumers
want or do not want to see produced.
 In addition, most production (e.g. agriculture, manufacturing
and services including banking, retail, health and
communications) occurs in the private sector.
 The government plays an important role in the economy. It
produces a number of goods and services such as schools,
hospitals, law courts, electricity, roads and ports. It also
regulates the market system by a number of means including,
encouraging competition, discouraging the production of
certain goods, such as guns and tobacco, and encouraging
the production of other goods such as solar panels.
 However, many countries are privatising their government
owned firms.
 The planned socialist system
 This system has fallen from popularity since the late 1980’s.
 Nowadays, Cuba and especially North Korea are, perhaps, the
two main remaining examples.
 Government economic planning (perhaps detailed five-year
plans) dictates national output targets for most key industries.
 These plans involve government orders about the type and
quantity of goods and services to be produced, the prices at
which they will be sold, and how much income people will be
paid.
 Furthermore, socialism implies state ownership of most
resources and businesses, including retail stores, banks,
manufacturing firms, hospitals, airlines, railways and farms,
again adding to the government’s control of the economy.
 The market socialist system
 Examples of this system would include China and
Vietnam.
 The resource allocation decisions of these countries
are primarily determined by the government
through central planning. However, increasingly
the markets or price system are playing an
important role in a number of sectors.
 Most businesses in the economy are owned by the
government. There is a growing number of private
enterprises and there has been extensive
privatisation of the government sector (i.e. sale of
government-owned firms to private sector).
 Four possible types of economic
systems - summary
PURE MARKET MARKET PLANNED
CAPITALISM CAPITALISM SOCIALISM SOCIALISM

OWNERSHIP Private Mainly Mostly by the Government/

OF ownership private government, collective/
RESOURCES ownership, some private public
some ownership
government
DECISION Mainly Mainly Mainly by the Mainly by the
MAKING through the through the government government/
markets, markets, and markets central
government government are gaining planning
has a limited has an in
role important importance.
role
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 Features of Australia’s economic system
 Australia has a market type of economic system, or
economy.
 This means that rising or falling prices in thousands of
markets, both in Australia and overseas, provide price
signals or instructions to the owners of resources. Based on
these signals, the owners can make economic decisions in
order to help them maximise their profits.
 The share or stock market is one of these markets used to
help make decisions. Share prices can suddenly plunge,
causing panic selling from investors wanting to get out of the
market before share prices fall too much. Changing share
prices will affect the investment decisions made by owners
of financial resources.
 Features of Australia’s economic system

 In Australia there is a dominance of decision

making by the market system rather than by
government planning or regulation, and capitalism
or private enterprise is more common than state or
socialist ownership.
 It is clear that our choice of economic system
reflects the two sets of common values or beliefs
found in Australian society.
 Beliefs and goals
1. An overriding belief in individual rights
By far the most important beliefs concern the rights of the
individual.
 Free enterprise (i.e. individuals have a choice of what is produced
and how resources are used)
 Private enterprise (i.e. most property and assets are owned by
individuals rather than by the state)
 Self-interest (i.e. people are mainly motivated by personal greed,
gain and profit maximisation)
 Competition and efficiency (i.e. sellers and buyers are each
encouraged to outdo their rivals)
 Consumer sovereignty (i.e. generally, individual buyers rather than
government planners are considered to be in the best position to
make decisions about how resources should be allocated and which
things are to be consumed).
 Supplementary collective beliefs or
economic goals

 Important as they may be, individual beliefs are

not the only values shaping Australia’s economic
system.
 Because the market capitalist system is not perfect,
it is also important for the government to set some
broad guidelines or collective economic goals for
the nation to pursue, so that living standards can
ultimately improve.
 Supplementary collective beliefs or
economic goals
 Strong and sustainable rate of economic growth (i.e. an
average annual rise in Australia’s volume of goods and
services produced measured by real GDP, averaging
around 3–4 per cent a year).
 Full employment (i.e. a low unemployment rate of
around 5 per cent of the labour force or a little more).
 Price stability (i.e. a low average inflation rate or rise in
general prices of around 2–3 per cent a year over the
economic cycle)
 External stability (i.e. ‘paying our way’ as a nation in
international financial transactions indicated by having
a low balance of payments current account deficit,
perhaps around 3–4 per cent as a percentage of GDP).
 Supplementary collective beliefs or
economic goals
 Equitable distribution of income and wealth (i.e. the
avoidance of poverty, and a desire to ensure that
everyone has access to essential goods and services
such as basic food, shelter and clothing, so that living
standards are reasonable).
 General improvement in living standards (i.e. a rise in
people’s economic and non-material wellbeing).
 Features of Australia’s economic system –
ownership
 Australia relies mostly on private enterprise or ownership of
the means of production (i.e. capitalism), but state or
government enterprise (i.e. socialism) also exists to a lesser
extent.
 In Australia, about 80 per cent of resources, assets and
businesses (e.g. firms including banks, farms, mines, factories
and suppliers of services) are owned by private individuals.
 Sole traders, partnerships, private companies, public companies and
franchises help to make up the private sector of our economy, which
accounts for most production.
 While the private sector is often motivated by a desire to maximise
profits, there are also other considerations affecting their decisions
such as gaining market share, developing employees, social
responsibility, and gaining personal satisfaction and independence.
 Features of Australia’s economic system -
ownership
 Government enterprise Governments own the remaining 20 per
cent of assets (e.g. land, buildings and other community services
including some railways, roads, schools, hospitals and housing).
 This public sector produces goods and services through government
business enterprises and through government departments.
 Unlike private enterprise, not all the goods and services produced by
governments are aimed at making a profit. For instance, governments pay
out welfare benefits, and some basic goods and services are provided free
of charge to the community.
 However, in recent times, there has been a shift towards the user pays
principle for some services (e.g. tolls on some freeways) to lower the cost
to governments of running these activities.
 There has also been a shift towards the privatisation of some government
business enterprises (i.e. selling them to private owners, often through a
‘share float’ as was the case with, say, Telstra, the Commonwealth Bank
and Qantas).
 Features of Australia’s economic system –
decision-making
 Who is in the best position to make the decisions or
choices involving:
 what and how much to produce? (i.e. the type and quantity of each
product)
 how to produce? (the production methods to be used by firms) or
 whom to produce? (the way goods, services and incomes are shared
around).
 Our system of decision making relies mostly on the
market or price system.
 Many believe that this approach maximises efficiency in
resource allocation and also provides a significant level
of consumer sovereignty or control.
 However, governments also influence decision making,
along with businesses, trade unions and other pressure
groups.
 Key points

 What is Economics about?

 People’s unlimited needs and wants
 Limited supply of resources available for use in
production
 Choices and concept of opportunity cost
 Four possible types of economics systems
 Distinctive features of Australia’s economic
system