The Nature of Economics

• The Economic Problem


  Scarcity. Since we have unlimited wants but limited resources, our wants are not able to be fulfilled.
• Choices with limited resources


  What to produce, how to produce, how much to produce and how to distribute what is produced
• Opportunity Cost


  The cost of the next best alternative which must be forgone to pursue another action OR the loss of other alternatives when one alternative is chosen
• Production Possibility Frontier


  A graphical representation showing all possible options of output for two goods that can be produced using all FoP
• Future Implications of Current Choices by Individuals


  Spending and saving patterns vary due to individual wants, age, income, future market expectations, lifestyle, etc.
• Spending in the short term


  1. Individuals will save less overtime if they spend in the short term

  2. Especially if on a lower income, may take longer to save for larger expenses or may go into debt
• Saving in the short term


  1. Individuals often have goals when they are saving in the short term

  2. Increases potential to spend in the medium-to-long-term
• Future Implications of Current Choices by Businesses


  • Businesses must decide to produce one good/service over others
  • They will specialise in a form of business activity to best use their resources
  • Public companies or businesses with shareholders must decide if they are going to distribute or invest their profits into capital goods or further expansion
  • Constant assessments of current choices in the short, medium and long term must be made to evaluate decisions and make adjustments to production or distribution methods
• Budget surplus


  When the government has more income compared to its expenses
• Budget deficit


  When a government spends more in a given year than it collects in revenue
• Future Implications of Current Choices by Governments


  1. Prioritise spending based on budget surplus or deficit

  2. Consider future market expectations if there are any issues in other economies

  3. Consider current collective wants

  4. Consider public pressure
• Production Possibility Frontier


  Refers to the maximum production potential of the economy with a given or finite level of resources.

  It shows the combinations of two alternative products that can be produced given the level of technology and a fixed quantity of resources when all resources are used to their full capacity.
• Economic Factors Underlying Decision-making by Individuals

  • Spending and saving
  • Work
  • Education
  • Retirement
  • Elections, voting and other political processes
• Economic Factors Underlying Decision-making by Businesses

  Prices and availability of resources

  Businesses need to consider the cost of:

  • Resources used
  • Land used
  • Capital used
  • Labour used
• Economic Factors Underlying Decision-making by Governments


  Influencing individuals and businesses

  • Governments have significant influence over economic choices made by individuals and businesses
  • This includes making some choices more or less expensive
  • Governments can also prohibit certain activities to influence economic behaviour
  • They can encourage economic activity, potentially providing incentives for them
• Spending and Saving

  There is a relationship between income, consumption and savings.

  • With higher income levels, the relative proportion of income consumed falls
  • Individuals with lower incomes consume more of their income than individuals with higher incomes
• Work

  Potential income earned is influenced by:

  • Skills
  • Education
  • Training
  • Qualifications
• Work

  Jobs that require university degrees, years of training and specialising in areas will earn a higher income. The higher income leads to more potential for higher levels of saving and/or consumption
• Education

  The ability of people to increase their knowledge and skills through training and development.

  • Higher levels of education = increased earning capacity
  • Lower levels of education = relatively lower level of lifetime income
• Elections, Voting & Other Political Processes


  Individuals contribute to influencing government decision-making by taking part in elections. They support objectives and elect individuals who best fit the community's wants.