Economics

• 3 fundamental questions of economics

  • What and how much to produce
  • How to produce
  • For whom to produce
• Laissez Faire economy


  A free market economy with no government control or intervention
• Laissez Faire economy


  • It was believed that free market as an invisible hand can allocate resources efficiently
  • Supply will always create its own demand
• Difference between laissez faire, modified market, and central-planning economies

  • Laissez faire: free market economy with no government intervention
  • Modified market: people and businesses carry out economic affairs freely but subject to some government intervention and regulation
  • Central-planning: economic decisions made by the state/government rather than consumers and businesses
• Market Failure


  The economic situation where free market leads to a socially undesirable outcome (inefficiency and/or inequity)
• Role of government in market failure

  Intervene when market failure occurs, through legislation, laws, or increased tax rates
• Business cycle


  1. Peak

  2. Recession

  3. Depression

  4. Trough

  5. Recovery

  6. Expansion
• Why the great depression was a market failure: High unemployment persistent which led to lower consumption and therefore less money flowing throughout the economy. Less consumption and demand in turn resulted in business not being able to produce goods and services which led to an economic depression whereby a long period of economic contraction occurred and a significant drop in GDP. Therefore, this led to a lower quality of life for many as they had no income, producing a socially undesirable outcome.
• Factors of production


  • Land (rent)
  • Labour (wages)
  • Enterprise (interest rate)
  • Capital (profit)
• Injections


  • Investment
  • Government spending
  • Export
• Leakages


  • Savings
  • Taxation
  • Import
• Keynesian economics


  • In the short run, price remains constant, firms match their production to the level of demand, rather than responding to price
  • Aggregate Demand (Total spending) determines the Aggregate Supply (total output, GDP, income)
  • Governments should increase spending and stimulate the economy, plan for budget deficits in times of unemployment
• Paradox of thrift


  More savings means less spending, hence less demand for goods and services, causing businesses to cut production and jobs, leading to even less income to save and spend (vicious cycle)
• Monetary policy


  Involves setting the interest rate on overnight loans in the money market ('the cash rate') to influence other interest rates, economic activity and inflation
• GDP


  Gross Domestic Product
• Fiscal policy


  The government adjusting tax and government spending
• How government can help economic recovery by increasing budget spending


  1. Government spending is an injection into the economy, providing jobs and income

  2. More people receiving income means more consumption, supporting more production (multiplier effect)
• Top 3 main sources of government revenue

  • Individual income tax
  • Company and resource rent tax
  • Sales tax
• Top 3 main sources of government spending

  • Social security and welfare
  • Other purposes
  • Health
• Multiplier effect


  One person's spending is another person's income, so each dollar spent by the government can increase GDP by multiple dollars
• Expansion


  Economic expansion is an increase in the level of economic activity
• Contraction


  Economic contraction is a decrease in the level of economic activity
• Recession


  A period of economic and business contraction, generally identified by a fall in GDP in two successive quarters
• Depression


  A long and severe recession in an economy or market
• GDP


  Gross domestic product (a monetary measure of the new things produced in a specific time frame)
• Market failure


  A situation where market delivers a socially undesirable outcome
• Multiplier effect


  One person's spending is another person's income. Each dollar spent by the government can increase GDP by multiple dollars
• Surplus


  An amount of something left over when requirements have been met; an excess of production or supply
• Deficit


  The amount by which something, especially a sum of money, is too small
• Budget in balance


  Revenue = expenditure
• Budget surplus


  Revenue > (greater) expenditure
• Budget deficit


  Revenue (smaller) < expenditure
• Monetary policy


  Involves setting the interest rate on overnight loans in the money market (the cash rate). The cash rate influences other interest rated in the economy affecting the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation
• Fiscal policy


  Adjusting tax and government spending
• Inflation


  The increase of price given in a given time period
• Imports (leakage)


  A product or service produced abroad and purchased in your home country. Money flows out of the national economy in the form of an international money transfer to an overseas firm (company)
• Exports (injection)


  A product or service produced in one country and sold to a buyer abroad. Money flows into the Australian economy in the form of an international payment to an Australian firm
• Efficiency


  Did the government stimulus help support jobs and keep the economy running at an efficient level?
• Equity


  Did the government stimulus help maintain equity (fairness) in the economy by supporting those who suffer from the GFC?
• Economic growth


  Did the government stimulus help support economic growth at its pre-GFC level?