ECO LU1

• Economy


  The management or law of the household, but it has since been expanded to include the management of larger entities such as businesses, industries, and nations
• Ten Principles of Economics

  • People face trade-offs
  • The cost of something is what you give up to get it
  • Rational people think at the margin
  • People respond to incentives
  • Trade can make everyone better off
  • Markets are usually a good way to organize economic activity
  • Governments can sometimes improve market outcomes
  • A country's standard of living depends on its ability to produce goods and services
  • Prices rise when the government prints too much money
  • Society faces a short-run trade-off between inflation and unemployment
• Scarcity


  Society has limited resources and therefore cannot produce all the goods and services people wish to have
• Economics is the study of how society manages its scarce resources
• Trade-off

  Making decisions requires trading off one goal against another
• Trade-offs


  • Guns vs butter
  • Military spending vs civilian goods and services
  • Food vs clothing
  • Leisure time vs work
  • Efficiency vs equity
• Efficiency


  The ability of an economy to produce the maximum amount of goods and services with the available resources
• Equity


  The fair distribution of resources and income among members of society
• Policies that promote equity

  Can help to reduce income inequality, but may also discourage people from working hard and investing in their education and skills
• Tax rates


  • In Australia, individuals earning between $18,201 and $45,000 pay tax at 19%, those earning between $45,001 and $120,000 pay 32.5%, and individuals earning above $180,001 pay 45%
  • In Malaysia, tax rates vary based on income levels
• Opportunity cost


  What you give up to obtain an item
• Explicit opportunity cost


  Direct, out-of-pocket expenses incurred when making a decision
• Implicit opportunity cost


  The value of the next best alternative that is foregone due to the decision
• Marginal change


  Small, incremental adjustments to an existing plan of action
• Marginal changes can have an impact on the overall outcome, but they do not fundamentally alter the situation
• Marginal changes can be used to analyze the effects of small changes in economic variables on outcomes, such as profits, revenue, and consumer behavior
• Incentive


  Marginal changes in costs or benefits that motivate people to respond
• The decision to choose one alternative over another occurs when that alternative's marginal benefits exceed its marginal costs
• Incentives


  • Tax breaks for businesses that invest in renewable energy
  • Penalties for emitting pollutants
  • Bonuses to employees who exceed their sales targets
• Comparative advantage


  A country's ability to produce a good at a lower opportunity cost than another country
• By specializing in the production of the goods in which they have a comparative advantage, each country can produce more of both goods than they would be able to produce on their own
• Market economy


  An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
• Invisible hand


  The idea that households and firms interacting in markets act as if guided by an invisible hand, taking into account the social costs of their actions and leading to outcomes that tend to maximize the welfare of society as a whole
• Markets are flexible and adaptable, able to respond quickly to changes in supply and demand conditions
• Property rights


  The ability of an individual to own and exercise control over a scarce resource
• Market failure


  When the market fails to allocate resources efficiently
• Causes of market failure

  • Externalities
  • Market power
• Government intervention to address market failure

  • Highways
  • T&G (the recent announcement)
• Production


  The creation of goods and services that satisfy human wants and needs
• Productivity


  The amount of goods and services produced from each hour of a worker's time
• Inflation


  An increase in the overall level of prices in the economy
• Phillips Curve


  Illustrates the trade-off between inflation and unemployment in the short run
• In the long run, the Phillips curve becomes flatter as prices and wages become more flexible, and the trade-off between inflation and unemployment becomes less significant