Welcome

MR BRERETON
What is the purpose of Economics?

Economics is a study of how scarce resources can be

best allocated to produce the goods and services
required to improve a society.

Economics helps us compare alternative courses of

action. It recognises that there will always be trade-
offs when choosing one option over another.

Ultimately, economics is concerned with ensuring A “Cost Benefit Analysis” is a critically

that individuals, businesses and governments are important tool for economists
appropriately informed in order to make the best
decisions and policies in order to improve society.

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 The Economic ‘Vibe’ – Periods of Time

Post Covid
MIB

Transition

CV
GFC

2000 2009 2012 2020 2022

Economic Growth
Inflation
Unemployment
Wage Growth (Nominal)
 What does this
cartoon tell you
about the
economic
relationship
between Australia
& China?
Imports Exports
 Sectors of an Economy

Households Business Government Overseas

Household or Consumer Perspective

Price

$8

$4
Demand
Curve

$1

1 2 4 Quantity
Firms or Business Perspective

Price

$8 Supply
Curve

$4

$1

1 2 4 Quantity
Market Perspective

Price

Supply
$8

$4 Equilibrium

$1

Demand

1 2 4 Quantity
PRICE MECHANISM
The price mechanism describes the
means by which millions of decisions
taken by consumers and businesses
interact to determine the allocation of
scarce resources between competing
users
Market Failure
Year 11 Economics
 Year 11 Economics

Price Mechanism

- Environmental damage
- Abuse of market power
- Poverty Market Failure
- Economic fluctuations - Environmental Policy
- Worker exploitation - Competition Policy
Government Intervention - Fiscal Policy (welfare)
- Macro Policy
- Labour policy
 Topic 1
Introduction to Economics

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Syllabus - Learn About
1. The nature of economics
1) the economic problem – wants, resources, scarcity
2) the need for choice by individuals and society
3) opportunity cost and its application through production possibility frontiers
4) future implications of current choices by individuals, businesses and governments
5) economic factors underlying decision-making by:
- individuals – spending, saving, work, education, retirement, voting and participation in the political process
- business – pricing, production, resource use, industrial relations
- governments – influencing the decisions of individuals and business

2. The operation of an economy

1) production of goods and services from resources – natural, labour, capital and entrepreneurial resources
2) distribution of goods and services
3) exchange of goods and services
4) provision of income
5) provision of employment and quality of life through the business cycle
6) the circular flow of income
– individuals, businesses, financial institutions, governments, international trade and financial flows
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3. Economies: their similarities and differences
Term 3

Examine similarities and differences between Australia and at least one economy in
Asia in relation to:
• economic growth and the quality of life
• employment and unemployment
• distribution of income
• environmental sustainability
• the role of government in health care, education and social welfare.

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1. The Nature of Economics
1.1 The Economic Problem
• We have unlimited wants
• We have limited resources
• This leads to scarcity as there are insufficient resources to satisfy people’s
wants. This is the economic problem.
• Economics is the study of how society chooses to allocate its scarce
resources to the production of goods and services in order to best satisfy
unlimited wants and maximise utility. Its about good decision making and
good policy.

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• What are ‘wants’? – Material desires of individuals and the
community.
• Different Types of wants:
- individual wants. Eg?
- collective wants. Eg?
- basic wants (‘needs’)

• Resources refer to the factors of production in economics. They

are the ‘inputs’ that are required to produce G&S or ‘outputs’.
• The quantity and quality of the factors of production will
ultimately affect the quantity and quality of G&S produced and
therefore our standard of living
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There are FOUR main factors of
production (or resources) used to
produce goods and services:
1. Labour
2. Land (or‘natural’)
3. Capital – the means of production;
also includes finance/funds used to
acquire capital

4. Entrepreneurship - (Enterprise)

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There are 4 basic questions that need to be answered to
solve the economic problem of scarcity:

1. What goods and services are to be produced ?

• In economies, like Australia, this is basically determined by consumer
demand. With some direct and indirect government involvement.
2. How much will be produced?
• Determined mainly by consumer
• Again, limited resources limit output. Over-production means
resources are wasted.
• The more resources used now, the less there may be in the future. e.g.
oil, coal.

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3. How are these G&S to be produced?
• This decision is made by businesses, who generally consider the least cost
combination of resources to produce the quantity of goods and services that
they plan to sell.
• Depends on resource availability and the level of technology
• The government may set certain controls on resource use, eg pollution, land
zoning, minimum award wages and conditions.

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4. How are these goods and services to be distributed among the
population? Not this

• People cannot have all that they want so output must be rationed.
• The distribution mechanism in Australia is a person’s income and
wealth. The greater the income the more goods and services can be
purchased.
• The government intervenes to care for those on low incomes or to
provide basic services, eg. health, education, law and order.

What happens when AI and robotics mean that that there are just not
enough jobs?
What is the distribution mechanism in a Marxist or communist
economy?

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1.2 & 1.3 - Choice, Opportunity cost and production possibility
frontiers (PPF)

What is the ‘opportunity cost’ of you sitting in this classroom

and studying Economics?

- PDHPE?
- Exercise?
- Being on social media on your phone?

Opportunity Cost (also known as economic cost) refers to the

highest-valued cost of opportunities foregone in order to make a
current purchasing or production decision.

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Examples:
1) Individual – You have been given $500. Assume that you can only
do 3 things with the money: save, spend on entertainment or
spend on clothes.

2) Firms – A private company based in NSW has $500,000 net profit

from the last financial year. It can either reinvest the profit to
expand into Qld or pay the profit as a dividend to the
shareholders.

What is the opportunity cost of choosing either option?

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3) Government – if the Federal Government spends $20billion for new
fighter aircraft. What is the opportunity cost of buying these aircraft?

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• Opportunity cost is best illustrated using a model of the Production
Possibility Frontier (PPF), also known as the Production Possibility
Curve.
• An economy’s PPF refers to the maximum production potential of the
economy with a given level of resources. It shows the various
combinations of production available.

• The production possibility frontier for the whole economy can be

illustrated by looking at the production of two goods - coconuts or fish.
• It is not possible to produce an unlimited quantity of either product as
resources are limited.

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 The three assumptions of the PPF are:
1. There are only two goods produced
• In this case the economy can produce 2. Resources are fixed or constant
at ‘a’ (15 coconuts and no fish) or at 3. All resources are fully employed
‘d’ (5 fish and no coconuts). Or a
combination of each – such as 10 a
coconuts and 3 fish at ’b’, or 5 15
coconuts and 4 fish at ‘c’.
f
• The economy cannot produce Unattainable
outside the production possibilities b
frontier due to limited resources 10
(eg.’f’). Attainable
• If the economy produces inside the e
frontier (eg. ‘e’), resources are not 5 c
being used efficiently. Eg. Labour/Ue
d

0 1 2 3 4 5
Fish 34
Constant PPF

Coconuts A = 24 coconuts & 0 fish

B = 16 coconuts & 4 fish
24 A
C = 8 coconuts & 8 fish
D = 12 fish & 0 coconuts
B
16
Cost of
First 4 Fish = ?
C
8
Another 4 fish = ?
Another 4 fish = ?
D

0 4 8 12 Fish
Hence Opportunity cost is
same Slide 35
A Concave PPF
• In reality, the PPF is usually concave in shape.
• This demonstrates that the economy faces INCREASING OPPORTUNITY
COSTS.
• That is, as you want additional units of A, you give up increasing amounts
of B. Or, the opportunity cost (reduction in A) increases as you produce
more of the alternative B.
• Increasing opportunity costs occur because not all resources are the same
kind or quality.
• Some resources are more efficient at producing certain goods and not so
efficient at producing others. Some resources are better suited to fish,
others to coconuts.

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 Unattainable

Inefficient
use of
resources

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Movements or shifts in PPF
Explain the impact of the following on the simple PPF: A
1. Improved resources eg. more educated workforce
or more efficient technology.
2. More resources (eg. due to an influx in skilled
migrants)
3. A decline in resources (eg. due to natural disaster,
no immigration)

Careful – these questions can be asked for ONE or B

BOTH of the products!!

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Exam Questions

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1. Opportunity cost is the cost of the alternative foregone. E.g.. $10 pocket money is spent at the canteen. The
opportunity cost is that the $10 is not saved for a bigger purchase in the future. Or the opportunity cost of studying
Economics in Y11 is giving up Geography
2. The production possibility schedule is a table which shows the various combinations of the production of two
products. The information is then used to create a production possibility frontier or curve.
3. The 3 assumptions of the PPF are:
- There are only two goods produced
- Resources are fixed
- All resources are fully employed
Having these assumptions leads to a simpler model which can be modified later when the assumptions are lifted.
4. a) 10 units of clothing
b) MRS is 10 units of clothing for 15 houses
c) At this point, the economy’s resources are being utilised efficiently
d) curve would shift out
e) the curve is concave as resources cannot always be used in the same way for two different goods. Therefore,
as we move down the curve, some of the resources we use for one good cannot be used to capacity in the
production of the other good.
f) the curve would shift outwards
5. The economy at Point A is using resources to produce consumer goods, which satisfy short term needs and wants
(hence higher living standards in the present). Point B, on the other hand, produces more capital goods (ie. machinery
and equipment to produce other goods) which yield long term economic benefits.

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43
1.4 The Future Implications of Current Choices
• In any economy, individuals, firms and governments
attempt to allocate resources or income to maximise
returns.
• However, the current choices made by consumers, firms
and governments have implications for their future
choices. How?
• Governments, firms and individuals that place a higher
value on current living standards might allocate more
resources to the production and consumption of
consumer goods such as food, clothing, cars and luxuries
and less on capital goods such as building new factories,
shops, office, ports, railways that have not been
produced for immediate consumption but will be used
for the production of other goods into the future
• This can be expressed on a PPF
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• An economy as a whole can choose between producing goods that
satisfy consumer demand immediately (consumer goods) and goods
that will increase our productive capacity in the future (capital goods).
• In the long run, an economy that focuses more on the production of
capital goods will increase its productive capacity and experience a
higher level of economic growth.
• In effect the country choosing to produce more capital goods now is
making the choice to forego satisfying some wants today so it can
satisfy a greater number of wants tomorrow.

Current Choices Current Implications Future Implications

Spend money or use resources ________ living standards _________ living standards

OR OR OR

Save money and resources ________ living standards ________ living standards

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1.5 - The economic factors underlying decision making (choices)

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48
2.0 - The Operation of an Economy
2. The operation of an economy
Do these 1) production of goods and services from resources – natural, labour, capital and
together entrepreneurial resources
& quickly 2) distribution of goods and services
in two 3) exchange of goods and services
slides 4) provision of income
5) provision of employment and quality of life through the business cycle
6) the circular flow of income
– individuals, businesses, financial institutions, governments, international trade and
financial flows

These two in a bit

more detail

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2.1
2.2
2.3
2.4

The Operation of an
Economy

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2.1
2.2
2.3
2.4

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Factors of Production Factor Incomes
2.5 - The Business Cycle
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What were Australia’s recent economic time periods?

2000 2009 2012 2020 2022

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58
2.6 - Circular flow model
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5-Sector Model Video

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5-Sector Circular Flow Model - Introduction

The ‘circular flow of income’ is similar to a flowchart that shows how money or
income moves around the 5 sectors of the economy.

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Household Sector

The household sector consists of all individuals in

the economy who earn an income (wages, rent,
etc.) by selling productive resources to firms
(labour and land).

With the income earnt, households purchase

goods and services from the firms sector to satisfy
their needs and wants and improve or maintain
their standard of living and quality of life.

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Firms Sector

The firms sector consists of all private businesses

which produce and distribute goods and services
to consumers.

Firms buy productive resources (labour, land)

from the household sector and then make income
payments (wages, rent, interest, profit) in return
for the use of these resources.

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2-Sector Model

Income (Y)

Resources

Individuals Firms
Goods/Services or Output (O)

Consumption/Expenditure (E)

This 2-Sector model assumes that individuals derive all income (Y) from firms in
return for providing resources. It also assumes that all that income is used to
purchase goods/Services produced by firms.
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Financial Sector

The financial sector consists of all financial

institutions (eg. banks) who engage in the
borrowing and lending of money.

The financial sector accepts savings (S) from the

household sector. The bank pays interest on these
deposited funds.

These funds are then lent to the firms sector so to

enable investments (I) to be made

The banks make profit by charging a higher rate of

interest to borrowers than they pay to the public
for depositing funds.
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Government Sector

The government sector consists of all economic

activities of local, state, territory and federal
governments in Australia.

Governments raise revenue through taxation (T).

This allows for expenditure (G) such as social
security, defence, education and health

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Overseas Sector

The overseas sector consists of all other countries

with whom there is trade.

Trade in goods and services consists of either

exports (selling to overseas) or imports (buying from
overseas).

In Switzerland, its called the ‘external sector’. Why

not the overseas sector?

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Leakages
Leakages refers to when money or income is lost in the
economy. These are leakages from the household sector
and would otherwise be amounts flowing back to firms
in the domestic economy.

Leakages remove money or income from the circular

flow of income, decreasing aggregate (total) income and
the general level of economic activity.

There are THREE sources of leakages. :

1. Savings (S) – which go to financial institutions
2. Taxation (T) – which go to the Government
3. Imports (M) – which go to overseas firms

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Injections

Injections are financial boosts to the economy.

Injections into the circular flow model of income

are those flows of money that increase aggregate
(total) income and the general level of economic
activity.

There are THREE sources of injections:

1. Investment (I) – from financial institutions
2. Government Expenditure (G)
3. Exports (X) – from overseas

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3-Sector Model

● If households don’t spend all of

their income (Y) on output (O),
then some money can be saved -
Savings (S).
● The amount saved will reduce the
circular flow of income.
● However, the financial sector uses
the savings to lends to firms who
make investments (I) into firms.
Investments are used to purchase
new capital goods (i.e. machinery)

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4-Sector Model

● Taxes are paid by households to the

government and are a leakage out of current
income, reducing the expenditure on current
goods and services.
● The government spends taxation revenue in
providing collective goods and services,
infrastructure to the firms sector.

● At this point it is worth noting that the

circular flow of income is just a model. It is
not a perfect representation of reality. For
example, firms also pay taxes to the
government. The government also makes
payments to the household sector in the form
of welfare. None of this is reflected in the
circular flow of income.

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5-Sector Model - Imports & Exports

Imports (M) represent spending by

Australian residents on goods and
services from the rest of the world. They
are leakages out of household income.
What would be income of an Australian
firm, becomes income of an overseas firm

Exports (X) represent spending by non-

residents on goods and services produced
by Australian firms. They are an injection
into local firms and increase output and
employment.

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Equilibrium and Disequilibrium

Equilibrium refers to a state where there is no tendency for the levels of income, expenditure and
output to change and GDP remains the same . For our 5-sector model, equilibrium is when the sum
of the total leakages equals the sum of the total injections.

Savings (s) + Taxation (T) + Imports (M) Investment (I) + Government Expenditure (G) + Exports (X)

Disequilibrium will occur if the sum of total leakages does not equal the sum of total injections
causing the levels of income, output and expenditure and employment to fall or rise.

Savings (s) + Taxation (T) + Imports (M) Investment (I) + Government Expenditure (G) + Exports (X)

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Disequilibrium – 2 scenarios

If: Leakages Injections If: Leakages Injections

(S + T + M) (G + I + X) (S + T + M) (G + I + X)

The result is – The result is –

• Downturn in economic activity • Upturn in economic activity
(contraction or recession) (expansion or boom)
• Falling income (Y) • Rising income (Y)
• Falling production/output (O) • Rising production/output (O)
• Falling expenditure • Rising expenditure
• Rising unemployment • Rising employment

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One Final Summary

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Activity - Questions

What influences the circular flow of income?

Explain the impact of an increase in consumption (spending) on the circular

flow of income.

Explain the impact of a fall in exports on the circular flow of income.

Explain the effect if there is an increase in business investment.

Explain the effect if there is an increase in government spending.

Explain the effect of a reduction in personal income tax rates

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Activity - Textbook Questions

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Extension - Homework Past HSC!!

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Extension - Homework Past HSC!!

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Extension - Homework Past HSC!!

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The Circular Flow of Income Model
• An extremely important model which shows the relationship
between various sectors of the economy and how income or
money flows through an economy The core of the circular
flow of income model is the relationship between
Households (or Individuals) and Firms (or Businesses).
• This relationship can be shown in the “Two Sector” model.
This is a ‘closed’ economy with no other sectors including
Government.
The Two Sector Model
Leakages & Injections:
• Leakages are things which reduce the amount of income in the
circular flow and reduce the level of economic activity
• The leakages come from the Household sector
• Assume you earn $1000. Do you spend it all?
• Injections are things which increase the amount of income in the
circular flow and increase the level of economic activity
• Leakages and injections are ‘paired’ and shown in following 5
sector model
 The Five Sector Model
Factor Incomes (Y)

Households Firms

Spending on Goods & Services (C)

The Sectors in the Circular Flow

Individual/Household
• Supply factors of production (especially labour and enterprise) to firms. They
receive income as a reward.
• They use the income to purchase G&S from firms.
• Some income is ‘leaked’:
• Savings to FI’s
• Taxes to Government
• Purchase of G&S from overseas (M)

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Firms/Business
• They purchase factors of production from households.
• They produce G&S and sell to households. They receive income in return.
• They are also responsible for ‘injections’:
• They are able to borrow from FI’s in order to invest (I)
• They sell G&S to the Government (G)
• They sell G&S overseas (X)

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Financial Institutions
• They are a market for borrowing and lending money
• They borrow from the household sector (savings=S= leakage).
• They then lend to firms who invest in capital – improving future productive
capacity
Government
• They help satisfy collective needs and wants
• They tax households
• They provide services by paying firms to provide G&S

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Overseas Sector
• All transactions with the rest of the world
• Import = leakage when households buy from overseas
• Export = Injection when firms sell G&S overseas

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Why an economy tends towards equilibrium

When injections are greater than leakages than the level of

income in the circular flow will increase causing an increase in
output and GDP. As incomes increase, households will pay more
in tax, increase savings and spend more on imports. This will
occur until such time leakages = injections and the economy
returns to equilibrium.

Restate the corollary.

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Limitations of the Circular Flow of Income

• Its just a model!

• Assists our understanding
• Has some basic assumptions which do not always reflect
reality.
• Can you think of some examples where the model
does not match reality?
• Draw at least two extra lines connecting two sectors.
• Tips:
• Which is the only sector taxed in the circular flow?
• What else is an important income source for many
households?