Economic Issues and Public Policy: Bus1Bue

latrobe.edu.
au/business
Economic Issues and Public

Policy
BUS1BUE
CRICOS PROVIDER 00115M

Introduction
CRICOS PROVIDER 00115M

latrobe.edu.au/business
Intended learning outcomes

 Define economics, the important concept of scarcity and how
people respond to incentives
 Describe the economic institutions that coordinate decisions
 Define the production possibilities frontier and use it to calculate

opportunity cost
 Explain how current production choices expand future production

possibilities
3
What is economics?? Why study it? (Watch

this to find out!)
A 2:54 minute clip
introducing
economics. You
probably use
economic concepts
in your daily lives.
After watching this

clip, can you think
of any?
Definition of Economics
Economics is the social science that studies the choices that
individuals, businesses, governments, and entire societies make
as they cope with scarcity and the incentives that influence and
reconcile those choices.
Economics divides into two main parts:
• Microeconomics
• Macroeconomics
The driver has limited phone data and needs to

make a choice between streaming music or her
Scarcity maps.
What choices in your life have you had to make
allocating resources?
Economics is all about how to use scarce resources
(<1minute to watch)
Scarcity
Scarcity refers to the limited nature of society’s resources.
Scarcity creates trade-offs.
How do you divide your time between studying different

subjects. Or between work, hanging out with friends and
sleeping in?
Each hour you spend doing one activity is one hour less that you
have to do something else.
Incentives
Understanding how people respond to incentives is central to
understanding how markets work.
When the price of beef rises, people decide to eat fewer steaks.
At the same time, beef farmers increase the size of their herds
and employ additional stockmen.
Incentives are also important in public policy. For example, a tax

on petrol leads people to purchase smaller, more fuel efficient
cars.
Opportunity cost
Opportunity cost is the best alternative that must be given up to
obtain some item.
For example, my opportunity cost of sitting through this lecture

is reading a book and enjoying an espresso at a local café.
Opportunity Cost
The opportunity cost of

Homer waiting in line is the
money he could of earnt
working… (<1min to watch)
What have you waited in

line for? What was your
opportunity cost?
Market economy
A market economy is an economy that allocates resources
through the decentralised decisions of many firms and
households as they interact in markets for goods and services.
It sits in contrast with a planned economy.

Check out this

market.
Buyers & sellers congregate

wherever there is demand
for goods and services! (1:04
min clip)
Have you seen a market in

an unusual location like this?
Market economy
Decisions are made by millions of self-interested households and firms.
Firms decide whom to hire and what to make. Households decide

which firms to work for and what to buy with their incomes.
Firms and households interact in the marketplace, where prices and

self-interest guide their decisions.
In a market economy, no one is looking out for the economic wellbeing

of society as a whole.
Market economy
The invisible hand is the idea that buyers and sellers freely
interacting in a market economy will create an outcome that
allocates goods and services to those people who value them
most, and will make the best use of scarce resources.
The concept was proposed by Adam Smith in An Inquiry into the

Nature and Causes of the Wealth of Nations (1776).
Market economy
In any market, buyers look at the price when determining how
much to demand, and sellers look at the price when deciding
how much to supply.
Smith’s great insight was that prices adjust to guide buyers and
sellers to reach outcomes that can maximise society’s wellbeing
as a whole.
When the government prevents prices from adjusting naturally

to supply and demand, it impedes the invisible hand’s
Models and assumptions

Models are used to simplify and represent economic relationships.
We might assume that there are only two goods in the world, or that
the firms and consumers in a market are only concerned with what
they buy and sell today.
Assumptions help us to simplify complex situations, focusing our

attention on the details that are most relevant to the problem at hand.
Using assumptions we can construct economic models to learn about

the world. Our models typically consist of diagrams and equations.
Economic coordination
To reap the gains from trade, the choices of individuals must be
coordinated.
To make coordination work, four complementary social institutions
have evolved over the centuries:
–Firms
–Markets
–Property rights
–Money
Economic coordination
A firm is an economic unit that hires factors of production and
organises those factors to produce and sell goods and services.
A market is any arrangement that enables buyers and sellers to get
information and do business with each other.
Property rights are the social arrangements that govern ownership,
use, and disposal of resources, goods or services.
Money is any commodity or token that is generally acceptable as a
means of payment.
Circular flow model

Production Possibilities Frontier (PPF)

(4:08 min clip)
Production possibilities frontier

The production possibilities frontier shows the various
combinations of output that the economy can possibly
produce given the available factors of production and the
available production technology.
It illustrates the trade-offs that are inherent to its economy.

The production possibilities frontier (PPF) is the boundary between
those combinations of goods and services that can be produced and
those that cannot.
To illustrate the PPF, we focus on two goods at a time and hold the
quantities of all other goods and services constant.
That is, we look at a model economy in which everything remains the
same (ceteris paribus) except the two goods we’re considering


This production possibilities frontier shows all the combinations
of cars and computers that can be produced by an economy.
If this economy devotes all its resources to making computers it
will produce 3000 computers.
If this economy devotes all its resources to building cars it will
produce 1000 cars.

This economy can also produce a combination of computers
and cars.
Point B is inside the frontier. This combination is possible
but inefficient.
Point D is outside the frontier. The combination of cars and
computers at point D is not possible for this economy.

Every point along the PPF involves a trade-off.
Moving from point C to point A increases the number of
cars by 100, but reduces the number of computers by 200.
We can say that the opportunity cost of these 100 cars is
200 computers.
The production possibilities frontier


The production possibilities frontier shows the trade-offs at
a particular point in time.
Over time, changes in technology and resources change the
combinations of goods and services that can be produced.
A technological advance in the computer industry expands
the set of production possibilities.
Trade Offs
Trade-offs happen everyday, during our
daily lives without us even recognising it,
this short article (7 minute read) explains:
https://fs.blog/2019/12/tradeoffs-decision-
making/
With the COVID-19 epidemic policy makers

have had to make trade offs between social
welfare, current and future economic
growth.
This article from May 2020 discusses the

early days COVID-19 government response
(5 minute read):
https://insidestory.org.au/covid-19-trade-o
ffs-the-full-story/
What trade offs have you had to make with

your daily life and COVID-19?
Microeconomics
Microeconomics is the study of how households and
firms make decisions and how they interact in markets.
For example, microeconomics focuses on individual

markets, examining how incentives and trade-offs
influence buyer and seller behaviour.
Macroeconomics
Macroeconomics is the study of economy-wide
phenomena, including inflation, unemployment and
economic growth.
For example, the setting of monetary policy depends

primarily on macroeconomic factors.
Micro vs Macroeconomics
(2:51 minute clip) Consider some of the issues reported in the news recently, are
they micro or macroeconomic issues?

The economist as policy advisor

Economists are experts.
In government, the advice of economists can have a significant
impact on the development of public policy.
In business, the advice of economists is important for formulating
corporate strategy.
Economists may be asked to explain the causes of economic
events, or to recommend policies to improve economic outcomes.
Positive vs normative statements

Positive statements are claims that attempt to describe the world as it is.
An example of a positive statement is ‘minimum wage laws create
unemployment’.
Normative statements are claims that attempt to prescribe how the
world should be.
An example of a normative statement is ‘the minimum wage should be
raised’.
Economics: A Social Science and Policy

Tool
Economist as Policy Adviser
Economics is a toolkit for advising governments and businesses and for making
personal decisions.
All the policy questions on which economists provide advice involve a blend of
the positive and the normative.
Economics can’t help with the normative part—the goal.
But for a given goal, economics provides a method of evaluating alternative

solutions—comparing marginal benefits and marginal costs.

Tool
Unscrambling Cause and Effect
The task of economic science is to discover positive statements that are
consistent with what we observe in the world and that enable us to understand
how the economic world works.
Economists create and test economic models.
An economic model is a description of some aspect of the economic world that

includes only those features that are needed for the purpose at hand.

Tool
A model is tested by comparing its predictions with the facts.
But testing an economic model is difficult, so economists also use
• Natural experiments
• Statistical investigations
• Economic experiments
Jobs in Economics
Economists can have many different jobs using models, statistic
and economic experiments in their daily work.

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latrobe.edu.

Economic Issues and Public

CRICOS PROVIDER 00115M

CRICOS PROVIDER 00115M

Intended learning outcomes

 Describe the economic institutions that coordinate decisions

 Define the production possibilities frontier and use it to calculate

 Explain how current production choices expand future production

What is economics?? Why study it? (Watch

After watching this

Economics divides into two main parts:

The driver has limited phone data and needs to

Scarcity creates trade-offs.

How do you divide your time between studying different

Incentives are also important in public policy. For example, a tax

For example, my opportunity cost of sitting through this lecture

The opportunity cost of

What have you waited in

It sits in contrast with a planned economy.

Check out this

Buyers & sellers congregate

Have you seen a market in

Firms decide whom to hire and what to make. Households decide

Firms and households interact in the marketplace, where prices and

In a market economy, no one is looking out for the economic wellbeing

The concept was proposed by Adam Smith in An Inquiry into the

When the government prevents prices from adjusting naturally

Models and assumptions

Assumptions help us to simplify complex situations, focusing our

Using assumptions we can construct economic models to learn about

Circular flow model

Production Possibilities Frontier (PPF)

Production possibilities frontier

Production possibilities frontier

Production possibilities frontier

Production possibilities frontier

Production possibilities frontier

Production possibilities frontier

The production possibilities frontier

Production possibilities frontier

With the COVID-19 epidemic policy makers

This article from May 2020 discusses the

What trade offs have you had to make with

For example, microeconomics focuses on individual

For example, the setting of monetary policy depends

they micro or macroeconomic issues?

The economist as policy advisor

Positive vs normative statements

Economics: A Social Science and Policy

Economics can’t help with the normative part—the goal.

But for a given goal, economics provides a method of evaluating alternative

Economics: A Social Science and Policy

Economists create and test economic models.

An economic model is a description of some aspect of the economic world that

Economics: A Social Science and Policy

But testing an economic model is difficult, so economists also use

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