1 Basic Economic Problem

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A. Basic Economic Problem B. Economic Systems C. Factors of Production Tertiary

What is the economic problem?
Resources include natural resources, machinery, people, and land. Resources are used to make goods and to provide services. Problem: scarce resources are used to make goods and services Any resources that are not scarce are called free goods (ex. air...) Whether a person is rich or poor, all people have the same basic needs (food, clothing, shelter, air...). Problem: human wants are unlimited Nobody can have sufficient goods and services to satisfy all their needs and wants, so people must choose which wants they will satisfy. Choice is needed because scarce resources can be used in lots of ways to make many different goods and services. Problem: scarce resources have alternative uses People, nations and the world must choose how scarce resources are to be used; must choose which goods and services to make because they cannot make everything that they want.

Opportunity cost: the cost of choice

Opportunity cost is the lost benefit from the next best alternative (whatever you could've bought instead of what you did buy). the lost benefit from the next best alternative CHOICE Car Rent a home

$ 150,000 >>> $1500 x 100 months The lost benefit = you have to walk everywhere Opportunity cost = 100 months of rent Taxi >>> $15 x 10,000 journeys

Bob has $10, he chooses to go see a movie and spends all of his money on the ticket. Instead of going to the movie, he could've bought 5 bottles of Coca Cola. The opportunity cost are the 5 bottles of Coca Cola. What is economics for? The choice of alternative goods and services an individual country has depends upon its share of resources in the world. Economics attempts to increase people's choice and maximize their welfare by advising how best to use scarce resources in order to make goods and services.

What is an economy?
0Economy-an area in which people make, or produce, goods, and services. 0Healthy Economy-an economy where a country uses its resources and adds value to them to meet the need of its citizens and sell the surplus for a profit to other countries. Most economies are made up of two economic sectors: The private sector-a sector of an economy made up of all organizations and firms owned by members of the general public. It also consists of private individuals and voluntary organizations. The public sector-a sector of an economy owned and controlled by a government. It consists of government organizations, and goods and services provided by the government.

Production, consumption and exchange

Production + Consumption + Exchange

0Production-any activity designed to satisfy people's wants (goods and services). 0Consumption-the using up of goods and services to satisfy our wants (goods and services). 0Exchange-the trade of something (goods and services).

Resources: the factors of production

0Factors of production-the scarce resources available for use in the production of goods and services to satisfy our wants. Factors of production are inputs into a production process from which an output of goods and services emerges. Land-a natural space where natural resources are gathered, harvested, mined, or collected. Labor-human resources that provide the physical and mental effort to make goods and services. Enterprise-the organizational ideas Capital-man-made resources which help to produce many other goods and services. 0Firm-an organization that owns a factory or a number of factories, offices, or shops, where goods and services are produced. 0Entrepreneurs-the people who have enterprise and can take risks in order to run, control, and manage firms.

What do resources produce?

0Consumer goods-any good that satisfies consumers' wants 0Capital goods-man-made resources which help us produce other goods and services 0Public goods-goods and services provided by the government because everyone benefits from them, even if they do not pay for them

0Merit goods-goods and services provided by the government because it thinks that people ought to benefit from them, even if they cannot afford to buy them The producer sets the price, the consumer determines the value. 0Production cost-the amount it costs to make the product.

Coping with scarcity

0Resource allocation-choosing what to produce and how much land, labor, and capital is needed to produce these things (the uses factors of production are put to)

What, how, and for whom to produce?

What to produce? > How to produce? > For whom do we produce?

Providing answers to what, how, and for whom?

0Economic system-how a country decides what to produce, how to produce, and for whom to produce

The market economic system

0Market-a place consists of all those people or firms who wish to exchange a given good or service. (producers + consumers) international (global) market-goods and services that are exchanged all over the world Economic Markets (Free/Open):

0Free market system-a system where the market (producers and consumers) decide what, how, and for whom goods and services are produced. All the resources in a market economy are privately owned by people and firms. Every business will aim to make as mush profit as possible. Advantages The market produces a wide variety of goods and services to meet consumers' wants The free market responds quickly to people's wants The market system encourages the use of new and better methods and machines to produce goods and services Disadvantages Factors of production will be employed only if it is profitable to do so The free market can fail to provide certain goods and services The free market may encourage the consumption of harmful goods The social effects of production may be ignored The market system allocates more goods and services to those consumers who have more money than others 0Price mechanism-a system of dependence between supply of a good or service and its price. When the supply is below demand, the price goes up. When the supply exceeds demand, the price goes down. 0Market forces solve the problem of what, how, and for whom to produce.

Planned economies
0Planned economy-an economy where the government determines the allocation of resources (what, how, and for whom to produce)

The mixed economic system

0Mixed economic system-a combination of government planning with the use of the free market

People and firms in the private sector own scarce resources with the aim of making as much profit as they can. The public sector also own some scarce resources to produce goods and services that they think their country, and its people, need and want. Advantages: the government may be able to create jobs for unemployed public goods are easily produced the government may be able to stop people from consuming harmful goods by making them illegal the government can use laws, or high taxes to try to prevent pollution of the environment the government can provide goods and services to the people that need them A mixed economy attempts to overcome the disadvantages of a market system by using government intervention to control or regulate different markets.

2 How the Market Works

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a. Demand b. Supply c. Elasticity

What is demand?
In a normal market the price increases as the quantity decreases. 0Demand - the want of consumers to buy goods and services. Price mechanism - if the price falls the producer will usually produce less, and vice versa 0Quantity demand - the amount of a good or service consumers are willing and able to buy 0Individual demand - the demand of one consumer 0Market demand - the total demand for that product from all its consumers 0Extension of demand - (increase in quantity demanded) the way in which demand changes with a fall in price 0Contraction of demand - (decrease in quantity demanded) the way in which demand changes when price rises 0Ceteris paribus - an assumption assuming that all other things remained unchanged Factors that may cause changes in demand and shifts in market demand curves: Changes in consumers' income 0normal good - a good that causes income to rise when the demand rises 0inferior good - a good that causes income to rise when the demand falls

Changes in taxes on incomes 0disposable income - the amount of income people have left to spend or save after taxes on their incomes have been deducted The prices and availability of other goods and services 0complementary goods - goods such as petrol for a car, butter for bread, etc. 0joint demand - when the demand of two things are interdependent on each other 0substitutes - a product that can replace the want for another good or service Changes in tastes, habits, and fashion Population change

What is supply?

0Supply - the amount of a good or service firms or producers are willing to make and sell at a number of possible prices 0Quantity supplied - the amount of a good or service producers are willing and able to make and sell to consumers 0Market supply - the supply of all the individual producers competing to supply that product What causes a shift in supply? Changes in cost of factors of production Changes in the price of other good and services Technological advancements Business optimism and expectations Global factors

Market price
Demand and supply curves are used to figure out what price and quantity the producers should manufacture the product, as the demand curve shows what price the consumers are willing to pay depending on the quantity of the product. Whereas the supply curve shows the possible prices producers are willing to sell a particular quantity of a product. The point at which these two curves intersect, is the point where the consumers and producers agree on a particular price for a certain quantity of a product. Economists use this point to plan or map the market for this particular product, as most markets have a pattern, and/or to help to producer choose a price and quantity that both the producers and consumers agree. 0Market price - The price at which the quantity demanded and the quantity supplied are equal 0Excess supply - when prices are higher than the market price (firms will supply more than what consumers demand)

0Excess demand - when prices are lower than the market price (the quantity demanded by the consumers exceeds what firms supply) 0Disequilibrium - when demand does not equal supply

Price elasticity of demand

0Price elasticity of demand compares the percentage change in quantity demanded with the percentage change in price that cause it. Example: Price of the good 5 pence 4 pence PEd = % change in quantity demanded % change in price of good PEd = 10 = 0.5 20 Demand is price inelastic because % change in price is greater that % change in quantity demanded. The PEd is 0.5. If the PEd is greater than 1, demand is price elastic. If PEd is less than 1, demand is price inelastic. Quantity demanded per week 100 110

Price elasticity of supply

0Price elasticity of supply is a measure of the responsiveness of quantity supplied to a change in price. PeS = % change in quantity supplied % change in price

3 Individuals and the Economy

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a. b. c. d.

Money Specialization Banks Labor Markets

The value of the money is determined by the trust that we have in the person that issued the money. Either by promising or by backing the currency. 0Characteristics of Money durable portable divisible limited supply (scarce) acceptable uniform ($1=$1) 0Barter - The direct swapping of goods and services. 0Functions of Money Money is a medium of exchange Money is a measure of value What other goods and products would be equivalent to. Ex. pencil = 2 eraser = 1 rulers measure length, thermometer measures temperature, money measures value. Money is a store of value Money tends to hold its value over time. Money is a means of deferred payment Characteristics of good money Acceptability Durability Portability

Divisibility Scarcity Stages of money Stage 1: Commodity money Stage 2: Precious metals Stage 3: Coinage Stage 4: Early paper money Stage 5: Paper money Notes and coins circulating in an economy and deposits with banks and other financial institutions make up the money supply.

What is the labor market?

The demand for labor - Firms and government organizations employ labor to produce goods and services. The demand for labor is therefore derived from the fact that people and other organizations want and need goods and services. The more goods and services are demanded, and the higher their price (and therefore revenue from their sale), the more the demand for labor likely to be. The demand for labor is closely related to the wage rate the workers receive for their employment and how productive they are because private profit-making firms will only employ additional workers if they add more value than they cost to employ.

The higher the wage rate in a particular labor market the more expensive it is to employ and vice versa. Salary - The wage rate paid for a particular job over a period of time. The supply of labor - The total supply of labor in an economy is its labor force. the supply of labor to a particular labor market for an occupation will depend on how many people are willing and able to do the jobs on offer. Example: The market supply of train drivers consists of: people currently employed as train drivers, people employed in other occupations who want to become train drivers, and the who also want to become train divers. As the wages for train drivers rise, the more people will want to be train drivers.

The supply curve for labor may also be backward bending because at some point a person might think they earn enough and would like more leisure time.

The market wage for a job

The equilibrium wage rate is where the demand and supply curves for labor intersect. What causes shifts in the demand curve for labor? Consumer demand for goods and services Increasing productivity Changes in the price and productivity of capital Changes in other employment costs

What causes shifts in the supply curve for labor? Changes in the net advantages of an occupation 0Net advantages - all the factors that affect the attractiveness of a job. Demographic changes (Changes in the size and age distribution of the population in a country) Education and training

Why do people earn different amounts?

0Wage differentials - Differences in wages between different jobs. Why do people earn different amounts? Different abilities and qualifications 'Dirty' jobs and unsociable hours Satisfaction Lack of information about jobs and wages Immobility (0labour force mobility - the ease with which workers can mover between jobs and different parts of the country) Fringe benefits (Ex. company cars, cheap travel) Why do people in the same job earn different amounts? Regional differences in labor market conditions (Ex. There may be shortages of workers with particular types of skills in some parts of the country.) Length of service Local pay agreements (When trade unions agree on a national wage rate for the employed.) Non-wage rewards (Offering workers benefits other than higher pay.) Discrimination Wage differentials Public-private sector pay gap The public sector will compete with the private sector firms to attract many of the same types of workers. Skilled and unskilled workers Less developed countries have many low-skilled workers who work for very low wages compared to other countries. It is therefore a lot cheaper for firms to produce good and services in these countries. Industrial wage differentials Expanding industries will tend to offer higher wages to attract workers with the skills they need, especially if the supply of labor with these skills

is relatively low. In contrast, the demand for labor in old, declining industries will be falling. International pay differentials Wages are higher in developed countries than in developing countries and less developed countries even after adjusting for prices and living costs which are often much higher in developed countries. 0Pension - The money the government or a company gives you when you retire.

Minimum Wage
Advantages Fair for workers to be paid a minimum wage Helps low earners gain a higher standard of living Extra disposable income should lead to extra spending in the economy Helps increase the gap between wages for low earners and unemployment benefit May help reduce unemployment Disadvantages Increases the cost to businesses Businesses may increase their prices (cost push inflation) Businesses may be unable to afford to employ as many workers Could cause unemployment Other workers may now ask for a pay rise Doesn't help the unemployed who don't receive a wage NOT ALL EMPLOYEES BENEFIT FROM A MINIMUM WAGE! THE ONE WHO GET A RAISE TO BUT THE ONES WHO GET FIRED DONT.

Motives that Affect Spending, Saving, and Borrowing

Individual choice and preferences; desire to save for the future vs. spending now

Changes in income tax Changes in prices of goods and services Changes in interest rates Availability of credit/loans and savings schemes Amount of disposable income Changes in attitudes to spending, borrowing, and saving

The Money Market

Financial Institutions are business organizations that specialize in providing a place where people can keep there money safely, help them make payments to others, make investments, and exchange money used in their country for currency used in another so they can make payments overseas. Without these specialized production and trade on the scale enjoyed today would be impossible, costs of production would be much higher, economies would be less developed and economic growth would be much slower. The money market is made up of all people and organizations that want money and all the people and organizations willing and able to supply money (namely the banking system that creates deposit money, and a central bank that issues notes and coins.) Banks are financial institutions in the money market. (they supply money in the form of loans and other financial products.) Banks earn profit from: Making loans Charging interest on loans Charging fees for their services Investing in shares in other companies Interest rate is the cost of borrowing money.

What services do Banks provide and how do they work (mechanisms)? Deposits o Payment of services (bills, tax, school fees) o Payment of interest o Security o Debit card o Financial advice Loans o Money for (houses, business, cars, education) o Credit card 13%-18%/month

Types of Banks
Commercial banks Accepting deposits of money and savings Helping customers make and receive payments Making personal and commercial loans Buying and selling shares for their customers

Providing insurance Operating pension funds Financial and tax planning advice Storing valuables, and much more Saving banks Provides a secure place for ordinary people to keep money, and in so doing providing money which the government can borrow. Savings and loans associations Specialize in keeping saving deposits and lending money to people on low incomes to buy homes. These long term loans are know as mortgages. Credit unions A co-operative, non-profit organization, own by its members. Started by people who wok or live together to provide low-cost loans to member who were on low incomes and unable to borrow money from other banks. Investment banks Specialize in helping large business organizations raise finance to fund operations and expansion by helping them issue and sell stocks and share on the stock market. Merchant banks are a type of investment bank. They were set up to help merchants finance the sale and transportation of goods overseas. Islamic banks Forbids interest charges and payments. Instead an Islamic bank can earn a profit from the fees it charges customers for banking services including making loans and people who deposit their money will earn a share of the banks profit rather than being paid interest. Merchant banks Provide loans for other companies. Provides finance for large companies by buying their shares.

Other Money Market Institutions

Finance houses ASK MR. DALZIEL TO EXPLAIN

Venture capitalists Provide finance for new and risky business ventures and will usually own a part of these companies (this is called venture capital). Pension funds A place where people can save regularly for their pension. Insurance companies A place where people can save regularly for life insurance. Investment and unit trusts An investment trust is a company that buys shares in other companies it thinks will be profitable and will pay good dividends on their shares. Instead of buying shares in just one company (because it is risky) small savers often buy unit trusts. Building societies Specialize in using their savers money to help people buy houses and other property.

The stock market

Stock is used to describe money raised by a joint stock company or corporation through the issue and sale of shares. A shareholder is any person/organization who holds shares. Market capitalization is the total value of a corporations issued shares. The stock market is a global market for buying and selling of new and second hand shares. The stock exchange is a business organizations that helps companies and government authorities to sell their stocks and shares to people and other organizations. The stock market gives investors the confidence to buy shares in the following way: Determines the structure of the markets for different types of shares Makes rules and regulations for the way in which the markets work Supervises the conduct of firms trading in shares

Provides up-to-the-minute information on share prices and trading

Stock exchanges are not open to the public. If an organization wants to buy or sell shares they must contact a share dealing firm (broker). Speculation the attempt to make money from buying and selling shares in the hope that their prices will change. Bulls people who buy shares hoping that their price will rice.

Bears people who sell shares hoping that their price will drop so that they can buy it back at a lower price.

Central Bank
The main function of a central bank is to maintain the stability of the national currency and the money supply in its group of member states (such as the European Union). Functions of a central bank: It It It It has the sole right to issue notes and coins is the governments banker manages the nations gold and foreign currency reserves manages the national debt

It regulates and supervises the banking system It is lender of the last resort It sets the official interest rate The monetary policy of a government involves managing the supply of money in an economy to help control both inflation and the countrys exchange rate.

Stocks
A stock represents your ownership in a company. A dividend is a percentage of the profit of the company paid back to shareholders.

When you make money with stocks you can either put it back into the company or put it into your pocket (or anything in-between).

The value of the stock is determined by the market.

4 Private Firms and the Economy

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Types of Firms:
Sole Trader
A one-person business Advantages The sole trader business is a very personal one The sole trader is his/her own boss The sole trader receives all the profits It is easy to set up a sole trader business Disadvantages The sole trader has unlimited liability The sole trader has full responsibility Sole traders lack capital

Partnership A business that is jointly owned, financed and run. Started through combining their money and sharing any profits. Advantages Partners bring new skills and ideas to a business More partners means more money for the business Partners can help in decisionmaking Disadvantages Partners can disagree Some partners may have joint unlimited liability Partnerships lack capital

Limited companies A business that sells shares to investors in order to raise money for the business. Shareholders own the business but there are so many different ones so they will most likely appoint managers to run the business on their behalf. They have a separate legal identity from its owners. A private limited company sells shares privately to people known to the existing shareholders.

A public limited company can sell shares to the public on the stock market.

Private limited company

Advantages Shareholders have limited liability Disadvantages Limited companies must disclose information about themselves to the general public (Show everything) Limited companies must hold an Annual General Meeting of shareholders each year (Allows company owners to vote on certain issues) The original owners of the company may lose control Company profits are taxed twice Private limited companies cannot sell shared on the stock market

Shareholders have no management worries

The company has a separate legal identity

Public limited company Advantages Public limited companies can sell shares publicly Public limited companies can publicly advertise their shares

Disadvantages It can be expensive to form a public limited company The divorce of ownership from control Management diseconomies

Joint stock companies Sells shares in order to raise revenue. Shareholders are the owners of joint-stock companies. Advantage Shareholders have limited liability Disadvantage Financial information may have to be disclosed

(Everything is shown) Shareholders receive dividends Large shareholders can outfrom profits vote others Shareholders elect directors to Directors may run the manage business in their own interests rather than for shareholders The company has a separate Shares can only be sold legal identity privately and with agreement of all other shareholders. It is a popular way for sole Taxed twice. Taxed when traders and partnerships to company gets money and raise additional finance for taxed when shareholders get business expansion their dividend.

Co-operatives Business organizations that are owned and controlled by a group of people. Each member has an equal share in the ownership and control of the organization no matter how much money they have invested in the company. One member, one vote policy. Worker co-operatives are owned and controlled by their workers. Consumer co-operatives are owned and controlled by the consumers. Multinationals A firm that operates in more than one country. (trades to other countries) Advantages Able to sell more than any other type of business Can avoid transport costs Can take advantage of Disadvantages Move their factories to wherever it is profitable to produce May switch their profits between countries May force competing firms out

different wage levels in different countries Can achieve great economies of scale Less chance of going bankrupt Can carry out a lot of research and development

of business May exploit workers May interfere in the government of a country

Public sector organizations Organizations owned or controlled by the government. 1. Central Government a. Makes decisions on political, economic, and other issues of national importance. 2. Local government a. Implements national polices at the regional or local level (given this responsibility by the central government) 3. Government agencies a. Non-elected organizations given the responsibility for the oversight and administration of specific government functions. (ex. Local health services) 4. Public corporations a. Government owned companies and trusts

Corporation?? Economies of scale

Fixed capital Money spent on capital goods Working capital Money used to run a business from day to day. (Used to pay wages, electricity bills, telephone bills)

Unlimited liability If a business goes bankrupt the owner(s) will ALL the business debts. This means that the owner(s) may have to sell personal possessions. Limited liability If a business goes bankrupt the owner(s) will only lose the amount of money the have put into the business. Silent partner (or sleeping partner) Provides money for the business in return for a share in the ownership and profits but will not be involved in day-to-day management. Controlling interest A person who buys over 50% of the shares in a company. They can then outvote all shareholders and control the business. Diseconomy an economic disadvantage Economy of scale No matter if youre a company of one, or of one thousand, you still need to have this one thing. The bigger you get, the cheaper the thing is. Something that doesnt contract or expand depending on a size of a company. Starting a company Do you have enough capital to set up a business? Yes (sole trader)

No (partnership

ECONOMIES OF SCALE

The reduction in average cost per unit as a firms output increases. Internal economies of scale 1. Financial As a firm grows in size, it is easier for that firm to access loans because banks see them as low risk. 2. Risk-Bearing As a firm increases its product range, the risk during a downturn is spread across its customer base. 3. Marketing A firm that has a large product range is able to use central brand marketing to advertise at little extra cost, which spreads across a wider range of goods. 4. Managerial As a firm expands, it has the opportunity to employ specialist managers in areas like Operations and Finance. This leads to an increase in productivity and lowers long run average costs. 5. Increased Dimension The theory that by increasing output, you gain extra benefits on top of those gained from the increase in output. Think of a cube as a firm. The measurements represents output. If its output doubles, then the benefits of the firm increase ten-fold. (The bigger you are the bigger you get)(Firms increases exponentially) External Economies of Scale Where one innovation or investment benefits the whole industry, lowering the LRAC (long run average cost) for all firms in the area. Logistic firms close to one another with all benefit from infrastructure improvements.

DISECONOMIES OF SCALE When a firm becomes too large and moves beyond its minimum efficient scale point.

This may be cause by mergers, a breakdown in communication, or lack of managerial experience. (Costs>Profits) Minimum efficient scale point The quantity with the lowest cost per unit Long Run Average Cost Productivity- measures the amount of output that can be produces from a given amount of input

1.5 Role of the Government and the Economy11/21/2012 8:57:

a. Budget and Taxation b. Cost Benefits Command (Planned) Economy The government has complete control. Laissez Faire (Pure capitalism) consumers and producers decide everything. GDP (Gross Domestic Product) The market value of all final goods and services produced in an economy over a given amount of time. Microeconomics The study of the relationship between producers and consumers in one market. Macroeconomics How a national economy works, The interactions between growth, income, employment, and price levels.

Goals of Government: 1. Steady and sustainable growth 2. Low and stable price levels 3. High employment rates 4. Fair income distribution 5. Sustainable balance of payments

Budget o Deficit Tax Revenue<Expenditures o Surplus Tax Revenue>Expenditure o Balance Tax Revenue=Expenditure

Corporate Income Tax Individual Income Tax (Direct Taxes) Goods and Services Tax (GST) (Indirect Taxes) REGRESSIVE Everyone pays the same percentage of a good, but compared to peoples income, it is a greater percentage of poorer peoples earnings compared to the rich.

1. 5 Aims of Government (Macroeconomics) i. Distribution of income ii.

Macroeconomy 2. Free vs Mixed Market a. When and to what extent should the government intervene? 3. What role should the government play in our economy? What can they influence and how? Factors of Production WIRP Resource Market (WIRP) Factors of production

Wages, interest, rent, profit

Consumers

Producers

G+S

Expenditure Product Market

G+S

Revenue

Public Sector Finance

The Public Sector in an economy delivers goods and services provided by the government.

Public expenditure is divided up into different categories: Current expenditure o Covers public sectors workers wages and salaries, social security benefits paid to unemployed and those on low incomes, and spending on consumable goods such as medicines, paper, pens, etc. (The day-to-day running expenses of the public sector) Capital expenditure o The money spent on government investments in new roads, school buildings, sea defenses, and military defense equipment. Reasons for public spending: 1. To provide public goods Goods that cannot be provided profitably by the private sector (street lighting, police force, etc.) 2. To provide merit goods Goods that they believe people aught to benefit from (state schools, public healthcare, etc.) 3. To reduce inequalities and help vulnerable people 4. 5. 6. 7. To To To To invest in the economic infrastructure support agriculture and industry control the macroeconomy give overseas aid

Sources of revenue: 1. Borrowing money from the general public 2. Interest payments on loans of money made to individuals, private sector firms and overseas payments. 3. Rent from publicly owned buildings and land. 4. Revenues from government agencies and public corporations that sell goods and services 5. Proceeds from the sale of government-owned industries. (Land or public buildings) 6. Taxes on incomes, wealth, and expenditure

Tax burden The proportion of tax taken from national income in a country. (the amount of tax they have to pay as a proportion of their income) Purpose of taxes: a. Raise money b. Discourage consumption of harmful goods c. Reduce income and wealth inequalities d. Help protect the environment e. To help the government achieve its macroeconomic goals Good tax has the following qualities: a. Fairness b. Must not discourage people from working c. Cheap to collect d. Convenience All taxes in a country together are called the tax system. Different Ways To Tax -Proportional (Same percentage no matter what you make) Balance between both. -Regressive (The more you earn, the lower the tax percentage) Less fairness but more efficiency. -Progressive (The lower you income, the less percentage you pay) More equitable (fair) and creates equality. May reduce efficiency. Corporation tax tax on company profits Capital gains tax tax placed on gains from the sale of shares and other valuable assets that have increased in value over time. Wealth taxes Taxes on the value of residential and commercial property. Advantages of direct taxes i. Revenue ii. Redistribution of wealth

iii. Take into account people and firms ability to pay Disadvantages of direct tax i. Lower work incentives ii. Less money to reinvest in enterprise iii. Tax evasion Value added tax a tax on goods and services levied as a percentage of their selling price. Tariff A tax levied on the price of goods imported from overseas as they enter a country. Excise duties taxes placed on certain goods based on the quantity of product purchased. (Fuel, tobacco, alcohol) User taxes or charges A type of excise duty linked to a specific good such as toll charges. Hypothecated tax A tax on a specific good or activity used to raise revenue for a specific purpose such as paying for road improvements rather than adding to total tax revenue. Advantages of indirect tax i. Cost of collection ii. Wider tax base (paid by almost everyone) iii. Selective aims iv. Tax alterations are quick and easy Disadvantages of indirect tax i. Uncertainty of amount ii. Regressive (greater burden on poorer people) iii. Inflation (add to the prices of goods which may increase price inflation) The budget the plans for spending and raising tax revenues in the financial year ahead. A budget deficit The government in spending more than it receives in tax revenue. National debt all the money borrowed by the public sector over time that has yet to be repaid.

Market Failure When too much or too little of something is produced by the private sector (when externalities occur) Externalities when a third party is negatively/positively affected by the production or consumption of a good. when a third party (someone who is not involved in the transaction) is negatively or positively affected by the production or consumption of a good or service.

Markets left alone will, most of the time, sometimes produce too much of something, or too little of something (over produce/under produce). Social Benefit the benefits that society gets from the consumption or production of a good or service Private benefit - the benefits that a third party gets from the consumption or production of a good or service When social benefit is less than the private, then the market fails. Private cost the third party costs from the consumption or production of a good or service Social Cost - the cost that society bears from the consumption or production of a good or service If something is being over produced or over consumed we can tax the good to alter behavior Budget surplus when government spends less than tax revenue Budget deficit when government spends more than tax revenue Externality External benefits or External costs Social Benefit = Private Benefit + External Benefit Social Cost = Private Cost + External Cost GOAL OF SOCIETY Social Cost = Private Cost; External cost=0

Tax incidence who pays the majority of the tax (tax inelastic good, the consumer will pay) Rule of interest rates interest rates are high, economic activity decrease Macro economics Inflation Balance of payments Budget surplus PSDR Central govt. PPC (and diagram) Tax (and diagram) Indirect tax VAT/GST (Value Added Tax/Goods and Services Tax) - a tax on goods and services levied as a percentage of their selling price. Inheritance tax Regressive tax Welfare state Market failure - when a third party (someone who is not involved in the transaction) is negatively or positively affected by the production or consumption of a good or service. Private costs cost to the consumer of producer of the good or service Private benefits benefit to the consumer or producer of the good or service CBA Micro economics Economic growth Govt. budget Budget deficit Fiscal policy Local govt. Public goods Subsidy (and diagram) Corporation tax - tax on company profits Excise duties - taxes placed on certain goods based on the quantity of product purchased. (Fuel, tobacco, alcohol)

Capital gains tax Proportional tax Tax allowance Externalities - when a third party is negatively/positively affected by the production or consumption of a good. External costs External benefits Unemployment GDP Balanced budget PSBR Public sector Public corporations Merit goods Direct tax Income tax Customs duties/tariffs Progressive tax Burden/incidence of tax Social costs The cost to all of society Social benefits - The benefit to all of society Social benefits should equal private benefits Why would governments spend money on education? (The market fails to produce enough of a good or service) Opportunity Cost (The lost benefit of the next best alternative) Transportation Hospitals Military Housing Social Benefits More efficiency Skilled labour force Rising national income (boosts economic activity and increases government income) External benefits to society

redistribution of income (low standard of living, poverty, spillover benefits) progressive regressive direct tax (income) indirect GST TRANSFER PAYMENTS When the governments give people money (unemployment benefits, welfare benefits Adv. And Dis. Of government intervention in the economy ADV Production of public and merit goods Prevent monopolies To fix market failures Make society more equitable Decrease demerit goods Regulate markets DISADV Less incentive to work hard and produce more (less efficiency and innovation) Less choice (consumers and producers) Increased taxes (less disposable income, lower incentive) Income vs Gst (EQUITY AND EFFICIENCY) (INCOME) EQUITY Progressive more fair (high income can afford to pay more) (GST) EFFICIENCY Regressive more efficient (incentive to work harder and earn more) Proportional

6 Six Economic Indicators

a. Growth b. Employment c. Inflation d. GDP

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Fiscal Policy Use of government spending and/or taxes to influence economic activity Gross Domestic Product Market value (price) of all final goods and services produced within an economy over any period of time. GDP per capita GDP divided by population Much better indicator of the well being of a countrys citizens. Imports are decreased from GDP Three ways of calculating GDP: Expenditure o Consumption spending o Investments spending o Government spending o Net exports (exports-imports) = National Income = Value of total output (Price x Quantity)

Gross domestic product The total value of output produced by all domestic firms in a country Gross national product GDP + Net property income from abroad Net national product

GNP - Deprecation National income The total amount of income earned in a macroeconomy. Capital consumption The amount spent on the repair or replacements of old capital. Economic growth The increase in the amount of goods and services the whole economy can produce over and above what it produced in the last year. Sustainable growth Long-term level growth. Real GDP A nations total output of goods and services adjusted for price changes. BaseYearPrices (PreviousYear) x CurrentOutput Money GDP / Nominal GDP GDP that has not been adjusted for price changes. GDP that includes inflation. Not an accurate figure. Doesnt show increase in output, only increase in price. CurrentPrices x CurrentOutput 2010 (Base Year) Price Chocolate Candy 2.00 1.00 Quantity 10 50 2010 (Base Year) Nominal GDP Real GDP Real GDP per Capita Real GDP / Population 70.00 70.00 2011 Price 3.00 1.10 2011 170.00 140.00 Quantity 20 100

Economic cycle The continuous ups and downs of national income Boom When real output and national income appear to grow faster than normal. Recession When real output and national income appear to fall faster than normal. The Meaning of Inflation The second macroeconomic objective is low and stable inflation. Inflation is defined simply as an increase in the average price level of goods and services in a nation over time. Causes Demand-Pull Inflation (When demand exceeds our capacity to produce, the prices must go up) drives economic growth (to an extent) because of higher demand o An increase in total demand in either C, Xn, I, or G. When demand increases without a corresponding increase in aggregate supply. The nations output cannot keep up with the demand, and prices are driven up as goods become more scarce.
Aggregate Demand Total value of all goods and services demanded in an economy over a given period of time. C Consumption (BIGGEST PART OF AGGREGATE DEMAND) Xn net exports (X-M) exports imports I Investment (Capital) G - Government

Cost-Push Inflation (BAAAAAAD!!) o The result of a negative supply shock (ex. Oil), arising from a sudden, often unanticipated, increase in the costs of production for the nations producers. Cost-push inflation could result from any of the following: Increase wage rate Increase resource costs

Increase energy or transportation costs

Increase regulation by the government Increase business taxes Stagflation BAAAD! Increase inflation Increase unemployment Decrease quantity Consequences of Inflation The Consequences of High Inflation Lower Real Incomes A households real income is its nominal income adjusted for any inflation. The more prices rise, the less a certain amount of income can buy for households. Higher inflation makes consumers feel poorer, since the real value of their incomes falls when inflation rises. Because the value of the money decreases and the incomes of employees stays the same, the value of their earnings go down. Lower Real Interest Rates for Savers The real interest rate is the nominal interest rate the inflation rate. Ex. If you have a savings account offering a 5% interest rate, and inflation is 2%, the real return on your savings is only 3%. But if inflation increases to 4%, your real return is just 1%. Because of the decrease in value of money, the savers will gain less value because the interest rates will stay the same and the money earned will stay the same

but the value of that money has decreased. Higher nominal interest rates for borrowers When banks anticipate high inflation in the future, they will raise the interest rates they charge borrowers today. This increases the cost of borrowing money to invest in new capital or to buy homes or expensive durable goods. Because of the decrease in value of money, the interest rates will increase in order to allow for the same value of money to be used. Reduced international competitiveness A country experiencing high inflation will find demand for its goods fall among international consumers, as they become more expensive compared to other countrys goods. Also higher prices and wages will reduce foreign investment in the country as firms fo not wish to produce where costs are rising, rather where costs will be low in the future. Because prices in that country would rise and causing the demand of those exports from overseas consumers to fall. In the case of unexpected inflation, the lender (in the case of a borrower and a lender) is hurt.

Problems with GDP as an indicator of welfare 1. Income equality 2. Disaster relief is included

3. Externalities (Environmental loss is not counted) 4. Technology replacing labor is not taken into consideration Human Development Index: Developed by the UN to calculate a countrys well-being. Takes into account the following indicators: (Health, Education, Living standards) Life expectancy at birth Mean years of schooling Expected years of schooling Gross national income per capita (GDP per capita)

Trade Cycle / business cycle

Real GDP

Time Business (Trade) Cycle - shows the short run fluctuations of GDP over time

PPC -A diagram that measure the maximum output of a combination of two goods or services, holding, quantity, and quality of resources constant.

Economic Growth A change in quantity and/or quality of our resources.

The quality and quantity of our resources do not allow us to produce at C.

We could produce at D, but it is not efficient. Low GDP.

MORE NOTES

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General rise of price levels in an economy over a given period of time. Causes -Monetary Rule (Too much money) -Demand pull inflation -Cost push inflation Consequences (Costs) -lower purchasing power (real income decreases) -reduced international competitiveness -borrowing interest rates (increased) -interest rates of saving (money return decreases) -uncertainty Government must try to decrease economic activity

UNEMPLOYMENT Unemployed someone who is actively looking for work but cannot find employment Unemployed -------------Labor Force (Unemployed+Employed) Typed/Causes 1. Cyclical Trade Cycle 2. Structural Unemployment a. miss-match between the skills you have and the skills needed b. you do not have the skills to do the jobs offered 3. Frictional Unemployment a. between jobs, waiting for a job 4. Seasonal Unemployment (5. Voluntary Unemployment riding the system, living on unemployment benefits) There will always be some unemployment.

=Unemployment rate

A) How is unemployment measure in the graph? Unemployed/Labor Force = Unemployment rate B) What evidence is there to suggest that the unemployment increase in the US is the result of cyclical factors? Unemployment increased during the global recession. Unemployment in all markets fail. C) Cyclical Unemployment unemployment cause by falling demand as result of a downturn in the economic cycle D) Costs of Unemployment Personal costs Loss of average income Loss of skills Depression Economic costs Decrease in GDP (Waste of Resources) Less government revenue More transfer payments E) Out of work when moving between jobs is C, Frictional Unemployment F) DISCUSS THE CONSEQUENCES OF UNEMPLOYMENT TO FIRMS LIKE BOEING AND AT&T. Other causes -minimum wages -high taxes -poor information -welfare checks MACROECONOMIC CONCEPTS Aggregate (Sum of) Demand - Total demand in an economy at different price levels (inflation rate) during a given amount of time. (Different inflation rates and their demand) Consumption (Households, Usually biggest), Investment (Businesses), Net exports (exports-imports), Government Spending

Aggregate Supply- Total supply of all goods and services produced at different price levels over a given amount of time. Any time resource costs change, aggregate supply will change.

7 International Trade
a. Balance of Payments b. Exchange Rates c. Free Trade and Protectionism d. Specialism

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8 Development Economics
a. Development Indicators b. Population

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Developing nations rely on the primary sector

HDI Gdp per capita Population in absolute poverty Less than a 1-dollar a day Life expectancy Literacy rate Excess to sanitation Median number of school years Carbon emission Improve health care Market/banking system Multinational companies Free Trade Education Infrastructure Uncorrupt government Types of aid Food aid Tech aid Loans Financial aid Dependency ratio = dependent population/ working population Dependent population- aging population Increase in dependency is okay if the working class more productive

What has caused birth rates to fall in many developed and developing countries Living standards (and my penis) are rising There is increased use of contraception Increase in female employment People are marrying later in life

Why are birth rates high in many less-developed countries? Living standards are poor There are high child mortality rate Custom and religion prevent contraception

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