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.
Households decide what to buy and who to
work for.
Firms decide who to hire and what to
produce.
Market Economy
Firms and households interact in the
marketplace, where prices and self-interest
guide their decisions.
All the high-income democracies, such as
Australia, the USA, Canada, Japan and many
European countries, are in large part market
economies.
Mixed Economy
A mixed economy is an economy in which most
economic decisions result from the interaction
Externality
A positive externality makes the bystander
better off.
For example:
A farmer who grows apple trees provides a
benefit to a beekeeper. The beekeeper gets
a good source of nectar to help make more
honey.
If you walk to work, it will reduce
congestion and pollution, benefiting
everyone else in the city.
Externality
A negative externality makes the bystander
worse off.
For example:
If you play loud music at night your
neighbour may not be able to sleep.
Economic Models
Economists use economic models to answer
questions.
For example
How do we deal with water scarcity in Australia?
The role of assumptions in economics
Any model is based on making assumptions
because models have to be simplified to be
useful.
Using assumptions we can construct economic
models to learn about the world.
Hypotheses in Economic Models
A hypothesis in an economic model is a
statement that may either correct or incorrect
about an economic variable.
Economic Variables is something measurable
that have different values (e.g. wages, prices,
litres of water).
Hypotheses in Economic Models
For example:
An example of a hypothesis in an economic model is
the statement that charging more for water will
lead to a decline in water usage.
An economic hypothesis is usually about a
casual relationship; in this case, the hypothesis
states that a higher water price causes or leads
to, reduced amounts of water usage.
Economic Variables
Economists accept and use an economic model
if it leads to hypotheses that can be confirmed
by statistical analysis.
Positive Analysis
Positive Analysis is statements that can be
checked by using the facts.
For example:
A reduction on taxation rates will lead to an
increase in spending by individuals
Economic Growth
At any given time the total resources available
to any economy are fixed.
For example: if Australia produces more
computers it must produce less of
something else televisions in our example.
Over time, though, the resources available to an
economy may increase.
For example: The amount of available
labour force and the capital stock shifts
the production and makes it possible to
produce both more computers and
more television.
Trade