VCE Economics Unit 3 Notes (SS 50)

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1 VCE Economics Unit 3 Year 2016 Mark Pages 46 Published Jan 10, 2017 VCE Economics Unit 3 Notes (SS 50) By Alex (99.15 ATAR)

2 Powered by TCPDF ( Your notes author, Alex. Alex achieved an ATAR of in 2016 while attending Trinity Grammar School Currently studying Bachelor of Commerce - Actuarial Studies at University of Melbourne Alex says: Hi! I completed VCE at Trinity Grammar School in 2016, attaining an ATAR of 99.15, with a perfect study score of 50 in Economics. I was honoured to be a House Vice-Captain, earning the position of prefect, along with additional academic and sporting awards throughout my schooling life. I have chosen to pursue a Commerce degree at The University of Melbourne, majoring in Actuarial Studies.

3 Unit 3: Economic Activity Area of Study 1: An inroduction to microeconomics: The market system and resource allocation Key economic concepts including relative scarcity, opportunity cost and the efficient allocation of resources; Relative Scarcity: Relative scarcity details the basic economic problem in which there are inadequate resources (land, labour, capital and enterprise) to satisfy our infinite and unlimited needs and wants. For example, if everyone on the earth decided that tomorrow they wanted 20 apples to eat, while this want may be satisfied for some, ultimately most would not be able to obtain and eat 20 apples as there are quite simply not enough to satisfy this desire. Needs and Wants: Needs outline the basic necessities for our daily lives. For example, shelter, food and water. On the other hand, wants outline the items that will make our lives more enjoyable. For example, computers, sunglasses and soft drink. Types of Resources: Natural Labour Capital Enterprise Natural resources are gifts of nature and include things such as water, land, oil and wood. Labour resources involves the work of humans to perform a specific job or task. This can be a mechanic, doctor, lawyer or architect. Capital resources involve man-made, manufactured goods that are used in production. For example, buildings, machines, robots, power generators and computers. Enterprise resources details a specialised type of labour resource which will use the skill of management and leadership to create a business, and utilise resources to produce goods and services. Opportunity Cost: Opportunity cost refers to the utility value of the next best alternative. Opportunity cost can be measured in a variety of different ways, such as money, time, external costs (which are transferred to others) etc. For example, if an apple is worth 5 happy points, and an orange 6 happy points, if I choose to eat an apple, this decision will have an opportunity cost of 6 happy points. The Production Possibility Frontier:

4 The production possibility diagram outlines the production choices available to society in ways resources may be used or allocated. Point X will result in resources not being utilised to their full extent. Point Y cannot be achieved for there are not adequate resources. Point A, B, C show the physical limit to a nations production when resources are used to their full capacity. However, each choice will result in an opportunity cost. Efficient Allocation of Resources: Definition: An efficient allocation of resources is said to occur when no other pattern of resource allocation between competing uses (no other combination of outputs produced from the available factors of production) would result in greater human satisfaction being achieved. The opportunity cost of production decisions is minimised when there is an efficient allocation of resources, and the productive capacity of the economy is maximised. The Various Efficiencies: Definition: Allocative efficiency occurs when the forces of supply and demand are the sole determinants of the price within a market. Whereas, on the other hand, technical efficiency relates to businesses producing goods and services at the lowest unit cost whilst maintaining the quality of output. Allocative Technical Dynamic Intertemporal Occurs when the forces of supply and demand are the sole determinant of prices in a market. This will ensure that resources are used in such a way to maximise the satisfaction of society s needs and wants. Relates to firms producing outputs for the lowest cost per unit, whilst maintaining the quality of these outputs. Involves firms being adaptive and creative in response to changing economic circumstances, in the ways they use resources. Entails ensuring there is a suitable balance between resources being allocated towards current consumption, but likewise, ensuring there is adequate national saving for financing future investments. Economic factors influencing decision making of households, businesses, government and other relevant groups; Decision Making of Consumers: - Rational The average consumer is considered to be rational. They will use their income to gain the greatest amount of satisfaction, and maximise this for the lowest possible cost. To do this,

5 Powered by TCPDF ( they will compare the costs of benefits associated with any purchase and make a fully informed decision. - Preferences Consumers will each have different tastes and preferences and be aware of how much extra utility they will gain from consuming a certain good or service. Thus, their decision making will be influenced by how much they like the good or service. - Budget Constraints Consumers will be forced to make choices based on both their preferences and the amount of money they have to make this purchase. Consumers cannot buy everything, and thus, will need to make compromises and choose amongst alternative products to obtain his or her maximum level of satisfaction. Decision Making of Businesses - Profit Businesses exist to make a profit, and thus, they will be motivated to make decisions that maximise revenue and minimise costs. - Degree of Competition The degree of competition will act to discipline the way in which firms operate, and decisions will need to be made that will make their product more appealing to consumers. - Government If the government introduce a new policy or law, any aspect of a firm that does not align with these new restrictions will have to be changed. Thus, the future decision making of businesses will need to align with policy decisions made by the government. Decision Making of Governments - Political Governments are elected by the population, and thus will make decisions that will be most likely to affirm their position of power, and ensure the prosperity of the economy. Decision Making of Charities - Altruism Not-for-profit organisations will make are motivated by the desire to help others and do what is best for the community, and thus, they will make decisions that are motivated by altruism.