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TOPIC 4
INTRODUCTION TO ECONOMICS
This topic has been developed in consultation with Dr Vicki Feast, School of
Commerce, University of South Australia, and is based on information in
Jackson and McIver (2004).
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Please note that the activities in this topic are designed to promote understanding of the
concept through reflection, discussion and relating theory to practical contexts in your
experience. They do not have right or wrong answers.
According to Jackson and McIver (2004), human beings have unlimited wants for
goods and services. However, the resources available to satisfy these wants are limited.
This is called the ‘economising problem’ and provides the foundation of economics.
It is based on two fundamental facts:
1. Society’s material wants are virtually unlimited or insatiable.
2. Economic resources are limited or scarce.
These resources are all the natural, human and manufactured resources that go
into the production of goods and services. They include land, capital, labour and
entrepreneurial ability. Economics can, therefore, be defined as follows:
Economics is concerned with the efficient use of limited productive
resources for the purpose of attaining the maximum satisfaction of our
wants (Jackson & McIver 2004, p. 4).
The study of economics is important because it:
•
•
•
•
provides the basis of government economic policy;
helps us to be better informed citizens;
assists in the making of business decisions; and
provides the means to develop a social perspective on economic problems.
ACTIVITY 1
In groups of two or three students, or by yourself, write a list of the ten most important
goods and services that you want/need every day.
1.
2.
3.
4.
5.
6.
7.
8.
TOPIC 4 — INTRODUCTION TO ECONOMICS / 35
9.
10.
Of these ten wants, which three are absolutely vital to your survival?
1.
2.
3.
Can you imagine a situation where these vital wants/needs could not be satisfied? (for
example, consider a developing country where water is not readily available). What role do
you think the government has to ensure that your basic wants/needs are satisfied?
The ‘economic perspective’ involves:
• Recognising that for society generally, resources are limited. We therefore need
to make careful choices about the production of one alternative over another.
• Assuming that individuals operate on the basis of rational self-interest. This
means that we make decisions that will provide us with the greatest benefits.
• Understanding the need for ‘marginal analysis’ whereby choices are made on the
basis of benefits exceeding costs.
According to Jackson and McIver (2004, p. 38), society needs to use its resources
efficiently. To achieve efficiency, society needs to realise both full employment and full
production.
Demand and supply
A central concept in economics is the law of demand and supply, which helps us to
understand specific economic issues as well as the operation of the entire economic
system.
Demand is the amount of product that consumers are willing and able to purchase
at a specific price and at a specific time. If the price falls, and all else remains constant,
the quantity demanded increases. That is, if the product is cheaper, consumers will buy
more.
The law of demand is:
The inverse relationship between the price and the quantity demanded of a
good or service during some period of time (Jackson & McIver 2004, p. 73).
Non-price determinants of demand include:
• consumer tastes/preferences;
• number of consumers in the market;
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• incomes of consumers;
• prices of related goods; and
• consumer expectations about future prices and incomes.
ACTIVITY 2
Consider a purchase of clothing you made recently. On what basis did you make your
decision to purchase the item? Was it price alone or did any of the other determinants listed
above have an impact on your demand for the product? List the other determinants.
The demand curve
(Jackson & McIver 2004, pp. 75–6)
The inverse relationship between product price and quantity demanded can be
represented on a simple two-dimensional graph (see Figure 4.1). Quantity demanded is
measured on the horizontal axis and price on the vertical axis. ‘An individual’s demand
schedule graphs as a down sloping curve because price and quantity are inversely related’.
In simple terms, the graph shows ‘that consumers will demand more of a product as its
price declines’. In contrast non-price determinants of demand shift the demand curve
either to the right (increase) or left (decrease). Take care to distinguish these different
determinants and the impact they have on the demand curve.
P
d
Price ($ per unit)
5
4
3
2
1
d
Q
0
10
20
30
40
50
60
70
80
Quantity demanded (units per week)
Figure 4.1: The demand curve.
TOPIC 4 — INTRODUCTION TO ECONOMICS / 37
Supply is the varying amounts of a product that producers are willing and able to
produce and make available for sale in the market at a specific price and at a specific time.
As the price rises, the quantity supplied also rises; as the price falls, the quantity supplied
also falls. That is, producers are willing to supply more of their product at a high price
than at a low price.
The law of supply is:
The direct relationship between the price and the quantity supplied of a
good or service during some period of time (Jackson & McIver 2004, p. 81).
Non-price determinants of supply include:
•
•
•
•
•
resource prices;
technology;
prices of other goods;
expectations; and
number of sellers in the market.
ACTIVITY 3
1. Imagine you have decided to sell your handmade crafts at a local market. How will you
determine the prices of your products? Consider each of the non-price determinants
listed above.
2. Now imagine that you have been working at the same market for a few weeks. You
initially charged $10 for a handmade ceramic dish, but you run out of this item every
week because it is very popular. No one else in the market is selling ceramic dishes
like yours. How does this affect both the quantity you are willing to supply and the
price? How does this affect your willingness to produce the beaded necklaces that
are very expensive to make, in both time and resources, and not very different to the
necklaces on the other stalls?
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The supply curve
(Jackson & McIver 2004, pp. 82–3)
The concept of supply can also be represented on a two-dimensional graph (see Figure
4.2). Just like demand, a change in supply occurs when one of the non-price determinants
of supply changes. An increase in supply shifts the supply curve to the right, and a
decrease in supply shifts the supply curve to the left. In a similar way to demand and in
contrast to a shift of the supply curve, a change in the quantity supplied caused only by
a change in the price of the product results in movement from one point to another on
a fixed supply curve. The distinction is important in economics.
P
Price ($ per unit)
S3
S1
5
S2
4
b
3
a
2 S3
1
S1
0
S2
2
Q
4
6
8
10
12
14
16
18
20
Quantity supplied
(thousands of units per week)
Figure 4.2: The supply curve.
Market equilibrium
Product surpluses result when the price of the product is above the market-clearing
price. This causes producers to reduce their prices to sell their product. Product
shortages result when the price of the product is below the market-clearing price. This
causes consumers to bid up the price of the product.
All other factors constant, an increase in demand and a decrease in supply will tend to
increase the equilibrium price. On the other hand, a decrease in demand and an increase
in supply will tend to decrease the equilibrium price.
When the supply decisions of producers and the demand decisions of buyers are
consistent, an equilibrium price occurs:
Equilibrium prices and outputs are determined through the interaction
of demand and supply leading to a market-clearing situation, where the
quantity supplied and quantity demanded are equal (Jackson & McIver
2004, p. 95).
TOPIC 4 — INTRODUCTION TO ECONOMICS / 39
A real world example
(from Feast & Adams 2004, p. 8)
The following newspaper report demonstrates the theories of demand and supply very
well. It is about Coca-Cola charging different prices depending on consumer demand
(that is, when it is hot and consumers are thirsty and therefore wanting more Coke). As
the example shows, increased demand results in higher prices. As a result of increased
demand and a subsequent shortage of the product at the current market equilibrium,
suppliers can raise prices, which results in an increase in quantity supplied and the
eventual achievement of a new market equilibrium. As commentators in the report
suggest, it does not seem ‘fair’ to increase the price of a product when it is needed most.
On the other hand, the supplier (Coca-Cola) argues that increasing (or decreasing) the
price of a product according to consumer demand is appropriate in a market economy.
Coke warms to changing prices
Fiona Hudson
Soft drink vending machines may soon charge more in hot weather and less when it
is cold. The world’s largest soft drink maker, Coca-Cola, is trialling machines which
can automatically raise or lower prices based on demand.
The company has been testing the technology in America for about three years.
Australian-based coke bottler, Coca-Cola Amatil, confirmed yesterday the so-called
‘smart machines’ were ‘bound to come to Australia’.
Consumer groups expressed fear they would be used to exploit thirsty customers. Australian Consumers Association spokesman, Matt O’Neil, said the machines
amounted to ‘commercial opportunism’. ‘They know if people are at a vending
machine, they’re thirsty and they’ll pay anything,’ he said. ‘Prices should remain uniform year-round.’ But Coca-Cola Amatil spokesman, Alec Wagstaff, said it was fair to
charge different prices in different situations. The machines were more likely to be
used for offering discounts than price rises, he said.
Australian vending machines already automatically relay information on how certain drinks are selling, if there are malfunctions or when a machine is out of stock.
Misdialling machines have been blamed for a large number of mistaken calls to the
000 emergency line.
The Advertiser, 29 October 1999
Reprinted with permission from the Herald and Weekly Times.
ACTIVITY 4
After carefully reading the newspaper article above, draw a two-dimensional graph (with x
and y axes) demonstrating both the change in demand and the law of supply in this case.
Write a paragraph explaining the graph.
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Suggested assessment
Research essay (1000 words)
Please research and write a fully referenced research essay based on the question below.
You are required to use information from a variety of sources such as books and journals
to support your arguments (see Chapters 1 and 2 for advice on reading and notetaking). Carefully follow the guidelines for writing an essay provided in Chapter 3, and
the information on academic conventions in Chapter 4. When proofreading your essay,
please follow the guidelines for self-editing provided in Chapter 5, and the referencing
guidelines provided in Appendix 1 and 2.
Outline the market situation for a product of your choice. Include likely demand and
supply and equilibrium concepts as they apply to your chosen product. Outline two
possible changes you can foresee in the market for the next 12 months for this
product (including prices and output changes) and give reasons for those changes
using demand and supply theory.
Please see the standard essay marking criteria provided in Appendix 3.
References
Feast, V & Adams, K 2004, Real world economics: a media review, McGraw-Hill, Sydney.
Jackson, J & McIver, R 2004, Macroecomonics, 7th edn, McGraw-Hill, Sydney.