Economics

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Economics

  1. 1. ECONOMICSIt can explain everything
  2. 2. Overview Introduction  Public Goods Margins  Fiscal Stimulus The Australian  International Economy Economics  Basic Concepts  Free Trade Markets  Institutions  Outline  Fair trade  Failureand intervention
  3. 3. Introduction Economics is the study of choice At its heart, it seeks to answer what to do with scarce resources – what to produce, how to produce, and who gets the results Economics in debating is often more about a way of thinking than about bringing a particular argument Economics in debating often involves looking at the affects on individuals or groups in terms of changing their incentives to engage in certain activities
  4. 4. Margins Economics is all about the margins, or what happens to people who are “on the edge”  Eg, Baby Bonus Policies are rarely going to affect everyone; worth thinking about who specifically they affect This applies not only in economics but in all debates  Eg Death Penalty debates
  5. 5. The Australian Economy Unusual, in that a large part is primary products  Major trading partners include China, Japan, US, South Korea, New Zealand, India Significant services sector Generally deregulated Independent Monetary Policy (interest rates) Moderate Welfare State Governments are willing to be interventionist  Active fiscal stimulus
  6. 6. Australian Economy: BasicConcepts Inflation: Rise in average prices  Badbecause it erodes wealth, but needed to ensure a moderate level of activity Unemployment: People without jobs, who want one Interest Rates (monetary policy): “Cost” of money  Used to moderate economic activity Economic Activity: stuff being produced and consumed – “trickle down” Fiscal Policy: Government spending and
  7. 7. Markets Basic capitalist theory is that producers supply more as price increases, and consumers demand more as price decreases These two effects work together to come up with some price that equates the number of buyers and sellers in a market Often referred to as the “efficient outcome”, or “perfectly competitive market”
  8. 8. Markets contd. Price is particularly important It acts as a signal to buyers and sellers about how they should react It’s important not only within markets, but between them as well Investment in renewable energy – or not  E.g.: needed? Competition is meant to spur innovation and lead to low prices
  9. 9. Markets contd. S P D Q
  10. 10. Markets contd. Since markets lead to the “right” amount of production, people are often loathe to interfere with them Anything that leads to an outcome other than the market outcome is traditionally seen as inefficient  Thisis because there are transactions that would have taken place that aren’t happening Examples – tariffs, quotas, price restrictions
  11. 11. Market Failure and Intervention However, markets don’t actually work like that Markets fail for a variety of reasons (usually because one of the assumptions underlying them doesn’t hold up):  Perfect information  Infinite buyers/sellers  Perfect mobility of capital  Perfect rationality  No external effects The extent to which they fail is usually the extent to which one of the assumptions breaks down
  12. 12. Market Failure and Intervention Intervention is designed to fix one of the problems above – though in some cases it may not be the best way to resolve the problem Debates are commonly about whether to intervene in a market to imperfectly solve a problem, or whether a problem is best left to the market to come up with its own imperfect solution
  13. 13. Information Asymmetry Fancy way of saying some people know stuff and other people don’t  E.g., Insider Trading Solution: Regulation Two other interesting types:  Adverse Selection: People offering themselves for selection are the ones you don’t want to select (eg: cars)  Moral Hazard: People act differently when insured against risk (eg: bailouts) Solution: ??
  14. 14. Monopolies/Duopoly/Cartels Exactly like the game One seller, charges a higher price than otherwise Eg Telstra Can be natural or otherwise Eg, OPEC Solutions: Government Regulation Other examples
  15. 15. Externalities Occur when a third party is affected by some economic transaction, and their welfare is not taken into account – may be positive or negative Means that market outcomes may not be efficient Eg, pollution Solution: Regulate/ban/subsidise/make mandatory However, these may also present opportunities for “market based” solutions  Taxes
  16. 16. Self-Correction? Most solutions are imperfect, in some way or another  Eg Taxes on Pollution Markets may come up with their own solution  Eg Job Market Just because the Government can intervene, doesn’t mean it will be better or that it should Other examples
  17. 17. Public Goods A public good is a good that is non-excludable and non-rivalrous in consumption  That is, people cannot be excluded from its benefits  Further, it means that once it is provided, it is provided whether one person consumes the good or a thousand people consume the good Examples include national defence, free-to-air TV, disease control, levees, lighthouses, and education (to a certain extent) Because of the effects, people have an
  18. 18. Public Goods contd. Public goods are an important concept – they describe how goods that people value may not get created, because everybody wants somebody else to do the hard work Also, they describe how a good’s cost may not be accurately reflected, as the benefits are wide-reaching Other examples
  19. 19. Fiscal Stimulus Involves trying to get money moving Monetary is better, but most people agree in the absence of this fiscal policy should take place Criteria is generally:  Credible role for Government  Timely – works quickly  Targeted – gets spent, and spent effectively  Temporary – not locking in the Government Often trade-offs involved  Eg Infrastructure
  20. 20. Free Trade Free trade works on the same basic economic principles – transactions that occur are mutually beneficial, and that these transactions can occur across national borders Often these transactions allow for new possibilities as different countries have different capabilities  Comparativeadvantage – should David Beckham mow his own lawn? The notion is that free trade allows for economic growth as well, which leads to
  21. 21. Free Trade However, Governments don’t always do this Arguments against pure free trade generally focus on less economic concerns, though not always  Infant Industries  Political considerations Protectionism generally benefits a few people a lot, and costs most people a little bit Important to think about who wins/loses, and how
  22. 22. International Economics -Institutions Governed largely by the WTO, IMF, World Bank Seen to be from the neo-classical school Have come under fire for policies that are seen to disregard social issues Generally focused on liberalisation (reducing barriers to markets functioning) This sometimes has negative outcomes – for example, IMF structural adjustment programs
  23. 23. Fair Trade A reaction to the free trade movement Looks to pay a “living wage”  Paying people sufficiently to allow them to live well Does this by setting a minimum price for commodities, which tend to fluctuate Leads to higher prices for products Seen as socially responsible However, has its own market distorting effects – effectively a price floor

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