Natural resources (Land, Labour, Capital, Enterprise) ➕ Man-made resources (Capital) ➕ Man (Labor) ➡️ Entrepreneur

Govt intervention in Micro-economics : taxes, price control, price ceiling, price floor, embargoes, regulation

Private goods - goods provided by the individual suppliers through market

Externalities : a cost or benefit caused by a producer that is not financially incurred or received by the producer

Tradeoff : To achieve greater equality,
could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.”

Opportunity cost : whatever must be given up to obtain it

Making decisions requires comparing the costs and benefits of alternative choices.

Rational people : systematically and purposefully do the best they can to achieve their objectives.

Marginal changes : incremental adjustments to an existing plan

Incentive : something that induces a person to act, i.e. the prospect of a reward or punishment

Benefits for countries : Get a better price abroad for goods they produce / Buy other goods more cheaply from abroad than could be produced at home

"Organize economic activity" - what goods to produce, how to produce them, how much of each to produce, who gets them

The interaction of buyers and sellers determines prices.

Each price reflects the good’s value to buyers and the cost of producing the good.

Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being.

Government may alter market outcome to promote equity

depends on the equipment, skills, and technology available to workers

The faster the govt creates money, the greater the inflation rate.

In the short-run (1–2 years),
many economic policies push inflation and unemployment in opposite directions.

Market Power : a single buyer or seller has substantial influence on market price

Examples : smoking in non-smokers / pollution - regional / traffic congestion / COVID19

Negative externalities : Cost on 3rd parties ➡️ Pollution

Positive externalities : Clean env. ➡️ Windmills / clean energy

Influenced factors : Political systems / Social Arrangement

Economic roles are passed from generation to generation

Mixed Economic System : Combines elements from traditional, command and market systems - heavily depend on one of the basic forms

Pros : Resource planning / Zero unemployment / Control of externalities / No competitive waste / Public & merit goods

Cons : Allocative inefficiency / over-manning / Lack of incentives to innovate / Lack of international trade / Shortages / Rationing

Pros : Entrepreneurship / Innovation / Variety / Profits / Consumer sovereignty

Productive resources are owned and governed by govt.

Cons : Business failure / Monopoly practices / Unemployment / Competitive waste

Productive resources are owned and run by individuals

Constitute the rules and generally accepted procedures that evolve in a community for determining what government does and how government outlays are financed

Useful to the positive approach in that it defines relevant issues

Useful to the normative approach in that it cannot make recommendations to achieve certain outcomes without an underlying theory of human behavior

The efficiency criterion / Pareto optimality : Normative criterion for evaluating effects of resource use on individual well-being

Taxation is the primary source of revenue for Govt.

Govt :There is no direct link between taxes and the goods and services provided by the Govt. ➡️ Taxes do no ration income or expenses.

Govt. activity requires reallocation of resources from private sector to Govt. ➡️ Individuals must let Govt.to take individual's right to command, so that the Govt. can provide goods and services

Method of finance ➡️ can distort the prices of goods and services in ways that prevent competitive markets from achieving efficiency

Alternative financing schemes can influence prices and amounts of private goods exchanged in markets

Reallocation of resources : ➡️ Ability of individuals to command resources is reduced ➡️ Revenue is used to bid for resources necessary to provide Govt. goods & services ➕ Income support to recipients of Govt.

Alternative to taxation : Govt. acquisition of resources directly

Excise tax : tax on the manufacture or sale of a particular good or service ➡️ selective tax on a particular form of wealth

Tax on profits : selective income tax ➡️ taxes only a particular form of income

MTR = 🔼 Total Taxes Paid / 🔼 Value of the Tax Base

Market failure ➡️ Insufficient resource allocation, Lost societal benefits, Under production of public goods (those that have a high societal value)

Externalities ➡️ Corrective action is taken by Govt. through the market itself ➡️ via policies and regulations (stick) and carrot (incentives)

Positive externalities : benefits (Ex : Clean energy, Education - 3rd party effect ➡️ social benefits, COVID vaccine, Fire brigade, Technology Spillover - can spread to other areas)

Qs < Qm ➡️ Not market Eq. qty / Social Opt. qty ➡️ Social - Welfare maximised

Rise in Govt. role in economy (Ex: economic crisis) ➡️ Increasing ageing population changes policy and expenditure

If there's no Govt. : Judicial system, National defence and homeland security, Social security, Unemployment insurance ➡️ won't be there or disorganized

Most efficient form of resource allocation ➡️ Has the invisible hand to operate the market ➡️ Assumes that markets are always clear and stable

Business cycles operate Govt. play in allocate resources and how individual choices, influence what Govt. policies affect the incentives of workers, investors and firms to engage in production

Govt. goods and services are distributed through non-market rationing ➡️ Govt. goods and services are not made available to people according to their willingness to pay and their use is not rationed by price. (Ex : National defence)

Private business firms are organised to hire resources in input markets to produce goods and services desired by household members

The Govt. participates in market as buyers of goods and services ➡️ Govt. use purchased inputs from households and acquire ownership rights of such productive resources as land and capital

Govt. and Taxes : The Govt. requires businesses and households to pay taxes, charges and fees

Long term ➡️ Impact of a deficit on national saving and future living standards

Stimulus Bill : created to increase employment during the recession ➡️ Causes federal deficit

Federal govt. expenditure ⬆️, Unemployment ⬆️

Corporate income tax collection ➡️ sensitive to fluctuations in economic activity

Personal income tax collection ➡️ based on a progressive rate structure also fluctuate with the level of economic activity

Unified budget balance : the difference between all federal government expenditures and revenues "on" or "off" budgets

NIPA budget balance : official measure of federal deficit in the national income and product accounts

Real budget balance : measure of change in federal debt after adjusting for effects of inflation and changing interest rates on the real market value of the outstanding net debt

Ricardian equivalence : when an increase in govt. borrowing to finance deficit causes increase in private saving that keeps level of interest rates fixed

Balanced budget or surplus implies that market demand for credit is equal to private demand for credit

Reduced supply of savings can contribute to higher real interest rates and lower economic growth

External debt – portion of a government’s debt borrowed from abroad

Comparedwithtaxfinancing,debtfinancingallows current generation more private consumption opportunities over its lifetime