ECONOMICS

It can explain everything

Overview

Introduction Margins The Australian

Economy Basic Concepts

Markets Outline Failure and

intervention

Public Goods Fiscal Stimulus International

Economics Free Trade Institutions Fair trade

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

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

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

Australian Economy: Basic Concepts Inflation: Rise in average prices

Bad because 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 taxation Has affect on the economy, but

limited/different

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”

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 E.g.: Investment in renewable energy – or

not needed? Competition is meant to spur innovation

and lead to low prices

Markets contd.

SP

D

Q

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 This is because there are transactions that

would have taken place that aren’t happening

Examples – tariffs, quotas, price restrictions

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

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

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: ?? Other Examples

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

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 Quotas/trading schemes/Property rights

Other Examples

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

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 incentive to “free-ride” – get the benefits without paying

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

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

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 Comparative advantage – should David

Beckham mow his own lawn? The notion is that free trade allows for

economic growth as well, which leads to ultimately greater benefits

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

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

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