CHAPTER 6 Foundations of economics
Learning activity 6.1 What is economics?
Suggested solution
1
Economics is known as a social science. It is unlike natural sciences because its theories
cannot be tested in controlled experiments that can be done in the same way over and over
again. There are too many variables because people do not always act the same way.
2
He suggested socialism (based on state ownership) as an alternative to capitalism (in which
wealth is privately owned). He saw workers being exploited under the capitalist system.
3
a
Karl Marx
b
Adam Smith
c
John Maynard Keynes.
4
Traditional economies might also sometimes be known as subsistence economies.
5
Traditional economies normally rely on people performing repetitive tasks with a lack of
capital investment. As such they are very labour-intensive.
6
A planned economy is one whereby the government creates a long-term overall plan for the
use of the economic resources within the economy.
7
Some people argue that under a planned economy people have no real incentive to work
hard and as such economic activity remains low and inefficiencies occur.
8
A black market is one where goods are bought and sold illegally such as pirated CDs or grand
final tickets.
9
In economic terms a market is any exchange of goods and services whether tangible or
intangible.
10
The price mechanism acts to:
i
bring down the price of items that are in oversupply or facing low demand
ii
increase the price of items that are undersupplied or facing significant demand
thereby arriving at an equilibrium point satisfying both consumers and producers.
11
In a mixed economy, control over economic decision-making is mixed, meaning that both
the private sector and the government through the public sector are able to control
economic decision-making. In reality, all economies are mixed economies to a lesser or
greater extent.
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CHAPTER 6 Foundations of economics
Learning activity 6.2 Freakonomics
Suggested solution
1
This is one of the questions Freakonomics has tackled at one time. According to Lewitt and
Dubner, morality is about the world as we would like it to be and economics is about the
world as it is. When we see the greed of some capitalists, who abandon morality while
chasing profits,we realise that, in some instances, economics is about how the world works.
However, there are other instances, such as green products and companies that sell ‘fair
trade’ goods which are purchased from countries with low incomes (ensuring that the seller
is treated fairly). So, in reality, our economic systems contain examples of actions that have
moral considerations and actions that are mainly in pursuit of profit, the latter mostly being
the norm. However, without companies making profits there would be no jobs for people so
it is all relative.
2
Students will have individual answers.
3
They usually began with a mountain of data and a simple, unasked question.
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CHAPTER 6 Foundations of economics
Learning activity 6.3 Needs and wants
Suggested solution
1
A McDonald’s meal would usually be seen as a want rather than a need because (in
Australia) most people have enough to eat. McDonald’s is a convenient meal, sometimes
seen as a treat and would only be bought because someone wanted to have McDonald’s.
However, it is relatively inexpensive and so people who have little to eat may see a
McDonald’s meal as a need rather than a want.
2
Students will have individual responses. They should provide reasons for their opinions.
3
Students will have individual responses.
4
Economic goods are goods sold to consumers, such as surfboards. Free goods are freely
available, such as air.
5
If producers can turn a want into a need then they will sell more products and make more
profit. For example, we have come to rely on mobile phones, whereas just a few years ago,
most people did not see the necessity of constantly being in contact with other people. For
example, some parents now see the use of mobile phones as a ‘necessity’ for keeping tabs
on their children, and their children expect to be able to call home if they need help.
6
Students will have individual answers. For example, a student might see the sacrifice of not
going to the movies as frequently as the price to pay for having the use of a mobile phone.
(Each time we decide to use our limited money to buy one thing, we are also deciding that
we will not buy something else.)
7
Because our resources are scarce, it is important that they not be wasted. This is the case on
an individual level as well as on a national and global level. Scarce resources, such as oil or
coal, by their very nature will run out. If we do not use resources carefully, and think of
alternative ways of making energy, we could find our lifestyle could change considerably.
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CHAPTER 6 Foundations of economics
Learning activity 6.4 Visy Recycling
Suggested solution
1
Trees are used for making paper. Because new trees can be planted, they are renewable
sources. However, they take a long time to grow before they are ready to be used for paper.
It is therefore important that an organised program of tree planting be undertaken.
2
Paper used in the home is a finished good but when it is collected for use in creating more
paper it then becomes an intermediate good. It can no longer be used by the consumer
because it has served its purpose but it is being used to create more paper.
3
Visy is helping to protect our natural resources by reusing paper. This means that not so
many trees are needed in the production of paper and paper does not need to be thrown
away. Recycling is reducing the amount of waste.
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CHAPTER 6 Foundations of economics
Learning activity 6.5 Production of goods and services
Suggested solution
1
Primary stage – involves using raw materials, e.g. trees, wheat to create goods.
Secondary stage – goods produced in the primary stage are made into various intermediate
goods and finished goods.
Tertiary stage – when the consumer obtains the finished goods or services, e.g. the selling of
mobile phones or education.
2
Land (natural resources) – the raw material provided by our environment such as trees,
minerals.
Labour (human resources) – the skills, competencies and physical and mental effort that
people contribute when producing goods and services such as people working in a factory or
computer technicians.
Capital (manufactured resources) – physical resources produced by humans to be used in
the production of goods and services such as machinery, photocopies.
Entrepreneurship (management resources) – all the various skills and talents used for good
management, for example the Chief Executive Officer of a bank.
3
Non-renewable resources are resources that are limited in terms of how long they will be
able to be extracted (e.g., oil and coal). If coal and oil run out around the world, then the
world, which depends on a high use of energy, will come to a standstill unless alternative
ways of creating energy on a big scale are developed, such as nuclear power and wind
power.
4
Flour can be considered an intermediate good because it is used in the production of bread.
It is also a good that is sold at the tertiary stage to consumers who will buy it for their own
personal use in the kitchen.
5
Students to make a list relevant to their school. Examples could include such things as
photocopier, overhead projector, computer, electronic whiteboard, printer.
6
Capital resources are needed by businesses in order to produce the goods or services they
sell in the most effective and efficient manner. Capital resources will generally save time
and money.
7
In 1979 Visy took on the job of recycling paper products to make more paper. To do this
they would have needed machines that would sort the paper that had been collected for
recycling and machines that would convert the recycled paper into new useable paper. The
30 recycling plants would have also needed the usual equipment for running a large
operation such computers.
8
The workers in a large company are the most important aspect of the business. Without
workers within a business, businesses could not operate. It is therefore important to hire
the right people and make sure people are happy at work. The human resource department
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is responsible for this. These departments play a very important role in the running of a
company.
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9
10
a
The wood in this instance is a consumer good because it is bought by the end user
and is not being used in the production of goods and services.
b
The cement in this instance is a consumer good because it is bought by the end user
and is not being used in the production of goods and services.
c
Even though this is a small business, the cement is being bought by Kerry to be used
in the production of cement tiles and is therefore a capital good.
d
The sewing machine in this instance is bought for Aaron’s own purposes not for the
production of goods and services so it is a consumer good.
Sample response: Money is used by us all, as consumers, to buy the goods and services we
need. In this context it is not a resource because it is not used to create goods and services.
However, when it is used in the production of goods and services (for example, to buy
machinery and pay wages) it is a financial resource. Money is therefore an essential
resource for all production. It pays for the natural resources, labour resources, capital
resources and management resources.
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CHAPTER 6 Foundations of economics
Learning activity 6.6 Production of goods and services
Suggested solution
1
The basic economic problem is relative scarcity. This leads to other economic problems such
as inflation, unemployment and poverty.
2
Scarcity is determined by the demand for and supply of a product. For many products, such
as electricity, there is unlimited demand but not enough resources to continue supplying
these products forever.
3
The three fundamental economic questions:
 What to produce?
 How to produce?
 For whom to produce?
4
a
Fashion tastes will influence a producer to produce items that are more likely to be
in demand from consumers.
b
Availability of resources will influence the level of supply. If a severe frost
significantly reduces the world coffee crops then less coffee will be produced.
c
the strength of the local economy can affect a producer’s decision about what to
produce because there may not be enough money for people to buy expensive
products so the producer might change to a cheaper alternative. If an economy is
booming, producers have more choices about what they can produce and may
choose more high end products.
5
Wage costs are a key supply factor in the production of goods and services. If wages are
rising, then producers are likely to use cheaper methods of production such as more
machinery. For example, as wages have increased, more and more machinery has been used
such as robots for making cars.
6
Japan uses its large skilled labour force to produce high-tech products such as cameras.
Because they have limited natural resources they are less likely or able to produce goods
that use large quantities of natural resources.
7
China has a huge labour force and therefore can make goods such as clothes very cheaply.
Because the labour force is so large, their wages are low.
8
Personal opinion required for this question.
9
a
The opportunity cost of increasing wheat production from 700 to 900 tonnes is what
the farmer gives up which in this case is 100 tonnes of wool.
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b
The opportunity cost of producing the 200 tonnes of wool is the wheat that is given
up: 300 tonnes. If he produces no wool he is able to produce 1000 tonnes for
wheat. If he produces 200 tonnes of wool he can only produce 700 tonnes of wheat.
c
The decision is personal but the following are issues that are likely to influence his
decision:
 The price of wool and price of wheat – he would need to work out how he can
make the most income from the land he has.
 The time required to produce wool or wheat – whether he is prepared to work
long hours to produce a higher income.
 The style of farming he prefers.
 The weather conditions – which product, wheat or wool, best suits the weather
conditions of the area.
10
The cost of the war in Iraq has been enormous. Although there is a very large population in
the United States, the tax dollars are limited. The US government has therefore had to
decide how to use their available money. The opportunity cost of continuing to fight in Iraq
is not being able to spend as much money on the infrastructure requirements at home, such
as building bridges or roads, and funding health care and education.
11
Some companies are labour-intensive because they use processes that use a lot of human
effort (such as running a restaurant), whereas some companies are capital-intensive because
they use processes involving a lot of technology and equipment (such as car manufacturing).
12
Consumers vote with their dollar and thereby can have consumer sovereignty over the
marketplace. If they purchase a lot of a particular good, producers will keep producing it. If
they stop buying a product, producers will stop producing it.
Consumers influence what is to be produced by what demanding certain products, such as
larger televisions and mobile phones with more and more capabilities. However, the
consumers can be influenced by advertising of goods by producers (such as by making a
want appear to be a need).
13
The government can place restrictions and taxes on various items to reduce the demand and
supply for them (such as alcohol and tobacco) and can also give subsidies and rebates to
increase demand for other items (such as solar power).
14
The financial cost of building a government structure is the cost of land, building materials,
labour, etc. However, the opportunity cost is the opportunity foregone in building the
structure (that is, the alternative uses the money could be put to). If the government did
not build the structure, it could spend more money on such things as health care.
15
Students to make choices and produce suitable material.
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CHAPTER 6 Foundations of economics
VCE pathway activity McDonald’s and production
Suggested solution
1
Food
Buns
Orange juice
Potatoes
Chicken
Eggs
Cheese
Milk
Lettuce
Beef
Tomatoes
Fish
Stage of production
Secondary
Secondary
Primary
Primary
Primary
Secondary
Primary
Primary
Primary
Primary
Primary
2
Labour, chip fryers, coffee makers, management skills, power, other foods such as butter.
3
Students to draw diagrams. A diagram for burgers could include:
wheat producedflourbuns
cattlebeef
lettuce
tomates
eggs
 BURGER
4
McDonald’s makes the hamburgers from intermediate goods that are supplied to them and
creates the finished good. This is the secondary stage. McDonald’s is also part of the
tertiary stage of production because it distributes the goods to customers.
5
McDonald’s sells goods and services. They mainly are a business that sells goods
(hamburgers, etc.). However, they are known for giving very fast service; this is part of what
they offer and people go there especially because they know they can get their food very
quickly. You could therefore say that they also sell service as part of the price of their food.
6
McDonald’s main products are hamburgers. However, they also have add-ons, such as
beverages, fries, deserts and salads so people can come in and have a complete meal. They
sometimes have giveaways with particular items. They also provide nutritional values of the
ingredients of their food on the packaging as a way of encouraging people to come into the
store.
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7
Opportunity costs of McDonald’s for:
McDonald’s: They have to choose which food items they will supply. They cannot supply all
types of food so the opportunity cost of supplying one is that they have to forego selling
another type of food, for example, they sell Coca Cola and lemonade but do not sell lemon
squash.
Consumers: Consumers have a choice of different food outlets and if they choose one outlet,
such as McDonald’s on a particular day they have decided not to choose say Hungry Jacks.
Consumers also have to choose between the different types of food that is available once in
the door. If they choose a Big Mac they will possibly not choose a cheese burger, therefore
the cheese burger is the opportunity cost of a Big Mac.
Suppliers: The people or businesses who supply McDonald’s have to choose what they are
willing to supply to McDonald’s. If they supply their beef to McDonald’s for example, they
cannot supply it to another food outlet.
8
Students will have different answers, but could include something like:
Pay wages to employees who then spend the money on other goods. There are
approximately 85 000 people employed by McDonald’s in Australia.
Pays suppliers for goods used in the production of their products. The money going to these
suppliers gets used in the economy and is therefore contributing to economic prosperity.
For example in 2007 McDonald’s Australia purchased 400 million buns.
Make profits – some of the profits may go to the US about two thirds of the McDonald’s
restaurant businesses in Australia are owned and operated by franchisees. This means the
profits go to the franchisees and are likely to be spent in Australia, so contributing to our
economic prosperity.
9
McDonald’s will try to turn an economic want, such as hamburgers, into a necessity so that
they sell more. If people feel that they absolutely have to have a McDonald’s hamburger,
then the sales will increase. This is sometimes achieved by extensive advertising.
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