Economics is the allocation of resources available to satisfy people’s needs and wants for goods and services (Layton, Robinson, & Tucker, 2016, p. 5). An economic model is “a simplified description of reality used to understand and predict the relationship between two variables” (Layton, Robinson, & Tucker, 2016, p. 8). That is, to forecast or predict, changes in key variables such as price to understand the effects of the changes and observe patterns (Layton, Robinson, & Tucker, 2016, p. 9). The results observed in the model contribute to the decision-making process for the allocation of resources.
However, a model only takes into consideration the variables that are assumed to be the most important to explain the theory. For example, several variables such as income, price of petrol, weather and type of car owned may influence petrol consumption. In this case, the economist must assume which of these variables is the most important in relation to the consumption of petrol making a subjective decision. Thus, it could be argued that economics models are false because they only look at the variables that are assumed important by the individual. In addition, as the information is false then has no reliable purpose.
The standard model of supply and demand is used to determine the level of supply and demand as a function of price and other variables such as income. They aim is to find the equilibrium which is the point where the price at which the quantity demanded by consumers is equal to the quantity supplied by suppliers (Layton, Robinson, & Tucker, 2016, p. 71). For example, lets assume that the demand and supply curve in Figure 1 shows the market for the consumption of bread.
Figure 1 – Hypothetical ...
... middle of paper ...
... would source Australian steel from land to make the submarines (Henderson, 2016). According to (Henderson, 2016) the project would create 2,800 Australian jobs in the shipbuilding and supply chain processes. Thus, injecting specialised inputs in to the labour market in South Australia and other areas in the country such (Henderson, 2016) that contribute towards economic growth.
Figure 5 - Economies of scale (Layton, Robinson, & Tucker, 2016, p. 146)
However, as seen in figure 5 the project must be cautious not to encounter diseconomies of scale where the project grows output beyond management levels due to labour policies or inefficient management.
As seen above the choice to use only one contractor for the production of submarines is justified as the government needs to control and focus production factors to create economy growth through efficient production.
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