“…you can’t always get what you want.”
The Rolling Stones may have said it in the most entertaining way in the late ’60s, but economists have been saying it for centuries,
Economics is the science, or study, of choice.
The pillars of modern mainstream economics include the concepts of scarcity, opportunity cost, self-interest, specialisation, market dynamics and market failure – all of which are relevant to an understanding of the reasons to invest and why property provides a relatively safe and predictable way to do so.
The fundamental problem we all face is scarcity, and it applies to us collectively and as individuals.
While Australia is a prosperous, naturally endowed nation, our resources are finite. To be considered useful, resources need to be known and accessible. Only then can they be regarded as one of the four factors of production – land, labour, capital and enterprise.
For example, Australia has an abundance of land, but most of it is arid desert.
The cost of development and infrastructure provision to make a desert inhabitable would be prohibitive.
But the explanation is simple – while our land areas are not dissimilar, theirs is very different topography, and it allows them to build right across the country – land is therefore not a scarce commodity.
Not so in Australia – the vast majority of us are confined to the edges (approximately 67%) and therefore, developed, useable, infrastructure connected and supported land is scarce and as a result, far more valuable.
It’s textbook supply and demand theory in practice.
Typically, your income is the resource you have at your disposal to satisfy your wants and needs.
Income is the return to the factors of production. There are four types of factor income:
Most of us will earn a wage or salary in return for labour,
but we also have the opportunity to
earn income in other ways too.
Once you have earned your income, there are only three things you can do with it; you can spend it, you can save it and, pay taxes.
There are no other alternatives!
Most people have the tax taken out automatically before they get to make any choices about consuming or saving. What you have left is disposable income.
Disposable Income = Gross Income – Taxation
Our predicament compels us to make choices. As rational human beings, it’s assumed that we all try to allocate our scarce resources to our competing needs and wants to maximise our satisfaction.
We are all economists!
In the next section, we will examine how we make those choices.
How do we as a nation and as individuals
increase our standard of living
by reducing scarcity and
enhancing our choices in life?