Preliminary Notes (Following Our 2015 Textbook the Market Economy) Topic/Chapter 1: What is Economics About?

1.1 The economic problem and the role of choices

Economic problem – how a society can satisfy the unlimited wants with the limited resources available Our wants are unlimited Resources are scarce Since we can’t satisfy all our wants we must choose between them We need to rate our preferences – leave some wants unsatisfied

Economics – trying to allocate our limited resources for the satisfaction of our unlimited and competing wants → must make choices – choosing one option and deciding against an alternative option

Opportunity cost – represents the cost of satisfying one want over an alternative want - the satisfaction you would receive from the alternative option i.e. give up opportunity to buy new car for a holiday → opportunity cost = satisfaction you could have gotten from car purchase

Individual – limited resources (due to limited income) e.g. holiday or car Firm – choice in allocation of scarce resources e.g. produce shoes or furniture Government – limited resources to satisfy community wants e.g. new motorway or hospital Relative scarcity + meaning

Relative scarcity refers to the scarcity of resources in comparison to the infinite wants of society. We must make choice based on what we can afford and what is available resource-wise.

Needs – goods and services that are essential for life/survival e.g. food, shelter and services like health and education

Wants – other goods and services that would make our lives easier or give us pleasure e.g. car, holiday Our wants are unlimited but our means of satisfying them is limited

Utility – satisfaction or pleasure derived from wants

Individual wants

e.g. high income = new phone, low income = basic food, clothing, shelter

Desires of each person – depend on personal preferences How many of these wants can be satisfied will differ –

depending on ability to purchase goods and services (i.e. income)

Less income → fewer wants able to be satisfied

Collective wants

e.g. education (schools), safety (defence and police forces)

Wants of whole community – depend on community as a whole

Usually provided by governmento Local – parks, libraries, local sporting facilities

o State – hospitals, schools

o Federal – satisfies wants of entire nation e.g.

defence force, enabled by taxation

Our wants are unlimited

e.g. always want newest technology

But means of satisfying our wants is limited Must choose between wants – prioritise Some will be satisfied sooner at the expense of others

Our wants change over time

e.g. 1yo pram, 7yo scooter,

19yo car, 90yo wheelchair

Age Income – increase in income → increase range of wants

that can be satisfied Technology – introduces new wants that people seek to

satisfy Fashion

All economies must answer the following questions:

1. What to produce – limited resources → can’t satisfy all wants → prioritise wants to satisfy → decide what goods and service to produce

2. How much to produce – aim to maximise satisfaction of wants Produce too much – resources wasted Produce too little – wants of some individuals will be left unsatisfied

3. How to produce – decide how to allocate resources in production process and look for most efficient method of production

4. How to distribute production – modern economies – share of production depends on income (higher income → afford to buy more ∴ larger share of production), economies must decide:

Equitable distribution – even Inequitable distribution – uneven Often conflict between equity and efficiency – more efficient → less equitable

1.2 The production possibility frontier (Lee-Tarte)

Used to demonstrate opportunity costs when individuals/communities make choices Shows various combinations of 2 alternative products that can be produced at a given point in time Society must choose what combination is most desirable On curve – efficient, all resources fully employed Outside curve– unattainable at the moment Inside curve – resources aren’t fully employed

Based on assumptions: Economy only produces 2 goods State of technology is constant Quantity of resources remains unchanged All resources are fully employed

New technology

More efficient methods of production Higher quantity goods, same amount resources

→ Upward shift of frontier

New resources

Increase in inputs e.g. discovery new resources or increased population due to immigration

Able to produce more of both goods

→ Push frontier upwards

Unemployment

Inefficient allocation of resources Total output less than what it could be –

producing within/underneath frontier

→ Frontier won’t change but our position in relation to it would – we would be inside

Shape

Things aren’t always equally substitutable Straight line = must be possible to shift all

resources between production of goods so opportunity cost is constant

Real world = not the case – cannot move resources without loss of productive capacity

→ Concave

1.3 The future implications of choices

Generally an economy can choose between producing consumer goods and capital goods Consumer goods – satisfy consumer demands immediately Capital goods – goods that will increase productive capacity in future i.e. will be used in the

production of other goods e.g. machinery

Capital goods don’t satisfy consumer wants and demands immediately, they expand economy’s production ability ∴ satisfying consumers to a greater extent and more efficiently in the future

Long-term – focuses on production of capital goods → increase productive capacity → higher level of economic growth

Economy must decide to produce consumer or capital goods – satisfy wants of consumers or maximise potential satisfaction in future

Individual – holiday or house and mortgage, immediate satisfaction or financial security Firm – must choose area of market to focus on – access potential success over medium to long

term Government – satisfying immediate needs may mean less funding to another area e.g. putting

money into education = ↑ economic growth and skill base, govts often influenced by political popularity

1.4 The economic factors underlying choices

Individuals Age Income Expectations e.g. income rise/fall in future Future plans e.g.

o Education → forgo income for a few years → usually rewarded with high income

o Work

o Family → one partner may have to forego income for a few years

o Retirement → must adjust to lower income

Personality factors – risk/security Voting in elections i.e. vote for way economy operates

Firms Pricing e.g. number of sales, profit Marketing strategy i.e. target market Produce consumer or capital goods Source of resources - cheaper or more expensive with reliable supply Ethical issues e.g. environment Industrial relations issues e.g. award wage/wage agreements with whole workforce/individual

contracts

Governments Have influence on economic choices of individuals and firms ← making it more/less expensive to

make choices e.g. tax on cigarettes May prohibit certain activities, penalties for breaking law e.g. businesses in same industry meeting

to set prices for industry (would harm consumer interest) Incentives to encourage certain activities e.g. tax for people who don’t have private health care

Chapter 2: How Economies Operate

2.1 The production of goods and services

Factor of production – any resource that can be used in the production of goods and services Quantity and quality of an economy’s factors of production (resources) influence how wealthy/poor

that economy will be

Examples Improvements in educational standards → changes in size and quality of labour force Higher investment in machinery → increased availability of capital Environmental damage → reduce quantity of natural resources that can be used in production

process

Natural resources – any resources provided by nature that are used in the production process

Labour – human effort, both physical and mental, used to produce goods and services

Capital – the produced means of production

Enterprise – involves organising the other factors of production for the purpose of producing goods and services

Resource Reward Examples

Natural resources

→ rent water forests mineral deposits

Labour → wages depends on

pop. – birth/death rates, immigration school leaving age and retirement age social attitudes – women in workforce availability of childcare

Capital → interest owed privately by individuals/firms

machinery tools factories computers

owned by community

roads and railways schools telecommunications networks

Enterprise → profit entrepreneur makes management decisions concerning all aspects of production and bears rick that these may not be correct ones

profit – earned because entrepreneur run successful business despite considerable risk

o revenue minus expenseso rent for land they own in production

process o wages for work efforto interest for capital invested in

businessScarcity in economies → four resources in limited supply

Natural resources – limited available Labour – limited b pop. Size, labour market skills, people’s willingness to work Capital – limited by extent to which govts and private sector are willing to invest Enterprise – supply of entrepreneurial skills limited by willingness of individuals to innovate and

take risks

2.2 The distribution and exchange of goods and services

Market economies – don’t attempt to distribute output evenly within society

Provide income as a reward for contribution to production process Owners of natural resources, capital and entrepreneurial skill receive income based on that value of

their input

+ Incentives for better skills and harder work to improve their share of output – Can be unfair, some people may be unable to contribute to production due to illness age or disability

Governments may decide to intervene to correct inequitable market outcomes, help people who would not otherwise receive an adequate level of income → Governments can influence distribution of goods and services

o Taking money from higher income earners – taxation and redistributing it to lower income

earners – social security

2.3 The business cycle

Business cycle – fluctuations in the level of economic growth due to domestic or international factors

Recession – the stage of the business cycle where there is decreasing economic activity, defined as 2 consecutive quarters of negative economic growth

Boom – the stage of the business cycle where there is increasing economic activity

Impacts of the business cycle

Recession Boom

falling production of goods and services increasing production of goods and services

falling levels of consumption and investment

rising levels of consumption and investment

rising unemployment falling unemployment falling income levels rising income levels falling quality of life rising quality of life falling inflation (deflation) rising inflation

Governments Aim to smooth the business cycle using:

o Fiscal policies i.e. govt budget and spending

o Monetary policies i.e. RBA cash rate and inflation target

During recessions – stimulate economic growth Long term – ensure the economy can sustain economic growth for a long period of time to avoid

major economic downturn

Inflation – a measure of the increase of general levels of prices CPI (Consumer Price Index) – main measure of inflation in Aus RBA use interest rates to control inflation Want income increase greater that inflation – difference = real wage increase

2.4 Circular flow of income + injections + leakages.

Circular flow of income model Describes the operation of the economy and the linkages between the main sectors in the economy

Leakages – items that remove money from the circular flow of income ↓ aggregate income ↓ economic activity S + T + M

Injections – items that put money into the circular flow of income ↑ aggregate income ↑ economic activity I + G + X

Sector

Households Depend on businesses to: produce the goods and services they demand, provide them with the income

to buy them Owners of factors of production, consumers Supply factors of production (e.g. land, labour, capital,

enterprise) to businesses Reward = rent, wages, interest, profit Income goes into – spending on locally produced

goods, savings, tax or purchasing imports

Firms Depend on households to: supply resources, consume of goods and services

Buys factors of production from households and use them to make goods and services

Financial institutions e.g. banks, building societies, finance companies, credit unions, superannuation funds, life insurance companies

Act as intermediaries between savers and borrowers Savings (leakage) essential for investment (injection)

to occur → creation of new capital goods

Governments Main aim – redistribute income, reallocate resources Help satisfy collective/community wants e.g. roads,

railways, schools, hospitals, defence 2 roles in circular flow of income

1. Imposes tax (leakage) on households and firms

2. Uses tax for gov expenditure (injection)

International trade and financial flows e.g imports, exports, international money flows (i.e. borrowing, lending)

Transactions our economy has with the rest of the world

M = leakage, X = injection

Equilibrium Occurs in the circular flow of income when S + T + M = I + G + X i.e. sum of leakages = sum of injections

Disequilibrium S + T + M < I + G + X or S + T + M > I + G + X i.e. S + T + M ≠ I + G + X

↓ level of economic activity - o ↓ Y, ↓ production, ↑ u/e

In circular flow - ↓ economic activity → ↓ leakages (consumers have less to save, spend on M or collected as tax)

Leakages will eventually = injectionso Restored to equilibrium but at

a lower level of Y – i.e. economy is contracting

↑ level of economic activity o ↑ Y, ↑ production, ↓ u/e

In circular flow - ↑ economic activity → ↑ leakages (consumers have more to save, spend on M or collected as tax)

Leakages will eventually = injectionso Restored to equilibrium but at

a higher level of Y – i.e. economy is expanding

3.1-2 The market economy and how economies differ

Pure market economy* – all major economic decisions are made by individuals and private firms, who are both motivated by self interest

Capitalist, free enterprise, laissez-faire (‘let things be’)

Centrally planned economy – government planners make economic decisions, little scope for individual choice to influence economy, public ownership of factors of production allows gov to allocate resources as it sees fit

e.g. China and Russia in past, no economies are centrally planned now

*The main weakness of a pure market economy is that the people who controlled factors of production would become very wealthy, while majority were exploited, vulnerable to volatile economic cycle

Modifications – govs now play larger role in decision making without going as far as centrally planned

Characteristics of a market economy

The market system

Market – a network of buyers and sellers seeking to exchange a particular product at a particular price

In a free market economy there are markets for goods and services and the resources that produce them

o Product market – the interaction of demand for and supply of the outputs of production i.e.

goods and serviceso Factor market – a market for any input into the production process (natural resources,

labour, capital, enterprise) Consumers want to buy at lowest possible price so they can satisfy more wants, businesses want to

sell at highest price to maximise profitso Price mechanism brings supply and demand together to determine the price for each g+s

Price mechanism – the process by which the forces of supply and demand interact to determine the market price at which goods and services are sold and the quantity produced

Changes in demand and supply in the product market will also influence supply and demand in the factor market

↑ demand of products → ↑ demand of resources that make them up + labour → ↑ prices To attract resources away from other areas of production, the manufacturer will offer higher prices

for them e.g. higher wages for labour

Role of the government: distribution of income in a free market

Social Welfare Payments – under the price mechanism there’s no income to non-participants (elderly, chronically ill, unemployed) in the production process. Income redistributed through taxing high income earners more heavily to provide social welfare (disability pensions, age pensions and unemployment benefits).

Progressive Income Tax – overall distribution is more equitable when sharing the produced output. High income earners are taxed higher proportionately than low income earners.

Why governments intervene in the market economy

Resource allocation

- provide important things that would not otherwise be provided

- provide important things that would not otherwise be provided

- Restrict production of harmful goods

Income distribution

- Create fairer and equal society and look after their well-being

Economic Stability

- Smooth out sharp fluctuations in the economic cycle

- Ensure stability in the economy and the financial system

3.3 is lots of bullshit

Topic 2: Consumers and Business

4.1 Consumer sovereignty

Consumer sovereignty – the manner in which consumers, collectively through market demand, determine what is produced an the quantity of production

Based on: Consumers sending signals to producers through their demand for g+s When demand is high, relative to supply – prices will rise Producers will then notice that higher profits can be made by producing those items for which

demand is greatest Will shift resources into those other forms of production ∴ consumer sovereignty can determine how resources are allocated in the economy

Consumer income levels determine the types of production that can occur in an economy As income levels rise, demand for luxury goods increases and so does their production

In a market economy there are a few factors that can reduce the sovereignty of consumers:

Marketing Some informative, but more aim to manipulate consumer behaviour

Consumer sovereignty = ↓ by manipulative/deceptive marketing practices

Misleading or deceptive conduct

Consumers can be deceived by false claims → pay for items they don’t really want to buy

Common e.g. weightless programs

Planned obsolescence Firms design products that are designed to wear out/go out of date quickly → encourage consumers to make further purchases in future

Manipulate consumers by emphasising importance of keeping up with latest fashions

Anti-competitive behaviour Firms that operate in markets where there are few other sellers → ↓ ability of consumer to choose what they really want

e.g. electronics companies manufacture so only that brand’s accessories are compatible

4.2 Decisions to spend or save

Y = C + S

increase in C → equal reduction in S change in level of Y → change in level of C and S

.

MPC = average propensity to consume – proportion of total income that is spent on consumption

=

MPS = average propensity to spend – proportion of income that is saved for future consumption

=

Because every dollar of a consumer’s disposable income must be spent or saved

MPC+MPS=1

as Y ↑, people tend to save a higher proportion of their income

i.e. MPS rises and MPC fallscan be shown in the consumption function

MPC = marginal propensity to consume – the proportion of each extra dollar of income that goes to consumption

=

MPS = marginal propensity to save – the proportion of each extra dollar of income that is saved

=

Over the course of our lifetime, our consumption and savings behaviour moves through several patterns

→ Y = disposable income after tax→ C = consumption expenditure→ S = savings.△ = difference in

Consumption function – a graphical representation of the relationship between Y and C for an individual/economy

Autonomous consumption (C that is independent of Y, must be spend to survive)

C = C0 + MPC (Y)

Our total consumption is equal to autonomous consumption plus the proportion of each extra dollar that is consumed, depending on your level of income

Breakeven level of income: when Y = C

Equilibrium level of income: when S = I

e.g.

a) nominate the consumption and savings functions

MPC =

=

= 0.8

C = C0 + MPC (Y)

450 = C0 + 0.8 (500)

C0 =50∴ C = 50 + 0.8Y∴ S = -50 + 0.2Y

b) calculate the breakeven level of incomebreakeven level of income when Y = C (substitute Y as C in consumption function)

Y = 50 + 0.8Y

0.2Y = 50

Y = 250

c) calculate the equilibrium level of incomeequilibrium level of income when S = I (substitute I value as S in savings function)

S = -50 + 0.2Y

C = consumption C0 = autonomous consumption MPC = marginal propensity to consumeY = income

Y C I

500 450 250

1000 850 250

1500 1250 250

0.2Y = 300

Y = 1500

d) graph the consumption and savings function

Steps to draw a consumption and savings function graph:

1. Draw and label axes with C and Y, and S and Y2. Mark autonomous consumption on both the consumption and savings functions3. Draw a 45o line on the consumption function4. Mark 0 and draw a horizontal line from 05. Draw a less steep line from autonomous consumption on both the consumption and savings

functions6. Mark where C = Y (breakeven) with a line7. Label both functions with their equations

4.3 Factors influencing individual consumer choice

Consumers aim to maximise their utility through their expenditure decisions Achieving higher utility means they have satisfied more wants Individual demand – the demand of each consumer for a particular good or service

Factors affecting a consumer’s expenditure choices:

Level of income As individuals earn ↑ Y, they tend to choose to buy more items and items of a ↑ quality

The price of the good or service itself

Must decide whether they are willing to pay price of g/s given Y level

People will buy necessities regardless of price changes Consumers are likely to reduce their demand for luxury goods as

price increases

The price of the substitute and complement goods

The demand of a good will be affected by the price of other goods

Substitute good – a good that consumers may choose to buy instead of another good e.g. butter and margarine

Complement good – a good that is used in conjunction with another good e.g. DVD player and DVDs

↑ price g → ↑ demand for substitute good ↓ price g → ↑ demand for good and its complement

Consumer tastes and preferences

Buy g+s that give them the highest utility Consumer preferences change over time → change in demand for

goods Innovation + technical progress → consumers demand new/better

products at the expense of other ones

Advertising Can create demand for g+s that didn’t exist before Can make demand for g+s less responsive to price increases by

building consumer loyalty

4.4 Sources of consumer income

Returns to factors of production

Consumer income – the rewards to the owners of the factors of production Wages from labour – main source Y, when participate in labour market, also incl non-wage Y e.g.

employer contributions to superannuation, workers compensation payments Rent from land – investment property generates property Y Interest from capital – people with greater wealth tend to enjoy a higher Y level because wealth

creates ongoing Y through returns from owning capital e.g. ownership of shares, interest on S in cash management accounts

Profit from entrepreneurial skills – profit is return for use of entrepreneurial skill

Social welfare

Social welfare payments – the payments made to increase the incomes of individuals/families in need of assistance by the government

Y collected through taxation then redistributed by gov through transfer payments Aim: provide a min. Y safety net → allow consumers to by necessities

o Assistance to the aged: 65+, retired

o Unemployment benefits: seeking but unable to find work

o Disability support payments: not able to work due to personal factors e.g. illness

o Family payments

Chapter 5: Business in the Market Economy

5.1 Business firms and industries

Firm – an organisation involved in using entrepreneurial skills to combine factors of production to produce a good or service for sale

Industry – consists of the firms involved in making a similar range if items that usually compete with each other

5.2 Production decisions

What to produce Skills and experience of the business operator – likely to be most successful in industry they know

well i.e. understand consumer demand Industries where there is strong consumer demand – more likely to find opportunities to expand

business Specific business opportunities – e.g. a region that doesn’t have a type of business, find a niche

market Amount of capital required to start the business – more likely to be attracted to lower start-up costs,

minimise risk

How much to produce Based on level of consumer demand + ability to convert demand into sales Produce too much – goods may spoil, too little – harm relationship w/ potential consumers

o Market research – determine likely sales + prices

Hard to anticipate consumer demand following changes in external conditions

How to produce Depends on relative efficiency of factors of production which can change over time

o Natural resources – discovered, new technology → ↑ improve productivity, diminished

though exploitation o Labour – investment in edu + training → ↑ productivity, decline in birth rate/aging pop → ↓

people available for worko Capital – can increase capital through investment in goods used in prod process, over time

old capital will become obsolete = depreciation o Enterprise – supply of entrepreneurs – increase under favourable political and economic

conditions, decrease when political instability or economic downturn Will use combination of factors of production that is most efficient

5.3 What business contributes to the economy

Growing private sector → ↑ economic growth, stronger revenue base to fund services provided by gov

Growing businesses employ → ↓ u/e Add to tourism → economic development Growth in individual businesses → ↑ economy’s productive capacity over time

o Outward shift of production possibility frontier → ↑ productive capacity → ↑ living standards

5.4 Goals of the firm

Maximising profits o Using lowest-cost combination of resources + charge highest possible price

Meeting shareholder expectationso Company directors represent shareholder’s interests – aim to meet their expectations

o Can create tension when conflict between actions that maximise share price and dividends

in short term but reduce firm’s value in long term Increasing market share

o Shareholders take on risk – risk capital, seek max profits as reward

o Managers – seek increased salaries, power + prestige

o Compromise between profit maximisation and increasing market share

Maximising growtho Long term – larger asset base → ↑ profits

o Can sometimes lead to failure e.g. Starbucks

Satisficing behaviour o Doesn’t attempt to maximise any objective, seeks to achieve adequate level in each area

o May seek to earn satisfactory level of profit (acceptable rate of return for shareholders)

rather than maximising profitso Excessive profits → invite new competitors into industry, gov regulation

o Social enterprise – goal of positive social/environ impact

5.5 Efficiency and production

An increase in productivity = an increase in output per factor of production (input) per unit of time

To ↑ productivity – need to ↑ production proportionately more than the ↑ in inputs of resources Resources are used more efficiently Overall living standards increase i.e. able to satisfy more wants

o Less wastage of scarce resources

o Lower production costs + higher profits

o Lower inflation rate

o Higher incomes

o Improve international competitiveness of industries

Specialisation – factors of production are used more intensely for a smaller number of production processes

Type Definition

division of labour

specialisation of labour

break down production process into sub-processes allowing labour to specialise e.g. assembly line approach in car manufacturing

localisation of industry

specialisation of industry

large number of businesses producing similar goods congregate in same area, share common infrastructure

large scale production

specialisation of capital

grow so large can use highly specialised capita equipment in production process

Internal economies and diseconomies of scale

Internal ← firm expands scale of operations

economies of scale Cost saving advantages

Specialisation of labour – break up production process

Invest in more efficient capital equipment Buy raw material in bulk Find a market for by-products Put resources into research and development

diseconomies of scale Cost disadvantages

Management lose touch with day-to-day running Duplication and paper work, red tape Problems in workplace relations Decrease in managerial and administrative

efficiency

LRAC – long-term average cost

External ← factors outside firm’s control, nothing to do with level of production

economies of scale Cost saving advantages

Localisation of industry Industry grows as a while Growing, competitive and more sophisticated

capital marketdiseconomies of scale Cost disadvantages

Increased pollution from growth of industry Concentration of industry and people in existing

urban areas Increase price of resources (exp if limited) due to

growth of industry

The law of diminishing returns

Increasing quantities of a variable factor added to a fixed factor → decline in total output → diminishing returns to variable factor

Assumptions: Only 2 factors of production – land and labour One factor is fixed, the other is variable Producer uses various quantities of variable factor in combination with fixed factor Level of technology and all other factors of production remain constant

e.g. production of wheat on a farm

Fixed factor (land)

Variable factor (labour)

Total physical product (TPP)

Average physical product (APP)

Marginal physical product (MPP)

1 0 0 0 0

1 1 5 5 5

1 2 12 6 7

1 3 21 7 9

1 4 32 8 11

1 5 45 9 13

1 6 54 9 9

1 7 56 8 2

1 8 56 7 0

1 9 50 5.5 -6

↓ ↓ ↓

output output/variable factor

difference per variable factor

in output

As you add workers to the farm output increases, but with the addition of the 6th worker, the law of diminishing returns sets in

Topic 3 - Markets

Chapter 6: Demand – the quantity of a particular good or service that consumers are willing and able to purchase at various price levels at a given point in time

6.1 Factors effecting market demand

The price of the g/s itself Must decide if willing + able to pay nominated price for item

Will buy necessities regardless of price changes Likely to ↓ demand for luxury goods if price ↑

The price of other g/s ↑ price → ↑ demand for its substitute ↑ price → ↓ demand for good + complement

Expected future prices Price expected ↑ near future → consumers bring forward consumption → ↑ current demand

Changes in consumer tastes/preferences

Change over time → change demand Innovation + technological progress → consumers

demand new + better products at expense of superseded ones

Level of income ↑ Y → more willing and able to purchase g+s that previously couldn’t afford

↑ Y → ↑ demand for luxury goods Y distribution + consumer expectations about Y also

change demandPop. size and age distribution

Pop size – affect quantity of goods demanded Age distribution – affect type of goods demanded

Ceteris paribus – an assumption used to isolate the relationship between 2 economic variables (Latin = ‘other things being equal’)

Focus on 1 factor at a time and analyse response of demand to change in this factor, assuming all other factors remain constant

6.2 Movements along the demand curve

Demand schedule – can be constructed making the assumption that all factors that could affect demand (except price) remain constant

Show quantity of a good that will be demanded over a range of prices at a given point in time

The Law of Demand states: The quantity demanded by consumers falls as price rises More people are willing and able to buy a g/s at a lower price Some exceptions for some luxury items e.g. eating at a fashionable restaurant – may experience

increased demands as prices rise, because it is a status symbol

The demand curve

Slopes downwards, left to right – as the price of a product rises, consumers will demand less of that product

Movements along demand curve

Assuming all factors (except price) remain constant → change in quantity demanded in opposite direction to price change → movement along demand curve = expansion/contraction of demand

Expansion of demand – when a decrease in the price of a g/s causes an increase in the quantity demanded

Contraction of demand – when an increase in price of a g/s causes a decrease in the quantity demanded

6.3 Shifts of the demand curve

A change in any of the factors (other than price of g/s itself) → shift of demand curve = increase/decrease of demand

Increase in demand – movement to the right, means consumers are:

Willing and able to buy more of the product at each possible price than before

Willing to buy a given quantity at a higher price than before

Decrease in demand – movement to the left, means consumers are:

Willing and able to buy less of the product at each possible price than before

Willing and able to buy a given quantity at a lower price than before

Factors causing shifts of the demand curve: Changes in factors apart from price of good itself

Increase in demand Decrease in demand

Prices of other goods and services

Rise in price of substitute good Fall in price of substitute good Fall in price of complementary good Rise in price of complementary good

Expected future prices

Expect increase of price in near future – bring forward purchase → ↑ current demand

Expected decline in price in near future

Consumer tastes and preferences

Fashion – increase demand for fashionable products

Product becoming less fashionable

New technology – increase demand for technologically advanced products

A good becomes superseded due to improve technology

Consumer incomes

Rise in level of income – can afford to buy more at the same price

Fall in level of income

Change in income distribution in favour of higher incomes – ↑ demand for more expensive products

Change in income distribution less favourable to demand

Improved consumer expectations about future income

Poor expectations about future economic prospects

Size and age distribution of population

Increase in pop → ↑ demand for all products

Decrease in population

Change in age distribution → ↑ demand for certain types of products

Change in age distribution less favourable to demand

6.4 Price elasticity of demand

The responsiveness/sensitivity of the quantity demanded to a change in price

Elastic demand – a strong response to a change in price

Unit elastic demand – a proportional response to a price change (total amount spent by consumers remains unchanged)

Inelastic demand – a weak response to a price change

Importance of price elasticity of demand

Firms: Need to understand the price elasticity of demand for g they sell

Decide on optimal pricing strategy If demand elastic – ↓ price → expand volume of sales → ↑ total revenue If demand inelastic – ↑ price → ↓ sales would be less than price increase → ↑ total revenue Important to have awareness of elasticity of demand in different price ranges, important to:

o Determine best pricing strategy

o Decide whether to change prices

Governments: Need to understand price elasticity of demand for g+s it provides for community

Need to be able to predict effect of changes in level of taxes + gauge responsiveness of demand to estimate revenue

Measuring price elasticity of demand

The total outlay method Look at effect of changes in price on total revenue earned

TO = P x Qd

If TO moves in same direction as price change – demand = relatively inelastic

If TO moves in the opposite direction to price change – demand = relatively elastic

If TO remains the same following a price change – demand = unit elastic

e.g.

Price $ Quantity demanded (units)

Total outlay

→ inelastic→ inelastic→ unit elastic→ elastic→ elastic

5 50 250

6 45 270

7 40 280

8 35 280

9 30 270

10 25 250

Perfectly elastic demand

TO = total outlayP = priceQd = quantity demanded

Demand curve = horizontal straight line Consumers will demand an unlimited quantity

a certain price but nothing at a price above this

Perfectly inelastic demand

Demand curve = vertical straight line Consumers are willing to pay any price to

obtain a given quantity of a good

6.5 Factors affecting elasticity of demand

Whether the good is a luxury or necessity

Necessities – inelastic demand Luxuries – elastic demand

Whether the good has any close substitutes

Goods with close substitutes – elastic demando Can switch products

No close substitutes – inelastic demando Can’s switch

Expenditure on the product as a proportion of income

Small proportion of Y – inelastic demand Large proportion of Y – elastic demand

The length of time subsequent to a price change

When price increases consumers may take time to respond → Qd may not change immediately

o Price increase – consumers take time to seek alternatives – demand more responsive

o Price decrease – take time for consumers to become aware now cheaper → switch to cheaper product – demand more responsive

After initial price change durable goods have more elastic demand that non-durable

o Rise in price of durable good → repair not replace – demand elastic

Whether the good it habit forming (addictive) or not

Inelastic demand – people with habits tend continue with habit even after price increase

Chapter 7: Supply – the quantity of a good or service that all firms in a particular industry are willing and able to offer for sale at different price levels, at a given point in time

7.1 Factors affecting market supply

The price of the g/s itself Market price influences producer’s ability + willingness to supply g/s

o Price to low → unable to cover costs of

production → don’t supply item Expectation of suppliers about future prices of g/s

o Price rises in future → ↑ supply

The price of other g/s May be more profitable to supply a different good → less willing to supply g

The state of technology Improvements → ↓ prod costs → ↑ firms supply good at given price

Changes in costs of factors of production

↓ cost → firms supply more of a particular good ↑ cost → more difficult to maintain supply → ↓ supply

Quantity of g available Actual quantity of g available = limiting factor ↑ suppliers → ↑ supply

Climatic and seasonal influence

e.g. affect agricultural production i.e. drought → ↓ supply

7.2 Movements along the supply curve

Supply schedule – can be constructed making the assumption that all factors that could affect demand (except price) remain constant

Show quantity of a good that will be supplied over a range of prices at a given point in time

The Law of Supply states: As the price of a product rises the quantity supplied will increase Firms already in industry – producing good becomes more profitable → ↑ production Higher price → more profitable → new firms attracted to industry

The supply curve

Slopes upwards, left to right – as the price of a product rises, suppliers will supply more of that product

Movements along supply curve

Assuming all factors (except price) remain constant → change in quantity supplied in same direction to price change → movement along supply curve = expansion/contraction of supply

Expansion of supply – when a decrease in the price of a g/s causes a decrease in the quantity supplied

Contraction of supply – when an increase in price of a g/s causes an increase the quantity supplied

7.3 Shifts of the supply curve

A change in any of the factors (other than price of g/s itself) → shift of supply curve = increase/decrease of supply

Increase in supply – movement to the right, means firms are:

Willing and able to supply more of a product at each possible price than before

Willing to supply a given quantity at a lower price than before

Decrease in supply – movement to the left, means firms are:

Willing and able to supply less of a product at each possible price than before

Willing and able to supply a given quantity at a higher price than before

Factors causing shifts of the supply curve:

Changes in factors apart from price of good itself

Increase in supply Decrease in supply

Fall in price of other goods – making the prod of these less profitable

Rise in price of other goods

Improvement in technology used in prod process

Certain technology no longer available

Fall in cost of factors of prod Rise in cost of factors of prod Increase in quantity of resources

available Decrease in quantity of resources

available Climatic conditions/seasonal change

that is more favourable to prod process

Climatic conditions/seasonal change less favourable to prod process

Chapter 8: Market Equilibrium

8.1 The concept of market equilibrium

Assumptions Pure competition in market place No government intervention

Price mechanism Determines equilibrium

Market equilibrium – the situation where, at a certain price level, the quantity supplied and the quantity demanded of a particular commodity are equal. This means the market clears (there is no excess supply or demand) and there is no tendency for change in either price or quantity

8.2 Establishing market equilibrium

Occurs where the demand and supply curves intersect

Occurs when 1. Qd = Qs2. The market clears3. There is no tendency to change

Explain how is market equilibrium is achieved in a situation of

a) excess demand at P1 – disequilibrium – Qd>Qs

. = excess demand

. = shortage

1. raise price to PE

2. expansion in supply 3. contraction in demand4. Qd=Qs → equilibrium

b) excess supply at P2 – disequilibrium – Qs>Qd

. = excess supply

. = surplus

1. lower price to PE

2. expansion in demand 3. contraction in supply4. Qd=Qs → equilibrium

8.3 Changes in equilibrium

Changes in factors other than price can cause a shift in either the demand or supply curves → change in equilibrium price and quantity

Explain how the following changes equilibrium

a) increase in demand increase in demand

→ need to raise price→ expansion in supply→ contraction in demand → new point of equilibrium – with higher equilibrium price and quantity

b) decrease in demand decrease in demand

→ need to lower price→ expansion in demand→ contraction in supply → new point of equilibrium – with lower equilibrium price and quantity

c) increase in supply increase in supply

→ need to lower price→ expansion in demand→ contraction in supply → new point of equilibrium – with lower equilibrium price and higher equilibrium quantity

d) decrease in supply decrease in supply

→ need to raise price→ expansion in supply→ contraction in demand → new point of equilibrium – with higher equilibrium price and lower equilibrium quantity

8.5 Government intervention in the marketplace

Market failure – occurs when the price mechanism may take into account private benefits and costs of production to consumers and producers, but it fails to take into account indirect costs such as damage to the environment

The socially optimum price level is above the market price (price mechanism undervalues the natural environment)

Market forces result in the overuse of natural resources

Summary of government intervention in marketplace

Problem Government action Outcome

market price too high price ceiling reduces price, quantity shortage (disequilibrium)

market price too low price floor increases price, quantity excess (disequilibrium)

market quantity too high (negative externalities)

taxes increased equilibrium price, reduces equilibrium quantity

market price too low (positive externalities)

subsidies reduces equilibrium price, increases equilibrium quantity

market doesn’t provide good or service (public good)

government provides good or services

government must collect taxation revenue to finance its supply of public goods

Price intervention Price ceilings will redistribute money from sellers to buyers Price floors will redistribute money from buyers to sellers

Price ceilings The maximum price that can be charged for a particular

commodity At Pmax there is a shortage of supply Qc > Qp

Price floors The minimum price that can be charges for a particular

commodity Only worrying about suppliers – guaranteeing them a minimum

price At Pmin there is excess supply Qp > Qc

Quality intervention

Externalities – social costs and benefits (not taken into account in the operation of the price mechanism)

Negative externalities E.g. pollution, environmental damage Gov can restrict production levels through laws or impose taxes of firms (which ↑ production costs

and ↓ production) Making individuals pay for the social costs created by production = internalising the externality

Positive externalities Positive social benefits from consumption of goods and services e.g. museums, public parks, art

galleries, public transport Gov may intervene to encourage the provision of these merit goods and services through subsidies

to consumers (or producers) – ↓ price and ↑ consumption

8.6 Competition and market power

Market structure Number and size of firms

Product characteristics

Barriers to entry

Examples

pure competition – a theoretical model of perfect competition

many

very small

same product none fruit and vegetables, fish markets

monopoly – only one producer in the industry

one

large

no close substitutes

extremely high

water supply

monopolistic competition – many small firms in the industry

many

small

differentiated products

easy motels, restaurants

oligopoly – a small number of large firms dominate the industry

few

large

usually differentiated products

high supermarkets, banks, oil companies, airlines

Topic 4: Governments

Chapter 9: Labour Demand and Supply

A labour market is where individuals seeking employment interact with employers who want to obtain the most appropriate labour skills for their production process.

THE DEMAND FOR LABOUR- Firms demand labour by offering wages- Demand for labour differs from consumer demand for goods and services because the demand for labour is a derived demand - Derived demand: where demand for one good or service occurs as a result of demand for another. This may occur as the former

is a part of production of the second.- The firm must hire more labour to help with the high production levels, increasing labour demand – labour is demanded only

because it is needed firm the firms to produce goods and services and make a profit.

Output of the firm- If a firm experiences higher sales, it will increase production and therefore increase demand for labour - Such factors that effect the level of output of a firm includes

o General economic conditionso Conditions in the firms industryo The demand for an individual firms products

Productivity of labour - Productivity of labour can be defined as the output per unit of labour per unit of time- Labour productivity generally depends on the quality of the workforce.- It is possible for the workforce to become more productive simply through

investing in technology (capital) and without any improvement in the actual skill or work patterns

- Increase labour productivity will have either a positive or negative effecto Positive: high productivity means that a fixed number or workers will be producing more goods and serviceso Negative: increase in productivity on the demand for labour in the short term will depend on the current level of aggregate

demand - It is easy to substitute between labour and capital- Labour costs are a relatively high proportion of its total costs- It is more difficult for the firm to pass on increased labour costs in the form of higher prices to consumers

THE DEMAND FOR SUPPLY- Governments are now paying more attention to the factors that influence the supply of labour- Individuals supply labour when they are ready and willing to work in the labour market - Labour supply curve slops upwards- Factors affecting supply include:

o Pay levels: higher the wage or salary offered, the more people will be prepared to sacrifice their leisure time and supply their labour

o Working conditions: attractive working conditions encourage a higher supply of labour to a workplace, whereas unattractive working conditions would discourage workers from joining that workplace

o Education, skills and experience requirements: requirements for some types of jobs can limit the supply of labour. All elements of human capital. High levels of human capital are more likely to achieve low unemployment. Changes in availability of education and training will also influence skills levels in workforce

o The mobility of labour: occupational mobility is moving between different occupations in response to wage differentials and employment opportunities whereas geographical mobility refers to the ability of a labour to move between different locations in response to improved wage differentials

THE AUSTRALIAN WORKFORCEDefined as that section of the population 15 years of age and above who are either working or actively seeking work.

- A person is defined as employed if they have one or more hours of work per week- A person defined as unemployed if they currently are available for work, are activity seeking work but unable to find

- Workforce is important in two aspects:o Size: bigger the workforce the greater the contribution it can make to the production of goods and serviceso Quality: a well educated, highly skilled, healthy workforce is much more productive than one that lacks in these

characteristics. The size and quality of the workforce is affected by three main factors:

Population size- Sets the limit to which the workforce can grow- Population growth is influenced by who main factors – natural increase and net migration

o Natural increase refers to the excess of births over deaths in the populationo Net migration refers to the excess of permanent new arrivals to our country over permanent departures – aprox

40% of total population growth since WWII- Australia’s natural increase has been steadily declining - Depressed economic activity and high unemployment levels leads to the government reducing our migration intake to

reduce the unemployment problem.- In times of economic growth – when there are shortages in the labour market and very good job prospects, governments

have tended to raise migration quotas Age distribution

- Australia has an overall aging population- Aging population is a phenomenon that has been observed in many industrialised economies as a result of declining birth

rates and an increase like expectancy - The potential size of the workforce is lower, while it needs to support a growing population of aged people – putting a

significant constraint on future economic growth Education patterns- Most important factor influencing the quality of a nation’s workforce- Critical for an economy to have a highly skilled and productive workforce- Australia has an tertiary education had average earning of 32% higher than those without education- Proportion of young Australians education has risen sharply over recent decades - Australia’s budget for education is average by international standards – more reliant on private funding

Labour market outcomesWAGE OUTCOMES

- Wages and salaries are the major source of income for most Australian household – provides 59% of income- Wage incomes produced by the labour market have a substantial influence on how income is distributed- Wage outcomes is affected by the following factors:

Average weekly earning o Level of average total earnings for all employees id $982.40 per week o Changes in nominal (money) wages do not tell us whether people are better off because they do not take into account

change in price levels that might be occurring at the same time. Difference in wage outcomeso Wage differentiating between different occupations – different occupations require different skillso Wage differentiating in same occupations – geographical mobility, the productivity of labour and the capacity of the firm to

pay the individualo Age and gender of an individual alter as older people are more experienced

TRENDS IN DISTRIBUTION OF INCOME FROM WORKThe wide spread use of enterprise bargaining (where employers and employees negotiate wage increases at the workplace level) has created a much greater difference in wage incomes for both different industries and individuals. Income distribution refers to the way in which an economy’s income is spread among the members of different social and socio-

economic groups- There is a considerable inequality in the distribution of income in Australia although it has become marginally less equal over the

past decade - The top 20% of income recipients accounted for 40.5% of total income

- The share of total income accruing to the bottom 40% of income recipients has remained relatively constant in recent years, while the highest income quintile has seen its share of income expand slightly

- Different wage outcomes across industries has resulted from changes in the structure of the economy

NON-WAGE OUTCOMESAre the benefits that many employees receive in addition to their ordinary and overtime payments, such as sick leave, superannuation, a company car, study leave or arrangements for employees to work from home for part of the week.

-Can vary from one workplace to another and in some industries, workers often earn far more than their regular wage because of substantial non-wage allowances

-Salary packing is a popular means of supplementing wages, with employees reciving a company car, laptop, child care ect.-Non wage outcomes include improving the flexibility for employees in their work patters. Usually included in a “flexibility clause”

THE COSTS AND BENEFITS OF INEQUALITYThere are advantages and disadvantages associated with an inequitable distribution of income

- Advantage: inequality encourages people to work harder to improve their position in the distribution of income, creates and strengthens individual incentives

- Disadvantage: system of free market capitalism divides society into cases, and that those in the working (under) class have limited opportunities to escape poverty Economic benefits:- Inequality encourages the labour force to increase education and skill levels - Inequality encourages the labour force to work harder and longer- Inequality makes the labour force more mobile - Inequality encourages entrepreneurs to accept risks more readily- Inequality creates the potential for higher savings ad capital formationEconomic costs of inequality

- Inequality reduces overall utility- Inequality can reduce economic growth- Inequality reduces consumption and

investment

- Inequality creates conspicuous consumption- Inequality creates poverty and social problems- Inequality increases the costs of welfare

support

Social benefits- Systems that determine the distribution of income and wealth does not give everyone the same level of

opportunity to pursue their income and wealth goals- Inequality exists in Australia due to:

o Existing inequality in the distribution of income and wealth tends to perpetuate inequality of opportunity

o Not everyone has the same mental and physical attributes and the same potential with regard to the acquisition of income and wealth

o People who acquire wealth through inheritance have greater opportunities to invest opposed to this who start with no wealth

o People may not have access to the same networks of people that may lead to new opportunities Social costs of inequality - Social class division - Poverty

UNEMPLOYMENTRefers to a situation where individuals want to work but are unable to find a job, and as a result labour resources in an economy are not utilized.

- Is calculated using the unemployment rate ( page )- Types of unemployment include:

o Cyclical unemploymento Structural unemploymento Long term unemploymento Seasonal unemploymento Frictional unemploymento Hard-care unemploymento Hidden unemploymento Underemployment

Recent trends include:- Upward trend in the average level of unemployment between 1970’s and 1990’s- Average rate of unemployment fell to an average of 5.5% in the first decade of the 21st century - Levels of unemployment peaked in the early 1990’s (10.7%) – highest since great depression - Main reason for such as large increase is the result of a recession (2008)- Adding to unemployment is structural change and microeconomic reform - Unemployment rates gradually fell in response to sustained economic growth - Since 2002, unemployment rate has remained below the average of major OECD countries - Lowest point of unemployment was early 2008 3.9% (before late 2008 recession)

Recession is the stage of the business cycle where there is decreasing economic activity, defined as two consecutive quarters of negative economic growth (fall in GDP)

Structural change refers to the process by which the pattern of production in an economy is altered over time, and certain products, processes of production and even industries disappear while others emerge

MOVEMENT AWAY FROM FULL-TIME WORK In recent years we have witnessed a shift away from full time to part time, casual and contract-based employment. These forms of employment give greater flexibility to employers in how they manage their workforce. - Part time employment is defined as those employees regularly working 20 hours or less per week. - Casual employment occurs when employees have occasional working hours but do not follow as set pattern- Australia has the third highest rate of part-time employment in the industrialised world (24.7% - 2009)- Some employees prefer part time work as it allows them to balance other responsibilities like family- Such information and communication technology make it possible for some employees to work in more flexible

arrangements such as working part-time from home.- Another significant trend is the growth of outsourcing and sub-contracting, where organisations pay a private sector

company or individual to do non-core functions. These jobs are normally contract based (only last for a limited amount of time) because the jobs only exist while the firm or individual has a contract to work for the other organisation

The changing Australian labour marketTHE ROLE OF TRADE UNIONS

A trade union is an association of workers that aims to advance their interests of its members by improving their wages and working conditions. Are usually based on particular occupation, industries, firm or a mixture of these.

- Occupational unions: draw their members from persons who possess a particular occupational skill, or range of skills, regardless of the industry or firm in which they work

- Industry based unions: cover workers in a particular industry regardless of the type of work that they do - Enterprise-based unions: represent only the workings of one specific enterprise - General unions: cover a whole range of workers with many different skills across various industries

The membership of trade unions declined substantially in recent decades due to a number of factors:o Changes in wage determinationo Changes within industrieso Changes in the nature of employment

Trade unions can influence the labour market in a variety of ways including:- Restricting the supply of labour - Exercising their bargaining power in negotiations with employers

THE ROLE OF EMPLOYER ASSOCIATIONSAre organisations that are formed to represent the interests of businesses, especially in industrial relations and in lobbying the government.

- They have two main roles:o They represent and promote the interests of their members by lobbying the government on matters such as

industrial assistance and industrial relation policieso They assist employers in managing industrial relation issues, such as representing their members in the various

industrial tribunals set up to settle industrial disputes - Employers associations do not exercise the same degree of market power as unions- The actions of employer association have been of benefit to both employers and employees

- Even if industry assistance helps one sector, it will hurt others and have a negative effect on employment levels in the long run.

AUSTRALIA’S CURRENT INDUSTRIAL RELATIONS FRAMEWORK- Has gradually evolved during the past three decades from a highly centralised system of wage determination towards one that

allows more room for wage levels and work arrangements to be negotiated at the level of the individual firm- The industrial relations is now governed by the fair work act with a national system for labour market regulation- Fair work system has established three main streams in the labour market that determines the pay and conditions of employees

o Industrial rewards A set of pay and conditions that are specific to an employee’s work or industry Provides a safety net of minimum wage and conditions Extend the protections of the national employment standards – may include types of employment, arrangements for

when work is performed, overtime and penalty rateso Collective agreements

Most common method of wage determination and is negotiated collectively through enterprise bargaining between an employer and employees, usually represented by unions

All agreement must comply with the national employment standards Covers all of the workers up to management level in the company or workplace Unions negotiate these arrangements on behalf of all employees Cover issues such wage increase, loadings for additional work hours

o Individual employment contracts Common law contracts are not a part of the formal industrial relations system but they comply with all the minimum

standards in the system Are simple agreements that are often 2 pages and involves add-ons to relevant awards Cannot offer pay rates and conditions that are below the rate that would be paid by the equivalent award. Enforced through ordinary courts – a small number of individual contracts made before FWA still operate in the

industrial relations system but will slowly be phased out by 2013

Topic 5: Financial markets

Types of financial marketsTHE ROLE OF FINANCIAL MARKETS IN THE ECONOMY

Financial markets in Australia play a crucial role in the operation of the economy. They create products that provide return for those who have excess funds, making these funds available to those in need of additional money.

- Are factor markets for capital in the economy - They can provide an efficient process by which income that is not used for consumption can still contribute to

aggregate demand

PRIMARY AND SECONDARY MARKETSPrimary financial markets: allow the creation of financial assets (SECURITIES: shares, bonds that provide the holder with ownership of the asset). This is the first time the asset is formed and sold (primary). The money from investors goes straight to the company involved. E.g. the sale of Telstra shares to the public. Business generates money for expansion or the creation of their business.

Secondary market: sales of assets that have already been formed in primary markets in the past. Most financial transactions are in the secondary market The main financial markets that exist in economies in the world are: Share of equity market: ownership shares in companies are issued or exchanged The debt market: where debt securities are exchanged, or cash is lent or borrowed The derivatives market: people buy and sell financial assets that are based on the value of other financial assets Foreign exchange market: financial assets from one country are exchanged for assets in another country’s currency

Financial Institutions: Finance companies (Banks): borrow from the public and funds are re-loaned to households/business Investment banks: borrow from companies with surplus funds and lend these to government or larger companies Credit unions: member belong to a particular trade or industry, people can deposit their funds or borrow money Permanent building society: accept deposits from the public and provide funds for home loans Mortgage originators: Wizard and RAMS. Life insurance companies Superannuation funds: receive contributions from individuals and invest their funds into financial assets such as shares Unit trusts: raise money from individuals who become part owners of the trust

FINANCIAL MARKET PRODUCTS- Credit: allows consumers to purchase goods and services in advance of actual payment. Eg. Credit cards offered by banks, credit

unions and some businesses.- Housing loans offered by banks as well as mortgage businesses such as Aussie. Long term loans to purchase property requiring

periodic repayments of interest.- Business loans debt that allows businesses to begin or expand, typically borrowed from banks.- Short term money market brings people and business together with temporary shortages or surplus funds such as banks. Those

with surplus funds such as banks issue forms of debt securities- Financial futures are contracts to trade in financial instruments (shares or bonds) at a later date for a certain price. It allows

investors to protect themselves against movements in interest rates or share prices by agreeing on a price at which to sell at a later date.

- Foreign exchange (FOREX) provides a market for people to buy and sell currencies- Bonds A bond is a written record of a debt. The borrower sells a bond in return for a loan. The holder of the bond receives

interest payments and the final repayment. Bonds can be sold/traded in secondary financial markets.

THE SHARE MARKET Role:- The financial market where investors buy and sell shares that give their owner a part-ownership of the company- 41% of Australians have shares this is the highest in the world- Investors purchase shares to gain a chance in company profits and make capital gains from increases in share prices- Australia has a high level of share ownership and the share market plays an important role in the economy, as many people

rely on the savings invested in shares for income especially in their retirement years

Function:- Shareholders invest in shares to gain profit and capital gain from an increase in share price. - These profits are known as dividends, it is a profit per share, divided amongst the shareholders according to the amount of

shares they have.- Capital gains is when an investor sells their shares for more than what they were originally sold for- The investor can only loose as much as their initial purchase of the shares

Effect on the economy:- The share market is often seen as a general indicator of how an economy is performing. - It is a reflection of consumer confidence, as this causes increased demand- High market prices reflect positive economic conditions, while an economy moving towards recession will have falling share

prices- Many share purchases are speculative which means they are bought with the intention of being re-sold within a short

period, the investor is hoping to make a short term gain.- A float is when a company lists itself on the stock exchange and offers its shares to the general public for the first time.

Importance of the share market: The share market provides individuals with a source of income and investment through dividends and capital gains. Companies issue shares which provides access to finance for investment and growth.

DOMESTIC AND GLOBAL MARKETS:as a resource rich country Australia depends on foreign sources of capital to finance its development.

- Foreign exchange markets: enable the movement of funds around the world- Global debt markets: important for Australia’s economic development because of the reliance on foreign borrowing- Equity markets: regulated by national governments so exist within individual countries.

REGULATION OF FINANCIAL MARKETSReserve Bank of Australia: The RBA is Australia’s central bank, its main roles are to conduct monetary policy and oversee the stability of the financial system. Function:

o Conducting monetary policy on behalf of the government: reserve banks actions to influence the cost and availability of money in the Australian economy through interest rates

o Control of note issue: sole issuing authority for Australian currencyo Regulation of the payments system: ensuring the stability adn efficiency of payment methods such as credit cards,

electronic cash, travellers cheques and stored-value cardso Banker to the banks: banks hold exchange settlements accounts with the Reserve Bank

Australian Prudential Regulation Authority: The government body established to regulate all deposit-taking institutions, life and general insurance organizations and superannuation funds. They have 2 main regulatory roles:

- Encourage behaviour by institutions that ill ensure they meet their obligations to the people who place money with them- For any ADI’s, insurance companies or superannuation funds that experience financial difficulty, APRA has the role of

sorting out the institutions financial position and ensuring that policy or deposit holders receive as much of their funds as possible

Australian Securities and Investments Commission ASIC is the government body with responsibility for cooperate regulation, consumer protection and oversight of financial service products. They prosecute and charge people (send to jail)

Regulate Australian companies and financial markets, with the aim of protecting investors and consumers improving the performance of the financial system

Have the power to monitor, investigate and act in situations where the integrity of the financial system has been undermined by the illegal acts of individuals

Also have powers to protect consumers against misleading or receptive and dishonest conduct affecting financial products and services

Australian Treasury: have the responsibility for advising the government on financial stability issues and for the legislative and regulatory framework for the financial system.

They are the main source of economic policy advice to the government Influence how governments devise budgets, collect taxes, allocate expenditure and implement other policies

Council of Financial Regulators: is a coordinating body for financial market regulation that provides cooperation and collaboration among its four members- the RBA, APRA, ASIC and Treasury.

During the 1980s deregulation occurred, Deregulation is the removal of government controls over an industry that is intended to make business more responsive to market force. To expose the industry to greater influence from domestic and global market forces.

The money marketBORROWERS: THE DEMAND FOR FUNDS

Borrowing is good for the economy and generates economic growth, employment, a high standard of living and quality of life. • individuals:

Consumers borrow when their demand for goods and services exceeds their current capacity to pay for them. Over 60% of economic growth (GDP) comes from consumers sending. Consumers borrowing inject money into the economy and this stimulates growth.

Borrow for housing (mortgage) or consumption• business (firms)

Entrepreneurs and business managers borrow to fund the expansion of their businesses. This will generate profit, employment and economic growth.

Business borrow for expansion or investment• government:

The government becomes a borrower of funds when it budgets for a deficit (when its current expenditure is greater than its current revenue)

FACTORS AFFECTING THE DEMAND FOR FUNDS:the level of demand for liquid funds (money liquidity) depends on the features of the financial system and the ease with which one can convert non-liquid assets into money.- transactions and speculative motives: people have day to day transactions to be made to purchase goods and services, this

means individuals hold a certain amount of money to make these transactions. Speculative motive is buying financial assets with the possibility of making a capital gain or loss.

- financial innovations: is when innovations in technology such as an increase in ATM’s and increased use of credit cars changes the demand patterns for money

the main opportunity cost of holding liquid funds is the foregone returns (or interest) that would have been earned by holding financial assets. As long as the benefit of holding liquidity (including lower costs for transactions and no risk of capital losses) outweighs the costs (the return foregone), individuals will seek to hold money rather than financial assets.

LENDERS: THE SUPPLY OF FUNDSIndividuals, businesses and governments participate in financial markets as lender when they are seeking a return on their wealth.• individuals

Individuals who hold wealth but do not wish to spend it have a range of options, some invest in assets, while others may invest in shares. They have a minimal role in lending

• business A business with a good cash flow and profits may choose to deposit its funds into a financial institution Banks are the major lenders in Australia and lend to businesses and individuals

• government Play minimal role as a lender mainly borrowers

• international Australian financial institutions can lend money overseas to borrowers. While this does occur in overall terms

Australia borrows far more from overseas countries than it lends. The total Australian borrowing from overseas is $2 trillion. The 2 trillion involves mostly equity (investment) and some borrowing as well.

INTEREST RATESCost of borrowing money expressed as a percentage of a total amount borrowed.

Quality of funds supplied = the quality of funds demanded.(represents the cost of borrowing and the return from saving)

Short term and long term interest rates are based on the length to maturity of the financial assets or securities. Interest rates on loans with a maturity of less than a year are known as short term. Long term securities are often seen as more risky and are also less liquid. Types of interest rates in the short and long term include:

- lending rates: the rate of interest charged by financial institutions when they lend money to customers Lenders will offer more funds when the interest rates rise as their return is higher

- Borrowing rates: rate of interest paid by banks to accept deposits (savings) Will borrow more funds when interest rates are lower as the costs are lower. Borrowers are important for economic growth, if households are borrowing there is increased confidence and spending will create employment.

Some factors that will influence the general level of interest rates include:-The demand for capital goods (investment)-The level of savings in the economy-The demand for liquid funds

-Inflationary expectations -International interest rates

CASH RATEAs without any other market, when the supply of funds held in the short term money market it too high, the rice of borrowing this money, the cash rate of interest, falls. Whereas, when the supply of funds in the settlements market decreases, the cash rate will rise. role of the Reserve Bank of Australia in determining the cash rate: if the RBA wants to reduce the cash rate, it will buy securities from commercial banks and in exchange deposit additional funds in their exchange settlement accounts. This may either be an outright purchase of securities, or repurchase agreements for securities where the seller agrees to buy the security back at a later date. This would result in downward pressure of the overnight cash rate as there is an increase in the supply of settlement funds.

When the RBA sells securities to a bank they subtract from the total exchange settlement balances. Thus decreasing the supply of settlement funds which puts upward pressure on the overnight cash rate. By selling government securities, the reserve bank creates a shortage or surplus of funds in the short term money market, thus affecting the cash rate of interest.

Increasing the cash rate means that it becomes more expensive for financial institutions to obtain funds in the short-term money market. Similarly a reduction in the cash rate lowers the cost of borrowing for banks in the short term money market and financial institutions then pass this cost saving on their customers in the form of lower lending interest rates

If interest rates fall, this encourages consumption and investment spending, which increases the level of economic activity. If interest rates rise, this deters consumption and investment in spending, and reduces the overall level of economic activity. RBA influence on interest rates to affect the level of economic activity is known as monetary policy.

Limits of marketsWHY THE GOVERNMENT INTERVENES

The free operation of market forces does not always achieve the most desirable economic and social outcomes.Under a completely free market (laissez-faire)

individuals may be unable to earn enough money to live inequalities between people and regions may worsen and the market may cause economic instability.

Because of this the government intervenes to achieve better allocation of resources, a more equitable distribution of income greater economic stability

Markets are effective in determining what our economy produces and how production is organized but they alone are not enough as they often do not consider social issues, The challenge is to find the right balance, Too much government intervention may stifle innovation, efficiency and growth and Too little exposes us to instability, inequality and lack of basic facilities

MARKET FAILURE IN THE PROVISION OF GOODS AND SERVICESMarket failure occurs because the operation of market forces creates unfavourable outcomes.Public goods - is a good once provided is difficult to prevent anyone from using – (non-excludable) - will therefore always attract free-riders – people who use without contribution - clearly there is no incentives for

companies to produce these goods as there is no way they can make a profit. - are non-rival - one persons enjoyment of the good does not diminish the potential for others to enjoy it, ie Gov spends

money on pollution controls, makes environmental improvements to improve air quality, Merit goods - are goods with benefits to the community that go beyond the individual who enjoys them directly. - Considered to be merit goods in that they benefit the whole society. - Gov plays a role as it funds most hospitals and provides financial support for arts groups

- If the market produces a harmful item it is known as a demerit good and it can produce too much of theseo Because these items have negative effects there sale may be restricted (licence required to sell alcohol)

- Governments supply goods through a natural monopoly –a market structure in which goods can only be provided by one supplier. Infrastructure, NBN network.

- Governments maintain ownership of these monopolies because they do not want private owners to have control over pricing as they may be tempted to overcharge(exploit). Governments tend to set a fair price, which covers the cost of providing the good or service but is not excessive to the consumer.

MARKET FAILURE IN INCOME DISTRIBUTION- The government’s role in redistributing income remains on of its most important functions in the economy - Left to operate without any government, free markets tend to produce substantial inequality in the distribution of income- Inequality will widen over time, because once people become wealthy their will tends to generate more wealth - Disadvantaged groups include those with low education levels, migrants from non-English speaking backgrounds, aboriginals

and single parent families. - Most common form of poverty is relative poverty: refers to those who standards of living is substantially lower than the average

for the economy as a whole, and is often defined as a level of income below 30% of average income - Governments can never remove all factors that contribute to inequality, they can improve opportunities though:

o Universal access to education until end of high schoolo Special education assistance programs and scholarshipso Living allowances for studentso Help mature-aged people enter high school education

- Concern of inequality was a major reason why the role of the government expanded in the 20th century - Governments created welfare, with the intension to create a more equal society

MARKET FAILURE IN EXTERNALITIES

Externalities are external costs and benefits that private agents in a market do not consider in their decision making process -Some externalities can be very good for third parties - positive externalities -Negative externalities have harmful effects, are of greater concern to the government. Usually involves looking at the spill-over

effect that production and other economic activities have on the environment.

MARKET FAILURE IN THE ABUSE OF MARKET POWERMarket structures can create imperfect competition. This is when only a small number of firms will survive. In this market situation, the market will produce a small quantity of goods and a higher priceFirms in highly concentrated industries possess substantial market power, which makes it easier for them to exploit their customer. Some ways in which they do this includes:- Monopolisation : firms using dominate market position to eliminate existing competition - Price discrimination : firms sell the same G+S in different markets as different prices- Exclusive dealings : firm set conditioned for supply that exclude retailers from dealing with other competitor- Collusion and market sharing : firms get together and agree on a pricing and market share arrangement that reduces the

competition between them

MARKET INSTABILITY: THE BUSINESS CYCLEWithout any government intervention, a free market economic system it is likely to experience severe fluctuations in the level of market economic activity, making it difficult to achieve the government’s goal of sustaining economic growth- boom periods: excess demand for goods and services cause a price increase- Recession: high inflation means an increase in interest rates and a severe downturn in the level of economic activity

Governments intervenes with economic stabilisation policies o Macroeconomic policy: fiscal and monetary policy o Microeconomic policies: competition policy and trade policy

The role of government in AustraliaTHE STRUCTURE OF THE GOVERNMENT

There are three stages of government:- The commonwealth (Federal) government, which has overall responsibility for the economy and has the most influence on

the economic performance- State governments, which play important roles in developing infrastructure, delivering government services and fostering

regional development - Local governments, which play a relatively minor role, mainly relating to local community facilities and roads

THE PUBLIC SECTORRefers to the parts of the economy that are owned or controlled by the government. It includes all tiers of the government as well

as business enterprisesConsisting of all three governments as well as government authorities such as the Sydney water corporation. Two important indicators that can demonstrate how the economy has changed as a whole are the public sector outlays (spending) as a % of GDP and public sector employment as a % of total employment.

Changes to the nature of government spending has occurred – governments have tended to spend less on infrastructure whilst spending more on social welfare payments and community services such as health care.Public sectors remain continually important due to:- Changes in the approach to economic management: introduction of Keynesian economics - Economic growth: living standards improving. The concentration of our population in larger town and cities have increased

demand for expensive community services include policies. The government has also been required to deal with problems created by economic growth, including pollution

- Growth in social security: governments would provide at least a basic standard of living for all people through the social security or welfare system. Tighter constraints on government spending. Due to political pressure and loss of revenue through excess welfare payments. Size of government may grow because of pressure to spend more on certain community services

THE REALLOCATION OF RESOURCESThe government can affect the allocation of resources in two main ways:

1. By influencing the way businesses and consumers behave in the market through taxation or spending measures2. By producing goods and services itself

In addition the government relocates resources through:- Taxation:

o Can have the effect of diverting resources away from certain types of economic activityo The influence of tax system is indirect o Direct: are those that are paid by the individual or business firms from which they are levied – they cannot be

passed on to someone elseo Indirect taxes: are levied on individuals and business firms, but they can be passed on to someone else. It is

attached to a good or service rather than an individual - Spending

o Can either rbe used to directly reallocate resources to a particular secot of the economy, or to influence the decisions of consumers and businesses

o Types include: Funding for the arts which otherwise might be unprofitable Grants for starting up businesses or new growth industries Subsidies for telecommunications companies such as Telstra Cash payments to private employment search businesses

- Government provision of goods and serviceo Gov involve themselves directly in the production process to achieve a better allocation of resourceso Through direct intervention governments were considered better able to provide important goods and services to

a larger number of people at a lower priceo The governments have largely sold their businesses to the private sector (privatisation) and reduced their direct

involvement in the provision of goods and services

THE REDISTRIBUTION OF INCOMEThe main way in which the government redistributes income through taxation and social welfare paymentsRedistribution occurs through the wealthiest groups more heavily and redistributing income through social welfare payments to lower socio economic groups, dramatically reducing inequality It is known that:

- Gross income inequality is severe prior to government intervention - As income rises, so too does the level of taxation - The majority of government benefits are received by the two lowest quintiles- Income inequality after government intervention is reduced substantially through government intervention

Different types of tax:- Progressive tax- Regressive tax- Proportional tax

Social welfare:o Also known as income support payments – account for around 37% of government expenditure o Has a considerable impact on the distribution of income in the economy o If often means tested as social welfare payments are designed to reduce income inequality o Largest area of social welfare is aged pensionso Age pensions is putting significant pressure of budget due to the ageing population

STABILISATION AND SUSTAINABLE GROWTHMajor problem is that the rate of economic growth changes from year to year. Monetary policy tends to operate as the main stabilisation policy. Fiscal policy also plays a very important role through the direct effect of the governments overall level of spending, taxing and borrowing in a yearMonetary policy:

- Involves action by the reserve bank on behalf of the government- Designed to influence the level of interest rates and the supply of money- By Gov influencing variables, they are able to influence the overall level of economic activity, inflation and unemployment - Used in the domestic market of operations – involves buying and selling government securities by RB in order to effect the cash rate of

interest and influence the level of interest rates in economy - Monetary policy can either be tightened or loosened depending on whether the government wishes to dampen or boost the level of economic

activity:o Tight MP : Gov wished to slow down the level of economic activity, putting upward pressure on interest rates to reduce money supply.

High interest rates reduce demand for money and dampen consumer investment, drop in aggregate demand would reduce inflationary pressures but leads to a rise in cyclical unemployment

o Loose MP : Gov increase level of economic activity, put downward pressure on interest rates – increasing the money supply, lower interest rates means increase in demand for money and investment. Rise in aggregate demand would reduce cyclical unemployment, but might also lead to a rise in inflation.

Fiscal policy:- Important in influencing growth rates, especially when the economy is in a downturn - Macroeconomic policy that can influence resource allocation, redistribution of income and reduce the fluctuation in the business cycle.

Includes government spending and taxation and the budget outcome

PUBLIC ENTERPRISEThere has been a clear shift towards minimising the role of government in the economy, and as the governments direct role in production has been substantially cut back - Government business enterprises (GBE) are businesses owned and managed by the government at either commonwealth or state level, and

have been role of to the private sector in a process known as corporatisation. - It has been felt that they would be run more efficiently as the private rather than GBE- Corporatisation occurs when the government encourages public trading enterprises to operate independently from the government, they are a

private business in order to improve efficiency and profit- Competition is the pressure on business firms in market to lower prices to increase their sales

OTHER ROLES IN THE ECONOMYThey want to ensure a maximum level of competition in the economy, protecting consumers from unfair business conduct and protecting the natural environment. Competition policy:- Wanting to ensure that the market operates efficiently – promote a workable competition- Sometimes may be necessary to reduce the number of firms in an industry. The remaining firms can then produce on a larger scale and

achieve the lowest possible long run average cost of production - Appropriateness of certain market structures depends on the specific features of an industry- Attempts to achieve a situation where markets are contestable – entry barriers to industries should be kept to a minimum by eliminating

business practices that restrict potential competition Consumer protection:- Now lies with the control from the commonwealth government- Ensures fair business conduct by prohibiting practices that restrict competition and imposing penalties on firms that breach these guides - Prohibits include: price fixing with competition, misleading advertising and price discrimination - Also played a key role in investigating petrol and grocery prices by examining the competition Environmental protection - Deals with the impact of economic activity on the environment – environmental sustainability - Has become significant tissue for governments with two underlying issues:

o Use of renewable and non-renewable resources: depleting the worlds stocks of non-renewable resources, government can contribute towards sustainable energy use by supporting alternative resources such as solar panels

o Price mechanism inaccurately reflects the externalities involved in production: often involve atmospheric and water pollution – extremely serious issue as their consequences cannot be contained international agreements on measures to address global environmental problems

Government in actionTHE BUDGET

Fiscal policy involves the use of taxation and spending powers through the commonwealth budget in order to achieve certain economic objectives including:

- Stabilising the level of economic activity- Maintaining low inflation- Reducing the level of unemployment- Achieving general policy goals in relating to the distribution of income

2011-2012 budget:- Before 2008 – government has been able to have budget surplus, had record low unemployment they were spending less on welfare

employments- Government budget position slowly deteriorated as the projections were not meet – loss of jobs as a result as well as increasing welfare- Return to economic growth average of 2.7% in December 2010. Solid growth has supported employment and company profitability, thereby

creating an increase in tax revenue- The slowing government recovery of budget is due to a number of factors:

o Increased expenditure associated with natural disasters in summer (disaster relief)o Reduced company taxation revenue due to the impact of high A$ and low consumer spendino Reduced company taxation due to the disruption in revenue caused by natural disasterso Reduced personal taxation as subdued investment markets have reduced capital gains tax payable o (resulting in an overall negative effect on agriculture and economy)

- Government wanted to remove stimulatory effect of government sector on the economy when it is not needed (reduce/remove fiscal spending)- With the gradual tightening of monetary policy by the reserve bank in October 2009 there has been a manageable rate of inflation (opposite to

loosening pressure leading to rise in inflation)- It is important for the government to get back to budget surplus as there will be a steep decline in the proportion of the population working over

the next two decades (ageing) – reduces the relative size of the tax base available to the government to fund the needs of a larger population of retirees

- To come to the 2011/2012 budget the government has to determine to what extend the improved taxation revenue would be allowed to flow through to an improved budget position, as opposed to being used to fund new spending initiatives

- Fiscal policy stance is current contractionary as there is less government spending – less inflation- The underlying cash balance position for the 2011/12 financial year was a deficit of $22.6 billion. Resulting in decreasing deficit (54.8- 22.6 =

32.2billion decrease)- Government deficit is currently 3.6% of GDP – expected to fall to 1.5% in 2011/12 - With remaining deficit, the government debt is expected to increase from $82.3 billion in 2010/11 to $106.6 billion in 2011/12 (peak level of

debt) - Weaker rates of economic growth elsewhere have contributed to much larger deficits being adopted around the world e.g. USA = 10% of

GDP- In comparison to other developed nations Australia is doing well

REVENUE AND EXPENDITURECommonwealth government get revenue from:

- Income tax (on individuals and companies)- Goods and services tax- Excise duty (imposed on producers of specific goods)- Customs duty (imposed on importers of goods)- Other tax revenue- Non-tax revenue

Commonwealth expenditure occurs on:o Social security and welfareo Infrastructure and social overhead capitalo Industry assistance and developmento Protecting the environment o Promoting ecologically sustainable development

THE IMPACT OF BUDGET OUTCOMESThe budget outcome gives an indication of the overall impact of fiscal policy on the state of the economy Budget balanced

Planned government revenue

= Planned government expenditure

Budget surplus

Planned government revenue

> Planned government expenditure

Budget deficit Planned government revenue

< Planned government expenditure

Three possible stances of fiscal policy:- Expansionary fiscal policy: government might reduce taxation revenue or increase government expenditure, creating either a smaller surplus

or bigger deficit than periods. Aims to increase the level of economic activity - Contractionary fiscal policy: government would be planning to increase taxation revenue or decrease government expenditure, creating

either a smaller deficit or bigger surplus than previously- Neutral fiscal policy: government does not change the budget outcome from the previous year level. Will have no overall effect on the level of

aggregate demand and economic activity

Automatic stabilisers are instruments inherent in the government’s budget that counterbalance economic activity. In a boom they decrease economic activity and in a recession they increase economic activity. Examples include transfer payments and a progressive tax system

INFLUENCES ON GOVERNMENT POLICIESParliament and political parties:

-Our parliament is divided into a lower house and upper house. New laws must win the approval of both houses. The outcome of the 2010 federal election was that a labour government was elected with 72/150 seats in the house of reps and 31/76 seats in the senate. The government cannot pass legislations without some support from other MP’s and senators, which means the government must often negotiate the details of its policies in order to get legislations passed

Business-in a market economy, successful and growing businesses are crucial for a nations prosperity. Shows the Substantial financial influence that

businesses have over political parties. Businesses are involved in discussion and contribute to policy making across a wide range of issues that may affect their activities. Some business groups represent the interests of a particular business sector. The influences of business have grown recently. Alongside the growth of professional lobbyist which represent individual companies

Unions-Largest organisations by membership in AUS. Mostly represents the interested of their members in individual workplaces, but they are also involved

in consultations with governments on many policy issues. The participate in public debates and sometimes issue reports on matters affecting the interest of member

Environmental groups-Prominent interest groups in recent decades. Forced to take environment issues more seriously as the natural environment is undertaken greater

threat now than ever before. political parties now compete to demonstrate their commitment to the environment Interest groups

-People with concerns, interest or expertise relating to specific issues often form organisations to work together towards common ends, have a strong local focus, resisting a development proposal or raising an issue of concern to a local community.

The media-In influences government policies. Through determining which issues will receive coverage to how issues will be presented to the public. The

distinction between reporting of fact and the presentation of a writer or broadcaster’s opinion is often blurred International influences

-International treaties and memberships of international organisations can impose constraints on economic policy making; for example as a result of our membership in the world trade organisation, Australia’s policy options to assist local industries are limited.

i. Demand for labour - The services of labour are demanded only because they are needed for the firm to produce goods and services and make a profit. - The demand for labour is a downward sloping curve. This indicates that as the price of labour (wages) fall, an individual firm will employ

more labour. - Derived demand is the derived from the demand of G & S within the economy

1.1 Factors Affecting Demand The output of the firm

The most significant influence on a firm’s demand for labour is its level of output. If a firm is experiencing higher sales, it will increase production and therefore increase demand for labour.

General economic conditions • Aggregate (total) Demand– refers to the total demand for goods and services within the economy.

• Higher rates of economic growth > falling unemployment levels and vice versa.

• Changes in the demand for labour will occur as a result of fluctuation in the business cycle

• Time lag between firms observing a pick-up in the level of demand and raising their demand for labour.

• Firms tend to operate with excess capacity. They do not always utilise their resources and tend to accumulate labour so as not to have to train new staff when production picks up.

• When production does increase, firms can satisfy the higher demand, at least in the short run, by using their existing resources more efficiently and intensively.

• During a fall in aggregate demand it takes time for firms to notice that their sales are falling, cut back production and retrench some of their workers

Conditions in the firm’s industry • A change in the consumer tastes and preferences for different goods and services will see a change in the allocation of labour between different industries

• Increase in demand for an industry’s products > increase in demand for labour

Demand for a firm’s products • Firm’s output is determined by its effectiveness in selling goods and services • This is determined by the quality of its products, its customer service and its marketing efforts.

1.2 Productivity of labour

- The productivity of labour can be defined as the output per unit of labour per unit of time: - The cost and productivity of labour will determine the extent to which a firm uses labour in its production.

Labour Productivity = Total Output/Labour Input

- Generally, labour productivity depends on the quality of the workforce (including overall education, skill, health and desire to perform) and how efficiently labour can be combined with other factors of production in the production process.

- An increase in labour productivity can have either a positive or negative impact on the demand for labour, depending on whether aggregate demand increases or not.

• If AD is rising, there is a higher demand for G & S – is AD is rising at a faster rate than the increase in productivity, higher demand will be greater than the higher production generated by the existing workers.

• If AD is unchanged, but labour productivity is rising then the existing workers will be producing more G & S, but there will not be any higher demand in the economy

• If AD is falling but labour productivity is rising, the demand for labour will fall even more

- In summary: more labour will be employed when labour productivity increases, but only when there is a sufficient increase in aggregate demand to warrant it.

- If firms substitute capital for labour > reduce demand for labour > output levels remain the same or increase. 1.3 Cost of Other Inputs

- Firms must consider the cost of all inputs when choosing how much labour to employ as compared to capital. - If the cost of labour is relatively high, firms will use more capital inputs in the production process, and less labour and vice versa.

- A firm’s demand will respond more sharply to price changes when:

• It is easy to substitute between labour and capital • Labour costs are a relatively high proportion of its total costs • It is difficult for the firm to pass on increased labour costs in the form of higher prices to consumers.

- When comparing the cost of labour against the capital, firms must include both wages and labour on-costs/benefits such as sick leave.

1.4 Other factors - A firm’s demand for labour may also be affected by discrimination or prejudice on the part of some employers, or due to mistaken belief that

members of certain groups in society are less productive workers. - Firms must satisfy certain legal requirements when employing workers, such as giving them holiday leave and ensuring minimum

occupational health and safety standards at the workplace. ii. The supply of labour

Factors affecting supply 2.1 Pay levels

• The higher wage offered, the more people are willing to work. • Other non-wage and salary incentives would also influence one’s willingness to work.

2.2 Working Conditions

• Attractive working conditions encourage a higher supply of labour to a workplace and vice versa. • Firms may offer incentives such as generous holiday leaves which would increase people’s willingness to work.

2.3 Education, Skills and Experience Requirements (Human Capital) • The education, skill and experience requirements for some type of sales can limit the supply of labour. • Human capital refers to the knowledge, skills and training of workers which contribute to the process of production ; reflects the quality of the

labour force and it’s productivity strength • A country with relatively high levels of human capital is more likely to achieve low unemployment. • Government spending on education and training will also influence the skill levels in the workforce.

2.4 The Mobility of Labour The supply of labour will be affected by its responsiveness to changes in the demand for labour in different areas and industries

Two types of labour mobility:

Occupational Mobility – refers to the ability of labour to move between different occupations in response to improved wage differentials and employment opportunities.

Geographical Mobility – refers to the ability of labour to move between different locations in response to improved wage differentials and employment opportunities. Factors that limit geographical mobility include:

• The costs of relocating, including travel, transportation and real estate costs. • The personal upheaval associated with moving, such as breaking ties with family and friends.

2.5 The Labour Force Participation Rate

• People may decide not to participate in the workforce because they want to undertake further study or take care of family; or • They think they are unlikely to find a job or would rather rely on other forms of income.

• Labour force: total employed and unemployed person in the country at a given time (workforce)

Labour Force Participation Rate (%) = Labour Force X 100 Working Age Population (15+) 1 2.6 Other Factors

• Supply of labour may be restricted as a result of government policy decisions or the collective action of those providing labour within an industry.

• Higher participation rate > increased living standards • Government can limit the supply of labour to particular occupations by imposing certain qualification and license restrictions e.g. builders.

iii. The Australian Workforce 3.1 Definition of the Workforce The Australian workforce can be defined as that section of the population who are 15+ years who are working or actively seeking work.

Included In the Workforce Not Included in the Workforce

• • • •

Persons aged 15 Employed for at least one hour a week On paid leave, strike or on workers compensation Unemployed – actively seeking and available for work

• • • •

Children under 15 years. Full time, non working students above 15 years Retirees People performing full time domestic duties

• Without a job but not available or actively seeking work

The Australian workforce can be divided into 2 categories:

1. The employed – a person is defined as being employed if they have more than one hour of work per week. 2. The unemployed – a person is defined as unemployed if they are currently available for work and are actively seeking work.

3.2 General Characteristics of the Australian Workforce The size and quality of the workforce is affected by 3 main factors:

a) Population size b) The age distribution

c) The labour force participation rate

a. Population Size

• Sets the limit to which the workforce can grow • The larger the total population, the greater the potential workforce • Population growth influenced by 2 factors – natural increase and net migration. • Natural increase refers to the excess of births over deaths in the population over a period of a year. • Net migration refers to the excess of permanent new arrivals to our country over permanent departures over a period of a year.

b. Age Distribution

• The greater the proportion of the population in the 15-65 age group, the greater the potential for a larger workforce.

- Full time workers are employed people who usually work 35 hours a week or more. - Part time workers are employed people who work more than 1 hour but less than 35 hours a week.

iv. Labour Market Outcomes Labour market outcomes refer to the performances of the labour market in terms of wage and employment levels.

Wage outcomes refer to the following:

• The rate of wages growth • The distribution of wages and salaries • The forms of labour income e.g. fringe benefits • The relative differences between these wage levels, according to income groups, occupational groups, age, gender and cultural background.

4.1 Wage Outcomes

Average Total Earnings - measures the average weekly gross rate of pay to all employees Nominal Wage - is the pay received by employees in dollar for their contribution to the production process not adjusted for inflation Real Wage - measures the actual purchasing power of money wages Inflation -

the sustained increase in the general level of prices over a period of time, usually one year this is commonly measured by the percentage change in the consumer Price Index (CPI)

-

4.2 Differences in Wage Outcomes Wage differentials between different occupations

• People are generally rewarded for working in occupations that require a higher level of skill and a longer period of training. • They will not spend their time and money acquiring education unless they are confident that they will receive higher wages when employed

or some other substantial benefit. • If occupational mobility is high, supply of labour will be high, less need for employers to raise wages to attract labour and vice versa.

- Wage differentials in the same occupations

• Wages also differ for workers in the same occupation, reflecting the various degrees of experience. • Employers find it difficult to attract labour to isolated locations, and generally have to pay higher wages to do so (geographical mobility). • The productivity of labour will influence wage rates paid. • Enterprise bargaining employees often gain higher wages at the individual enterprise level in exchange for taking steps to increase their

productivity. • The capacity of the firm to pay also influences wage outcomes. More profitable firms have a greater capacity to pay for higher wages.

- Age

• Income levels are low in the earlier years of working life. • Highest when people are 25-64. • Income levels decline as people get older and need to rely on aged pensions.

- Gender

• Discrimination by employers against certain groups in our society means that people in some groups have fewer job opportunities and less access to higher paid jobs, leading to lower earnings.

- Ethnic and Cultural Background

• Those born overseas tend to receive higher weekly income levels than those born in Australia. • Migrants from non-English speaking countries have lower income levels than those born in Australia. • Lack of understanding of the language leaves the non-English speaking migrants unable to obtain better paid jobs even if they have the

equivalent skills and experience of their Australian-born counterparts. 4.2 Non-Wage Outcomes Many employers receive additional benefits such as sick leave, holiday leave and other fringe benefits. These are known as non-wage outcomes.

Different types of non-wage outcomes include:

• Salary packaging. Employees receive a company car, laptop etc. • Bonus cash payments. These come about as a performance bonus, either based on the company’s profit performance or the employee’s

individual work performance. • Flexibility for employees in work patterns. Employees may be given time to study, extra paternal leave etc.

4.3 Trends in the Distribution of Income from Work

• In the 1980s, the prevalence of the award wages system ensured that differences in wage outcomes both between and within occupations were smaller.

• Negotiations between employers and employees have created a much greater difference in wage outcomes for both different industries and individuals.

• Emerging industries that require skilled labour are likely to pay higher wages than declining industries that are experiencing falling demand for their goods and services.

4.4 Income Distribution Within Occupations

• Recent years have seen an increase in the dispersion of earnings within occupations and among employees with the same skill levels or educational qualifications.

• Another contributing factor is the declining level of union membership in Australia. • High rates of union membership create more similar wage outcomes in an occupation, but as union influence has declined there has been

greater variation in wage levels. 4.5 The costs and benefits of an inequitable distribution of income Economic benefits of inequality - The labour force is encouraged to increase education and skill levels

• If those with higher qualifications and skills receive higher income rewards, new entrants and participants in the labour force will be encouraged to improve their education and skill levels.

• Income inequality > increase in the quality of the labour force.

- The labour force is encouraged to work longer and harder

• The potential to earn higher income produces an incentive for workers to work longer hours or to work overtime. • Workers will only be willing to give up leisure time in order to work longer hours when they feel the extra income is more valuable than their

leisure time. • Increased output is rewarded through higher pay > improved labour productivity.

- The labour force becomes mobile

• A more mobile labour force > more efficient allocation of resources > higher rate of economic growth - Entrepreneurs are encouraged to more readily accept risks

• Income rewards for entrepreneurs is necessary to encourage them to take risks associated with business. • If they did not receive extra rewards for risk taking then > fewer entrepreneurs and businesses > lower rate of economic growth > fewer jobs

> reduced productive capacity in the economy. - Potential for higher savings and capital formation

• Higher income earned, the greater the proportion of income that will be saved and vice versa. • Greater income inequality should encourage increased savings in the economy because of the greater number of higher income earners.

Economic costs of inequality - Overall utility is reduced

• Generally felt that inequality in the distribution of income reduces the total utility or satisfaction in society. • Based on the assumption that people on higher incomes gain less satisfaction from an increase in income that people on lower incomes. • Reasoning is that as more of a good is consumed it will prove progressively less utility to the consumer.

- Consumption and investment is reduced

• Poorer people spend a higher proportion of their income than richer people. • Thus less income will go towards consumption. • This leads to lower economic activity, employment, investment and living standards.

- Expenditure on conspicuous consumption

• Inequality in income distribution creates a class of higher income earners who spend a large proportion of their income on ‘conspicuous consumption’, which is a consumption of expensive goods and services purely for the purpose of displaying wealth e.g. expensive cars/clothes.

• Lower income earners might try to emulate conspicuous consumption to lift their status, rather than spending their money on more necessary goods or services.

- Less work and work efficiency

• Inequality in income distribution causes relative poverty. • Reduces educational opportunities and lowers self esteem. • May result in people not working to their full capacity or not working at all.

- Welfare support

• Places demands on government spending as a large number of people on low incomes may require government assistance. Social costs of inequality - Problems associated with social class divisions

• Class divisions can result in tensions between people and between different regions. • Wage disputes between workers and capitalists, in which workers try to improve their income level, are a common cause of dispute. • These divisions can lead to social and economic upheaval

- Poverty

• There are many Australians who live in relative poverty. • This leads to misery for those in poverty and tends to trap families into a vicious cycle of low incomes and few economic opportunities. • High poverty levels also tend to be associated with high levels of crime, suicide, disease and reduced life expectancy.

v. Labour Market Trends 5.1 Unemployment

Unemployment Rate = (Number of unemployed/labour labour) x 100/1Types of Unemployment

Cyclical unemployment Results from the ups and down of the business cycle. During a downturn, firms respond by cutting back production levels and laying off workers.

Structural unemployment Occurs because of a mismatch between the skills demanded by employers and those possessed by unemployed people.

Seasonal unemployment Occurs because of the seasonal nature of some jobs (such as tourist-related jobs) and during periods of the year when new school leavers enter the job market

Frictional unemployment Occurs as people change jobs – it usually takes some time to move from one job to another Hard Core unemployment Refers to those individuals who might be considered unemployable because of some personal characteristic

such as mental or physical disability Hidden unemployment Refers to those individuals who are not counted in the official unemployment figures ( they have given up actively

seeking work or have gone back to school) Long term unemployment Refers to those individuals that have been out of work for a period of 12 months or more.

Underemployment Refers to those individuals who have part-time jobs but would like to work more hours per week. 5.2 The Move Away From Full Time Work

- The labour market has been undergoing changes over recent years. The main change in work practices is the shift away from full time work towards more work structures which give businesses flexibility e.g. part time work, casual jobs, outsourcing, individual contracts and sub-contracting.

5.3 Part time employment

- Part time workers are employed people who work more than 1 hour but less than 35 hours a week. - Casual employment is when employees have occasional work hours that don’t follow a set pattern. - The 90s saw a shift towards part time and casual employment. Several factors help to explain this shift, these include:

• Some employees prefer part time work to satisfy non work commitment e.g. family, study • Part time work my be a preferred lifestyle choice • Improvements in communication technology make it possible for people to work in more flexible arrangements

5.4 Casualisation of Work The advantages of casualization are:

- Flexibility for employers to increase or decrease as per the business’ change in demand

- Employers can avoid paying some non-wage costs such as penalty rates or redundancy entitlements - Flexibility for employee who want to engage more in non-work commitments (i.e. family, study)

The disadvantages of casualization are:

- Less job security

- More difficult for employees to plan financially for the future (i.e. home loans securing) - Less staff loyalty and development of workforce skills

5.5 – 5.7 Outsourcing, Contractors and Sub-Contracting - Outsourcing and subcontracting is when the firm pays a private sector company or an individual to perform non-core functions. These jobs are

predominately contract based (limited time period).

vi. Labour Market Institutions - The relationship between employers and employees is known as industrial relations.

- The Industrial Relations System involved the laws, institutions and processes established to resolve conflict between employers and employees.

6.1 Trade Unions The Role of Trade Unions

• A trade union is an association of workers, which aims to advance the interests of its members by improving their wages and working conditions.

• Trade unions bargain collectively on behalf of their members, thereby increasing bargaining power of individual workers in wage negotiations.

• They use industrial actions such as strikes to support their claims for higher wages or working conditions.

Occupational Unions Draw their members from people of the same occupation e.g. Electrical Trades Union Industrial Unions Cover workers in a particular industry regardless of the type of work they do e.g. Transport Workers’ Union General Unions Cover a whole range of workers with many different skills across various industries e.g. The Australian Workers

Union. Most unions are joined with the Australian Council of Trade Unions (ACTU).

The ACTU has several roles today:

• It provides a national union movement voice when proving input into Safety Net Review Wage Case. • Play a key role in major industrial relations disputes. • Is the voice of the union movement on key industrial relations issues e.g. enterprise bargaining.

Unionisation levels have declined because of:

• Increasing casualisation of the workforce in the services sector where union presence is low. • The decline in manufacturing employment, a traditional stronghold of unionism • The decentralisation of wage determination • A general fall in confidence in the union movement’s ability to deal with industrial issues.

Trade unions can influence labour market outcomes in 2 ways:

• By restricting the supply of labour to only unionised worker, this will cause a shift in the supply curve to the left, forcing up wage rate. Reduces the quantity of labour employed to only union members.

• By attempting to raise wage levels above market equilibrium. If the award wage for an occupation is raised, the supply curve of labour may change, creating a wage floor. However at the wage rate, supply of labour exceeds demand and thus leading to unemployment.

6.2 Employment Contracts - These are agreements made between an employer and employee on an individual basis. They generally favour the employer.

Contracts offer employer a number of benefits:

• They provide the greatest flexibility for changing pay and working conditions to the individual circumstances of the firm and employee. • At the end of the program, the employer has no obligation to provide work or redundancy payment.

Outsourcing is another form of employment replacing full time work. Outsourcing (or sub-contracting) occurs when an organisation pay businesses to perform a function, which it doesn’t regard as a core part of its business focus, For example, governments leaving their information technology operations in the hands of private companies.

Advantages of outsourcing:

• It aims to improve efficiency because it allows the organisation to focus on its area of specialisation • It tends to create shorter term employment arrangements because workers only work until they complete the job.

Sub contracting is a method of labour contracting which is more common in certain industries such as building. Sub contractors are private companies that work for large contractors, but charge their own wage rates and provide for all the costs of employment e.g. taxation, superannuation etc.

Role of Employer Associations Employer Associations represent employers in similar industries.

Employer Associations seek to have a collective voice on industrial relations to protect the interest of their member in negotiation with trade unions. Employer Associations:

• Make employer submissions at the annual Safety Net Review Case • Make employer submissions over industrial relations issues such as unfair dismissal laws.

6.3 Current Employment / Industrial Framework

• The federal government has the constitutional power and responsibility to resolve nation industrial disputes. • State and Federal industrial tribunals set minimum wages and working conditions for a range of occupational awards at both state and

federal level as a means of providing a safety net for workers on minimum wages. • Tribunals hold hearing and may be called upon to conciliation or arbitration services. • Introduction of Workplace Relations Amendment Act 2006 > AIRC’s power to adjust the federal minimum wage and working conditions was

handed over to the Australian Fair Pay Commission (AFPC) • The Federal Government creates legislations to establish procedures for wage negotiations and working conditions.

The Role of Industrial Tribunals - The main role that these tribunals play is to resolve disputes between employers and employees.

- The key role of the Australian Industrial Relations Commission (AIRC) has been to resolve industrial disputes through conciliation and arbitration.

- Conciliation – is the process in which the tribunal provides a mediator who tries to help the disputing parties to reach an agreement -

Arbitration – occurs when an industrial tribunal or court makes a rule that is legally binding on all parties. - The Court’s role is to interpret and to enforce AIRC decisions.

- The Court’s role is important because the AIRC is not a court, and therefore its decisions and determinations are not automatically enforceable in the same way as the courts would be.

- The Workplace Ombudsman enforces the legal obligations of employers, unions and employees. The role of the Ombudsman is to ensure that agreements are implemented, and that employees receive their minimum pay entitlements.

- The Workplace Authority promotes individual contracts and reviews contracts.

TIPS ON WRITING AN HSC ECONOMICS ESSAY

o Know your stuff Know the key directive terms and apply them correctly – highlight them as soon as you look at the

essay question. Know your economic terms and use them appropriately – for example, “depreciation” not

“decrease” in the AUD. Having a glossary of terms and definitions that you learn off by heart before a test is beneficial. Many essays should start with a definition in the intro paragraph (handy for many short answer questions that require definitions too).

o Combine theory with practice Year 11 essays are more theoretical, however in the HSC course your essays should focus on what

has and is actually happening in the economy rather than what could happen – for example, if your essay is on unemployment you must discuss what the actual causes are of Australia’s current unemployment levels, not the textbook theory of possible causes of UE. Best answers will combine theory with practice – for example, the economic slowdown in Australia has caused cyclical unemployment to rise.

To discuss/analyse/explain etc what is actually happening in the Australia or global economy requires current data and statistics. Sometimes this info is provided for you in stimulus material (which is usually out of date), but you must come to exams prepared with memorised statistics. Write a sheet of relevant stats and learn them off by heart before the exam. You won’t need too many.

o Structure your essay well The best way to ensure a good structure is to take a few minutes to write an essay plan on your

question sheet or at the start of your answer booklet. You can go back and add to your plan at any time as you’re writing.

Your introduction should be one or two paragraphs only. Don’t say “In this essay I will..” (Don’t use first person). Provide any necessary definitions and make some general broad comments about your topic area.

Write your essay in a logically sequenced way – address each point in order – don’t jump all over the place. If the essay question is in two parts, address each part in turn – don’t try to combine the two parts. Leave a line between your responses to each part of the question (like pausing in a speech) to show the marker you are about to start a new section.

Stick to the question – while it is always appropriate in a discuss or analyse question to draw in material from other areas of study, don’t go off on a tangent and waste valuable time. Keep asking yourself whether you are answering the question. Irrelevant material won’t lose you marks however you won’t get any marks either, and you are wasting time that you could use to write material that will get you marks. For example, if the essay is on the policies to address inflation, you might briefly mention the causes of inflation in one of your introductory paragraphs, however don’t spend the first page or more on the causes of inflation!

Watch your paragraphs – make sure they are not too long. Indent each paragraph or leave a line between paragraphs if typed. Paragraphs that are too long annoy the marker and make it hard to follow what you are saying. Like pausing or taking a breath in a conversation, breaks between paragraphs allow the marker to pause and then move onto your next point. Structure each paragraph around a particular point.

Don’t use dot points unless you are running out of time and quickly have to list what you were going to say.

Don’t pre-prepare essays and hope they fit the question – learn your content and be able to adapt it to the question and the directive term

o Read the rubric The rubric is the list at the top of your essay page that says “you will be assessed on how well

you…”. This list may contain crucial information – for example, use diagrams to illustrate your answer or use a case study. If it is in the rubric then it should be in the marking criteria, and if you don’t use case studies, for example, when it’s in the rubric you will lose marks.

If there is stimulus provided for a particular essay then the rubric will include something like “use your own knowledge and the information provided”. This means that you must refer to the stimulus in some way. This doesn’t mean you have to “quote” any part of the stimulus – in fact it’s better not to – only that you refer to it, for example “Unemployment reached a peak of 11.1% in 1992” shows that you have interpreted a graph. “Some economists argue that microeconomic reform has stalled” shows that you have read a stimulus quote. Stimulus material is meant to supplement your own knowledge and give you a starting point – never confine your essay response to the material in the stimulus.

o Manage your time and handwriting Be very aware of your time constraint. If the question is a two part question, chances are the first

part has an easier directive term than the second. Many students spend a lot of time on the first section, which may be very broad, then leave little time for the harder second section. The marker is probably assigning more marks, however to the second section. Make sure you leave enough time to adequately answer both sections.

While every effort is made by the marker to read your handwriting, if it is difficult to read the marker may not follow what you are saying. You must have legible handwriting – if you have a real problem with this, get help!

o Good Economists can see all sides… You must be objective in your responses. If you have a particular political belief, make sure you see

all sides and present arguments appropriately. Don’t use emotive language such as “terrible” or “hopeless”. Don’t use first person. If you want to give an opinion, say “some argue that..” or “it can be argued

that..” or “the government has been criticized because..” Never say “I think that..”

SAMPLE STRUCTURE – POLICY / ISSUE ESSAY

Can be adapted for any policy/issue question

e.g. “Discuss the effectiveness of policy options to manage economic growth

in the Australian economy”

Introduction

Definition – economic growth 1 – 2 broad statements, incorporating the question e.g. “After experiencing strong economic growth

for over 17 years, Australia has experienced a slowdown since 2008. The Australian government has used a number of policy options to promote and maintain sustainable economic growth”

Body:

Paragraph describing recent trends in EG and current economic conditions. (stats)

Fiscal Policy

Definition Broad statement about the use/role/importance of FP to manage growth, particularly in current

conditions Theory – how can FP be used to increase / decrease EG?

o Keynesian diagramo Expansionary / contractionary policy & multiplier

Recent use of FPo Current budget / stimulus packages (stats)

Discussion of effectiveness, with a focus on current FP (stats), rather than theoryo Political constraintso Time lags (stimulus packages very timely – evidence)o Global constraints (recession, stats)o FP/MP working together?o Aggregate demand side of economy onlyo Other discussion points / criticisms of current FP

Monetary Policy

Definition Broad statement about the role/importance of MP in managing growth, particularly in current

economic conditions Theory – how can MP be used to increase/decrease EG?

o Domestic market operationso Transmission mechanism

Recent use of MP (stats) Discussion of effectiveness, with a focus on current MP (stats), rather than theory

o Political constraints – RBA independent – more effectiveo Time lags – long for MPo Importance of expectations effect in MPo Global constraints (OS interest rates)o FP/MP working together?o Aggregate demand side of economy only (if issue is inflation, works best from demand pull

inf)o “Blunt instrument aspect of MPo Other discussion points / criticisms of current MP

Microeconomic policy (including labour mkt reform)

Definition Broad statement about the role of MER in promoting growth (supply side, long term) Theory – how does MER lead to EG?

o Increases in productivity, competition, leads to increases in aggregate supply and structural change

o AD/AS diagram Use of particular MER’s – describe in detail a few that relate to a particular issue – in the case of EG

lbr reform, trade policy, NCP Discussion of effectiveness MER’s in promoting growth

o Political constraints – often very unpopularo Time lags – very longo Deals with supply side, which helps with cost push infl, leading to long term growth and less

UE. o Short terms costs e.g structural unemploymento Future directions of MER – National Reform Agenda (COAG) – 3 streamso Impact on distribution of income e.g. lbr reformo Other discussion points / criticisms of MER

Conclusion

Brief conclusion – no more than one short paragraph

Draft notes

1. Definition of opportunity cost + example + table exampleThe theory of ‘Opportunity Cost’ refers to what we have to give up in order for us to get what we want. It represents the alternative forgone. The production possibility frontier represents to concept of ‘opportunity cost’. For example in the table below, the opportunity cost of producing 50 bikes is 20 cars.

Cars Bikes100 080 50

2. Relative scarcity + meaningRelative scarcity refers to the scarcity of resources in comparison to the infinite wants of society. We must make choice based on what we can afford and what is available resource-wise.

3. Impact of minimum wage rates The impact of minimum wage rates will encourage more people to go out and look for employment because they can be guaranteed a certain amount of money for the amount of hours they work.

4. Describe the RBA, ASIC, AIRC and APRA, and outline their responsibilitiesThe Reserve Bank of Australia has a main responsibility of maintaining three things;

1. Maintaining the stability of the Australian currency2. Maintaining full employment 3. Controlling the cost of credit via Interest Rate/Monetary Policy

The Australian Securities and Investments Commission is responsible for making sure than financial markets in Australia are fair and transparent, meaning that there are not hidden catches.The Australian Industrial Relations Commission works to

Assist employers and employees in solving industrial disputes Handling termination of employment claims Modernising and maintaining awards Dealing with applications about industrial action

The Australian Prudential Regulation Authority has a role of establishing and enforcing prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by institutions we supervise are met within a stable, efficient and competitive financial system.

5. The types of tax; regressive, proportional, progressive + meaning + diagram.Regressive tax refers to tax that decreases the tax rate as the amount of funds borrowed decreasesProgressive tax refers to the tax that increases the tax rate as the amount of fund borrowed increases.Proportional tax is a tax imposed so that the tax rate is fixed as the amount subject to taxation increases. In simple terms, it imposes an equal burden (relative to resources) on the rich and poor.

6. Define consumer sovereigntyConsumer sovereignty is when consumer demand determines the composition of production

7. Explain the difference between nominal and real rates of interestThe nominal interest rate is the rate that is advertised by financial institutions to attract borrowers and savers. The real rates of interest take into account inflation rate.

8. Describe factors contributing to structural and cyclical unemploymentCyclical unemployment refers to unemployment due to an inadequate aggregate demand. It means that the demand for a product is not great enough at the point in time and the producer sees no use in employing extra people. It is called cyclical unemployment because it varies with the business cycle.Structural unemployment refers to the mismatch of skilled workers and the spot for skilled labour. Even though there may be enough spots for the unemployed, the unemployed lack skills needed for the job.

9. LRAC+diagramThe long-run average cost curve depicts the per unit cost of producing a good or service in the long run when all inputs are variable. In the long run, when all factors of production can be changed, productive efficiency occurs at the optimum scale of output. (Q₂)

10. Internal economies of scale + examples

Internal economies of scale relate to the lower unit costs a single firm can obtain by growing in size itself. There are five main types of internal economies of scale.

Bulk-buying economies

As businesses grow they need to order larger quantities of production inputs. For example, they will order more raw materials. As the order value increases, a business obtains more bargaining power with suppliers. It may be able to obtain discounts and lower prices for the raw materials.

Technical economies

Businesses with large-scale production can use more advanced machinery (or use existing machinery more efficiently). This may include using mass production techniques, which are a more efficient form of production. A larger firm can also afford to invest more in research and development.

Financial economies

Many small businesses find it hard to obtain finance and when they do obtain it, the cost of the finance is often quite high. This is because small businesses are perceived as being riskier than larger businesses that have developed a good track record. Larger firms therefore find it easier to find potential lenders and to raise money at lower interest rates.

Marketing economies

Every part of marketing has a cost – particularly promotional methods such as advertising and running a sales force. Many of these marketing costs are fixed costs and so as a business gets larger, it is able to spread the cost of marketing over a wider range of products and sales – cutting the average marketing cost per unit.

Managerial economies

As a firm grows, there is greater potential for managers to specialise in particular tasks (e.g. marketing, human resource management, finance). Specialist managers are likely to be more efficient as they possess a high level of expertise, experience and qualifications compared to one person in a smaller firm trying to perform all of these roles.

11. Describe the Reserve Bank’s Implementation of the Monetary PolicyMonetary policy decisions involve setting the interest rate on overnight loans in the money market. Other interest rates in the economy are influenced by this interest rate to varying degrees, so that the behaviour of borrowers and lenders in the financial markets is affected by monetary policy (though not only by monetary policy). Through these channels, monetary policy affects the economy to achieve;

the stability of the currency of Australia; the maintenance of full employment in Australia; and the economic prosperity and welfare of the people of Australia."

12. LFPR + calculation

The labour force refers to those people over fifteen years and less than sixty five years, who are either employed, or actively looking for employment. Calculated by work force divided by working age population.

13. Unemployment rate + calculationThe Unemployment rate refers to the percentage of persons who are aged 15 - 65 and are actively looking for work but are not in the workforce. The unemployment rate is calculated by total unemployed persons/15 to 65 populations. By total unemployed persons, we refer to those that are looking for work, not just unemployed.

14. Average costs + calculations + methods of reducing AC’sThe average cost refers to the total cost of production divided by the output. Methods to reduce average costs can be to reduce production costs by producing more efficiently, finding a cheaper alternative to resources, or even technological advancements.

15. Factors contributing to a shift in the demand curve +to the right +to the left.

Many things determine the movement of the demand curve such as Price Size of potential market Level and distribution of consumer income Consumer taste and preference Price and availability Price and availability of a complementary good Consumer expectations Availability of credit

16. Factors contributing to a shift in the supply curve +to the right +to the left

Things that may contribute to the change in the supply cure include; Cost of production Level of technology Availability of resources Seasonal conditions Price of other goods Producer’s expectations Ease of entry into and exit the market Number of suppliers

17. Budget outcomes +impact on economic activityA surplus budget represents a budget where the government has more income than expenditure over a certain period of time. This allows the government to hand out more benefits and welfare to the Australian society.A deficit budget refers to a budget where the government expenditure is greater than government income over a certain period of time. This requires the government to borrow funds from overseas, and as a result, more taxes will be charged, causing people to spend less.A neutral budget refers to a budget where government income is equal to government expenditure.

18. Calculation of average rate of taxThe average rate of tax is the tax payable divided by taxable income.

19. Merger VS TakeoverA merger is when two different companies of similar size and reputation merge together to form under one legal entity. A takeover, however, is the purchase of a smaller company by a larger one.

20. Law of diminishing returns +calculationsThe law of diminishing returns states that there is a point in production when no matter how much money you put into production; it may not necessarily bring you higher profits. This is represented in the diagram below.

21. Public goodsPublic goods refer to those that are open to the public, non-rivalled and non-excludable. This means that the use of the public good by one person does not affect the use of it by another person. A typical example could be the exchange of MP3 music over the internet; the use of these files does not restrict any other person from accessing and downloading these files.

22. Natural monopoliesNatural monopolies refer to those firms that provide natural resources for the public. For example, Sydney Water is a natural monopoly for supplying water, a natural resource, to the general public.

23. Law of demand + Law of supplyThe Law of Demand states that the quantity demanded is the opposite or inverse function of the price mechanism. i.e. if the demand is high, the price will be lower. The Law of Supply states that the quantity supplied is a direct relation to the price mechanism. i.e. if more are supplied, then the rice will be high.

24. Factors influencing elasticity of supplyFactors that can affect the elasticity of supply could include;

Advertising Change of income Trends

25. Define interest rates +factors that influence itInterest is the amount of money that is received by lenders (or paid by borrowers). An interest rate is the rate at which the lender charges the borrower for borrowing that money, for example, 10% on $200. Then the interest would be $20. Factors that affect the interest rate could be;

Cash rate Long term or short term loan The availability of funds for borrowing The demand for borrowing funds

26. Characteristics of Australia’s workforceAustralia’s workforce and participation rate has grown over the years, and the majority of the workforce is what they refer to ‘Baby Boomers’. Those who are Non-English speaking background or Aboriginal/Torres Strait Islander receive lower average incomes than others in the Australian community.

27. Redistribution of income +budgetThe redistribution of income refers to the collection of taxes and then handing welfare payments back out to people who need them. Generally, if we are in a surplus budget, people who get welfare will receive more benefits rather in comparison to if a deficit or neutral budget.

28. Meaning of marginal rate of taxThe Marginal rate of tax refers to a ‘flat tax’. A flat tax (short for flat rate tax) is a tax system with a constant tax rate. Usually the term flat tax would refer to household income (and sometimes corporate profits) being taxed at one marginal rate.

29. Market structures e.g. monopoly

A market structure refers to the composition of a certain market. If the market is a monopoly, there is one individual firm that dominates that market. If the market is a oligopoly, it means that there are many firms in the same market selling differentiated products in order to attract market power.

30. Price floors and ceilings +diagramsThe government may use a ceiling price or floor price in order to achieve certain economic or social outcomes. A ceiling price, a limit on the price charged for a good or service, may be introduced in an attempt to make a particular good or service more accessible to the community. A floor price may be used to guarantee that producers will get a minimum price for their output.

31. Price elasticity of demand +calculationThe price elasticity of demand is the response, in quantity demanded, to a change in price. Price (P) x Quantity demanded (Q) = total outlay.

If price and total outlay move in opposite directions, then demand is relatively elastic. If price and total outlay move in the same direction, then demand is relatively inelastic. If price changes and total revenue is unchanged, the demand is unit elastic.

32. Price mechanism A price mechanism is any type of process that allows the matching of buyers and sellers. Generally speaking, the seller will accept the highest price possible that is agreed upon by the seller and the buyer.

33. Primary and secondary markets

The primary market is that part of the capital markets that deals with the issuance of new securities. i.e. the issuing of new shares by a firm.The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. i.e. ASX

34. RBA +cash rate changes +methodThe Reserve Bank of Australia is responsible for changing the cash rate on a regular basis. It does this by reviewing the current situation in the economy and taking into account any inflation or other economic activity that may disturb the process of the economy. This is what they call the ‘Monetary Policy’, where the Reserve Bank Board gathers once a month to change the cash rate and then release this information to the media.

35. Impact of increase/decrease in cash rateThe cash rate is controlled by the RBA to ensure that the economy stands in a stable condition. It can increase or decrease the cash rate in order to fix or combat issues that the economy is presented with.With an increase in cash rate, the financial institutions will charge more on people who are borrowing, so spending will be decrease and savings increased.With a decrease in cash rate, more people will be encouraged to borrow funds and spend money because there is less money charged on the cost of credit.

36. Reasons for Government intervention into marketsThe government intervenes in markets because some markets are unable to provide efficiently, and result in market failure. Other goods and services cannot be provided by public markets so the government has to provide them i.e. welfare, defence.

37. Factors contributing to an increase and decrease in the demand/supply of labour

The demand and supply of labour may vary depending on the type of skills and number of jobs available. An increase in the supply of labour may be caused by overseas immigrants, or policies that encourage mothers to enter the workforce. An increase in the demand for labour may be due to a lack of skills required in the workforce. A decrease in demand may be because the economy cannot provide enough jobs for the entire working age population. A decrease in the supply of labour may be because the government policies do no favour people who work.

38. Fiscal policy +allocation of resourcesThe Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary and contractionary:

A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through a rise in government spending or a fall in taxation revenue or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. Expansionary fiscal policy is usually associated with a budget deficit. The fiscal 2008 and 2009 South African budget for South Africa is R3265 billion.

Contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue or reduced government spending or a combination of the two. This would lead to a lower budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.

The process includes; taking the scope/situation current economy policy Refers to government policy that attempts to influence the direction of the economy through changes

in government taxes, or through some spending.

39. Automatic stabilisers +roleAutomatic stabilisers work as a tool to dampen fluctuations in real GDP without any explicit policy action by the government.

40. Counter cyclical policies +economic managementCounter cyclical policies refer to those policies that try to work against cyclical tendencies in economy. They try to encourage economic activity when it is low, or decrease economic activity if it is booming. This is a process of economic management and used to stabilise the economy.