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 cant 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

Collective wants

e.g. education (schools),

safety (defence and police
forces)

Our wants are unlimited

e.g. always want newest

technology

Our wants change over

time

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
Wants of whole community depend on community as a
whole
Usually provided by government
o Local parks, libraries, local sporting facilities
o State hospitals, schools
o Federal satisfies wants of entire nation e.g.
defence force, enabled by taxation
But means of satisfying our wants is limited
Must choose between wants prioritise
Some will be satisfied sooner at the expense of others

Age
Income increase in income increase range of wants
that can be satisfied
e.g. 1yo pram, 7yo scooter,
Technology introduces new wants that people seek to
19yo car, 90yo wheelchair
satisfy
Fashion
All economies must answer the following questions:

1. What to produce limited resources cant 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 arent 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 wont change but our position in

relation to it would we would be inside

Shape

Things arent 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 dont satisfy consumer wants and demands immediately, they expand economys
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 dont 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 economys 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

Labour

wages

water
forests
mineral deposits
depends on

interest

pop. birth/death rates, immigration

school leaving age and retirement age
social attitudes women in workforce
availability of childcare
owed privately by individuals/firms

Capital

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 expenses
o rent for land they own in production
process
o wages for work effort
o interest for capital invested in
business
Scarcity in economies four resources in limited supply
Natural resources limited available
Labour limited b pop. Size, labour market skills, peoples 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 dont 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

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

falling levels of consumption and

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

increasing production of goods and

services
rising levels of consumption and
investment
falling unemployment
rising income levels
rising quality of life
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

Firms

Financial institutions e.g.

banks, building societies, finance
companies, credit unions,
superannuation funds, life
insurance companies

Governments

International trade and

financial flows e.g imports,

exports, international money flows

(i.e. borrowing, lending)

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
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
Act as intermediaries between savers and borrowers
Savings (leakage) essential for investment (injection)
to occur creation of new capital goods

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)
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 = injections
o 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 = injections
o 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 services
o 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 profits
o 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 theres 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

Misleading or deceptive
conduct
Planned obsolescence

Anti-competitive behaviour

Some informative, but more aim to manipulate consumer

behaviour
Consumer sovereignty = by manipulative/deceptive
marketing practices
Consumers can be deceived by false claims pay for
items they dont really want to buy
Common e.g. weightless programs
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
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
brands 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

Y = disposable income
after tax
C = consumption
expenditure
S = savings
.

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 consumers 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 falls
can 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

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
plus the proportion of each extra dollar that is
depending on your level of income

C = consumption
C0 = autonomous consumption
MPC = marginal propensity to
consume
Y = income

consumption
consumed,

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

500

450

250

1000

850

250

1500

1250

250

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 income
breakeven level of income when Y = C
Y = 50 + 0.8Y
0.2Y = 50
Y = 250
c) calculate the equilibrium level of income
equilibrium level of income when S = I
S = -50 + 0.2Y
0.2Y = 300
Y = 1500
d) graph the consumption and savings function

(substitute Y as C in consumption function)

(substitute I value as S in savings function)

Steps to draw a consumption and savings function graph:

1.
2.
3.
4.
5.

Draw and label axes with C and Y, and S and Y

Mark autonomous consumption on both the consumption and savings functions
Draw a 45o line on the consumption function
Mark 0 and draw a horizontal line from 0
Draw a less steep line from autonomous consumption on both the consumption and savings
functions
6. Mark where C = Y (breakeven) with a line
7. 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 consumers expenditure choices:
Level of income
The price of the good
or service itself
The price of the
substitute and
complement goods

As individuals earn Y, they tend to choose to buy more items and

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

Consumer tastes and

preferences

Advertising

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
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
Can create demand for g+s that didnt 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 doesnt 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 work
o 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 economys 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 expectations

o Company directors represent shareholders 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 firms 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 growth
o Long term larger asset base profits
o Can sometimes lead to failure e.g. Starbucks
Satisficing behaviour
o Doesnt 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 profits
o 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

break down production process into sub-processes allowing

labour to specialise e.g. assembly line approach in car
manufacturing

specialisation of labour
localisation of industry
specialisation of
industry
large scale production
specialisation of capital

large number of businesses producing similar goods

congregate in same area, share common infrastructure

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

diseconomies of scale

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
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 firms control, nothing to do with level of production

economies of scale

Cost saving advantages

diseconomies of scale

Localisation of industry
Industry grows as a while
Growing, competitive and more sophisticated
capital market
Cost disadvantages

The law of diminishing returns

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

 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)

12

21

32

11

45

13

54

56

56

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

The price of other g/s

Expected future prices

Changes in consumer
tastes/preferences

Level of income

Pop. size and age

distribution

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
price demand for its substitute
price demand for good + complement
Price expected near future consumers bring
forward consumption current demand
Change over time change demand
Innovation + technological progress consumers
demand new + better products at expense of
superseded ones
Y more willing and able to purchase g+s that
previously couldnt afford
Y demand for luxury goods
Y distribution + consumer expectations about Y also
change demand
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 complementary good

Fall in price of substitute good

Rise in price of complementary good

Expected future prices

Expected decline in price in near

future

Product becoming less fashionable

A good becomes superseded due to

improve technology

Fall in level of income

Change in income distribution less

favourable to demand

Poor expectations about future

economic prospects

Decrease in population

Change in age distribution less

favourable to demand

Expect increase of price in near

future bring forward purchase
current demand
Consumer tastes and preferences
Fashion increase demand for
fashionable products
New technology increase demand
for technologically advanced
products
Consumer incomes

Rise in level of income can afford

to buy more at the same price
Change in income distribution in
favour of higher incomes
demand for more expensive
products
Improved consumer expectations
about future income
Size and age distribution of population

Increase in pop demand for all

products
Change in age distribution
demand for certain types of products

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

TO = total outlay
P = price
Qd = quantity
demanded

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

50

250

45

270

40

280

35

280

30

270

10

25

250

Perfectly elastic demand

inelastic
inelastic
unit elastic
elastic
elastic

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 demand

o Can switch products
No close substitutes inelastic demand
o Cans switch
Small proportion of Y inelastic demand
Large proportion of Y elastic demand

Expenditure on the
product as a proportion
of income

The length of time

subsequent to a price
change

Whether the good it habit

forming (addictive) or not

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
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

The price of other g/s

The state of technology

Changes in costs of factors

of production

Quantity of g available

Climatic and seasonal

influence

Market price influences producers ability + willingness

to supply g/s
o Price to low unable to cover costs of
production dont supply item
Expectation of suppliers about future prices of g/s
o Price rises in future supply
May be more profitable to supply a different good
less willing to supply g
Improvements prod costs firms supply good
at given price
cost firms supply more of a particular good
cost more difficult to maintain supply supply
Actual quantity of g available = limiting factor
suppliers supply
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

Fall in price of other goods making

the prod of these less profitable
Improvement in technology used in
prod process
Fall in cost of factors of prod
Increase in quantity of resources
available
Climatic conditions/seasonal change
that is more favourable to prod
process

Chapter 8: Market Equilibrium

Decrease in supply

Rise in price of other goods

Certain technology no longer

available
Rise in cost of factors of prod
Decrease in quantity of resources
available
Climatic conditions/seasonal change
less favourable to prod process

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 = Qs
2. The market clears
3. 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
.
demand

= excess

= shortage

1.
2.
3.
4.
b) excess supply

raise price to PE
expansion in supply
contraction in demand
Qd=Qs equilibrium

at P2 disequilibrium Qs>Qd
.
supply

= excess

= surplus

1.
2.
3.
4.

lower price to PE
expansion in demand
contraction in supply
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

b) decrease in demand

decrease in demand

c) increase in supply

need to lower price

expansion in demand
contraction in supply
new point of equilibrium
with lower equilibrium price
and quantity

increase in supply

d) decrease in supply

need to raise price

expansion in supply
contraction in demand
new point of equilibrium
with higher equilibrium
price and quantity

need to lower price

expansion in demand
contraction in supply
new point of equilibrium
with lower equilibrium price
and higher equilibrium
quantity

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
account private benefits and costs of production to consumers
producers, but it fails to take into account indirect costs such as
the environment

The socially optimum price level is above the market

(price mechanism undervalues the natural environment)
Market forces result in the overuse of natural resources

into
and
damage to

price

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 doesnt 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
price
At Pmin there is excess supply
Qp > Qc

Quality intervention

minimum

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

same product

none

fruit and
vegetables, fish
markets

monopoly only one

producer in the
industry

one

no close
substitutes

extremely
high

water supply

monopolistic
competition many
small firms in the
industry

many

differentiated
products

easy

motels,
restaurants

oligopoly a small
number of large firms
dominate the industry

few

usually
differentiated
products

high

supermarkets,
banks, oil
companies,
airlines

Topic 4: Governments

very small

large

small

large

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 conditions
o Conditions in the firms industry
o 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 effect
o Positive: high productivity means that a fixed number or workers will be producing more goods and
services
o 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 WORKFORCE

Defined 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
services
o 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 population
o Net migration refers to the excess of permanent new arrivals to our country over permanent
departures aprox 40% of total population growth since WWII
- Australias 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 nations 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
- Australias budget for education is average by international standards more reliant on private
funding

Labour market outcomes

-

WAGE 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 outcomes
o Wage differentiating between different occupations different occupations require different skills
o Wage differentiating in same occupations geographical mobility, the productivity of labour and
the capacity of the firm to pay the individual
o Age and gender of an individual alter as older people are more experienced

TRENDS IN DISTRIBUTION OF INCOME FROM WORK

The 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 economys 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 OUTCOMES
Are 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 INEQUALITY
There 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 formation
Economic costs of inequality
- Inequality reduces overall utility
- Inequality creates conspicuous
- Inequality can reduce economic
consumption
growth
- Inequality creates poverty and social
- Inequality reduces consumption and
problems
investment
- 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

UNEMPLOYMENT
Refers 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 unemployment
o Hard-care unemployment
o Structural unemployment
o Hidden unemployment
o Long term unemployment
o Underemployment
o Seasonal unemployment
o Frictional unemployment

Recent trends include:

- Upward trend in the average level of unemployment between 1970s and 1990s
- Average rate of unemployment fell to an average of 5.5% in the first decade of the 21 st century
- Levels of unemployment peaked in the early 1990s (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 market

THE 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 determination
o Changes within industries
o 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 ASSOCIATIONS
Are 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 policies

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.
o

AUSTRALIAS 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 employees 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 rates
o 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 markets

THE 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 MARKETS
Primary 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
countrys 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 resold 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 Australias economic development because of the reliance on
foreign borrowing

- Equity markets: regulated by national governments so exist within individual countries.

REGULATION OF FINANCIAL MARKETS
Reserve Bank of Australia: The RBA is Australias 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 currency
o Regulation of the payments system: ensuring the stability adn efficiency of payment methods
such as credit cards, electronic cash, travellers cheques and stored-value cards
o 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 ADIs, 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 market

BORROWERS: 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 ATMs 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 FUNDS
Individuals, 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 RATES
Cost 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)
- Inflationary expectations
- The level of savings in the economy
- International interest rates
- The demand for liquid funds
CASH RATE
As 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 markets
WHY 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 SERVICES
Market 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
these
o 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 governments 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 school
o Special education assistance programs and scholarships
o Living allowances for students
o Help mature-aged people enter high school education
Concern of inequality was a major reason why the role of the government expanded in the 20 th 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 POWER
Market 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 price

Firms 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 CYCLE
Without 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 governments
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 Australia

THE 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 SECTOR
Refers 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 enterprises
Consisting 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 RESOURCES
The 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
measures
2. 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 activity
o 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 else
o 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 service
o Gov involve themselves directly in the production process to achieve a better allocation of
resources
o Through direct intervention governments were considered better able to provide important
goods and services to a larger number of people at a lower price
o 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 INCOME
The main way in which the government redistributes income through taxation and social welfare
payments
Redistribution 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 pensions
o Age pensions is putting significant pressure of budget due to the ageing population
STABILISATION AND SUSTAINABLE GROWTH
Major 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 year
Monetary 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 ENTERPRISE
There 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 ECONOMY

They 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 action
THE 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 spendin
o Reduced company taxation due to the disruption in revenue caused by natural disasters
o 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 EXPENDITURE

Commonwealth 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 welfare
o Infrastructure and social overhead capital
o Industry assistance and development
o Protecting the environment
o Promoting ecologically sustainable development
THE IMPACT OF BUDGET OUTCOMES

The budget outcome gives an indication of the overall impact of fiscal policy on the state of the economy
Budget
Planned government
=
Planned government expenditure
balanced
revenue
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 governments 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 POLICIES
Parliament 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 MPs 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 broadcasters 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, Australias 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 firms 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.

Conditions in the firms industry

Demand for a firms products

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

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 industrys products > increase in demand for labour

Firms 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 firms 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 firms 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 ones 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 peoples 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 its 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
Working Age Population (15+)

100
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

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

Not Included in the Workforce

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

Nominal Wage
Real Wage
Inflation

measures the average weekly gross rate of pay to all employees

is the pay received by employees in dollar for their contribution to the production process not adjusted for inflation
measures the actual purchasing power of money wages
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 companys profit performance or the employees
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 100/1
Types of Unemployment
Cyclical unemployment
Structural unemployment
Seasonal unemployment
Frictional unemployment
Hard Core unemployment
Hidden unemployment
Long term unemployment
Underemployment

Results from the ups and down of the business cycle. During a downturn, firms respond by cutting back
production levels and laying off workers.
Occurs because of a mismatch between the skills demanded by employers and those possessed by unemployed
people.
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
Occurs as people change jobs it usually takes some time to move from one job to another
Refers to those individuals who might be considered unemployable because of some personal characteristic
such as mental or physical disability
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)
Refers to those individuals that have been out of work for a period of 12 months or more.
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 subcontracting.
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 dont 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
Industrial Unions
General Unions

Draw their members from people of the same occupation e.g. Electrical Trades Union
Cover workers in a particular industry regardless of the type of work they do e.g. Transport Workers Union
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 movements 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 doesnt 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 > AIRCs 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 Courts role is to interpret and to enforce AIRC decisions.

The Courts 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

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).

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 Australias 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 wont need too
many.

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 youre writing.
Your introduction should be one or two paragraphs only. Dont say In this essay I will.. (Dont 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 dont jump all over
the place. If the essay question is in two parts, address each part in turn dont 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, dont go off on a tangent and waste valuable time. Keep asking
yourself whether you are answering the question. Irrelevant material wont lose you marks
however you wont 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
dont 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.
Dont use dot points unless you are running out of time and quickly have to list what you were
going to say.
Dont 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

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
dont use case studies, for example, when its 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 doesnt mean you have to quote any part of the stimulus in fact its
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.

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!

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.
Dont use emotive language such as terrible or hopeless.
Dont 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 diagram
o Expansionary / contractionary policy & multiplier
Recent use of FP
o Current budget / stimulus packages (stats)
Discussion of effectiveness, with a focus on current FP (stats), rather than theory
o Political constraints
o Time lags (stimulus packages very timely evidence)
o Global constraints (recession, stats)
o FP/MP working together?
o Aggregate demand side of economy only
o 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 operations
o 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 effective
o Time lags long for MP
o Importance of expectations effect in MP
o Global constraints (OS interest rates)
o FP/MP working together?

o
o
o

Aggregate demand side of economy only (if issue is inflation, works best from demand pull
inf)
Blunt instrument aspect of MP
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 MERs describe in detail a few that relate to a particular issue in the case of EG
lbr reform, trade policy, NCP
Discussion of effectiveness MERs in promoting growth
o Political constraints often very unpopular
o Time lags very long
o 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 unemployment
o Future directions of MER National Reform Agenda (COAG) 3 streams
o Impact on distribution of income e.g. lbr reform
o Other discussion points / criticisms of MER

Conclusion

Brief conclusion no more than one short paragraph

Draft notes
1. Definition of opportunity cost + example + table example
The 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
100
80

Bikes
0
50

2. 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.
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 responsibilities
The Reserve Bank of Australia has a main responsibility of maintaining three things;
1. Maintaining the stability of the Australian currency
2. 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 decreases
Progressive 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 sovereignty
Consumer sovereignty is when consumer demand determines the composition of production
7. Explain the difference between nominal and real rates of interest
The 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 unemployment
Cyclical 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+diagram

The 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. (Q)

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 Banks Implementation of the Monetary Policy
Monetary 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 + calculation
The 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 ACs
The 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
Producers expectations
Ease of entry into and exit the market
Number of suppliers
17. Budget outcomes +impact on economic activity
A 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 tax
The average rate of tax is the tax payable divided by taxable income.
19. Merger VS Takeover
A 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 +calculations

The 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 goods

Public 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 monopolies
Natural 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 supply
The 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 supply
Factors that can affect the elasticity of supply could include;
Advertising
Change of income
Trends
25. Define interest rates +factors that influence it
Interest 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 Australias workforce
Australias 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 +budget
The 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 tax
The 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 +diagrams
The 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 +calculation

The 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 +method
The 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 rate

The 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 markets
The 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 resources
The 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 +role

Automatic stabilisers work as a tool to dampen fluctuations in real GDP without any explicit policy action by
the government.
40. Counter cyclical policies +economic management
Counter 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.