All Notes

Chapter 1
What is Economics:
Economic involves the study of the problem of scarcity of resources in
relation to human wants (ie. Supply and demand)
Problem:
"How a society can satisfy the unlimited wants with the limited resources
available"
Economy problem arises because the supply of resources is limited or
finite in relation to the demands or wants of individuals
People need to obtain goods and services , food, shelter, services
Wants are unlimited and satisfying them are limited
Concept:
Economic theory attempts to help us to work out which wants are our
highest priority
Helps us organise our production in order to satisfy the maximum number
of our wants (we can never satisfy all our wants)
Definitions
Basic Wants Needs that all individuals must satisfy e.g. food,
clothing, shelter, these are "necessary wants"
Recurring wants Wants that must be continually satisfied (Food, water)
Individual wants Wants of each person according to their preferences
and income
Collective wants Wants demanded by a community e.g. health care,
education, defence, police, ambulance
Substitute wants Interchangeable wants e.g. Second hand car over
new car
Luxury wants Wants that are excessive and not necessary
Complementary Wants that are derived from other wants e.g. car-
wants petrol
Wants change over time,
o Factors include age, income, technology, fashion
Scarcity
Main problem involves the scarcity of resources
Choices have to be made about how resources will be used in
production
Scarcity arises because the demand for goods and services used to
satisfy wants and needs exceeds the supply of resources used to
produce those goods and services at any one point in time
Key Questions:
1. What to produce
o Depends on the consumer or capital goods mix
o Decides on which wants will be satisfied first, and which will leave
unsatisfied
2. How much to produce
o Depends on level of consumer demand
3. How to produce
o Economies of scale = As production increases, cost reduces,
ie. Aim to maximise output with minimal input
o Depends on resource availability and level of tech
o Most efficient method of production that uses the least amount of
economy resources so that greatest number of wants are satisfied
4. How to distribute production
o Highest income = Highest preference
o Factor incomes and the provision of welfare

Opportunity Cost
Cost of the alternative forgone
May be expressed in terms of time e.g. spending hours doing something
Economics cost or Real cost

PPF
Shows the possible production of two alternative products
o Given that technology and limited quantity are used to their full
capacity
Points on the PPF curve represent the economy operating at full
capacity
Shifting PPF
Outward shift
o Technology improves
o Increase in inputs (e.g. new resources, increased population)
Choices affecting future
Economy focusing production of capital:
o Increase productivity = Long term higher economic growth
Economic factors underlying choice
Individuals
o Economic choices made by individuals are influenced by factors:
Age (Young - Retired)
Income
Expectations (Relationship b/w property and shares)
Future plans and family circumstances
Personality factors (Low/High risk taker)
Business
o Aim to generate most profit with least amount of resource
Minimise costs - Maximise profits
Choosing cheapest available resources
 Consider ethical issues
Industrial relation issues (Unions - Wage negotiations)
Government
o Influences economic choices of individuals and businesses
Tax - Lower production
Imposing heavy penalties - Price fixing, anti-competitiveness
Subsidize - encourage env. friendly products

Chapter 2
2.1 The production of goods and services:
Goods and services are the outcome of the production process:
o Goods= tangible things (e.g. car)
o Services= intangible things (medical help)
A "factor of production" can be defined as any resource that can be
used for the production of goods and services
o Anything used in the input for output
o Increased factor of production = Wealthier economy

Individuals are the owners of factors of production

Owners receive the income from factor of production
4 Factors of production:
Natural resources - Rent
o Resources provided by nature used in production process
E.g. land, water, fishing areas
Labour - Wages
o Most important resources (China = "Global Production House")
o Effort of humans (Physical + Mental)
o Primary indicator = population
o Factors of immigration, retirees, job training, school leavers
Capital - Interest
o Capital is built on borrowing money
o Machines, technology, long term purposes
o "Produced means of production"
o Infrastructure is a form of capital owned by community
e.g. Roads, railway, bridges, school, telecom
Enterprise - Profit
o This is the organisation that organises the factors of production
o Control factors to maximise profit
o Profit is not simply revenue minus expenses (+ Rent)

All resources have common problem of scarcity

Limited amount of natural resources
Labour force depends on population size, expertise, willingness to work
Capital depend on the extent to which investors are willing to invest
Only a small amount of people acquire entrepreneurial skills

Price of labour is determined by the supply and demand of labour

Highly educated and skilled works are in relatively low supply

2.2 Distribution and exchange of goods and services

GDP = Total amount of goods and services produced in an economy in
a given year
o Measures performance/health of economy
o Also measures total income of the society
o Greater national savings = Healthier economy
System of distribution provides incentive for people so that level of
wages depends on:
o Willingness to work
o Skill
o Expertise and Education qualifications
o Bargaining power in wage negotiations
System is unfair because people many not be able to participate
o Sick, age, disabled

2.3 Business cycle

Business cycle is when market economies are subject to a cycle of ups
and downs.
Despite the fact that it fluctuates continuously, the overall trend is always
a growth in output
Cyclical flow causes significant disruptions for both individuals and businesses
Booms
o Economic growth
Recession
o Economic downturn
o Firms postpone plans for new investment
o Reduce production and demand for labour
o Employment falls
o Reduction in purchasing of goods and services

Recession Boom
Falling production of goods and Increasing production of goods and
services services
Falling levels of consumption and Rising levels of consumption and
investment investment
Rising unemployment Falling unemployment
Falling income levels Rising quality of life

2.4 Circular flow of income

Circular flow model is based on dividing the economy into 5 sectors
A. Individuals
 Concerns their earning and spending
Individual supply factors of production
Most of their income goes towards consumption of domestic goods,
savings, tax and imported goods
B. Businesses
Engaged in production and sale of goods and services
Buys factors of production to produce goods and services
Individuals supply resources
Individuals consume goods
Individuals depend on businesses to produce goods, services
and income
C. Financial institutions
Institutions engaged in borrowing and lending of money
Intermediaries between savers and borrowers of money
Banks, Building societies, Finance companies, Credit union,
Superannuation funds, Life insurance companies
Rely on individuals and firms to undertake saving and investment
Savings = Leakages = Reduced activity
Investment = Injection = Increased activity
D. Governments - Public sector
Satisfaction of collective wants
E.g. Roads, railway, schools, hospital
Imposes tax for government expenditure
Taxation = Leakage
Gov Exp. = Injection
Transfer payments = transaction with an expectation of no return
E. International Trade and financial flows
Covers all transaction our economy has with the rest of the world
Exports and Imports
2.5 Equilibrium level
Total leakages = Total injections
Leakage = STM
Injection = IGX
Disequilibrium
Leakages > Injections
Recession Effects till balance
Injections > Leakages
Boom Effects till balance
Chapter 3
3.1 Market economy
Pure market economy = Decisions are made by individuals and private
firms
Resources owned by private sector without gov. intervention
Capitalist, free enterprise and laissez-faire
Real world = Mixed market economy

A. Market system
 Network of buyers and sellers, seeking to exchange at a certain
price
Product market = Market for goods and services
Consist of consumers and businesses
Supply and demand
B. Private ownership of property
Individuals have the rights to sell and transfer to whoever they want
with whatever condition they want to impose
C. Consumer sovereignty
Notion where consumers determine what and how much to
produce
Individuals are free to choose how they will spend their income
D. Freedom of enterprise
Entrepreneurs are free to set up profit making activities
Determine what goods and services are produced
E. Competition
Primary regulator allowing price mechanism to work
Large substantial amount of buyers and sellers
No single individual/firm influence over market

3.2 Australia: Market economy + Government

Mix between pure market and totally planned economy
Free market does not always provide most efficient allocation of
resources
Self-interest (No consideration of public or env. Issues)
Reasons for government intervention
Willing to take risks and outlay huge capital (unlimited resource)
Interest in collective wants
E.g. Roads, parks, defence
Provides regulation
Prevents exploitation of consumers
Price fixing, anti-competition, monopoly (TPA)
ACCC regulator
Government Distributes income more evenly
Tax revenue -> social welfare payment

Market Forces Government intervention

Private property Public ownership
Free enterprise Regulations
Consumer sovereignty Social welfare payments
Competition Progression taxation

How mixed economy aims to solve economy problem

Government intervenes in market outcomes in:
What to produce
 Gov. producer
Competition with private enterprises
Encourage forms of production through subsidies (incentives)
How much to produce
Limit production (setting quotas)
Encourage domestic producers to compete with foreigners
(tariffs)
Tariffs - More expensive foreign products
Quotas
Subsidies - Lower price (competition)
Protects infant industries
How to produce
Influencing labour costs
Setting minimum wage and working conditions
How to distribute production
Higher income = Higher tax -> Social welfare to low income

3.3 Comparing Economics

Australia's population of 24 million
Output ahead of NZ and Indonesia
Output lower than Japan, China, US
Population main reason why economy is small
GDP per capita more accurate indicator of economic outcome
Debt to GDP
Debt servicing ratio
HDI used to calculate quality of life
Australia does not produce like a 1st world country but living
standards are 1st world country
High level of environmental quality despite highly urbanized society
Clean Air and Water Acts
Issues: Air pollution from motor vehicles, greenhouse gas
(petroleum)
Role of government:
Basic health, education, welfare services, transportation
Shareholder = People invested into corporation (owners)
Stakeholders = People affected by decision making process (workers,
suppliers, customers, wider community)
Leakages
Savings Invest capital
Tax Disposable income, Decrease spending
Import $ flowing out of domestic economy
Injections
Investments Inject $ into country
Gov exp. Spending on infrastructure
 Exports Domestic goods/services
Foreign purchases of products
$ flow into domestic economy

Chapter 4
4.1 Consumer Sovereignty - Consumer influence/Power
Consumer sovereignty:
Where consumers decide what goods and services will be produced by
exercising their freedom to choose what they want and which wants
they will satisfy
Business firms will produce whatever goods and services are in demand
Demand high = Price Rise = Firms will shift resources into those form of
production

Factors that can reduce the sovereignty of consumers

Marketing
o Exerts influence over the spending pattern of consumers
o Diminishes consumers sovereignty
Manipulative or deceptive marketing practices
Misleading or deceptive conduct
o Consumers can be deceived by false or misleading claims (sec 52
TPA)
Planned obsolescence
o Goods designed to wear out quickly
Monopoly Behaviour
o Single producer or supplier of market (illegal)
o Diminishes abilities of consumers to choose

4.2 Decision to spend or save

After taxed income consumers can spend or save
This income is called "disposable income" (Y)
That is, Y = C + S
Y = Disposable income after tax
C = Consumption expenditure
S = Savings
Increase in consumption will cause an equal reduction in the level of
saving (Y cannot move)
Rise in saving will bring equal reduction in consumption
Y can only change if both C and S change

Concepts
Average propensity to consume (APC)
This is the proportion of an individual's income that is spent on consumption
APC = C/Y
Average propensity to save (APS)
This is the proportion of an individual's income that is saved
APS = S/Y
Note: APC + APS = 1

Factors that influence the decision of whether to save or spend

A. Cultural factors
Asian economies tend to save more than industrialized economies
B. Personality factors
People are cautious and anticipate for the future
C. Expectations of the future
People who expect their income to rise save less now
D. Any specific future spending plans
People save more if they plan to make a major expense
E. Tax policies
Superannuation saving = tax free
Businesses can reduce tax by increasing expenses
F. Availability of credit
High debt = High consumption

Income
As income rises, people tend to save a higher proportion of their income
APS rises and APC falls
People with lower incomes proportionately more of their disposable
income than higher income earners
Example
Income rises = Rise of level of consumption
However, even at very low income levels individuals tend to have
some positive level of consumption
As income rises, consumption also rises
However, because income rises faster than consumption, their
average propensity to consume falls
 Therefore a person's tendency (or propensity) to consume or save for
each extra dollar they earn can be viewed as
MPC = The proportion of each extra dollar of income that is
consumed
MPS = The proportion of each extra dollar of income that is saved
Thus, MPC + MPS =1

Age
People tend to smooth their consumption
Expectation of low income = Save now to maintain living standard
The older the people the more income they will acquire
Increased level of skills, expertise, education and experiences
Retirement = No income = Government pension
Higher income earners:
Save to pay past debts + accumulate assets (retirement)
Thus as an individual grows older, their average propensity to
consume initially falls (as their income rises) and then subsequently
rises again after retirement
This is what we call "life-cycle theory of consumption"

4.3 Factors influencing individual consumer choice

Main factors affecting consumer's expenditure are to:
Maximise the their utility or well-being
Maximise the level of satisfaction of their wants
1. Level of income
Higher income = Greater level of their expenditure
2. Price of good or service itself
Higher price = Less likely of purchase
 However necessities less affected by price change
3. The price of substitute and complement goods
Consumers are able to substitute one for the other
If the price of margarine rises, consumer demand for butter, which is
a substitute, will tend to increase
4. Consumer tastes and preferences
Consumer tastes and preferences change over time, hence
demand for particular goods will also change
Moreover, innovation and technological progress lead to
consumers demanding new and better products at the expense of
a superseded one
5. Advertising
Companies use radio, TV and newspaper to communicate with
consumers
The better the communication the higher the demand for their
goods and services

4.4 Sources of consumer income

A. Return from factors of production
Consumers receive income from these factors of production:
Wages from labour
Rent from land
Interest from capital
Profit from entrepreneurial skills
B. Social welfare
The payments are:
Employment benefits
Disability allowance
Family allowance
Au study/Youth Allowance

Chapter 5
5.1 Business firms and industries
Business firm:
o Organisation uses entrepreneurial skills to utilise factors of production
to produce product
Industry:
o Firms involved in making a similar range of product in competition
Business firms are the major production units in our economy, their size,
behaviour and performance influence our overall productive capacity

5.2 Production Decisions

What to produce
Factors influencing a business operator's decisions as to what to produce are:
Skills
o Likely to be successful if understands industry
 o Where they understand the demands, nature, quality and person
contacts
Consumer demand
o Demand is the primary indicator as to what to produce
Business opportunities
o For example, there is not much pharmacies in remote and rural
areas, hence a good opportunity to open one
Capital
o Often people mortgage their house to build up collateral.
o This will enable them to have some form of capital ($) to start their
business

How much to produce

Assessment of level of consumer demand and ability to convert demand
into sales
o If production is too high, unsold goods may spoil
o If production too low, may harm relationships with potential
consumers
New businesses often face difficulties as to how much to produce
o Are often inexperienced and cannot anticipate demand quantity
(e.g. Bread shop)

How to produce
Decision is after when you already determined how much to produce
Production process involves resources (inputs) to create goods and
services (outputs)
A firm's decisions on how to produce depends on the relative efficiency
of the 4 factors of production at the time:
Natural resources
Labour
Enterprise
Capital

5.3 What business contributes to the economy

Strong growth in sales for a large number of businesses boost the overall
growth rate of the economy
Growing businesses also employ more people and reduce their
incidence of unemployment
Growth in individual businesses also increases an economy's productive
capacity over time.
Reflected in an outward shift in the PPF
Noting that government also help the growth of the economy by
offering information, cash payments, training, overseas marketing
(specific activities)
Contribution determined by policies, rules, regulations imposed
Best incentive = Low tax
5.4 Goals of the firm
Motives of the entrepreneurs:
Maximising profits
o Profits = Total revenue - Total cost of production
Meeting shareholder expectations
o Company directors chosen to represent shareholder interests
Increasing market share
o Market capitalisation = How much company is worth in economy
o Shareholder and Manager conflict
Shareholder = Maximum profit for risk of capital
Manager = Increased salary and power
Maximising growth
o Occurs at expense of profits
o Resource into marketing and expansion of org.
o Marginal profits
Satisficing behaviour
o Does not attempt to maximise any particular objective
o Seeks to achieve adequate level of attainment in each area
Prevents new competitors / government regulation
5.5 Efficiency and production
Productivity
How much we produce with given quantity of resource, per unit of time
o Increase = Increase output with same input per unit of time
o More efficient use of limited resources
Benefits of increased productivity:
o Less wastage of scarce resources
o Lower production costs, Higher profits
o Lower inflation rate (firm does not have to raise price)
o Higher incomes
o Improved international competitiveness of our industries
Specialisation and productivity
Business firms can increase productivity by specialisation
A. Division of labour
Breaks down production process into sub-processes
Groups designated to specific tasks
Reduces time and effort
B. Location of industry (specialisation of land)
Enables common infrastructure requirements to be shared
C. Large scale of production (specialisation of capital)
For business to expand productivity -> new technology
Internal economies and diseconomies of scale
Firms are able to reduce their per unit costs of production as output
increases
Economies of scale:
o When average cost per unit of production fall as size of output
grows
Internal economies of scale:
 Firm achieves large scale of production to minimize costs
o Specialization of labour by breaking up the process of production
o Invest in more efficient capital equipment (replace labour)
o Can buy raw material in bulk (cheaper)
o Sell its by-products while a small firm cannot
o Invest resources into research and development
Internal diseconomies of scale:
Firm cannot continue to grow, per unit cost of production rises
o Loss of management capability -> inefficiency
o Problem of employment relation (working conditions)
LRAC - Relationship between production costs and economies of scale

o Point X represents the most efficient level of production for the firm
Technical optimum
Lowest level of average costs of production
External economies and diseconomies of scale:
o Situation where things that affect a business lie outside of its control
External economies of scale:
Benefits to a firm because of outside influences, not due to change of
operations
o Increasing localization of industry generally
Locating near a highly populated are with a supply of skilled
labour
o Growth of industry = All firms derive benefits
Gov. providing special research and development to promote
industry
External diseconomies of scale:
o Growth of industry causes pollution
Gov. pollution control, costs to firm
o Trend towards concentration of industry and people = transport
congestion
o Growth of industry = increase costs of raw material due to demand

5.6 Investment and technological changes

Technology offers opportunity of securing competitive advantage over other
companies
Implications of technological change:
Production methods (Systematic)
o Lower costs
o Increased efficiency
o Decrease labour requirement
o Larger production runs
Prices
o Internet = Comparison of prices
o Forces firms to reduce their prices
Employment
o Technological change = Redundant jobs
o Reduces staffing levels due to faster production and data
processing tech
o Job opportunities for people with specific skills
o Structural unemployment = mismatch skills (short term - healthy)
Output and profits
o Technology offer better quality products at a low price
Increased output - Increase productivity - Decrease price
o Respond and customize output to specific needs of market
Increase demand -> higher output -> more profit
o Not all investments in technology will recoup their costs
Types of products
o New technologies expand range of products to satisfy market
demand
o Customize output to specific wants of individuals
Globalisation
o Able to connect global stock market (e.g. spot traders vs computer
networks)
o International communication is cheaper
Low cost of communications allows information to flow more
freely from overseas to consumers and businesses
Better informed decisions about product and consumption

Chapter 6
Demand : 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 affecting market demand

6 main factors affecting market demand - (About consumer sovereignty)
1. Price of the good or service itself
Whether consumers are willing to pay the nominal price for the item
Necessities are purchased regardless of price
Luxury items are heavily influenced by the price
2. Price of other goods and services
Goods that are considered substitute or compliment
 3. Expected future prices
Consumers expecting a price rise will increase current demand
Causes inflationary expectation
4. Changes in consumer tastes and preferences
Innovation and technological progress = demand for new and
better products
At the expense of superseded products
5. The level of income
Rise income = Rise demand for luxury goods more than necessities
Expectation of future income influence their decision to buy certain
types of goods
(Expected pay rise or retrenchment)
6. The size of the population
Population size affect total quantity of goods demanded

Ceteris Paribus Assumption

"All other factors/things remain constant"
With respect to demand: "All other factors that could affect demand remain
constant"
Isolate relationship between particular variables

6.2 Movement along the demand curve

Demand curve represents relationship between price and the quantity
demanded
Inverse relationship
Law of demand:
Quantity demanded falls as price rises
P proportionate to 1/Q

The curve:
 Slopes downwards from left to right
Movements along the curve:

Contraction occurs when increase in price and decrease in demand

Expansion occurs when decrease in price and increase in demand

6.3 Shifts of the demand curve

Changes in any of factors affecting demand could shift curve to left or right
Increase in demand
Movement to right = Increase in demand
Consumers willing to buy a given quantity at a higher price than before

Decreases in demand
Movement to the left = Decrease in demand
Consumers willing to buy a given quantity at a lower price than before
Price elasticity of demand
Price elasticity measure the responsiveness or sensitivity of the quantity
demanded of a particular product to changes in its price
Elastic Strong response to change in price
Inelastic Weak response to a price change
Unit elastic Proportional response to price change
(total amount spent by consumers unchanged)
Importance of price elasticity of demand
Awareness allows firms to determine best pricing strategy
Elastic demand
o Lowering price would generally expand volume of sales
o Increase in total revenue
Inelastic demand
o Increase price leads to increase in total revenue
Government manipulates elasticity to impose tax without losing tax
revenue
Measuring price elasticity of demand
Total outlay method:
Look at effects of change in price on the total revenue earned by the
producer
Rules:
Inelastic Price increase + Revenue increase
Elastic Price increase + Revenue decrease
Unit elastic Price increase + Revenue same

Price elasticity and the slope of a demand curve

 Elasticity is determined by the upper and lower end of the curve, NOT
the slope
o Upper part of curve quantity demanded is highly responsive to price
changes
Where prices are high, demand will be relatively elastic
Low price levels, demand will be relatively inelastic
Extremes of elasticity (doesnt happen in reality)
A. Perfectly elastic demand - Only accepts 1 price

B. Perfectly inelastic demand

Consumers willing to pay any price to obtain a given quantity of a good

6.5 Factors affecting elasticity of demand

A. Whether the good is a luxury or necessity
Luxury = elastic
Necessity = inelastic
 B. Whether the good has any close substitutes
Products with close substitutes tend to be highly elastic
C. The expenditure on the product as a proportion of income
People do not react to price increase in pens compared to a new
car
D. The length of time subsequent to a price change
Price increases does not result in an initial response
Consumers take time to adjust to price change
Seek alternatives
E. Whether a good is habit-forming or not
Addictive products are rarely sensitive to price changes

Lesson 7:
Supply-
Quantity of a good or service that all firms are willing and able to offer
for sale at different price levels, at a given point in time
Producer's perspective
7.1 Factors affecting market supply
A. Price of the good itself
Price of product influences producer's willingness to supply it
High price -> produce more (unsustainable long term)
Diminishes competition and reduces output
Expectation of future price of good influences supply
B. Price of other goods or services
Price of butter remains the same, margarine price increases
More profitable to produce margarine
C. State of technology (economies of scale)
Improvements in technology lower production costs
Allows firms to supply more goods at a given price
Allows firms to adjust production runs to accommodate changing
demand
D. Changes in cost of factors of production
Fall in cost of factors of production allow firms to supply more (vice
versa)
E. Quantity of the good available
Number of suppliers affect the quantity of goods and services
available
More suppliers enter an industry = Increase supply (vice versa)
Saturated market deters producers
F. Climatic and seasonal influence
Changes in climatic conditions and seasons affect agricultural
production

7.2 Movements along supply curve

Law of supply:
Price of product rises, quantity supplied rises
 More profitable = Increase production
Higher price = Attraction new firms to industry
Supply curve

Slopes upward from left to right

Dame relationship between price and quantity supplied
Movements only supply curve

Contraction occurs when a decrease in price causes the quantity

supplied to fall
Expansion occurs when an increase in price causes quantity supplied to
rise

7.3 Shifts of the supply curve

Note: Ceteris paribus
Change in any of the factors, leads to shift of entire supple curve for
product
Increase in supply

Movement in supply curve to the right = increase in supply

Product controlled by output = P x Q
Encourage by Q changes
Decrease in supply

Movement in supply curve to left = decrease in supply

Factors that cause shifts in the supply curve

Increase in supply
Fall in price of other goods
Improvement in technology used in
production
Fall in cost of factors of production
Decrease in supply
Rise in the price of other goods
Production technology no longer
available
Rise in cost of factors of production
Increase in quantity of resources
available
Climatic conditions or seasonal
changes favourable to production
Decrease in quantity of resources
available
Climatic conditions or seasonal
change unfavourable to production
Regulations restricting scale of good
(risk to health and safety)

7.4 Price elasticity of supply

Price elasticity of supply measures sensitivity of quantity supplied of a product
to change it price
Elastic Rise in quantity proportionately greater than increase in price
Inelastic Less proportionate change in quantity than increase in price
Unit elastic Quantity supplied rises same proportion as price increase

Price elasticity and slope of supply curve

A. Perfectly elastic supply and Perfectly inelastic

Elastic Supplier would supply infinite quantity of the good, below price
not be willing to supply any
Inelastic Quantity supplied is fixed regardless of price

7.5 Factors affecting elasticity of supply

Number of factors that can affect responsiveness of supply to price changes
Time lags after a price change
The greater the time that production have to respond to price
changes
Supply of product elastic
Immediately after price change
 Supply of products would be perfectly inelastic
Short run = Price elasticity of supply increases
Long run = Producer increases inputs, greater production = supply
price elastic
Business is inelastic if a lot of resources, or unable to acquire
resources to meet demand
Ability to hold and store stock
Easier it is to hold stock = More elastic the supply
Hold during economy downturn -> sell during economic upturn
(dont need to desperately sell)
Excess capacity
When a firm is not using resources to full capacity
Supply will be elastic when firms have excess capacity
Respond quick to price increase, by increasing use of existing
resource
Supply will be inelastic when firms at full capacity

8.1 Market Price

Price Mechanism:
o The market of forces of supply and demand, which determine the
prices at which commodities will be bought and sold in the market.

Market Equilibrium:
o Situation where, at a certain price level, quantity supplied and
quantity demanded of a product is equal
o In this situation there is no tendency for change, and the market
clears (no excess demand or supply)
o Graphically it is where the demand and supply curves intersect.
Excess Demand- Demand > Supply:
o Leads to a price rise due to a shortage, resulting in an expansion of
supply and a contraction of demand, continuing until equilibrium.

Excess Supply- Supply > Demand:

o Sellers must drop their price due to an excess supply, resulting in a
demand expansion and supply contraction until equilibrium.
 o

8.2 Changes in Equilibrium

Increase in Demand- Leads to an increase in equilibrium price and
quantity.
o To get to new equilibrium- demand has increase and now exceeds
supply
o Forcing a price rise- leading to a supply expansion, continuing until
new equilibrium

Decrease in Demand- Leads to a decrease in equilibrium price and

quantity.
o To get to new equilibrium- Price is dropped as supply exceeds
demand.
o Supply contracts until new equilibrium.

Increase in Supply- Lowers equilibrium price, raises quantity.

o As there are more products available, there is an expansion in
demand occurring until new equilibrium, thus lowering price.

Decrease in Supply- Raises equilibrium price, lowers quantity.

o Due to a decrease in supply, there are fewer products available,
therefore an contraction in demand, until new equilibrium.

8.4 Role of the Market

 Product Market- The interaction of demand for and supply of the outputs
of production.
Factor Market- A market for any input in the production process.
8.5 Solutions to the economic problem
Allocative Efficiency:
o The economys ability to allocate resources to satisfy consumer
wants.
o This is productive as it is the best way to use resources to achieve
the maximum number of wants in a society.
8.6 The importance of relative price in reflecting opportunity costs in the g/s
and factor markets
Price Mechanism:
Efficient as any consumer willing to pay the market price will be satisfied
and producers will be able to sell all they produce.
The market price of a commodity reflects the opportunity cost
associated with it.
Externalities
Items not taken into account in the operation of the price mechanism
Positive Externalities
Social Benefits (positive impacts coming from the individual consumption
of collective g/s).
Negative Externalities
Social Costs (negative impacts coming from the individual consumption
of collective g/s)
Public Goods
Goods which private firms are unwilling to supply as they are not able to
restrict usage and benefits to those willing to pay for the good provided
by government.
Merit Goods
Goods not produced in sufficient quantity by private sector as individuals
dont value those goods (e.g. health care).
Government may subsidise to lower prices and increase consumption.

Problem Government Action Outcome

Market price too Price ceiling Reduces price- Quantity Shortage
high
Market price too Price floor Increases Price- Quantity Excess
low
Negative Taxes Increases Equilibrium Price,
externalities Reduces Equilibrium Quantity
Positive Subsidies Reduces Equilibrium Price,
externalities Increases Equilibrium Quantity
Public goods Government Government collects taxation
provided g/s revenue to fund supply.
8.7 Variations in Competition
Market Structure-
Number and relative size of firms within an industry, nature of the product sold
and ability of entry for new firms.
Market Number Product Barriers to Example
Structure and size of characteristics entry
firms
Pure Many small Homogenous No Fruit and
Competition firms product barriers to vegetables
entry Fish markets
Monopolistic Many Differentiated Relatively Shoe Repairs,
Competition relatively products easy Coffee Stores, Dry
small firms cleaners, Barbers,
Restaurants
Oligopoly Few , Differentiated Extremely Supermarkets,
relatively products high Banks, Oil
large firms companies, airlines

Monopoly One large No close Extremely Sydney Trains,

firm substitutes high Sydney Water,
Sydney Airport
Market Power:
The power to set prices
Effects of changing levels of competition and market power on price and
output
As more competition enters a market each firm has less influence on
price setting or less market power and: more competition -> more output
-> lower price

Chapter 9
Labour Demand Market
The interaction between
o Individuals seeking employment to earn income
o Employers who want to obtain appropriate labour skills for their
production process
There are many distinct labour markets (Engineers, lawyers)
o Conditions in one area of the labour market may vary significantly
from conditions in another
o There could be a shortage of workers with specific skills, whilst the
economy has a high level of unemployment
9.1 Demand for Labour
Firms demand labour by offering wages
 Demand for labour is a derived demand
o Labour is needed for the firm to produce goods and services to
make a profit
Output of the firm:
Demand for labour is influenced by firm's level of output
o High sales -> Increase production -> Increase demand for labour
Higher rates of economic growth are associated with falling
unemployment levels and vice versa
o Change in demand for labour will occur as result of fluctuations in
business cycle
Time lag
o Economic conditions and level of employment do not occur
simultaneously
o Due to firms operating at excess capacity
o Firms hoard labour to avoid having to train new staff when
production increases
Productivity of labour:
Productivity of labour + labour costs compared to other input costs
determines extent of labour use
o The productivity of labour can be defined as the output per unit of
labour
o Labour productivity = Total Output / Labour Output
o Labour productivity depends on the quality of the workforce
Education, skills, health, motivation, efficiency with production
process
Cost of other inputs
If the cost of labour is relatively high = More use of capital and vice versa
Capital is a substitute for labour
Capital = Interest rates
Firm's demand for labour will be more elastic:
o It is easy to substitute between labour and capital
o Labour costs are a relatively high proportion of its total costs
o It is more difficult for the firm to pass on increased labour costs in
form of high prices
Labour costs does not just include wages
o Long service leave entitlements, sick leave, holiday pay, worker
compensation, payroll tax, fringe benefits tax and superannuation

Business expansion:
Business expenses = borrowed money
Borrowed $ -> subject to interest rates
Interest rates -> Cost of capital
The cost of capital is represented by:
Level of interest rates
o (cost of borrowing funds to purchase capital)
Opportunity cost of using own funds to finance capital expenditures
o Could be earning returns on funds
9.2 Supply of labour
Pay levels
Higher wages = Higher supply of labour
Incentives such as remuneration package (ie. Company car)
Working Conditions
Attractive working conditions = Higher supply of labour
o Flexible hours
o Generous holiday leave
o Pleasant working environment
Education, skills and experience requirements
Requirements can limit supply of labour
Elements of human capital, countries with better human capital = low
unemployment
Mobility of labour
Occupational mobility
o Ability of labour to move between different occupations in response
to wage differentials and employment opportunities
Geographical mobility
o Ability of labour to move between different locations in response to
improved wage differentials and employment opportunities
Cost of relocating, travel expenses, rent, real estate costs
Personal upheaval, family and friends

Labour force participation rate

Percentage of working age population those aged 15+ in the workforce
Labour Force participation rate (%)= labour force _
Working age population (15+)
o Can be affected by:
State of economy
Retirement
Changing social attributes to working mothers, family orientated
People studying longer

9.3 Australia Workforce

People considered part of the work force are:
Age 15+
Employed at least 1 hour per week
On paid leave, strike or worker's compensation
Unemployed but are actively seeking and available for work
o Applies for jobs
o Responds to applications
o Register employment agencies
People not considered part of the work force are:
Retired
15< years of age
Domesticated mothers
 Full time and non-working students
Unavailable or not actively seeking work

Population size
The larger the total population the greater the potential workforce
Influenced by:
o Natural increase
Excess of births over deaths in the population taken over a
period of one year
o Net migration
Excess of permanent new arrivals to our country over
permanent departures
Influenced by the level of economic activity
Reduced economic activity = high unemployment = reduce
migration intake
Current age distribution is approximately 15 - 75 years old
Education patterns determine the quality of work that a nation as a
whole provides

9.4 Labour market equilibrium

Demand curve operates in accordance to the law of diminishing
marginal returns (the more apples you eat the less it will taste good)
o Each worker will contribute less to total production than the previous
worker
o A profit-maximising firm will only employ the extra worker if they
have them at a lower wage rate

EXAMPLE: Increase participation rate (Labour supply graph)

o Increase Supply
o Wage decrease
o Quantity Increase
Wage = cost to business
Wage decrease -> cost decrease
o Decrease cost push inflation
o Therefore non-inflation economic growth

Unemployment
Economic growth = YD (Aggregate demand)
->
YD = C + I + G + X -M
Investment = Business/Individual

Budget 17/18 -> Tax reforms

Ie. Reducing corporation tax to 20%
Hence,
1. Low input cost for business
 2. Increase disposable income
3. Expansionary stance
Increase productivity and employment

Since GFC
Low Cash rate
=
Low mortgage rate
=
Low financial obligation for consumers
=
Increase disposable income
=
Increase consumption
(however NOT THE CASE)

Because unemployment high

High rate from 2007-2017
4%->5.9%
Implications: Low productivity
Solutions
Focus on businesses
-> Tax reform (decrease evening tax)

Lesson 10 Labour Market Outcomes

10.1 Wage outcomes
Focus on the price of labour
(e.g. job growth, unemployment levels and hours worked by employees)
Wage and salaries are major source of income for most Australian
households
Average weekly earnings
Measures average weekly gross rate of pay (pay before tax) to all
employees
o Full time and part time employment, overtime
Nominal wage vs Real wage
Nominal wages do not tell us whether people are better off
o Because they do not take into account changes in price levels that
might be occurring at the same time
Real wages are a measure of the actual purchasing power of nominal
wages
o Ie. Money wages adjusted for any change in the level of inflation
o e.g. Wage rise is input costs to producers, hence, passed over to
consumers in higher prices
Employers can afford higher real wages if there are also strong increases
in productivity
 o IF growth in real wages is higher than productivity growth,
employers profits decrease leading to employment of less labour
and more machines = higher rate of unemployment
o (Capital is a substitute for labour)
Differences in wage outcomes
Labour market is made up of a number of different micro-markets
o A market for each type of occupation
o Each individual enterprise and that wage rate differentials occur
between these markets
A. Wage differentials between different occupations
Different occupations require different levels of education and skills
o People are generally rewarded for working occupations that
require a higher level of skill
People who work in poor conditions or labour demanding jobs are
often rewarded with higher wages
Occupational mobility is the ease in which labour can move from
one occupation to another
o Influences the wage rate
o High occupational mobility = High supply of labour
o Less need for employers to raise wages to attract labour
B. Wage differentials in the same occupation
More experienced workers are generally considered as more
valuable
Higher qualifications are generally paid more
Higher productivity of labour influence wage rates
Capacity of the firm to pay is also another factor
Geographical labour mobility:
o The ease at which labour can move from one area to another
o People who move to isolate areas generally get paid more
C. Age
Working ages are between 25 to 70
D. Gender
Women are forced to reduce their paid work hours because they
fulfil other roles such as child bearing
Discrimination still exists with respect to job opportunities
Women are said to face a 'glass ceiling' in employment
o An invisible, rather than a formal barrier that denies women
access to the top paying position
Ethnic cultural background on distribution of income
Income of persons born overseas are also influenced by the length
of time that they have been resident in Australia
10.2 Trends in the distribution of income from work
Australian Industrial Relations Commission (AIRC) set wages for most
employees
o Minimum wages
o Ensured that wage outcomes both between and within
occupations are relatively similar
 Different age outcomes across different industries are result of changes
in structure of the economy
Emerging industries requiring skilled labour are likely to pay higher wages
than declining industries (engineering)
There has been an increase in the gaps in earning between occupations
and groups
o Recent years has seen an increase in the dispersion of earnings
within occupations and among employees with same skill levels or
educational qualifications
10.3 Non-wage Outomes
Sick leaves, parental leave, holiday leave, superannuation, overtime,
and other fringe benefits
o Varies substantially from one firm to another
o No single measure of non-wage outcomes for employees
o Cannot be measured in dollar terms
Salary packaging is a popular means of supplementing wages
o Employees receive a company car, laptop, subsidised childcare,
gym etc.
o Companies offer these because they can use it as a tax deduction
E.g. Novation lease - where employers receive benefits under
the company
e.g. buying a car under the company (not upfront or bank
lending)

10.4 The costs and benefits of inequality

2 emphasis
o Inequality has the advantages of creating and strengthening
individual incentives and increasing their share of output
o People will be encouraged to work harder and change their
position in the distribution of income
o However, there is a division of the society and the lower class that
will find it hard to escape poverty
Economic benefits of inequality
Encourages the labour force to increase education and skill levels
Encourages the labour force to work longer and harder (to earn more)
Encourages the labour force to be more mobile (willing to move to
remote places, higher compensation)
Encourages entrepreneurs to accept risks more readily
Creates potential for higher savings and capital growth
Economic costs of inequality
Reduces overall utility (satisfaction derived from consuming something)
o Reduces satisfaction in society
Reduces economic growth
o Low income earners spend a higher proportion of their income
Reduces consumption and investment
o Not enough money for low income earners to spend on
consumption or even investment
 o Consumption of necessities constitute highest proportion of income
flow in economy
Creates conspicuous consumption, rich spend money on expensive
lavish products
o Creates hierarchy in society
o Note: economies such as France rely on tourism (conspicuous
consumption)
Creates poverty and social problems
Increases the cost of welfare support, hence our taxes
Social benefits of inequality
Inequality of opportunity exists due to some factors
o Rich can provide good education to their children
o More chance of a better university and potentially a prosperous
career
o Reality is that some people are talented and some are not, it is
nature and inventible
o Some are lucky enough to receive a large inheritance
o Some are lucky to be exposed to a large network of people
Social costs of inequality
2 Major problems:
Social class divisions"
Poverty

10.5 Unemployment
Unemployed:
Over 15, without a job, stood down from a job without pay but actively
seeking full-time or part time work

Unemployment rate(%)= Number of persons unemployed x 100

Total Labour force
Types of unemployment
A. Cyclical unemployment
Results from the ups and downs of the business cycle
B. Structural unemployment
Mismatch between skills demanded by employers and those
possessed by unemployed people
C. Seasonal unemployment
Seasonal nature of some jobs
E.g. shops only hire people during Christmas or (farming
industry)
D. Frictional unemployment
Means that it takes time to move from one job to another (new work
contract)
E. Hard-core unemployment
Can't be employed because of personal characteristics (e.g.
criminal record or disabilities)
F. Hidden unemployment
 Relates to people who have given up actively seeking work or have
gone back to school
G. Long term unemployment
People out of work longer that 12 months
H. Underemployment
People who have part time jobs but would like to work more hours
I. Gardening leave
When people leave a job but cannot start a new job for a period
Because they possess copyright, patents, knowledge of
previous company
Labour market institutions:
Industrial Relations System
Unions:
An association of workers aiming to advance members interests by
improving their wages and conditions.
(They influence wage outcomes, exercise bargaining power negotiating
with employers, restrict supply of labour)
Employer associations
Lobby groups representing business interests,
(lobby govt on industrial relations policies, assist employers in managing
industrial relations issues).
Current employment/industrial framework
The Ten National Employment Standards (Fair Work Act 2009), national
minimum wage, modern awards, enterprise agreements.
Modern awards
Industrial awards provide minimum wages and working conditions for
employees specific to their industry.
Enterprise agreements:
Workplace agreement negotiated collectively through enterprise
bargaining between employers and employees.
Common Law Contracts:
Simple agreement involving add-ons to relevant awards between an
employer and employee, enforced through court of law.

About unemployment:
A. Most healthiest is structural unemployment because, signifies:
Economy is going through transition (capital focus)
Long term: Increase efficiency and achieves economies of scale
Forces labour force to be re-educated, hence increase long term
productivity
B. Most severe = cyclical unemployment
Subject to business cycle
(property market tends to double every 7 years)
Extremely hard to mitigate, however, fiscal policy (tool) involving
infrastructure spending9

Lesson 11 Changing Australian labour Market

 Industrial Relations
o The relationship between employees and employers
"Industrials relationships" involves:
o The laws, institutions and processes established to resolve the
conflicts between employers and employees.
The system is a structure that operates over the labour market,
changing its operations and its outcomes
1.1 Role of Trade unions
Association of workers that aim to advance the interests of its members
by imrpvoing wages and working condition
A. Occupational unions
o Draw members from persons who possess a particular skill
regardless of the industry/firm in which they work (e.g. Electrical
trades union)
B. Industry Based unions
o Cover workers in a particular industry regardless of the work they do
o (e.g. Australian meat industry employees union)
C. Enterprise based unions
o Represent only the workings of one specific enterprise. (Rare)
D. General based unions
o Cover a whole range of workers with many different skills across
various industries (Mining or energy union)
Decline in union ship due to:
Changes to wage negotations
o Movement away from centralised bargaining to enterprise
bargaining has tended to reduce the overall influence of unions in
wage negotiations
Changes within industry
o Business growth has mainly occurred in industries where union
membership levels have historically been low, such as retail, trade
and service industries.
Changes in the nature of employment
o Where unemployment growth has mainly occurred in casual, part-
time, and temporary employment, which have lower levels of trade
union membership
Role of unions in the labour market
Unions influence the labour market by:
o Restricting supply of labour
For e.g. encourages people to go on strikes
o Exercising their bargaining power in wage negotiations
Employees act together = significant power due to difficulty in
replacing the entire workforce
Changes shape of supply curve
Labour supply exceed the quantity of labour demanded,
employment becomes less than the original equilibrium
quantity
May cause unemployment
 o Both lead to increase in wage rates

11.2 Role of employer assoications

Employers combined to form their own association
Not as well organised as unions due to different interests and
competition
2 Roles
o Represent and promote interests of their members by lobbying the
government such as industry assitance and industrial relation
policies
o Assist employers in managing industrial relations issues, represent
their members in various industrial tribunals

Role of employer associations in labour market

Key benefit of these associations is that they are sometimes able to
successfully lodge policies to government to protect against foreign
competition
Also successful in the area of industry assistance (gov. subsidies)
Associations can increase outputs, hence increase demand for quantity
of labour
11.3 The role of industrial tribunals
Commonwealth and state tribunals
o Australian Industrial Relations Commission (AIRC) and Federal Court of
Australia
AIRC determines minimum set of work and pay conditions through
'awards'
Award - Minimum wage level
o System designed to prevent and settle industrial disputes between
employers and employees
o Main role is to resolve disputes between employers and employees
o Independent to government but powers determined by legislation
2 Main Roles:
o Conciliation
AIRC provides a mediator who tries to help the disputing parties
reach a mutual agreement
Outcome of conciliation process is not binding upon either of the
parties
o Arbitration
When an industrial tribunal or court makes a ruling that is legally
binding on all parties
Office of employment advocate
o Agency created within the industrial relations system
o Role to encourage growth of individual contracts within the Australian
labour market
o And to enforce restrictions on compulsory union membership
o No formal powers to resolve disputes and refers matters elsewhere

11.4 Evolution of industrial relations in Australia

Industrial awards
o Continuation of the traditional system for those workers unsuccessful in
negotiation an enterprise agreement
Certified agreements
o Where an enterprise bargaining agreement negotiated between an
employer and a group of employees (usually represented by a trade
union)
Australian Workplace Agreement
o An individual contracts negotiated between the employer and employee