Economic Terms and Market Interactions

Economic Terms

• Aggregate Demand (AD): The total demand for goods and services in an economy, calculated as AD = C + I + G + X - M.
• Aggregate Supply (AS): The total supply of goods and services that firms in an economy plan to sell during a specific time period.

Markets

• Definition: Interaction points between buyers and sellers where goods, services, and resources are exchanged.
• Role of Markets: Price mechanism ensures allocative efficiency by balancing supply and demand.

Types of Markets

• Factor Markets: Exchange of factors of production such as labor, land, and capital.
• Labour Market: A specific factor market focused on employment; determines wage rates through demand and supply of labor.
• Capital Market: Facilitates access to funds for production by connecting savers and borrowers.
• Product Market: Trade of finished goods and services.

Law of Demand and Supply

• Demand: Quantity of a good or service that consumers are willing to buy at a given price.
• Supply: Quantity of a good or service that producers are willing to sell at a given price.
• Law of Demand: Inverse relationship between price and quantity demanded.
• Law of Supply: Direct relationship between price and quantity supplied.

Price Elasticity

• Price Elasticity of Demand: Measures responsiveness of quantity demanded to price changes.
• Price Elasticity of Supply: Measures responsiveness of quantity supplied to price changes.
• Elasticity Types: Elastic (>1), Inelastic (<1), Unit Elastic (=1).

Market Equilibrium

• Description: Point where demand equals supply.
• Surplus: Occurs when supply exceeds demand.
• Shortage: Occurs when demand exceeds supply.

Price Control Schemes

• Price Ceiling: Maximum legal price set below equilibrium.
• Price Floor: Minimum legal price set above equilibrium.

Market Structures

• Perfect Competition: Many firms, similar products, free market entry, no price control.
• Monopoly: Single producer, no close substitutes, high barriers to entry, price maker.
• Natural Monopoly: Often government-provided services due to unique characteristics.
• Monopolistic Competition: Numerous small firms with slightly different products and low barriers to entry.
• Oligopoly: Few large firms dominating the market, competing on price and non-price factors.

Labour Markets

• Derived Demand: Demand for labor based on the necessity to produce goods and services.
• Labour Force Definitions:
  • Employed (E): Individuals working over 1 hour a week.
  • Unemployed (UE): Individuals actively seeking work but unable to find employment.
  • Labour Force (LF): Total of employed and unemployed individuals.
• Labour Force Participation Rate (LFPR): Proportion of working age population in the labor force, calculated as LF/WAP x 100.
• Unemployment Rate: Percentage of the labor force that is unemployed, calculated as UE/LF x 100.

Types of Unemployment

• Cyclical: Linked to the economic cycle; occurs during downturns.
• Structural: Resulting from technological advances and demand shifts causing job obsolescence.
• Frictional: Temporary unemployment while transitioning between jobs.
• Seasonal: Fluctuations in employment due to seasonal industries.
• Long-term: Individuals unemployed for over 12 months.
• Hardcore: Long-term unemployable due to circumstances.
• Regional: Unemployment due to regional industry layoffs.
• Hidden: Individuals not counted in official unemployment statistics due to discouragement.
• Underemployment: Individuals working less than they desire to.

Labour Market Institutions

• Unions: Organizations focused on improving conditions for workers.
• Employer Associations: Advocate for employer interests, including lobbying for regulations.
• Fair Work Commission: Established by the Fair Work Act 2009, independent body overseeing employment standards.

Government Policies

• Macroeconomic Policies: Aim to stabilize the economy; include fiscal and monetary policies.
• Microeconomic Policies: Target individual industries to enhance aggregate supply and productivity.
• Price Stability: Goal of the RBA to maintain inflation within 2-3%.

Financial Instruments

• Commonwealth Government Securities (CGS): Used for managing overnight cash supply and government funding.
• Government Bonds: Instruments issued to raise funds for government deficits.
• Consumer Price Index (CPI): Measures inflation through a weighted basket of goods.
• Cash Rate: The interest rate on overnight loans in the short-term money market.

Exchange Rates and Interest Rates

• Exchange Rate: Represents the value of one currency against another.
• Interest Rate: Annual cost of borrowing money expressed as a percentage.

Role of Government in Economics

• Market Failure: Inefficiencies when market pricing does not reflect social costs or benefits.
• Private Goods: Require purchase to gain consumption benefits.
• Public Goods: Non-excludable and non-rival goods; often not supplied by the market.
• Free Rider Problem: Benefits obtained without payment from public goods.
• Merit Goods: Underproduced due to low perceived value among consumers.

This quiz explores key economic terms such as Aggregate Demand and Aggregate Supply, as well as the dynamics of markets where buyers and sellers engage. Understand the role of the price mechanism in achieving allocative efficiency in a market economy. Test your knowledge of various types of markets and their functions.