Economics

The Market Economy

• In a pure market economy, individuals and private firms make economic decisions driven by self-interest
• Most economic resources are privately owned
• People can pursue wealth without government intervention
• Alternative names are capitalist, free enterprise, and laissez-faire
• Contrasts with a centrally planned economy where government planners make decisions
• Centrally planned economies feature public ownership, allowing government resource allocation
• Russia, Eastern Europe, and China previously followed this model
• No major economy fully adheres to a purely planned system now

Characteristics of a Market Economy

The Market System

• A market connects buyers and sellers for product exchange at a price
• Free-market economies have markets for all goods, services, and resources
• Product markets involve consumers (demand) and businesses (supply)
• Price affects consumer demand and business supply decisions
• Consumers seek the lowest prices, while firms aim for the highest profits
• The price mechanism balances supply and demand to determine prices
• Increased demand raises prices, encouraging producers to increase supply
• Decreased demand lowers prices, leading to reduced production
• Changes in product markets influence factor markets via the price mechanism
• Factor markets are markets for any input into the production process

Private Ownership of Property

• Individuals can own means of production to derive income and wealth
• They may sell or transfer ownership under chosen conditions

Consumer Sovereignty

• Consumers choose spending to satisfy wants, influencing production
• Consumers determine which goods/services are produced by freely choosing what they want
• Businesses produce demanded goods and services
• Consumers influence what goods and services are produced and the quantity
• This defines consumer sovereignty,

Freedom of Enterprise

• Individuals can use resources as they choose
• Entrepreneurs can establish profit-making ventures
• They can determine what to produce and how
• Workers can choose occupations or opt out of working

Competition

• Competition enables the price mechanism to function effectively
• It involves numerous buyers and sellers
• No single buyer/seller can influence market price to gain an advantage
• In free markets, many producers compete
• Less competition may allow a few large businesses to overcharge to gain profit

Australia: A Mixed Economy

• No economy is purely market-based or planned; all are mixed economies
• Decisions on production and distribution are made by a mix of market forces and government
• Globalisation saw a shift towards market forces since the 1980s
• Governments have become more interventionist since the 2000s global financial crisis
• Government intervention addresses inefficient resource allocation
• Necessary goods and services might not be provided by the free market alone
• Railways were historically government-owned due to large capital outlays and risks
• Private sector may not provide collective goods/services like parks, roads, or national defence
• The government provides goods beneficial to the whole community on a non-individual basis
• Governments supplement private supply to achieve social outcomes in healthcare and education
• Essential goods/services, like defense, are better handled by the government
• Governments regulate markets through bodies like the ACCC to prevent exploitation and price-fixing
• Undesirable goods/services (illicit drugs, internet gambling) may be banned

Government Intervention in Distribution of Output

• Gov't intervenes because the free market may not provide a fair distribution.
• Social welfare payments: redistribute income to support the elderly, unemployed, and chronically ill
• Government taxes higher incomes more heavily to fund these payments
• In 2020–21, Australia spent $168 billion on social security
• Progressive income tax: redistributes income for a more equitable output sharing
• High earners are taxed at higher rates than low earners

Economic Stability

• Counter-cyclical policies smooth business cycle fluctuations
• Governments intervene during major economic crises, such as the COVID-19 pandemic
• Governments intervene in the market economy to: allocate resources, distribute income, and provide economic stability

How Mixed Economies Solve Economic Problems

• In mixed economies, markets primarily determine answers to key questions
• Governments intervene to modify market outcomes in several ways

What to Produce

• Gov't can b a producer itself like schools, roads, bridges, tv/radio services
• Can encourage production via subsidies, tax incentives, or start-up funding
• Can limit production of undesirable goods
• Nicotine vaping products became illegal without a prescription in Oct 2021

How Much to Produce

• Governments can limit the production of some goods or services
• Taxi licenses are regulated by state governments
• The growth of ridesharing services challenges this
• The government can encourage the provision of desirable goods/services (merit goods)
• Government subsidies support arts, education, and renewable energy
• Protectionist trade policies promote Australian producers by restricting imports with taxes or grant cash payments/lower taxes

How to Produce

• Gov't affects factor costs and their use in production
• Industrial relations laws set minimum wages and conditions, impacting labor costs
• Laws regulate firm behavior through safety rules, environmental controls, and child labor prohibitions

How to Distribute Production

• Many gov't policies affect distribution
• High incomes pay more tax, redistributed to lower incomes via welfare
• This changes the distribution compared to market-determined incomes
• Government may impose a minimum wage in the labor market, increasing lower incomes

Comparing Economies

• Australia is compared with advanced economies and Asian economies

Asian Economic Ties

• Australia's trade relationships are mainly with Asian economies
• Strong performance is linked to Asian economies
• Rising living standards allow for comparisons

Diversity in Asia

• The Asian region includes diverse economies from large, powerful economies to small island states

Economic Growth and Quality of Life

• Australia is a middle-sized economy with a small population
• The Australian economy is the fifth largest behind China, Japan, India, and South Korea
• These economies are members of the G20
• The Asian economic region has been the world’s fastest-growing since WW2

Economic Growth

• China, Indonesia, and India have experienced the fastest growth
• The Japanese economy has slowed
• Emerging economies grow faster to "catch up"
• Australia achieved industrialization before World War II
• Australia achieved stable economic growth

Living Standards

• GDP per capita gauges living standards
• Australia has the second-highest standard of living in Asia
• Quality of life involves more than economic output per capita
• The Human Development Index (HDI) ranks Australia high

Unemployment

• Unemployment rates have recently been low across regional economies
• The COVID-19 pandemic increased unemployment rates

Distribution of Income

• Pure market economies tend to have a more unequal distribution of income
• Mixed economies with government intervention tend to be more equal

Income Inequality

• Asian economies have greater levels of inequality than European ones
• Australia, Japan, and New Zealand have a more equal distribution of income

Environmental Sustainability

• Environmental sustainability is an important part of modern economies
• Environmental challenges include water/air pollution and efficient processes
• Australia has a very poor biodiversity record, making them responsible for 6-10% of species extinctions since 1500 AD
• Key environmental issues include climate change and global warming
• Australia is implementing policies to reduce emissions
• Australia is criticized for a lack of overall policy framework on carbon emissions

The Role of Government

• A major question facing any society is the extent to which the government should be involved in economic activity.
• Governments can set price levels, impose regulations, or use taxes and subsides
• Over the past three decades, the lines between planned or market economies has become more blurred

Economic Freedom

• The Index of Economic Freedom assesses the interventions of governments
• Australia is 12th "free-est" world economy

Government Spending

• Government spending indicates govt roles in the economy
• Higher levels generally coincide with greater roles
• Provision of health/education examines the role in different economies

Health Care

• Australia has the Medicare system
• Healthcare are often privately found in developing Asia

Education

• Australia offers universal free education at primary/secondary levels
• Government funds higher than Asian nations

Social Welfare

• Australia social welfare is greater than what it is in most other Asian Countries
• Welfare ensures minimum living standard for people who cannot/seek to work
• Includes unemployment benefits, age pension, disability, and other assistance
• Australia's public expenditure on elderly and disabled pensions is high by regional standards