Economics Year 11 Review (2).pdf

Topics Economic Terms Aggregate Demand (AD) Aggregate Supply (AS)  Markets - Where buyers and sellers of goods, services and resources interact and conduct transactions Role of Markets: The price mechanism in a market economy provides the best solution to...

Topics Economic Terms Aggregate Demand (AD) Aggregate Supply (AS)  Markets - Where buyers and sellers of goods, services and resources interact and conduct transactions Role of Markets: The price mechanism in a market economy provides the best solution to the economic problem, as forces of demand and supply bring about allocative efficiency. Types of Markets: Factor markets - A factor market is a market in which the factors of production such as labour, land, and capital are bought and sold. Labour market - A factor market where the quantity and quality of labour demanded, and the supply interact to determine the wage rate and the allocation of labour. Capital market - Provide access to funds which are necessary for production. It brings together the savers and borrowers. Product market - This is a market in which the finished outputs (both goods and services) of individual industries are bought and sold. Law of Demand and Supply Demand - Refers to the quantity demanded of a good Supply - Refers to the quantity of a good or service or service at a particular time which producers are willing and able to produce at any Law of Demand - The quantity demanded varies given time inversely with price. Law of Supply - The quantity supplied is a direct or The Demand Curve positive function. I.e supply follows price The Supply Curve  Price Elasticity of Demand Price Elasticity of Supply 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑦 (∆𝑄/𝑄) 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑦 (∆𝑄/𝑄 𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 (∆𝑃/𝑃) 𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 (∆𝑃/𝑃) Elastic - if Q is greater than the initial change in price Elastic - if Q is greater than the initial change in price Inelastic - if Q is less than the initial change in price Inelastic - if Q is less than the initial change in price Unit Elastic - if Q is equal to the initial change in price Unit Elastic - if Q is equal to the initial change in price Ceteris Paribus (Other things being equal) - means all other factors that influence demand are held as constant  Market Equilibrium The situation where demand meets supply Surplus - Where supply exceeds demand Shortage - Where demand exceeds supply Changes in equilibrium  Price Control Schemes Price Ceiling - Where the maximum price for a good or service is established below equilibrium. Price Floor (minimum price) - is a point that the government may establish above the equilibrium price. Market Structures Perfect Competition ○ A large number of firms producing similar products ○ Free entry to the market ○ Producers do not have much influence over the price Monopoly ○ Only one seller or producer of good  ○ No close substitutes so no competition ○ Very high barriers to entry due to cost ○ Price makers Natural Monopoly ○ The government may provide these services, due to the nature of goods and services Monopolistic competition ○ A large number of small firms ○ Slight difference in product ○ Low barriers to entry ○ Some level of market power usually through Oligopoly ○ Few large-scale firms ○ Slightly difference product ○ Sellers compete on price and non-price basis ○ The government intervenes to regulate conduct of oligopolists Labour Markets - Labour is a Derived Demand as it depends on the demand for goods and services that need to be produced. Derived Demand - Demand for resources derived from the demand for final output Labour Market Terms + Functions Terms: Employed (E) - People working more than 1 hour a week for paid work Working Age Populations (WAP) - People aged 15 years and over Labour Force (LF) - People of working age who are employed full-time or part-time or are actively looking for work Functions: Total Labour Force = Employed (E) + Unemployed (UE) 𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒 Labour Force Participation Rate (LFPR) = 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐴𝑔𝑒 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 × 100 𝑇𝑜𝑡𝑎𝑙 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 Unemployment Rate = 𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒 × 100 𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 Labour Productivity = 𝐿𝑎𝑏𝑜𝑢𝑟 𝐼𝑛𝑝𝑢𝑡 Table: Australian Population Under 15 years Population over 15 years Not in Labour Force Labour Force (LF) (NILF) Unemployed Employed (UE) (E)  Unemployment Refers to a situation where individuals are willing to work and actively seek work but are unable to find work. As a result, the resources in the economy are not fully utilised Cyclical - Occurs when there is a contraction in the level of economic activity or AD. Occurs due to fluctuations in the economy. Structural - Occurs because of structural changes within the economy caused by changes in technology, demand for goods and services, and microeconomic reforms in the economy. This results in some jobs becoming obsolete and the creation of new jobs. This mismatch takes time for workers to acquire new skills. Frictional - Represents the people who are temporarily unemployed as they change jobs Seasonal - Is unemployment incurred by specific industries or occupations which are characterized by seasonal work. Long-term - Refers to those who have been out of work for 12 months or longer Hardcore - Refers to long-term unemployed people who are considered “unemployable” due to their circumstances (disability), these are not counted in UE. Regional - Occurs when major industry/industries in a particular region reduce their demand for labour causing widespread UE. Hidden - Refers to people who may not be counted in the official UE as they have given up seeking work, discouraged workers or for other reasons. These show up on LFPR but not on UE Underemployment - Refers to people who work less than full-time hours but would like to work longer hours or full-time. Labour Market Institutions: Unions - An organization of workers that aims to achieve improved conditions and benefits for employees. Employer Associations - Is a body that acts on behalf of employers. This role can include lobbying governments to relax labour market regulation or provide assistance in training workers. Fair Work Commission - An independent government body, established by the ‘Fair Work Act 2009’ Polices: Macro Economic policies - policies that affect the economy as a whole with the aim of minimising fluctuations in the business cycle. - Expansionary Fiscal and Monetary Policies to address AD, as demand for labour is a Derived Demand - Welfare policies Mirco Economic policies - Reforms that are aimed at individual industries, seeking to increase aggregate supply by improving the efficiency and productivity of producers. Financial Markets - Short-term money market (STMM) - A financial market where money is borrowed and lent for short periods of time, usually between 6-12 months. Domestic/Overnight market operations (DMOs) - Are actions by the RBA to buy and sell CGS in order to influence the supply of cash in the STMM to influence cash rate Authorised Depository Institutions (ADI) - ADIs are authorised to accept deposits from the public and supervised by the Australian Prudential Regulation Authority (APRA) Non-banking financial Institutions (NBFI) - are financial institutions that do not perform the daily functions of banking Exchange Settlement Accounts (ESA) - are accounts kept by ADI’s with RBA Exchange Settlement Funds (ESF) - are funds kept in the ESA to settle accounts with other banks and the RBA Reserve Bank of Australia (RBA) - The RBA is the central bank of Australia and is responsible for financial stability and the implementation of Monetary Policy Monetary Policy (MP) Refers to the actions by the RBA to change the cost of credit in the economy to achieve its economic goals Stance of MP Market Operations ESA Balance Cash Rate Contractionary RBA sells CGS Fall in cash Higher Neutral RBA buys CGS Rise in cash Lower Expansionary Ensures demand & supply No change in cash No Change is met Unconventional Monetary Policy - when tools other than changing a policy interest rate are used I.e. forward guidance, asset purchases, term funding facilities, adjustments to market operations, and negative interest rates. Price Stability - refers to the RBA objective of inflation between 2-3% Commonwealth Government Securities (CGS) - Are sold to ADIs to maintain the supply of cash in the overnight cash market and a source of raising funds by the government Government Bonds - These are treasury bonds and securities that are issued by RBA on behalf of the government to raise funds for a deficit budget Second-hand securities - These are treasury bonds and securities that are issued by RBA on behalf of the government to raise funds for a deficit budget Consumer Price Index (CPI) - is a measure of inflation which uses a weighted basket of essential goods and services and measures the price change over a period of time Cash rate - Is the interest paid on the overnight loans in the STMM Interest Rate - Annual percentage cost of borrowing funds in financial markets Aggregate demand - Total level of demand within the economy (AD = C+I+G+X-M) Macroeconomic - The Branch of economics dealing with aggregate economic behaviour or the economy as a whole Deregulation - removal of government regulations imposed on a market Inflation targeting - Monetary Policy target 2-3% over the economic cycle Exchange rate - The price difference when converting one currency into another currency Interest rate elasticity- The proportional change in the quantity of money demanded divided by the proportional change in interest rate. Interest rate - Annual percentage cost of borrowing funds in financial markets Role of Government - Government Intervention in the Market Economy Market Failure - This occurs when the price mechanism fails to properly reflect the social costs or benefits to society and can result in inefficient outcomes. Private Goods - Must be purchased by an individual to gain the benefits from consuming it Public Goods - These are goods that the private sector suppliers will not supply as they are not able to effectively charge for them due to the characteristics of the good. Nonexcludable - Cannot be confined to those who have paid for it. Non Rival - Means the consumption of one individual does not reduce the avaliabilty of the good. Free Rider Problem - When non-purchasers can gain benefits without payment. Merit Goods - These are not produced in sufficient quantities because individuals do not place sufficient vale on them. Collective Goods and Services - Collective needs and wants, often has high costs and low profitability and may not attract the private sector to supply them. Natural Monopolies - Where the nature of production has to be large scale and to achieve economies of scale it is beneficial that one producer produces it. Issues in the Market Relative Poverty - Income below the average standard of living in the community Absolute Poverty - Income below the minimum income benchmarks Monopoly Power - Left to their own, large companies will compete in ways that are unfair and result in higher prices being paid my consumers. Externalities - Third-party effects arising from the production and consumption of goods and services for which no appropriate compensation is paid. (They can be both positive and negative) Interaction with Businesses Government Business Enterprises (GBE) - also known as Public Trading Enterprise (PTE) are businesses owned and managed by a government at either the commonwealth or state level Privatisation - when a government-owned business is sold and becomes a public limited company. Corporatisation - when the government encourages PTE to operate as private businesses to improve their efficiency and profitability. Deregulation - the removal of restrictions and regulations governing the operation of markets. Taxes: The primary goal of taxes is the reallocation of resources. Reallocation of resources - implemented through the fiscal budget using the tax-welfare system and discretionary spending. Progressive Tax - Where high-income earners pay a greater percentage of their income than low-income earners Proportional Tax - where all income earners would pay the same percentage of income tax Regressive Tax - where high-income earners pay a lower percentage of their income than low-income earners Direct Taxes - Where the person on whom the tax is levied must pay the tax because it can not be passed on Indirect Taxes - Where the person on whom the tax is levied does not bear the burden of the tax Fiscal Policy - Federal Budget Fiscal Policy Stances: Stance Tax Government Budget Outcome Impact Revenue Expenditure Expansionary Decrease Increase Larger Deficit / Smaller Surplus Simulate AD Neutral Increase Decrease Smaller Deficit / Larger Surplus Reduce AD Contractionary No Change No Change No Change No change in AD Automatic Stabilisers - The Change in budget outcomes with a change in economic activity but without any policy change. Referred to as the cyclical component of the budget. There are two main automatic stabilisers 1. Progressive personal income tax system 2. Unemployment and other welfare benefits Discretionary spending of the budget - deliberate revenue and expenditure changes initiated by the government.