Textbook Notes Final (1).pdf

Economics: Topic 1 – Introduction to Economics: Chapter 1 – What is Economics About: 1.1 The Economic Problem & The Role of Choices: The Economic Problem – Wants, Resources & Scarcity: The Economic Problem – Our wants our Limited & Our Resources are Scarce 🡪 We Must Choose Between them...

Economics: Topic 1 – Introduction to Economics: Chapter 1 – What is Economics About: 1.1 The Economic Problem & The Role of Choices: The Economic Problem – Wants, Resources & Scarcity: The Economic Problem – Our wants our Limited & Our Resources are Scarce 🡪 We Must Choose Between them (By Ranking Preferences) The Study of Economics – Aims to Solve the Economic Problem (Study of Choices) Wants: Wants – Material Desires that Provide Pleasure/Satisfaction (Utility) Individual Wants – Desires of Each Person Collective Wants – Wants of the Whole Community Recurrent Wants – Constantly Needing to Satisfying a Want (Food & Petrol) Complementary Wants – Follows the Initial Satisfaction of Another (Car 🡪 Petrol) The Key Economic Issues: 1. What to Produce: o Limited Resources 🡪 We Must Decide Which Want to Satisfy 2. How Much to Produce: o To Allocated Limited Resources Efficiently & Maximise the Satisfaction of Wants (Too Much = Wasted Resources & Too Little = Wants Unsatisfied) 3. How to Produce: o An Economy must Decide how to Allocate its Resources in the Production Process (Most Efficient Method of Production that uses the Least Amount of Resources) 4. How to Distribute Production: o Must Decide between an Equitable (Even) or Inequitable (Uneven) Distribution o Often Conflict between Equity & Efficiency Opportunity Cost: Opportunity Cost – Forgoing the Opportunity to Satisfy a Want for an Alternative One Formula = What One Sacrifices / What One Gains Opportunity Cost can be Applied to: o Individual Consumer – With Limited Resources 🡪 Must Choose One Want o Business Firm – Choice in the Allocation of its Scarce Resources o Government – Limited Resources that it can Use to Satisfy Community Wants 1.2 The Production Possibility Frontier Production Possibility Frontier – Demonstrates How Opportunity Costs arise when Individuals or the Community make Choices Assumptions are Made: o The Economy only Produces those 2 Goods o State of Technology is Constant o Quantity of Resources Remains Unchanged  o All Resources are Fully Employed 1.3 The Future Implications of Choices Economy can Choose: o Consumer Goods – Produce Goods that Satisfy Consumer Demand Immediately o Capital Goods – Goods that will increase our Productive Capacity in the Future 🡪 Higher Economic Growth Future Implications for Individuals, Businesses & The Government: 1. Individuals – Mortgage (To Buy a House) instead of a Holiday 🡪 More Financially Stable in the Long Term 2. Businesses – Must Focus on the Products that are Likely to Maximise Profit (Limited Amount of Capital Labour & Entrepreneurial Skill) 3. Government – Decisions of Government affect the Entire Economy 1.4 The Economic Factors Underlying Choice Individuals: Choices Made By Individuals Depend Upon: o Age, Income, Expectations, Future Plans, Personality & Family Circumstances o Voting in Elections 🡪 Contribution to Economic Decisions o Must Make Choices between Spending & Saving 🡪 Spending = Satisfies Present Wants, Saving = Raises Future Living Standards Business: Choices made by a Business Depend Upon: o Pricing their Product o How to Produce their Product o What Resources to Use o How to Manage Employees Government: Choices made by The Government Depend Upon: o Economic Choices of Individuals & Businesses 🡪 Determine the Cost of Choices o Influence Individual & Business Decision-Making Process Chapter 2 – The Operation of an Economy: 2.1 The Production of Goods & Services Goods & Services – Outcomes of the Production Process Factor of Production – Any Resource that can be Used in the Production of Goods & Services Four Factors of Production in an Economy – Natural Resources, Labour, Capital & Entrepreneurial Resources (All 4 Resources are Scarce) Natural Resources: Natural Resources – Naturally Occurring Materials that are used in the Production Process  Reward – Rent Labour: Labour – Human Effort (Physical & Mental) Used to produce Goods & Services Reward – Wages Capital: Capital – ‘Produced Means of Production’ 🡪 Not Produced for Immediate Consumption, but to be Used in the Production of other Goods & Services Reward – Interest Entrepreneurial Resources (Enterprise): Enterprise – Organising of the Other Factors of Production for the Purpose of Producing Goods & Services Reward – Profit 2.2 The Distribution & Exchange of Goods & Services Main Function of an Economy – Determine how to Distribute & Exchange the Goods & Services Produced within the Economy Distribution: Distribution – Must be a Balance that Provides Rewards for Investment, Entrepreneurs, Innovation & An Acceptable Quality of Life Gross Domestic Product (GDP) – Total Amount of Goods & Services Produced in an Economy Annually Market Economies – Provide People with Income as a Reward for their Contribution to the Production Process 🡪 Do Not Distribute Output Equally o Advantage – Provides Incentives for People to Obtain Better Skills & Work Harder to improve their Share of Output o Disadvantage – Unfair for People who cannot Contribute to the Production process because of Illness, Age or Disability Unfair Distribution – Government Taxes Higher Income Earners & Gives to Lower Income Earners Exchange: Money – Medium for Exchanging Goods & Services (By Individuals & Businesses) Barter – Non-Cash Exchange of Goods & Services 2.3 The Business Cycle Business Cycle – Cycle of Fluctuation within an Economy (Domestic or International Factors) Impacts of the Business Cycle: Recession: Boom: o Falling Production of Goods & o Increasing Production of Goods  Services & Services o Falling Levels of Consumption o Rising Levels of Consumption & Investment & Investment o Rising Unemployment o Falling Unemployment o Falling Income Levels o Rising Income Levels o Falling Quality of Life o Rising Quality of Life 2.4 The Circular Flow of Income Equilibrium: Equilibrium – Sum of all Leakages is Equal to the Sum of all the Injections to an Economy Disequilibrium – Inequality between Total Leakages & Total Injections in an Economy Injections: Leakages:  o Flows of Money that Increase o Items that Remove Money from Aggregate Income & The General the Circular Flow of Income, Level of Economic Activity Decreasing Aggregate Income & o Three Injections = Investment, The General Government & Exports Level of Economic Activity o Total Injections > Total Leakages: - o Three Leakages = Savings, Upturn in the Level of Economic Taxation & Imports Activity o Total Leakages > Total - Rising Incomes Injections - Downturn in the - Rising Production Level of - Rising Employment Economic Activity - Falling Incomes - Falling Production - Rising Unemployment Chapter 3 – How Economies Differ 3.1 The Market Economy Market Economy – All Major Decisions are made by Individuals & Private Firms Motivated by Self-Interest o Most Economic Resources 🡪 Owned by the Private Sector o People able to Seek Wealth without the Government intervening or affecting Business Activity o Other Terms – Capitalist, Free Enterprise & Laissez-Faire Characteristics of a Market Economy: 1. The Market System o Market – Network of Buyers & Sellers seeking to Exchange a Particular Product at a Certain Price o Product Markets – Market for Goods & Services 🡪 Buyers are Consumers & Businesses are the Sellers o Price Mechanism – Where Forces of Supply & Demand interact to Determine the Market Price at which Goods & Services are sold and the Quantity Produced o Factor Market – Market for Factors of Production 2. Private Ownership of Property o Individuals have the Right to Own the Means of Production (or Resources) and can use these to Derive Income & Acquire Wealth 3. Consumer Sovereignty o Consumer Sovereignty – Manner in which Consumers, through Market Demand, Collectively Determine what is Produced & the Quantity of Production o Consumers are Provided with more Wealth 4. Freedom of Enterprise o Individuals have the Right to use their Resources as they Choose 5. Competition o Competition – Pressure on Business Firms in a Market Economy to Lower Prices or  Improve the Quality or Output to Increase their Sales of Goods & Services to Consumers 3.2 Australia: A Market Economy with a Role for Government Mixed Economy – An Economic System where the Decisions Concerning Production & Distribution are made by a Combination of Market Forces & Government Decisions Government must Intervene in Production 🡪 Most Efficient Allocation of Resources: o Some Necessary Goods & Services are not Provided under a Pure Market System o Often better for Essential Goods & Services to be Provided by Government instead of Private Individuals o Government Regulations – Prevent Producers from Exploiting Consumers Government Intervenes in the Distribution of Output (Income) 🡪 Fair Distribution: o Social Welfare Payments o Progressive Income Tax Why Governments Intervene in the Market Economy: Resource Allocation: o Provide Important Goods & Services that wouldn’t normally be Provided o Restrict Production of Harmful Goods Income Distribution: o Create a Fairer Society & Look After People Economic Stability: o Smooth out Sharp Fluctuations in the Economic Cycle o Ensure Stability in the Economy & Financial System How the Mixed Economy aims to Solve the Economic Problem: Determined by the Operation of Markets, but the Government can Intervene to Modify Certain Market Outcomes 3.3 Comparing Economies Rising Living Standards in Asia 🡪 Shift Towards Market-Orientated Economies = More Meaningful Comparisons & Economic Analysis Types of Economies: Developing: Emerging: Advanced: o Low HDI o Low HDI o High HDI o Low Growth o High Growth o High Growth Definition: Australia China: Economic Gross Domestic Advanced & Mixed Emerging & Pro-Market Growth Product (Total Economy Economy dollar value of all 3.2% annual growth 8% annual growth (last Goods & Services (last decades) decades) Produced GDP – US$55,060 per GDP – US$10,261 (2019) Annually 🡪 capita (2019) 16.22% of Global GDP in Primary indicator 1% of Global GDP in 2019 2019 14.7% in 2007 to see the Health (Fluctuating Growth) 🡪 of a Largest Economy & Country’s Population Economy) GDP = C + G + I + NX Imports & Imports – Goods 24% Exports = Iron 17.8% of Global GDP Exports being Brought In Ore🡪 $48.2 Billion (2016) 10.7% of the Exports – Goods Worlds Exports of Goods Sold and Services Internationally Quality of Life HDI – Measure Life Expectancy – 83 Life Expectancy – 76 of Economic HDI Value – 0.944 HDI Value – 0.738 Development HDI Rank – 2/188 HDI Rank – 90/188 (Life expectancy Public Health Care – Significant rise in HDI at birth, levels of Medicare – 1984 🡪 High 1975- 2015 education Expenditure to GDP attained & Ratio – 9.2% Material living standards) Measured by Gross National Income per capita Employment Unemployment 5.2% Unemployment 3.8% Unemployment in & Rate = Aim for 5% in 2018 2018 Services 🡪 51% 2019 Unemploym Unemployment – 2.09% 🡪 Agriculture 2019 9% 🡪 Agriculture 2019 ent Not Actively 66.15% 🡪 Services 2019 (China supplies more Seeking a Job COVID - Tourism resources to neighbouring decreasing by 27% in Countries) 2020 🡪 2.6 million Visitors Distribution Main Sources of Gini Index 🡪32.80 Gini Index 🡪 46.5 of Income Distribution of  Income = Tax & Australia 🡪 Tend to Chinese 🡪 Tend to Save Welfare Spend (2/3 of Income) (2/3 of Income) o Far more even distribution within Australia o Kuznets Curve 🡪 Inequality within Australia is decreasing BUT in China is Increasing Environmen SDG – SDG – 20th Sustainable tal Sustainable Biggest Export – Iron Development Goals – Sustainabilit Develop Goal Ore ($48.2 Billion) 🡪 76th y (SDG) detrimental impacts Biggest Export – (September on environment – Manufactured Goods 2015, UN) ceasing would have (94.3% of Exports in even larger 2016) detrimental effects 7% of China’s GDP lost (injection would stop to Pollution entering the Circular China contributes 20% of Flow of Income) Total Global Carbon Dioxide Role of Government Government Government $$ – 36% Government Intervention is Spending – 37% Health – 6.4% GDP Often Required Health – 6.3% of GDP Education – 4% GDP Education – 5.2% Welfare – 40% GDP Welfare – 40% Topic 2 – Consumers & Business Chapter 4 – Consumers in the Market Economy: 4.1 Consumer Sovereignty Main Assumptions in a Market Economy – Consumers Determine what is Produced (Exercise Choice) Consumers Answer: o What to Produce o How Much to Produce Aspects of Business Conduct that Reduce Consumer Sovereignty: 1. Marketing – Diminished by Manipulative or Deceptive Marketing Practises 2. Misleading or Deceptive Conduct – False/Dishonest Claims about a Product 3. Planned Obsolescence – Products Wear Out Quickly or go Out of Date 4. Anti-Competitive Behaviour – Markets with Few Other Sellers (No Consumer Choice) 4.2 Decisions to Spend of Save Consumers Decide to Either Spend or Save:  🡪Y=C+S o Y = Disposable Income o C = Consumption Expenditure o S = Savings Average Propensity: Average Propensity to Consume (APC): Proportion of Income Spent on Consumption C/Y Average Propensity to Save (APS): Proportion of Income Spent on Savings S/Y Factors Influencing Decisions to Spend or Save: 1. Cultural Factors 2. Personality Factors 3. Confidence & Future Expectations 4. Specific Future Spending Plans 5. Tax Policies 6. Availability of Credit 7. Income o Income Rises – Save Higher Proportion & Consumption Levels Rise o Income Decreases – Spend Proportional more of Disposable Income 8. Age o Young 🡪 Lower levels of Income = Spend More & Save Less o Middle Age 🡪 Income Rises = Consumer Smaller Proportion of Income Saved o Elderly Age 🡪 No Income = Spend Savings Marginal Propensity: Marginal Propensity to Consume (MPC): Proportion of Each Extra Dollar of Income that goes to Consumption (Slope of the Consumption Function) Change in Consumption / Change in Income Marginal Propensity to Spend (MPS): Proportion of Each Extra Dollar of Income that is Saved Change in Saving / Change in Income MPC & MPS: MPC + MPS = 1 Consumption Function 4.3 Factors Influencing Individual Consumer Choice Utility –Pleasure Individuals Derive from the Consumption of Goods & Services Individual Demand – Demand of Each Consumer for a Particular Good or Service Main Factors Affecting the Consumer’s Expenditure Choices: 1. Level of Income – Higher Income 🡪 More + Better Quality Items 2. Price of Good or Service – Necessities (Purchase no Matter What) & Luxury (More Responsive to Price Change) 3. Price of Substitutes – Price of One Good Rises 🡪 Demand for Other will Rise 4. Price of Complements – A Good used in Conjunction with Another 5. Preferences / Tastes – Constantly Changing Demand 6. Advertising – Makes Demand less Responsive to Price Increases by Building Consumer Loyalty over Time 4.4 Sources of Consumer Income Consumer Income mainly comes as a Return for Resources such as Land, Capital & Entrepreneurial Initiative Returns to Factors of Production: 1. Wages From Income – Main Source of Income for Consumers 2. Rent from Land – Consumers own Land that becomes a form of Income when Rented 3. Interest from Capital – Returns from the Ownership of Capital (Superannuation, Investment Funds, Ownership of Shares, Interest & Savings) 4. Profit from Entrepreneurial Skills – Operation of a Business Social Welfare: Age Pension – >66 & Retired from Working Parenting Payment – For Primary Carers of Young Children (Distributed According to Income) Disability Support Pension – People with Permanent Physical, Intellectual or Psychiatric Condition that stops them from Working JobSeeker Payment – People Aged 22 & 66 Actively Seeking Working Chapter 5 – Business in the Market Economy: 5.1 Business Firms & Industries  Business Firm – Organisation Involved in Using Entrepreneurial Skills to Combine Factors of Production to Produce a Good or Service for Sale Industry – Consist of Firms involved in Making a Similar Range of items that usually Compete with Each Other 5.2 Production Decisions What to Produce: Skills & Experience of the Business Operator Industries with Strong Consumer Demand Business Opportunities Amount of Capital Required to start the Business How Much to Produce: Must Assess Consumer Demand If Too Much is Produced 🡪 Storage is Expensive & Goods Perish If Too Little is Produced 🡪 Can’t Maximise Sales & Dissatisfied Customers How to Produce: Production Process – Combining a Range of Inputs to Create Output Firm’s Decision on How to Produce depends on the Efficiency of the 4 Factors of Production (Natural Resources, Labour, Capital & Enterprise) 5.3 What Business Contributes to the Economy Healthy, Growing Private Sector 🡪Higher Rate of Economic Growth & Stronger Revenue Base to Services Provided by the Government (Mining Boom in 2000s 🡪 Higher Proportion of Mines in Mineral-Rich Areas) Growing Businesses = Employ more People (Reduced Unemployment) Businesses Contribute to Regional Development Growth in Individual Businesses = Increase an Economy’s Productive Capacity (Outward Shift in the PPF) 5.4 Goals of the Firm Objectives of the Firm = Motives of the Entrepreneur Objectives to Pursue: Objective: Explanation: Maximising Profit: o Biggest Possible Profit o Smallest Possible Loss o Profit – Difference in a Firm’s Total Revenue (Sales) & Total Costs of Production Meeting o Legal Responsibility Shareholder o Shareholders want Maximised Short-Term Results Expectations: o Business want Long-Term Results  Increasing o Increase Percentage of Sales the Business has in the Market Share: Market 🡪 Greater Profit & Competitive Edge Maximising Growth o Larger Asset Base = Higher Profits Satisficing o Attempt to Pursue Satisfactory in All Goods Behaviour: 5.5 Efficiency & Production Productivity: Productivity – Quantity of Goods & Services the Economy can Produce with a Given number of Inputs, per Unit of Time Increase in Productivity – Increase in Output per Factor of Production (Input), per Unit of Time (Increase is Desirable – Firm is Making more Efficient use out of Limited Resources 🡪 Satisfies a Greater Number of Wants) Production – Total Amount of Goods & Services Produced Increase in Production – Increasing number of Resources used Productivity Contributes to an Improvement in Living Standards: Less wastage of Scarce Resources Lower Production Costs & Higher Profits for the Business Firm Lower Inflation Rate Higher Incomes Improved International Competitiveness of Australia’s Industries Specialisation & Productivity: Specialisation – Factors of Production (Labour, Natural Resources & Capital) are used more Intensely for a Smaller Number of Production Processes Type: Definition: Division of Labour – o Break down Production Process 🡪 Labour Specialisation of Labour Specialises in a Particular Part of the Process (Avoid Time & Effort of Moving from One Process to Another) Location Of Industry – o Businesses that Produce Similar Goods & Specialisation of Services congregate around the Same Area to Natural Resources Reduce Production Costs Large-Scale o Businesses grow so Large they can use Highly Production – Specialised Capital Equipment in their Specialisation of Production Process Capital Internal Economies & Diseconomies of Scale: Internal Economies: Internal Diseconomies: o Internal Economies – Cost Saving o Internal Diseconomies – Cost Advantages of a Firm Expanding Saving Disadvantages of a Firm its Scale of Operations Expanding its Scale of Operations Advantages: o Able to take Advantage of Disadvantages: Specialisation of Labour 🡪 o Management lose Touch with Breaking up Production Process Day to-Day Operation of the Firm 🡪 into Different Stages Increase in Inefficiency o Invest more Into Efficient o Duplication & Paperwork Capital Equipment o Problems in Workplace Relations o Buy Raw Materials in Bulk (Less 🡪 Management don’t know the Cost) o Find a Market for its Staff By-Products o Allocate Resources Personally into Research & Development o Decrease in Managerial & o Invest in Human Capital Administrative Efficiency o Easier & Cheaper to Raise Finance 🡪 Business Expansion External Economies & Diseconomies of Scale: External Economies: External Diseconomies:  o External Economies – Cost o External Diseconomies – Cost Advantages outside a Firm’s Disadvantages outside a Firm’s Control (Occur Regardless of a Control (Occur Regardless of a Firm’s Level Firm’s Level of Production) of Production) Disadvantages: Advantages: o Growth of an Industry = o Increase Localisation of Increased Pollution Industry o Government o Increasing the Concentration of Providing Special Industry 🡪 Transport Research & Development to Bottlenecks Promote the Industry o Cost of a Firm’s Raw Materials o Growing, Competitive & Increase (Due to Increasing Sophisticated Capital Market 🡪 Demand Forces) Cheaper Investment Funds 5.6 Investment, Technological Change & Ethical Decision Making: Impact of Investment, Technological Change & Ethical Decision Making on a Firm Through: Production Methods – Technological Change & Innovation 🡪 Increased Productive Capacity of Economy (Making it Possible to Use Existing Resources more Efficiently) Prices – Well-Informed Market Place 🡪 Squeezed Profit Margins & Forced Firms to reduce their Costs to Compete with Competitors Employment – Technological Change 🡪 Made some Jobs Redundant BUT Created New Jobs too Output & Profits – Businesses that Invest in Technology 🡪 Offer Better Quality Products at a Lower Price (Respond to Market Demand & Customise Output) Types of Product – New Technologies 🡪 Expand the Range of Products that may be Produced to Satisfy Market Demand Globalisation – Development of Global Money & Stock Markets 🡪 Business Attracts Investment Funds Worldwide Environmental Sustainability – Minimising Pollution & Waste, Preserving the Natural Environment & Increasing the Use of Renewable Energy (Businesses May Change their Practices) Topic 3 – Markets: Chapter 6 – Demand: Law of demand - When price is Reduced, Consumers will Buy more of the Product Demand – Quantity of a Particular Good or Service that Consumers are Willing & able to Purchase at Various Price Levels at a Given Point in Time Market demand – Demand by all Consumers for a Good or Service Aggregate demand = C + I + G + (X-M) 6.1 Factors Affecting Demand Price of the Good / Service: Must Consider Whether they are Willing to Pay the Nominated Price Necessity Goods – People Require no Matter the Change in Price Luxury Goods – Goods that are not Required Price of Other Goods & Services: Substitute Goods – Close Alternatives If the Price of Good Rises 🡪 Demand for Substitutes to Increase Complementary Goods – Goods that Consumers Purchase with another Product If the Price of a Goods Increases 🡪 Demand for Complementary Decrease Expected Future Prices: Price Expected to Rise 🡪 Increase the Current Demand Changes in Consumer Tastes & Preferences: Change in Taste 🡪 Change in Demand Innovation & Technological Progress 🡪 Consumers Demand New & Better Products The Level of Income: Higher Income Earners 🡪 Willing & Able to Purchase more Goods & Services (Specifically Luxury Goods) Income Distribution – the Spread of an Economy’s Income among the Members of Different Social & Socioeconomic Groups Size of the Population & Age Distribution: Population 🡪 Quantity of Goods Demanded Age Distribution 🡪 Type of Goods Demanded Behavior of Consumers: Positive Network Externality (Bandwagon Effect) – People Demand a Good because Other People Have it Negative Network Externality (Snob Effect) – Demand for a Good is Higher the Fewer People who Own it Ceteris Paribus Assumption: Assumption that Isolates the Relationship between Two Economic Variables All The Other Factors that Could Affect Demand Remain Constant 6.2 Movements Along the Demand Curve Demand Curve:  Price = Vertical Axis Quantity Demanded = Horizontal Axis Typical Curve 🡪 Slopes Downwards from Left to Right Illustrates the Same Relationship between Price & Demand Movements along the Demand Curve: Movement along the Curve – Response to Price Changes Contraction in Demand – Increase in Price 🡪 Decreased Quantity Demanded Expansion in Demand – Decrease in Price 🡪 Increased Quantity Demanded 6.3 Shifts on the Demand Curve Shift on the Curve – Response to Other Factors Influencing Demand Increase – Shift to the Right: Decrease – Shift to the Left: o Consumers Willing & Able to Buy o Consumers are Willing & Able to More of the product at Each Buy Less of the Product at Each Possible Price Possible Price than Before o Willing to Buy a Given Quantity at o Willing to Buy a Given Quantity at a Higher Price than Before a Lower Price than Before Factors Causing a Shift in Demand: 1. Price of Other Goods & Services 2. Expected Future Prices 3. Consumer Tastes & preferences 4. Consumer Incomes 5. Size & Age Distribution of the Population 6.4 Price Elasticity of Demand Price Elasticity of Demand – Measures the Responsiveness of the Quantity Demanded for a Particular Product to Changes in its Price Elastic Demand o Strong Response to a Change o 1 Importance of Price Elasticity of Demand: Business Firms: Aware of Elasticity of Demand in Different Price Ranges 🡪 Know Best Pricing Strategy If Demand is Elastic – Lowering Prices = Increased Sales If Demand is Inelastic – Increasing Price = Increased Revenue Government: Need to Price Goods & Services Fairly Need to Predict the Effects of Changes in the Level of any Indirect Taxes Measuring Price Elasticity: Total Outlay Method – Looking at the Effect of Changes in Price on the Revenue earned by the Producer o If Price & Revenue move in the Same Direction – Demand 🡪 Inelastic o If Price & Revenue move in the Opposite Direction – Demand 🡪 Elastic o If Revenue remains Unchanged in Response to a Price Change – Demand 🡪 Unit Elastic Perfectly Elastic & Inelastic Demand: Perfectly Elastic – Consumers Demand Perfectly Inelastic – Consumers are an Infinite Quantity at a Certain Price willing to Pay Any Price 6.5 Factors Affecting Elasticity of Demand Whether a Good is a Luxury or Necessity: Necessities – Increase in Price 🡪 Quantity Demanded will not Decrease Greatly Luxuries – Increase in Price 🡪 Quantity Demanded Decreases Whether the Good has any Close Substitutes: Goods with Close Substitutes 🡪 Highly Elastic Demand Goods with No Close Substitutes 🡪 Inelastic Demand Expenditure on the Product as a Proportion of Income: Goods & Services that take up a Small Proportion of Income 🡪 Lower Price Elasticity Length of Time Subsequent to Price Change: Price of Product Increases 🡪 Quantity Demanded may not Initially Respond Greatly Durable Goods 🡪 More Elastic Demand Whether the Good is Addictive or Not: Goods that are Habit-Forming 🡪 Inelastic Demand Chapter 7 – Supply: Supply – Quantity of a Good or Service that all Firms in a Particular Industry are Willing & Able to Offer for Sale at Different Price Levels 7.1 Factors Affecting Market Supply The Price of the Good itself: Influence ability & Willingness to Supply it Expectations about Future Price (Expectation to Rise 🡪 Increase in Supply) The Price of Other Goods or Services: Price of Good X Remained the Same, but Good Y Increased 🡪 Profitable to Produce Good Y The State of Technology:  Improvements in Technology – Lower Production Costs & Allow more Firms to Supply more Goods at a Given Price Quantity of the Good Available: Quantity of the Good Available 🡪 Overall Limiting Factor that affects Supply Climatic & Seasonal Influence: Affect Agricultural Production 7.2 Movements along the Supply Curve Supply Curve: Changes in Price Typical Slope 🡪 Upwards from Left to Right Equal Relationship between Price & Quantity Law of Supply – More Quantity is Supplied at a Higher Price & Less at a Lower Price Movements along the Supply Curve: Contraction – Decrease in Price causes Quantity Supplied to Fall Expansion – Increase in Price causes the Quantity Supplied to Rise Only a Change in Price = Movement along the Curve 7.3 Shifts of the Supply Curve Shift on the Curve – Response to Other Factors Influencing Demand Increase – Shift to the Right: Decrease – Shift to the Left:  o Firms are Willing & Able to Supply o Firms are Willing & Able to Supply More of the product at Each Less of the Product at Each Possible Price Possible Price o Following an Increase in Supply, o Following a Decrease in Firms can now Supply more of Supply, Firms now Supply Less the of the Good at the same Price Product at the Same Price o Firms are Willing to Supply a o Firms are Willing to Supply a Given Quantity at a Lower Price Given Quantity at a Higher Price than than Before Before Factors that Cause Shifts in the Supply Curve: Increase: Decrease: o Fall in the Price of Other Goods o Rise in the Price of Other 🡪 Production of Other Goods Less Goods o Discontinued Profitable Technology o Improvement in Technology used o Rise in the Cost of Factors of in the Technology Process Production o Fall in the Cost of Factors of o Decrease in the Quantity of Production (Labour or Capital) Resources Available o Increase in the Quantity of o Regulations relating to Health Resources available & Safety o Climatic Conditions or Seasonal o Climatic Conditions or Seasonal Changes that are More Favorable Changes that are Less Favorable to the Production Process to the Production Process 7.4 Price Elasticity of Supply Price Elasticity of Supply – Measures the Responsiveness of the Quantity Supplied of a  Product to Changes in Price Relatively Elastic – Rise in Quantity Supplied is Proportionately Greater than the Increase in Price Relatively Inelastic – Rise in Quantity is Proportionately Less than the Increase in Price Unit Elastic – Quantity Supplied Rises by the Same Proportion as the Price increases Price Elasticity & The Slope of the Supply Curve: Perfectly Elastic Supply – Infinite Quantity Perfectly Inelastic Supply – Quantity of the Good is Supplied at a Certain Price Supplied is at a Fixed Level Regardless of (Highly Unlikely Situation) the Price 7.5 Factors Affecting Elasticity of Supply Time Lags after a Price Change: Immediately After Price Change – Supply of Most Products would be Virtually Inelastic In the Short Term – Price Elasticity of Supply Increase In the Long Term – Producers can Increase any of the Inputs, and thus Facilitate a Greater Increase in production in response to a Price Change Ability to Hold & Store Stock: Inventory – Total Stock of Goods & Services held by a Firm at a Particular Point in Time which is Intended for Sale to Consumers Easier to Hold Stock the More Elastic the Supply Excess Capacity: Excess Capacity Exists when a Firm is not Using its Existing Resources to their Full Capacity The More Excess Capacity 🡪 More Elastic Supply Chapter 8 – Market Equilibrium: 8.1 Concept of Market Equilibrium  Two Assumptions are Made o Pure Competition in the Marketplace o No Government Intervention Price Mechanism – Process by which the Forces of Supply & Demand interact to Determine the Market Price at which Goods & Services are Sold & The Quantity Produced Market Equilibrium – At a Certain Price Level, the Quantity supplied & the Quantity Demanded of a Particular Commodity are Equal 🡪 Market Clears 8.2 Establishing Market Equilibrium Market Equilibrium – Demand & Supply Curves Intersect (Quantity Demanded is Equal to Quantity Supplied) Market Equilibrium Occurs when: o Quantity Demanded = Quantity Supplied o The Market Clears o There is no Tendency to Change Excess Demand – Quantity Excess Supply – Quantity Supplied Demanded Exceeds the Quantity Exceeds the Quantity Demanded Supplied 8.3 Changes in Equilibrium Changes to Equilibrium Price & Quantity can lead to a Shift in the Demand or Supply Curve How an Increase in Demand & Supply Change Equilibrium:  Increase in Demand 🡪 Increase in Demand for a Good at any Given Price Increase in Demand = Raises Equilibrium Price & Equilibrium Quantity Decrease in Demand = Lowers both Equilibrium Price & Equilibrium Quantity Increase in Supply = Lowers Equilibrium Price but Raises Equilibrium Quantity Decrease in Supply = Raises Equilibrium Price & Lowers Equilibrium Quantity 8.4 Role of the Market Price Mechanism – Most Important Role in Determining the Economic Problem Product Market – Interaction of Demand & Supply of the Outputs of Production Demand Curve – Wants of Individuals in the Economy Supply Curve – Determines a Price & Quantity that best Satisfied Individual Wants with the Limited Resources Available Producers will only Produce Goods & Services for which there is Consumer Demand Factor Market – Market for any Input into the Production Process (Land, Labour, Capital & Enterprise) Allocative Efficiency – an Economy’s Ability to Allocate Resources & Satisfy Consumer Wants Price Mechanism is Efficient Since: o Any Consumer Willing to pay the Market Price for a Good or Service will be Satisfied o Any Producer Offering Goods or Services at the Market Price will be able to Sell as they Produce o 🡪 Competition among Producers also Ensures they are Responsive to Consumer Demand 8.5 Government Intervention Market Price for Goods & Services in Product Markets may be Considered too High or too Low (Equilibrium Quantity may also be Too High or Too Low) When Markets do not Produce the Desired Outcomes 🡪 Market Failure (Price Mechanism considers Private Benefits & Costs of Production but not the Social Costs & Benefits) Market Failure: Market Failure 🡪 Typical Demand & Supply Diagram Price Mechanism 🡪 Will Result in the Market Price & Quantity Levels Supply Curve 🡪 Takes into Account all Costs of Production Socially Optimum Price Level is Above the Market Price Socially Optimum Quantity is Below the Market Level Government Action: Problem: Governme Outcome nt Action: Market Price 🡪 Price Ceiling o Reduces Price & Quantity Shortage Too High (Disequilibrium)  Market Price 🡪 Price Floor o Increases Price & Quantity Excess Too Low (Disequilibrium) Market Quantity Taxes o Increases Equilibrium Price 🡪 Too High – o Reduced Equilibrium Quantity Negative Externalities Market Quantity Subsidies o Reduces Equilibrium Price Too Low – o Increases Equilibrium Quantity Positive Externalities Market Does Governme o Government Must Collect Taxation Revenue Not Provide nt to Finance its Supply of Public Goods Good or Provides Service (Public Good or Goods) Service 8.6 Competition & Market Power Number & Size Product Barriers to Examples of firms Characteristics Entry 1. Pure Many firms, Homogeneous None Fruit + Vegetables Competition very small 2. Many firms, Differentiated Relatively Motels & Monopolistic relatively small Easy Restaurants Competition 3. Oligopoly A few, Usually High Supermarkets, relatively differentiated Banks, Airlines large 4. Monopoly One firm only, No close Extremely Australia Post generally large substitutes High Topic 4 – Labour Markets: Chapter 9 – Labour Demand & Supply: 9.1 Demand for Labour: Labour – A Derived Demand:  Derived Demand - Labour is Demanded as it’s Needed for Firms to Produce Goods & Services (Make a Profit) Labour Market – Individuals Seeking Employment Interact with Employers who want to obtain the most Appropriate Labour Skills for their Production Process Consumers Demand Higher Levels of Goods & Services 🡪 Firms Increase their Level of Output (Increases Labour Demand) Demand 🡪 Businesses / Firms Supply 🡪 Employees Factors Affecting Demand for Labour: Factor: Explanation: Output of o Firm’s Level of Output – Significant Influence on a Firm’s the Firm: Demand for Labour o Factors influencing the Level of a Firm’s Output: 1. General Economic Conditions (Aggregate Demand 🡪 Total Demand for Goods & Services within an Economy) 2. Conditions in the Firm’s Industry (Consumer Demand) 3. The Demand for an Individual Firm’s Products (Effectiveness in Selling Goods & Services) Productivity o Productivity of Labour – the Output per Unit of Labour Per Unit of Labour: of Time o Labour Productivity = Total Output / Labour Input o Labour Productivity 🡪 Depends on the Quality of the Workforce o Effect of Increase in Productivity 🡪 Depends on Aggregate Demand The Cost of o Firm must Consider how to Combine Labour & Capital o Other Inputs: Demand for Labour is Elastic When (Respond to Price Changes quickly) if: 1. It is easy to Substitute between Labour & Capital 2. Labour Costs are Relatively High Proportion of its Total Costs 3. It is More Difficult for the Firm to pass on Increased Labour Costs in the Form of Higher Prices to Consumers 9.2 Supply of Labour: Individuals Supply Labour 🡪 Ready & Willing to Work in the Labour Market Factors Affecting the Supply of Labour: Factor: Explanation: Pay Levels: o Pay Level – The Wage or Salary paid to Employees (Price of Labour) o Higher Wage 🡪 More Likely People are Willing to Sacrifice their Leisure o Non-Wage Incentives 🡪 Company Car & Superannuation Benefits Working o Attractive Working Conditions 🡪 Encourage Higher Supply Conditions: of Labour to a Workplace o Unattractive Working Conditions 🡪 Discourage Workers from joining the Workplace Education, o Human Capital (Education, Skills & Experience Requirements) Skills & can Limit the Supply of Labour Experience Requirements : Mobility of o Supply of Labour – Affected by its Responsiveness to Changes Labour: in the Demand for Labour in Different Areas & Industries o Types of Labour Mobility: 1. Occupational Mobility – Change in Occupation 2. Geographical Mobility – Change in Location Labour o Labour Force (Workforce) – Consists of all the Employed Force & Unemployed People Participati o Working Age Population – Number of People in an on Rate: Economy (Older than 15) o 🡪 Labour Force Participation Rate = Labour Force / Population Aged 15 Over X 100 o Workforce Rate – 66% in 2019 o Factors Influencing the Participation Rate: - State of the Economy – Participation Rate is Pro-Cyclical - Ageing Population - Social Attitude – Specifically the Role of Women in the Workforce - School Retention Rates – Growing Tendency for Kids to stay at School Longer & Seek Tertiary Education (46% of the Working Population has a Post-Secondary School Qualification)  Other Factors: o Supply of Labour – Affected by Government Policy Decisions or the Collective Action of those Providing Labour within an Industry - Immigration Policies – 67% of Immigrants were given Entry to Australia on the Basis of their Skills (2018-19) - Professional Associations (Law Society, Australian Medical Association & Engineers Australia) – Impose Standards of Education, Continued Training & Professional Conduct o Government Intervenes - Imposing Qualifications & Implementing License Restrictions 9.3 The Australian Workforce: Workforce – Section of the Population (15 Years and Above) Working or Actively Seeking Work Employed – One or more Hours of Work per Week Unemployed – Currently available for Work, are Actively Seeking but cannot find a Job Two Aspects of the Workforce – Size & Quality (Affected by Population Size, Age Distribution & Educational Patters) Included: Not Included: o Aged 15 and Above o Retired o Employed at Least One Hour o Aged Under 15 per Week o Performing Full-Time o On Paid Leave, Strike or Domestic Duties Worker’s Compensation o Full-Time, Non-Working Students o Without a Job but not Available / Actively Seeking Factors Affecting the Workforce: Population Size: Population Size 🡪 Determines Size of the Workforce Population Growth Influenced By: 1. Natural Increase – Excess of Births over Deaths 2. Net Migration – Excess of Permanent Immigrants Australia’s Natural Increase has Declined 🡪 0.6% of the Population Australia’s Net Migration 🡪 Accounts for Approximately 40% of Our Population Age Distribution: Australia’s Workforce – 15-65 Age Group Proportion of the Population 15-65 🡪 Beginning to Decline (Baby Boomer Period = Retiring)  Overall Ageing Population (Last 3 Decades) 🡪 Australia’s Workforce will be Growing at 1/10 of its Growth Rate (Constraint of Future Economic Growth) Education Patterns: Critical for an Economy to have a Highly Skilled & Productive Workforce A person with a bachelor degree will, on average, earn around 1.7 times as much as someone who did not complete a high school education 76% of Australians aged 25-64 have completed an upper secondary school education. This ranks Australia 14 out of 34 OECD nations, with a completion rate just above the th OECD average of 75% in 2012 Chapter 10 – Labour Market Outcomes: 10.1 Wage Outcomes Wage Outcomes Produced by the Labour Market Influence How Income is Distributed Wages Comprise 57% if Household Incomes Measuring Wage Outcomes: Average Weekly Earnings: Average Total Earnings for All Employees – Weekly Gross Rate of Pay to all Employees Nominal Wages – Pay Received by Employees in Dollar Terms for their Contribution to the Production Process (Not Adjusted for Inflation) Real Wages – Measure of the Actual Purchasing Power or Money Wages (Nominal Wages Adjusted for the Effects of Inflation) Real Labour Costs – Will Rise if the Growth in Real Wages is Higher than Productivity Growth Differences in Wage Outcomes: Wage o Occupational Mobility – The Ease in Which Labour Differentials can Move from One Occupation to Another between Different Occupations: Wage Differentials o Geographic Mobility – The Ease in Which Labour can in the Same Move from 1 Area to Another Occupation: o Productivity of Labour – Quantity of Output Produced per Unit of Labour per Unit of Time o Capacity of the Firm to Pay Age: o Income Varies With Age 🡪 Highest between 25-64 Gender: o Equal Pay for Equal Work Principle o Equal Pay for Equal Value Principle Migrant Status & o Indigenous Australians Have Longer Term & Higher Levels Cultural of Disadvantage  Background o 3 in 10 Working Australians 🡪 Born over Seas 10.2 Trends in The Distribution from Work Fair Work Commission – Ensures Differences in Wage Outcomes both Between & Within Occupations was Smaller Enterprise Bargaining – Negotiations between Employers & Employees about Pay & Work Conditions at the Level of the Individual Firm Income Distribution – Way in Which an Economy’s Income is Spread among the Members of Different Social & Socioeconomic Groups Unequal Income Distribution – Grown Slightly over the Past Decade Income Distribution Within Occupations: Increase in the Dispersion of Earning within Occupations & Among Employees with the Same Skill Level Declining Level of Union Membership in Australia 10.3 Non-Wage Outcomes Superannuation – Form of Saving that Individuals Cannot Access until they Reach Retirement Age Non-Wage Outcomes – Benefits that Many Employees Receive in Addition to their Ordinary & Overtime Payments (Sick Leave. Superannuation & Company Cars) Non-Wage Outcomes 🡪 Incentives for Employment (Do Not Appear in the Average Weekly Earning Statistics) Types of Non-Wage Outcomes: o Salary Packaging – Employees Receive a Car, Computer, Subsidised Childcare, Gym Membership & Other Assistance o Bonus Cash Payments – Made on a Performance Basis (Individual or Company) o Improve the Flexibility of Work Patters – Allowing Time for Study Leave & Extra Parental Leave 10.4 Costs & Benefits of Inequality Inequality has Economic Benefits but Social Costs Economics Benefits of Inequality: Income Inequality – Increase in Productive Capacity of Resources & Increase in GDP Per Capita 🡪 Incentive Effects of Inequality Inequality Encourages the Labour Force to Increase Education & Skill Levels Inequality Encourages the Labour Force to Work Longer & Harder Inequality makes the Labour Force more Mobile Inequality Encourages Entrepreneurs to Accept Risk more Readily Inequality Creates the Potential for Higher Savings & Capital Formation Economic Costs of Inequality:  Inequality Reduces Overall Utility Inequality can Reduce Economic Growth Inequality Reduces Consumption & Investment Inequality Creates Conspicuous Consumption Inequality Creates Poverty & Social Problems Inequality Increases the Cost of Welfare Support Social Benefits of Inequality: Social Benefit Reflected to an Employee’s Relative Productivity Social Benefits 🡪 Very Limited Social Costs of Inequality: Decreased Levels of Wellbeing Division of Social Classes Increased Rates of Poverty within the Population 10.5 Unemployment Highest Priority of All Policies Affecting the Labour Market – Reduce Unemployment Unemployment – A Person over the Age of 15, Without a Job, who is Actively Seeking Work An Unemployed Person must Fulfill the Following Criteria: o Regularly Checking Advertisements from Different Sources for Available Jobs o Being Willing to Respond to Job Advertisements, Apply For Jobs & Attend Interviews o Be Registered with any Employment Placement Provider that is a Member of Job Services Australia Unemployment Rate = Number of Persons Employed / Total Labour Force X 100 Types of Unemployment: Cyclical Unemployment – Downturn in the Business Cycle Structural Unemployment – Mismatch Between Skills Demanded by Employers & Those Possessed by Unemployed People Long-Term Unemployment – Individual Unemployed for a Period of 12 Months or More Seasonal Unemployment – Seasonal Nature of Some Jobs Frictional Unemployment – As People Change Jobs, Moving from One Job to Another Hard-Core Unemployment – Individuals Who Might be Considered Unsuitable for Work due to Personal Reasons (Mental Illness, Physical Disabilities or Drug Abuse) Hidden Unemployment – Individuals who are not Counted in the Official Unemployment Rate (Given Up Actively Seeking Work) Underemployment – Individuals who have Part-Time or Casual Jobs but Desire more Hours Per Week Recent Unemployment Trends: Four Decades – Unemployment has been a Significant Economic Policy Challenge in  Australia 1992 – Highest Average Rate of 10% 2008 – Lowest Average Rate of 4% Currently – Between 5-6% (OECD Average of 5.3%) Unemployment in NSW (August 2020) 6.7% Disparities in Unemployment Rates within Cities, Regions & Remote Areas 10.6 Movement Away from Full-Time Work Labour Market – Undergoing Substantial Change (Result of Changes in Business Practices, Economic Conditions & Government Policies) Shift From Full-Time Work 🡪 Arrangements that are More Flexible (Part-Time, Casual, Outsourcing, Individual Contracts & Subcontracting) Part-Time & Casual Employment: Part-Time Employment – Employees Regularly Working Less than 35 Hours a Week Casualisation of the Workforce – Growth of Casual Employment (Relative Decline of Full-Time Permanent Jobs) Part-Time Employment Allows Employees to: o Balance Other Responsibilities o Working Part-Time from Home o Employers have Greater Flexibility in Staffing Arrangements (Increase Hours in Busy Periods) Changing Employment Structures: Shift Away from Direct Employment Arrangements 🡪 Allows Businesses to Change their Staffing Levels as Business Conditions Change Contractors – Paid to Provide Specific Services or Work that is Not intended to be Full Time Outsourcing – Organisation Pays another Business to Perform a Function Casualisation of Work: Advantages: Disadvantages: o Flexibility for Employers to o Less Job Security Increase or Reduce Staffing Levels o Difficult for Employees to Plan o Employers may Avoid Paying & Budget for the Future Non Wage Costs (Redundancy o Less Staff Loyalty & Less Entitlements) Development of Workforce Skills o Flexibility for Employees Chapter 11 – The Changing Australian Labour Market: 11.1 The Role of Trade Unions Industrial Relations System – Laws, Institutions & Processes Established to Manage the Relationship between Employers & Employees Trade Union – Association of Workers 🡪 Aims to Advance the Interests of Members by Improving Wages & Working Conditions  Main Function- Represent Member’s Interests 🡪 Negotiating Wage Increases, Training, Safety in the Workplace & Organisational Changes Different Types of Unions: o Occupational Unions o Industry-Based Unions o Enterprise-Based Unions o General Unions Most Unions 🡪 Affiliated with the Australian Council of Trade Unions (ACTU) Overall Decline in Trade Union Membership o Changes to Wage Determination Changes Within Industries o Changes in the Nature of Employment The Role of Unions In the Labour Market: Representing Employee Interests Exercising Their Bargaining Power in Negotiations with Employers Restricting the Supply of Labour 11.2 The Role of Employer Associations Employer Associations – Response to Labour Organising itself through Unions on the Supply Side Typically Operate as Industry-Based Lobby Groups o Represent & Promote the Interests of their Members by Lobbying the Government on Industrial Relations Policies o Assist Employers in Managing Industrial Relations Issues At a Federal Level, Important Employer Associations: o Business Council of Australia (BCA) o Australian Industry Group o Australian Chamber of Commerce & Industry (ACCI) N The Role of Employer Associations in the Labour Market: May Lobby the Government for: o Protection from Foreign Competition o For Tax Exemptions o Industry Assistance Increase in Demand for Labour 🡪 Increase in Wage Rate 🡪 Increase in Employment of Labour Main Roles that Employer Organisations Play in the Labour Market: Assisting Members in Negotiating Wage Agreements with Employees Negotiating Wage Agreements that Cover a Large Number of their Members Providing Advice, Training & Direct Assistance to Employers Lobbying the Government for Changes to Government Policies (Relating to Industrial Relations & Skills Training) Representing Employers’ Interests in any Hearings in Industrial Tribunals 11.3 Australia’s Current Industrial Relations Framework Australia’s Industrial Relations System – Governed by the Fair Work Act, 2009 Fair Work Commission – Government Agency that sets Minimum Standards Minimum Employment Standards: Provisions of the National Employment Standards (10 Employment Conditions): o Maximum Weekly Hours of Work (38) o Right to Request Flexible Working Arrangements o Leave o Notice of Termination & Redundancy Pay Industrial Awards (Safety Net): Awards – Establish the Minimum Wage & Working Conditions for Employees Awards Extend to the Protection of the National Employment Standards (Provisions are Tailored to the Specific Industry / Occupation) Enterprise Agreements: Enterprise Agreements – Negotiations between the Employer & Employee Better Off Overall test (BOOT) – Workplace Agreements must Pass 🡪 Employees be Made Better Off Overall by an Agreement Common Law Contracts: Individual Contract (Fair Work Act) Common Law Contracts – Not Part of the Formal Industrial Relations System (But Comply with Minimum Standards in the System) Topic 5 – Financial Markets: Chapter 12 – Types of Financial Markets: 12.1 The Role of Financial Markets in the Economy Financial Markets – Crucial Role in the Operation of Market Economies 🡪 Create Products that Provide Returns for those who have Excess Funds, Making these Funds Available to those who need Additional Money (For Consumption or Investment) Financial Intermediaries – Firms that Hold the Accumulated Funds of Individuals or Firms as Deposits & The Make Loans to Other Individuals/Firms Sources of Savings: o Proportion of Household income that is not Spent on Consumer Goods o Businesses can Save by not Distributing all of their Profits to their Owners o Government Budget for a Surplus (Revenue is Greater than Expenditure) o Foreign Pools of Savings (International) Reasons for Borrowing: o When Demand for Goods & Services Exceeds their Current Capacity o Entrepreneurs & Business Managers Borrow to Fund Operation / Expansion o Government when it Budgets for a Deficit (Expenditure is Greater than Revenue) o Financial Institutions can Lend Money to Overseas Borrowers Financial Markets – Factor Markets for Capital in an Economy 12.2 Primary & Secondary Financial Markets Australia’s Financial Sector – Wide Variety of Financial Institutions Primary Financial Markets – Facilitate the Creation of Financial Assets (Securities) that are Sold into an Economy Secondary Financial Markets – Transactions with Financial Assets that have Already been Issued on a Primary Market Australian Securities Exchange (ASX) – Largest Primary & Secondary Financial Market Main Financial Markets that Exist in Economies Globally: o Share Market – Ownership in Shares in Companies are Issued or Exchanged o Debt Market – Debt Securities (Bonds) are Exchanged or Cash is Lent & Borrowed o Derivatives Market – People Buy & Sell Financial Assets that are Based on the Value of Other Financial Assets o Foreign Exchange Market – Financial Assets Defined in One Country’s Currency are Exchanged for Assets Defined in Another Country’s Currency Financial Intermediaries – Channel Excess Savings (From Net Savers) in the Economy to those who Wish to Borrow the Funds (Net Borrowers) Financial System – Divided into Banks & Non-Bank Financial Intermediaries Other Financial Institutions: o Finance Companies o Investment Banks o Credit Unions o Permanent Building Societies o Mortgage Originators o Superannuation Funds 12.3 Financial Market Products Variety of Financial Market Products in the Economy to meet the Various Needs of Lenders & Borrowers Consumer Credit – Allows Consumers to Purchase Consumer Goods & Services in Advance of Actual Payment 🡪 Credit Card Increased Competition in Financial Markets – Improve the Allocation of Resources in the Economy Housing Loans – Long-Term Loans used to purchase Property (Periodic Payments of Interest) Business Loans – Form of Debt allowing Businesses to Invest in their Business Operations Short-Term Money Market – Bring Together People & Businesses with Temporary Shortages or Surpluses of Funds Bonds – Longer-Term Securities for which Lenders Receive Regular Fixed Payments from the Issuing Institution & Receive the Principal Value (Debt) at the end of the Bond Period Financial Futures & Options – Contracts to Trade in Financial Instruments at a Later Date for a Certain Price Foreign Exchange (Forex Market) – Market for Buying & Selling of Foreign Currencies 12.4 The Share Market  Share Market – Financial Market where Investors Buy & Sell Shares (Financial Assets that give their Owner Part-Ownership of a Company) In 2017, 37% of Australians owned Shares For a Firm to Use Shares 🡪 Must be a Company (Incorporated) Public Company – Shares are not Subject to any Transfer Restrictions (Shares are traded Freely on the Share Market) Private Company – Restricts Ownership of Shares to only a Few Individuals & Places Restrictions on Share Transfers Share Market brings Together Buyers & Sellers in a Medium of Exchange Stock Exchange – Manifestation of the Market 🡪 Trading Securities ASX – Provides a Regulated Environment for Investors to Buy & Sell Shares Role & Function: Role & Function of the Share Market – Seen from the Perspective of Investors & Shareholders For Investors – Gain a Stake in a Company’s Profits & make Capital Gains from Increases in Share Prices For Shareholders – Could Win or Lose Float – Occurs when a Company Lists itself in the Stock Exchange & Offers its Shares to the General Public for the First Time Shareholders: Management: Share o Happy 🡪 Value of their o Possible Bonuses & Price Investment Increases Increased Job Security Rises: Share o Unhappy 🡪 Value of their o Increased Pressure Price Investment Decreases from Shareholders & Falls: o May Replace Managers Threat of Job Insecurity Effect on The Economy: Share Market – Indicator of an Economy’s Economic Conditions All Ordinaries Index – Measures the Changes in the Overall Value of Companies listed on the Australian Securities Exchange (ASX) Share Market also Acts as a Method of Allocating Resources to Different Types of Production Speculation – Shares being Bought with the Intention of Being Resold in a Short Period of Time 🡪 Investors hoping to Make Short-Term Capital Gains 12.5 Domestic & Global Markets Australian Financial Markets are Integrated with Global Financial Markets Australia – Dependent on Foreign Sources of Capital to Finance it’s Development 🡪 Foreign Participation in Australia’s Financial Markets Foreign Exchange Markets – Enable the Movement of Funds around the World  Global Debt Markets – Important to Australia’s Economic Development due to Reliance on Foreign Borrowing Equity Markets – Regulated by National Governments 🡪 Exist Primarily within Individual Countries (New York Stock Exchange) Bank for International Settlements – International Organisation that Helps Central Banks Promote Financial Stability through Market Regulations International Monetary Fund – Oversees the General Stability of the International Financial System (Monitors Economies & Markets & Assists Countries having Difficulties) International Organisation of Securities Commission – For Share Markets International Association of Insurance Supervisors – For Insurance Markets Benefits of Global Financial Markets – Allow Australians to Access Foreign Capital to Invest in Houses & Businesses 12.6 Regulation of Financial Markets Stable Financial Markets – Critical for the Functioning of an Economy If Steady Flow of Funds is disturbed 🡪 Consequences for the Households & Businesses Involved Maintaining Financial Market Stability through Regulation 🡪 Key Objective of Government Economic Policy Council of Financial Regulators – Coordinating Body for Financial Market Regulation that Provides for Cooperation & Collaboration among the Financial Market Regulators Financial Market Regulators: Reserve Bank of o Monetary Policy Australia (RBA): o Payments System Regulation o Supply of Banknotes o Stability of the Financial System Australian o Prudential Supervision & Regulation of all Prudential Deposit-Taking Institutions Regulation o Life & general Insurance Authority (APRA): o Superannuation Funds Australian Securities o Corporate Regulation & Investments o Consumer Protection Commission (ASIC): o Oversight of Financial Service Products Australian Treasury: o Advises the Government on Financial Stability Issued o The Legislative & Regulatory Framework for the Financial System Chapter 13 – The Money Market: 13.1 Borrowers: The Demand for Funds  Individuals – Personal Reasons: o Long Term Purposes – Mortgage o Short Term Purposes – Purchasing a Car, International Travel or Education Businesses – Most Borrowing of Any Sector in the Economy: o Expand Production o Invest In Research & Development o Complete Projects o Can Raise Finance 🡪 Issuing Shares to Raise Equity or Debt by Issuing Bonds & Borrowing Money from a Financial Institution Governments – Raise the Level of Economic Activity Deliberately o If Growth Rate is Slow 🡪 Borrow to Increase Spending or Decrease Taxation o Funding Major Infrastructure 13.2 Factors Affecting the Demand for Funds Individuals with Surplus Funds: o Hold them as Money (Currency & Bank Deposits) o Purchase Financial Assets (Bonds or Shares) Benefit of Holding Money = Liquidity Benefit of Purchasing Financial Assets = You can Earn by Holding Them Financial Assets = Risk (Value Changes depending on the Market Condition) Reasons that People Hold Money instead of Investment: o Transaction Motive – Day-to-Day Transactions that Require Money o Precautionary Motive – Unpredictable Circumstances o Speculative Motive – Expecting Capital Loses Demand for Funds by Individuals Affected by: o Sophistication of the Financial System o Typically want to Hold more Cash for Transactions & Precautionary Purposes o Household Debt – Increased from 41% in 1980s to 190% in 2020s Demand for Funds by Businesses Affected by: o Cash Flow Generated by Business Operations o General Economic Conditions o Level of Interest Rates Financial Innovation – Affect Consumer’s Demand for Liquidity & Reshapes Financial Markets 13.3 Lenders: The Supply of Funds Individuals: o Place Deposits in Financial Institutions o Lending their Money to that Institution & Getting a Return Businesses: o Very Strong cash Flow but No Immediate Plans to Spend Money o If Interest Rates are at a Level where Maintaining Deposit Funds are more Lucrative than Investing 🡪 More Likely to Deposit Government: o Revenue Exceeds Spending 🡪 Either Pay Off Outstanding Debts or Maintain  Positive Financial Balances International Sector: o Australia = Low Savings Rates (Relies on Overseas Savings) o Foreign Liability – When Australians Borrow Money from Overseas o Value of Australia’s Net Foreign Debt = $1.5 Trillion (2020) 13.4 Money & Money Supply Money – Crucial Role in the Functioning of any Modern Economy Value of all Goods & services 🡪 Expressed in Terms of Money 4 Characteristics of Money: o Medium of Exchange o Measure of Value o Store of Value o Method of Deferred Payment Money Supply – Total Amount of Money in the Economy that has the Four Characteristics Money Supply = Measured in 4 Ways 🡪 Financial (Monetary) Aggregates: 1. Currency – Currency in Circulation held by the General Public 2. M1 – Currency & Deposits held in Transactional Accounts 3. M3 – M1 + All Non-Transactional Deposits 4. Broad Money – M3 + Deposits in Non-Bank Financial Intermediaries – Holdings of Bank Deposits Credit – Loans that are Provided by Banks & Other Lenders to Household & Business Borrowers 13.5 Interest Rates Interest Rates – Cost of Borrowing Money (Expressed as a Percentage of the Total Amount Borrowed) Interest Rate – Rate of Return (Yield) on Financial Assets or Financial Instruments (e.g. Bonds) Rate of Interest – Price that Brings Equilibrium in a Financial Market 🡪 Quantity of Funds Supplied by Lenders = Demand by Borrowers Any Factor that Affects the Supply or Demand for Funds in the Economy 🡪 Change in the Rate of Interest Interest Rates – Indirectly Determined by the Reserve Bank of Australia Rate of Interest: o Borrowing Rate o Lending Rate o Interest Rate Differential – Difference between Borrowing & Lending Rate Short & Long Term Interest Rates:  o Short Term – Interest Rates with a Maturity of Less Than 1 Year o Long Term – Interest Rates with a Maturity of More Than 1 Year Factors Influencing the General Level of Interest Rates: o Demand For Capital Goods (Investment) o Level of Savings in an Economy o Inflationary Expectations o Government Budget o International Interest Rates o RBA & Conduct of Domestic Market Operations 13.6 The Reserve Bank of Australia & Cash Rate Reserve Bank of Australia – Country’s Central Bank 🡪 Directly Manage the Cash Rate & Has Significant Influence over the Cash Rate Cash Rate – Interest Rate in a Fundamental Financial Market 🡪 Overnight Money Market (Market for Short-Term Loans Between Banks) Cash Rate – Manages the Level of Economic Activity (Monetary Policy) Mechanics of the Cash Rate: o Exchange Settlement Accounts o The Policy Interest Rate Corridor o Open Market Operations Exchange Settlement Accounts: Banks – Need to Hold a Certain Proportion of Funds with the Reserve Bank in Exchange Settlement Accounts 🡪 To Settle Payments with Other Banks & The RBA ES Accounts – Transferral of Funds Between Banks (e.g. ANZ 🡪 Westpac) Overnight Money Market – Market where Banks with a Shortage of ES Funds can Borrow from Banks with an Excess of ES Funds o Demand by Borrowers & Supply from Lenders Interact to set the Market Price The Policy Rate Corridor: RBA – Does Not have the Power to Directly Announce the Cash Rate 🡪 Ensures the Cash Rate never Strays Far from the Target (Dealing with ES Funds outside the Overnight Money Market) RBA Pays an Interest Rate to Banks on Funds Held in ES Accounts that is always 0.25% Below the Cash Rate Target o RBA’s Deposit Rate 🡪 Creates a ‘Floor’ (Minimum) Value for the Cash Rate RBA – Always Willing to Lend ES Balances Directly to Banks Outside the Overnight Market o RBA’s Lending Rate 🡪 Creates a ‘Ceiling’ (Maximum) Value for the Cash Rate Floor & Ceiling Rate 🡪 Form the Policy Rate Corridor for the Cash Rate Policy Rate Corridor – Responsible for Implementing Changes to the RBA’s Cash Rate Target Domestic Market Operations: Demand for ES Balances by Banks Fluctuates on a Daily Basis Cash Rate – Price at which this Demand intersects with the Supply of ES Funds Available  RBA Manages the Supply of ES Funds 🡪 Conducting Domestic Market Operations Domestic Market Operations (DMO) – Purchase & Sale of financial Securities by the RBA in Exchange for ES Balances Domestic Market Operations Involves: o Outright Purchases o Sales of Securities (Second-Hand Commonwealth Government Bonds or Repurchase Agreements 🡪 Repos = ‘Seller’ of a Bond Agrees to buy the Bond or Security back from the ‘Buyer’ at a Later Date) RBA uses Cash Rate Policy Corridor to Implement Changes to the Cash Rate Target & Domestic Market Operations to Ensure the Cash Rate Stays at its Target Why is the Cash Rate Important: Cash Rate – Provides the Foundation of the interest Rate Structure in the Economy o Increase in Cash Rate = More Expensive for Financial Institutions to Obtain Funds 🡪 Increase in the Cost of Borrowing o Decrease in Cash Rate = Less Expensive for Financial Institutions to Obtain Funds 🡪 Lowers the cost of Borrowing Changes in the Interest Rates – Impact the Level of Economic Activity o Fall in Interest rates – Encourages Consumption & Investment Spending 🡪 Increase in Economic Activity o Rise in Interest Rates – Deters Consumption & Investment Spending 🡪 Reduction in Economic Activity Reserve Bank’s Influence on Interest Rates (To Affect the Level of Economic Activity) 🡪 Monetary Policy o Tighten Monetary Policy – Raising interest Rates o Loosen Monetary Policy – Lowering Interest Rates Tightening Monetary Policy: Loosening of Monetary Policy: Topic 6 – Government & The Market Economy: Chapter 14 – The Limits of Markets: 14.1 Why Governments Intervene Government Intervenes in the Market: o Achieve a Better Allocation of Resources o Equitable Distribution of Income o Greater Economic Stability Markets – Effective at Determining What Goods & Services our Economy Produces Market Failure – Occurs because the Operation of Market Forces Creates Unfavourable or Inefficient Outcomes Market Failure may Airse: o Provision of Goods & Services o Income Distribution o Externalities o Abuse of Market Power o Economic Instability 14.2 Market Failure in the Provision of Goods & Services Public Good – Good which, once Provided, is Difficult to prevent anyone from using,  regardless of whether they pay for it’s use (e.g. Street Lighting & Public Parks) o Non-Excludable & Non-Rival Merit Goods – Markets producing inadequate Quantities of an Item (e.g. Health Care & Art) Demerit Goods – Items that bring Harm to the Community (Tobacco & Alcohol) Natural Monopoly – Market Structure in which Goods can be Efficiently provided by 1 Supplier (No Competition) 14.3 Market Failure in Income Distribution Disadvantaged Groups – Low Education Levels, Migrants from Non-English Speaking Backgrounds, Indigenous Australians & Single-Parent Families Relative Poverty – The Living Standards of the Poor in comparison with the Rest of the Population Absolute Poverty – Situation where Individuals have only just Enough Income to enable them to Survive Welfare State – Comprehensive System of Welfare Benefits such as the Age Pension, Unemployment Benefits, Free Access to health Care & Subsidised Access to Government Services (Transport & Housing) 14.4 Market Failure in Externalities Externalities – Form of Market Failure that occur where the Price Mechanism Fails to Represent the True Social Costs or Benefits of Production Positive Externalities – Externalities that Deliver Benefits to Third Parties (e.g. Benefit to the Economy of Higher Labour productivity) Negative Externalities – Harmful Effects on the Economy & On Society (e.g. Pollution) 14.5 Market Failure in the Abuse of Market Power Ways in Which Firms Abuse their Market Power: o Monopolisation – Elimination of Existing Competition o Price Discrimination – Firm Sells the Same Type of Goods or Service in Different Markets at Different Prices o Exclusive Dealing – Firm Sets Conditions for Supply that Exclude Retailers from Dealing with other Competitors o Collusion & Market Sharing – Firms get Together & Agree on a Pricing & Market Sharing Arrangement that Reduces Competition 14.6 Market Instability: The Business Cycle Business Cycle – Descries the Tendency of Economic Growth Rates in a Market Economy to Fluctuate between Boom Periods of High Economic Growth & Bust Periods of Harsh Recession Without Government Intervention – Experience Severe Levels of Fluctuation in Economic Activity (Government aims to Sustain Growth & Minimise Fluctuations) Economic Stabilisation Policies: Government Government Microeconomic Macroeconomic Policies: Policies:  Influence: o Entire Economy o Individual Firms & Industries Examples: o Fiscal Policy o Competition Policy o Monetary Policy o Trade Policy Chapter 15 – The Role of Government in Australia 15.1 Structure of Government Three-Tiered Structure of Government in Australia: o Commonwealth (Federal) Government o State Government o Local Government Federal Government: o Australian Constitution – Commonwealth Government & The State Governments are Independent of Each Other o Australian Constitution – Establishes the Law-Making Powers of the Commonwealth & State Governments State Government: o Goods & Services Tax – Largest Source of Revenue for State Governments o Expenditure for the NSW Government Include: - Education - Health - Transport - Public Order & Safety Local Government: o Local Planning & Development Decisions o Providing Local Services (e.g. Rubbish Collection) o Community Facilities (e.g. Parks & Libraries) 15.2 The Public Sector Public Sector = Commonwealth, State, Local Governments & Government Business Enterprises Total Public Sector Outlays – Proportion of Total Annual Expenditure by all Levels of Government Factors of the Public Sector: o Government’s Expanded Role after the Second World War o Provision of Government Services o Growth of Social Security 15.3 The Reallocation of Resources Reallocation of Resources – Changes Pattern of Production in the Economy Government Affects the Allocation of Resources in 2 Main Ways: o Influencing the way Businesses & Consumers Behave in the Market Through Taxation or Spending Measures o By Producing Goods & Services Itself (Public Goods)  Taxation: o Direct Taxes – Paid by the Individuals or Business Firms on which they are Levied o Indirect Taxes – Levied on Individuals & Business Firms, but can be Passed onto Someone Else Spending: o Funding o Grants o Subsidies o Cash Payments Government Provision of Goods & Services: o Privatisation 15.4 The Redistribution of Income Governments should Act to Create a more Equitable Distribution of Income Taxation System: o Tax Base – Items that are taxed o Average Rate of Tax – Proportion of Total Income earned that is Paid in Tax o Marginal Rate of Tax – Proportion of any Increase in Income that is Paid as tax o Progressive Tax o Regressive tax o Proportional Tax Social Welfare Payments: o Social Welfare – Income Support Payments o Means Tested – People on High Income may be Ineligible to Receive Specific Benefits 15.5 Stabilisation & Sustainable Growth Economy’s Major Problem, - Rate of Economic Growth Changes from Year to Year (Business Cycle) Monetary Policy: o Actions of the Reserve Bank of Australia o Tighten Monetary Policy – Slow Economic Growth o Loosen Monetary Policy – Increase Economic Growth Fiscal Policy: o Direct Effect of the Government’s Overall Level of Spending, Taxing & Borrowing in a Year 15.6 Public Enterprises Government Business Enterprises (GBE’s) – Businesses Owned & managed by the Government (Federal or State) Privatisation – GBE’s Sold off to the Private Sector Corporatisation – Public Enterprises act as Private Business Enterprises (e.g. AusPost) Competition – Pressure on Business Firms to Lower Prices or Improve the Quality of Output to Increase Sales of Goods & Services to Consumers 15.7 Other Roles in the Economy Competition Policy: o Workable Competition – maximum Level of Competition compatible with the Market Structures & Conditions of an Industry o Goal of Increasing Competition – Balanced against the Goal of Achieving Economies of Scale o Australian Competition & Consumer Commission (ACCC) Consumer Protection: o Competition & Consumer Act o Australian Competition & Consumer Commission (ACCC) Environmental Protection: o Environmental Sustainability o Renewable & Non-Renewable Resources Chapter 16 – Government In Action: 16.1 The Budget Fiscal Policy – Macroeconomic Policy involving the use of Taxation & Spending Powers through the Federal Budget in order to Achieve Certain Economic Conditions The Budget – Official Document that sets out the Government’s Revenue & Expenditure plans for the Coming Year 16.2 Revenue & Expenditure Government Revenue: 92% of Government Revenue = Taxation Sources Direct Taxes: o Income Tax (Personal & Company) o Goods & Services Tax Indirect Taxes – Sales Taxes 16.3 Impact of Budget Outcomes Balanced Budget o Planned Government Revenue = Planned Government Expenditure Budget Surplus o Planned Government Revenue > Planned Government Expenditure Budget Deficit o Planned Government Revenue < Planned Government Expenditure Change in the Budget Outcome: Expansionary Fiscal Policy Stance – Increase Economic Activity Contractionary Fiscal Policy Stance – Decrease Economic Activity Neutral Fiscal Policy Stance – Maintain Economic Activity Automatic Stabilisers: Automatic Stabilisers – Policies that Operate Automatically to Counterbalance the Trend in the Level of Economic Growth & to Stabilise the Economy Increase in the Level of Economic Activity – Budget Outcome is a Smaller Deficit Decrease in the Level of Economic Activity – Budget Outcome is a Smaller Surplus 16.4 Influences on Government Policies Parliament & Political Parties Businesses Unions Climate & Environmental Groups Welfare Agencies The Media Interest Groups International Influences