Economics Topic One: Introduction to Economics

The nature of economics

The economic problem wants, resources, scarcity:
The economic problem: resources are scarce in relation to infinite human wants
Economies attempt to solve the economic problem by answering the four functions of the economy: What to
produce? How much to produce? How to produce? To whom to distribute?
Wants- Material desires of an individual for comfort/pleasure can be individual or collective.
Characteristics of wants- Unlimited, can be recurrent/complementary, changed by age, must be prioritized.
Utility- Satisfaction derived from consumption.
The four factors of production are: land (paid in rent), labour (paid in wages),
capital (paid in interest) and enterprise (paid in profit)
Choice
Both individuals and society are limited by scarcity. This implies that people
want more than what is achievable. Choices have to be made on a daily basis
by all consumers, firms and government to prioritize wants as economic
resources are limited, but human needs and wants are unlimited, so therefore
choice is needed.
Opportunity cost & production possibility frontiers:
Opportunity cost- the cost of the alternative want foregone by satisfying a
want.
Opportunity cost can be graphed as a production possibility frontier from a
production possibility schedule. Point A is all food and Point B is all clothing,
Point C is a mixture. All points represent full employment of resources/full
productive capacity. A point inside of the curve means unemployment of
resources.
Improvement in technology, a resource discovery or productivity increase all
lead to a curve shift outward.
A frontier in reality is curved as resources cant usually
be substituted at a constant rate.
Future implications of choices by individuals, businesses
and governments:
Consumer goods- y axis (items produced for
immediate satisfaction of needs and wants) and
Capital goods- x axis (produced for the production of
other goods) are graphed on a curved PPF.
Individuals, businesses and governments engage in economic activity to achieve
allocative efficiency (maximising use of limited resources available)
Individuals, business and governments all face the following implications on
living standards:
- Spend resources/money now ->Higher now -> Lower in the future
- Save resources/money now ->Lower now -> Higher in the future
Economic factors underlying decision-making
Income = Consumption + Saving, Y= C+S
Higher income earners spend more in total than lower but save higher percentage of income.
Individual
- Spending: consumption is carried out to satisfy needs and wants.
- Saving: saving is carried out to spend later, invest or to spend once a certain point is achieved.
- Work: the higher the skills needed/education/qualification for a job, the higher the income earned,
therefore, higher potential levels of saving & consumption (standards of living)
- Education: the higher the level, generally the higher level of income earned, therefore higher levels of saving
& consumption (standards of living)
 - Retirement: employers must contribute 9.5% of employees salary to superannuation.
- Voting and political participation: voting may reflect ones economic decisions.
Businesses
- Pricing: businesses aim for profit maximisation, usually determined by: price = production costs + mark up.
Important as costs must be covered to gain profits- price depends on costs, demand and competition levels
- Production: business decides on the most efficient combination of resources to use.
- Resource use: businesses must utilise resources to most valued use (allocative efficiency)
- Industrial relations: Negotiation of wages and working conditions are important because they determine
employee productivity and promote motivation and job satisfaction.
Governments influence the decisions of individuals and businesses.
- Governments allocate resources which provide infrastructure.
-Federal government attempts to stabilise economic activity through (monetary/fiscal) economic policies.
- Governments redistribute income through taxation.
- Government regulates economic behaviour to consumer rights and increase competition in markets raising
efficiency and lowering prices.
The operation of an economy
Production of goods and services from resources
The 4 factors of production are: land (paid in rent), labour (paid in wages), capital (paid in interest) and
enterprise (paid in profit). These are used by businesses to produce g/s.
Distribution of g/s:
Distribution of g/s determined by income.
Income determined by: education, training, qualifications, skills, experience, type of employment.
Income redistributed by government through taxation.
Exchange of g/s:
Economies use money as a medium for exchanging g/s.
Prices are indicators of relative value of g/s.
The exchange of g/s occurs in markets.
Provision of income:
Individuals paid factor income payments in return for the resources given to be utilised in production (either
rent, wages, interest or profit)
Final Income = Gross Income + Social Wage Taxation Indirect Taxes
Government redistributes income (social welfare payments)
Provision of employment and quality of life through the business cycle:
Employment in Aus created through private and government sectors
Primary industry raw material extraction,
Secondary industry manufacturing
Tertiary industry providing services
Quality of life depends on quantity and quality of g/s in the economy and community.
The business cycle is fluctuations in the level of economic growth.
- Recession- decreasing economic activity: expenditure, output, income and employment are at the minimum
level and government attempts to stimulate economic activity.
- Boom- expenditure, output, income and employment peak (as economic activity peaks) and shortages of
resources lead to inflation.
- Upswing phase expenditure, output, income, employment and government spending increase.
- Downswing phase expenditure, output, income and employment begin to fall.

The circular flow of income

In the five sector model equilibrium occurs when S+T+M=I+G+X
Leakages-The removal of money from the circular flow decreasing the
level of economic activity.
Injections- The input of money into the circular flow increasing the level
of economic activity.
 Disequilibrium occurs when leakages do not equal injections
- leakages > injections: Income, Output, Expenditure and employment will fall (leading to a recession and a
contraction in the flow)
- leakages < injections: Income, Output, Expenditure and employment will rise (leading to a boom and an
expansion in the flow)
If disequilibrium occurs, changes in expenditure, output, income and employment will lead to equilibrium
being regained in the economy.
Individuals- Supply factors of production to firms in exchange for incomes, which is then used on savings,
taxation, consumption/expenditure and imports.
Businesses- Buys factors of production to produce and sell g/s. Depend on supply of resources and consumption
of g/s.
Financial Institutions- Intermediaries between savers and borrowers of money. Needed for mobilising savings,
using them for investment.
Governments- Imposes taxes, using revenue to fund government expenditure.
International Trade and Financial Flows- Involves transactions with the rest of the world, including imports,
exports and international money flows.
Economies: their similarities and differences
Australia and Japan-
Economic Growth and Quality of Life- Japan and Australia are two of the largest economies of Asia and are the
only Asian nations part of the G20. Both have experienced slower growth than other Asian nations over the past
few decades. They are both industrialised and have relatively high quality of life when looking at the world.
Employment and Unemployment- Japans unemployment rate has been lower than Australias since the mid
1980s. Australia has similar employment patterns to Japan with most employed working in the tertiary sector.
Distribution of Income- They both have a relatively even distribution of income
Environmental Sustainability- Australia has over double the CO2 emissions of Japan per capita. Australia has
significantly lower Water productivity than Japan also.
Role of Government in Health Care, Education and Social Welfare- They have similar market economies. They also
have similar percentage of GDP government expenditure. They both have a strong government role in provision
of health care and education. Japan has almost double the social welfare spending of Australia due to pensioners.

Topic Two: Consumers and Business

The role of consumers in the economy
Consumer sovereignty: patterns of consumer spending and saving/dissaving: variations with income and age.
Consumer sovereignty- the pattern of consumer spending determines the pattern of production and resource
allocation.
Y = C + S; Income=Consumption+ Savings
Consumption Function- Relationship between income and consumption stating income rises faster than
consumption.

Average Propensity to Consume- Proportion of total income spent on consumption


Average Propensity to Save- Proportion of total income spent
Marginal Propensity to Consumer- Proportion of each extra dollar of earned income spent on consumption
Marginal Propensity to Save- Proportion of each extra dollar of earned income saved for future consumption.
Individuals and economies with higher incomes have a higher APS and MPS and lower APC and MPC, vice
versa is true
MPC + MPS = 1
Breakeven point: C=Y, S=0
Saving: C<Y, Dissaving: C>Y
Consumer consumption patterns vary with age as consumers
preferences and needs change, as well as employment and
incomes.
Dissaving occurs in childhood and old age with saving occurring in
adulthood
 Factors that influence saving: cultural and personality factors, expectations of the future, tax policies,
availability of credit, age, income
Factors influencing individual consumer choice
Income- increase in income levels is accompanied by an increase in total amount of spending and an increase
in the total amount of saving. Spending decreases as a percentage of income and saving increases as a
percentage of income (as income increases, APC and MPC decrease , APS and MPS increase)
Price- consumers will buy the least expensive brand of a good (with quality and quantity being constant), as
price increases, demand decreases.
Price of substitutes- as price of a product increases, the demand for a lower-cost substitute increases.
Price of complements- the demand for the product decreases, as the price of complements increases.
Preferences/tastes- change in tastes or preferences towards a g/s may lead to an increase in demand.
Advertising- Has a major impact on consumer choice, with the aim of building brand loyalty.
Sources of income
Income- the return for resources
Wages- income from labour supplied
Rent- income from land supplied
Interest- income from capital supplied
Profit- income from enterprise (return from investments)
Social welfare- income supplied by government for those in need of assistance including elderly, disabled and
unemployed.
The role of business in the economy
Define; firm, industry and a firms production decisions:
Firm- any business organisation which uses resources to produce g/s to satisfy consumers needs and wants
usually in return for profit.
Unincorporated firm- sole traders and partnerships; have unlimited liability.
Incorporated firms- private and public companies; have limited liability.
Industry- group of firms producing a similar range of g/s.
Quaternary industry- Provide knowledge and information.
Quinary industry- firms and individuals who provide personal services.
A firms production decisions include:
- What to produce?: Specific business areas of strong knowledge and demand with known requirements to
establish.
- How much to produce?: Aiming for maximum profit with little to no shortages/surpluses, based on market
research, demand and access to capital.
- How to produce?:Resources and technology required, production decisions depending on efficiency to attempt
to produce output at minimum cost.
Business as a source of economic growth and increased productive capacity and goals of the firm:
When the private sector is healthy, higher economic growth occurs and government has a stronger revenue
base to fund services. A growing business leads to employment of more people, leading to a reduction in the
unemployment rate. Business and Industry can also lead to the development of a region, improving way of
life. It also improves the productive capacity of an economy over time, through capital goods which is why
government often provides incentives and injections to business.
The main goals of a firm are: profit maximisation, growth maximisation, increasing market share, meeting
shareholder expectations and satisficing behaviour
Efficiency and the production process: productivity, internal and external economies and diseconomies of scale:
Productivity- how much is produced with a given quantity of resources per unit of time.
Productivity improves living standards due to the ability to satisfy more wants through less wastage, lower
production costs/higher profits for firms, lower inflation rate, higher incomes, increased international
competitiveness of industry.
Production- Total amount of g/s produced
The main sources of productivity improvements in the production process are:
- the division/ specialisation of labour- firms break down production process into sub-processes, allowing
labour to specialise in a specific part of the production process.
- the specialisation/localisation of land/industry- firms locating near each other or specific locations to
 reduce production costs by sharing common requirements.
- the specialisation of capital/large scale production- Firms using highly specialised capital equipment in the
production process.
Internal economies of scale- Cost saving advantages resulting from a firms expansion of operations. They
may be; better ability to: take advantage of specialisation of labour, invest in more efficient capital
equipment, find a market for its products, put resources into R & D etc
for a strong future, raise finance for expansion and bulk-buying.
Internal diseconomies of scale- Cost saving disadvantages resulting
from a firms expansion of operations beyond a certain point. These
disadvantages include inefficiency increase, duplication of jobs, lack of
personal relationships, decline in managerial/administrative efficiency.
Technical Optimum- Most efficient level of production for a firm.
Average costs of production at lowest point possible. As this is
approached on the curve per-unit production costs are falling and once it passes this point, they begin to rise.
External economies of scale- advantages due to industry growth the firm is part of. They include: increasing
localisation, healthy capital market and extra benefits.
External diseconomies of scale- disadvantages due to industry growth the firm is part of. They may be:
Increased pollution, transport issues, raw material cost rises due to higher demand.
The impact of investment, technological change and ethical decision making on the firm
Ethical Decision Making- Business decisions considering society rather than profits only. This is often
influenced by government legislation.
Production methods- investment and technological change has changed production methods from being
labour intensive to being more capital intensive leading to increased efficiency and lower costs.
Prices- Technology lead to a better informed market place, squeezing profit margins and reducing costs.
Employment - investment and technological change will lead to a requirement for specialist labour skills and
structural unemployment (due to labour saving production methods)
Output- investment and technological change may increase output which may be of higher quality.
Profits - investment and technological change may lead to an increase of profits in the future.
Types of Products- Technological change creates new products and industries, ethical consumerism lead to
the creation of new products and the altering of old ones.
Globalisation- Driven by technologies which has made the world smaller.
Environmental sustainability- firms need to ensure, the best they can, their production methods dont
contribute to environmental issues.

Topic 3: Markets
Demand
Demand- The quantity of a particular good or service that consumers are willing and able to purchase at various
price levels at a given point in time.
Individual Demand- Demand of each individual consumer.
Market Demand- Demand by all consumers for a good or service.
Law of demand- Quantity demanded by consumers falls as prices rise.
Ceteris Paribus- An economic assumption used to evidence the relationship between two variables, meaning
other factors stay constant.
Demand Schedule- Table showing the demanded quantity of a good at different price levels, at a given point in
time.
The Demand Curve- A graphical representation of the data presented/demand schedule, slopes downwards left
to right.
Movements along the Curve: Only Price Changes (Ceteris Paribus)
Contraction of Demand- Increase in price of g/s causes quantity demanded to
decrease; it is an upward movement along the curve.
Expansion of Demand- Decrease in price of g/s causes an increase in quantity
demanded; it is a downward movement along the curve.
Shifts of the Curve: Shift due to factors other than price.
Increase in Demand- Shift right from d1 to d2, consumers are willing and able to
buy more at each possible price than before. At p1, demand has increased from
originally q1 to q2 (more demand for same price), also means consumers are
willing to buy the same quantity for a higher price, at q1 the original price was p1,
following demand increase, for q1 the consumer will now pay (p2) a higher price
(same demand for higher price).
Decrease in Demand- Shift left from d1 to d2, consumers are willing and able to
buy less at each possible price than before, at p1, quantity demanded has
decreased from q1 to q2 (less demand for same price). Consumers are willing
and able to buy a given quantity at a lower price than before. At Q2, consumers
were willing to pay P2, following demand decrease, now willing to pay the lower
price of P1 (Same quantity for lower price).
Factors Affecting Demand-
Price of the g/s- Necessities are bought regardless of price change, other goods
(wants/luxuries) are likely to have a reduced demand from a price increase.
Price of complements/substitutes- A rise in substitute product prices will lead to a demand increase, whilst a rise
in complement product prices will lead to a demand decrease.
Income- An income level rise would mean more consumers would be willing and able to purchase more expensive
products increasing their demand, a shift in income distribution would alter demand for different g/s. Also
expected future incomes and prospects will influence their decisions to buy certain g/s.
Population- Size determines the overall quantity of goods demanded, change in age distribution affects the types
of goods demanded.
Expected Future Prices- If consumers expect a future price increase, current demand would increase. If
consumers expect a price decrease they are likely to wait, therefore a decrease in current demand.
Tastes and Preferences- Demand for (trendy) items in fashion will increase, whilst items out of fashion would
decrease in demand.
Price Elasticity of Demand- Measures the responsiveness of quantity
demanded to a change in price, calculated as the % change in quantity
divided by % change in price.
Elastic Demand- Strong response to change in price.
Inelastic Demand- Weak response to change in price
Unit Elastic Demand- Proportional response to change in price (total
consumer spending amount remains unchanged).
Relatively Elastic Demand- Quantity demanded-very responsive to price change.
Relatively Inelastic Demand- Less than proportionate change in quantity demanded.
Importance of Price Elasticity of Demand-
Business- Need to understand it for the goods they sell in order to decide on their optimal pricing strategy.
Government- Need to understand price elasticity of demand when pricing g/s it provides to the community. Also
needs to have the ability to predict the effects of changes in the level of indirect taxes and special levies.
Total Outlay Method- Calculate the price elasticity of demand by looking at the effect of changes in price on the
revenue earned by producer.
-Slope of demand curve should not be used to determine price elasticity of demand. Perfectly elastic=Horizontal,
Perfectly Inelastic= Vertical.

Factors Affecting Elasticity of Demand-

Elastic Demand Inelastic Demand

Luxuries Necessities
Close substitutes Few or no close substitutes
Expensive Items- Large proportion of income Cheap Items- small proportion of income
Long run demand- takes time to adjust to price Short run demand- May not respond greatly
or seek alternatives.
Durable goods Non durable or habit forming goods
Supply
Business Firms determine how the demands of consumers are to be met through producing g/s.
Supply- Quantity of g/s that all firms in a particular industry are willing and able to offer for sale at different price
levels in a given period of time.
Individual Supply- The supply of a business firm.
Market Supply- Sum of individual firms supplies of individual producers at various price levels.
Law of Supply- As the price of a certain product rises, the quantity supplied by producers will rise. (usually due to
a view of higher profitability)
The Supply Curve- A graphical representation of the data presented/demand
schedule, slopes upwards left to right.
Supply Schedule- based on ceteris paribus, shows quantity supplied over a
range of prices at a given point in time.
Movements along the Curve: Only Price Changes (Ceteris Paribus)
Contraction of Supply- Decrease in price of g/s causes quantity supplied to
decrease; it is a downward movement along the curve.
Expansion of Supply- Increase in price of g/s causes an increase in supply
demanded; it is an upward movement along the curve.
Shifts of the Curve: Shift due to factors other than price.
Increase in Supply- Shift left from s1 to s2, producers are willing and able to
supply more at each possible price than before. At p1, supply has increased from
originally q1 to q2 (more supply for same price), also means producers are
willing to supply the same quantity for a lower price, at q1 the original price was
p1, following supply increase, for q1 the producer will now produce (p2) at a
lower price (same supply for lower price).
Decrease in Supply- Shift right from s1 to s2, producers are willing and able to
supply less at each possible price than before, at p1, quantity supplied has
decreased from q1 to q2 (less supply for same price). Producers are willing and
able to produce a given quantity at a higher price than before. Producers were
supplying Q2 at P2, following supply decrease, now willing to supply for the
higher price of P1 (Same quantity for higher price).
Factors Affecting Supply-
Price of the g/s- If market price is too low, a producer may not be able to cover
costs of production, therefore wouldnt supply the product.
Price of other g/s- A rise in another products prices will lead to an increased
supply in that product due to increased profitability and vice versa.
Expected Future Prices- If producers expect a future price increase, perhaps due to a demand increase, supply
would be increased due to possibility of increased profit.
State of Technology- Improvements will lead to lowered production costs, allowing a greater supply at a given
price, along with the possibility to adapt faster to changing demand.
Changes in the cost of factors of production- A fall would allow firms to supply more of a good; a rise would
make it difficult to maintain current production levels. A rise in the price of a factor of production would lead to a
decrease in supply of g/s whose production relied on that production factor.
Quantity Available- A limiting factor, perhaps due to a scarcity of resources.
Number of Suppliers- As more suppliers enter an industry, supply increases and vice versa.
Climatic/Seasonal Influence- Some products rely on different climates and seasons where supply is at its highest
and vice versa.
Price Elasticity of Supply- Responsiveness of quantity supplied to a change in price. Calculated as % change in
quantity supplied divided by % change in price.
Unit Elastic Supply- Proportional response to change in price.
Relatively Elastic Supply- Quantity supplied proportionately greater than an increase in price- very responsive to
price change
Relatively Inelastic Supply- Less than proportionate change in quantity supplied.
Elastic Supply- Strong response to price change.
Inelastic Supply- Weak response to price change.
Factors Affecting Elasticity of Supply-

Factors causing supply to be elastic Factors causing supply to be inelastic

Longer time periods Shorter Time Periods
Ability to hold stock in inventory Unable to hold stock- perishable items
Firms have excess capacity- not using all Resources being used to full capacity
resources fully. Can respond to change through
using resources more intensively.
Market Price
Price Mechanism- The interplay of forces of supply and demand,
which determine the prices at which commodities will be bought
and sold in the market.
Market Equilibrium- Situation where, at a certain price level,
quantity supplied and quantity demanded of a product is equal- in
this situation there is no tendency for change, and the market clears (no excess demand or
supply). Graphically it is where the demand and supply curves intersect.
Excess Demand- Demand > Supply: Leads to a price rise due to a shortage, resulting in an
expansion of supply and a contraction of demand, continuing until equilibrium.

Excess Supply- Supply > Demand: Sellers must drop their price due to an excess supply,
resulting in a demand expansion and supply contraction until equilibrium.
Changes in Equilibrium-
Increase in Demand- Leads to an increase in equilibrium price and quantity. To
get to new equilibrium- demand has increase and now exceeds supply, forcing a
price rise- leading to a supply expansion, continuing until new equilibrium.

Decrease in Demand- Leads to a decrease in equilibrium price and quantity. To get to new
equilibrium- Price is dropped as supply exceeds demand. Supply contracts until new
equilibrium.
Increase in Supply- Lowers equilibrium price, raises quantity. As there are more products
available, there is a contraction in demand occurring until new equilibrium, thus lowering price.
Decrease in Supply- Raises equilibrium price, lowers quantity. Due to a decrease in supply,
there are fewer products available, therefore an expansion in demand, until new equilibrium.
Role of the Market-
Product Market- The interaction of demand for and supply of the outputs of production.
Factor Market- A market for any input in the production process.
Solutions to the economic problem-
Allocative Efficiency- The economys ability to allocate resources to satisfy consumer wants.
This is productive as it is the best way to use resources to achieve the maximum number of
wants in a society.
The importance of relative price in reflecting opportunity costs in the g/s and factor markets
Price Mechanism- Efficient as any consumer willing to pay the market price will be satisfied and producers will be
able to sell all they produce.
The market price of a commodity reflects the opportunity cost associated with it.
(Alternatives to Market Solutions) Role of Government-
Market Failure- Price mechanism may take account of private benefits and costs of
production to consumers and producers, but fails to take into account indirect social
costs and social benefits. -Leads to government intervention.
Price Intervention- main reason is to affect the distribution of income.
Price Ceilings- The maximum price that can be charged for a commodity. They
redistribute money from sellers to buyers. Leads to excess demand.
Price Floors- The minimum price that can be charged for a commodity. They redistribute
money from buyers to sellers. Leads to excess supply.
Quantity Intervention-
Externalities- Items not taken into account in the operation of the price mechanism
Positive Externalities- Social Benefits (positive impacts coming from the individual consumption of collective g/s).
Negative Externalities- Social Costs (negative impacts coming from the individual consumption of collective g/s)
Public Goods- Goods which private firms are unwilling to supply as they are not able to restrict usage and benefits
to those willing to pay for the good- provided by government.
Merit Goods- Goods not produced in sufficient quantity by private sector as individuals dont value those goods
(e.g. health care). Government may subsidise to lower prices and increase consumption.
Problem Government Action Outcome
Market price too high Price ceiling Reduces price- Quantity Shortage
Market price to low Price floor Increases Price- Quantity Excess
Negative externalities Taxes Increases Equilibrium Price, Reduces
Equilibrium Quantity
Positive externalities Subsidies Reduces Equilibrium Price, Increases
Equilibrium Quantity
Public goods Government provided g/s Government collects taxation revenue to fund
supply.
Variations in Competition-
Market Structure- Number and relative size of firms within an industry, nature of the product sold and ease of
entry for new firms.

Market Structure Number and size Product Barriers to entry

of firms characteristics
Pure Competition Many small firms Homogenous No barriers to
product entry
Monopolistic Many relatively Differentiated Relatively easy
Competition small firms products
Oligopoly Few , relatively Differentiated Extremely high
large firms products
Monopoly One large firm No close Extremely high
substitutes
Effects of changing levels of competition and market power on price and output
As more competition enters a market each firm has less influence on price setting or less market power and:
more competition -> more output -> lower price

Topic 4- Labour Markets

Demand for and supply of labour
The demand for labour (by individual firms):
The demand for labour is derived from the demand for the g/s that labour is used to produce. Therefore, an
increase in the demand for a g/s, there will be an increase in the demand for labour for production.
Factors affecting demand include:
o (Outputs) Output of the firm- If a firm is experiencing higher demand for their products, they will demand
more labour to increase production output levels. This is affected by-
- Economic Conditions- Aggregate demand is the total demand for g/s in the economy. When a firms products
are in high demand, firms demand more labour as this is what is needed to produce more. This demand for
labour is highly affecting by fluctuations in the business cycle. Firms tend to operate at excess capacity so
when change occurs, firms can fully employ existing resources
- Conditions in the firms industry- Changes in consumer demand leads to proportionate labour demand
changes.
- Demand for individuals firms products- Despite a negative change in the industry a firm is part of, if the firm
can gain increased market share due to their products being in demand, it may experience growth in its
output despite the opposite occurring to the industry as a whole.
o Productivity of Labour- The firm must determine organisation of
production, deciding on technology or labour. Labour productivity is the
output per unit of labour per unit of time.
o (Inputs) Cost of Other Inputs- Comparing cost of labour (including wage rates and on-costs) vs other inputs,
main substitute being capital. When this substitution is easy, firms demand for labour becomes more elastic.
- Higher Cost of Labour = Less demand for labour as capital is used instead.
- Firms measure full cost of labour vs full cost over time of capital investment
- Capital costs are interest rates for funds, firms may get special tax allowances in the situation of investment.
- Firms may operate overseas for cheaper labour, therefore, demand for labour in certain industries is
influenced by numerous countries.
The supply of labour- Potential employees offering their services to firms.
Factors affecting labour supply-
Pay Levels/Remuneration Package- The higher the pay, the higher a person would sacrifice leisure time.
Working Conditions- Encourage a higher supply of labour, this is covered by the National Employment
Standards which sets a number of minimum conditions for Australian employees regarding leaves, hours etc.
Human Capital- Countries with higher levels more likely to achieve lower unemployment. Due to amount of
sacrifice, time and effort, there may be a lower labour supply to those occupations requiring higher
education. This is influenced by govt funding.
(Mobility of Labour)- Responsiveness to changes in demand for labour in different areas/industries.
Occupational Mobility of Labour- Ability to move between occupations due to employment opportunities
and wage differentials- influenced by education requirements and professional associations.
Geographic Mobility of Labour- Ability to move between locations due to employment opportunities and
wage differentials- influenced by personal upheavals and relocation costs.
Participation Rate- % of civilian population aged 15+ in the workforce.
Participation Rate =

Factors Influencing Participation Rate:

Economic State- It times of high growth and prosperity, the populace is more inclined to actively seek work,
during a recession; employees are worried about job security.
Aging Population Trends
Changing Social Attitudes such as women in the workforce
School Retention Rates- It is likely students enter the workforce later due to schooling commitments.
Other factors include govt policies and restrictions and education requirements.
The Australian workforce:
Workforce/labour force- number of employed persons and unemployed persons actively seeking work.
Employed- One+ hours of work per week
Unemployed- People available and actively seeking to work, but unable to find a job.
Unemployment rate =

General Characteristics of Aus Workforce

Population Size- Growth experience through migration and natural increase. A skilled migrant is a migrant
with qualifications.
Age distribution- Aging population means more people outside working age, meaning to workforce may
decline.
High quality education prepares future generations for productive working lives, providing a foundation of
skills allowing specialisation of labour, many Australians now undergo tertiary education.

Labour market outcomes

Differences in incomes from work:
Wage outcomes (rate of wage growth, distribution of income, fringe benefits., relative wage) vary for people
based on: income group, gender, occupation, age, cultural background.
Trends in Distribution of Income- Much greater since the early 1990s when enterprise bargaining became
more popular. Family benefits have offset increase wage differentials. Also declining union memberships has
also lead to more inequality amongst occupations.
Non Wage Outcomes for different occupations- Include fringe benefits, leave, salary packaging, bonuses,
flexible working patterns and superannuation
 Arguments for a more equitable distribution of income: increase consumption/utility levels, support
aggregate demand, alleviate poverty and isolation.
Arguments against a more equitable distribution of income: prevent a potential reduction in allocative
efficiency, to boost national saving, investment, growth and employment creation, to create an incentive
effect on workers and producers, to prevent a higher tax burden on taxpayers and reduce government
spending, to prevent poverty traps from emerging.

Labour market trends:

- Unemployment/Underemployment rising unemployment due to slow growth (now 6.25%)
- casualisation of workforce causing underemployment (2011-12: 7.2%)
-Part-time work increasing (24.6% 2013)
-Casualisation of work caused by increase in part-time work
-Outsourcing increasing
-Contractors and Sub-contracting increasing
Types of unemployment-
Frictional unemployment people moving between jobs.
Seasonal unemployment unemployment caused by season change
Structural unemployment a mismatch of labour skills due to changing industry/technology
Cyclical unemployment contraction in labour demand, workers who are let go due to lowered g/s demand.
Long term unemployment unemployment for over 12 months
Hard core unemployment people deemed unemployable
Hidden/disguised unemployment Have given up actively seeking work
Underemployment People who would like to work more.
Labour market institutions:
Industrial Relations System-
Unions- An association of workers aiming to advance members interests by improving their wages and
conditions. (They influence wage outcomes, exercise bargaining power negotiating with employers, restrict
supply of labour)
Employer associations- Lobby groups representing business interests, (lobby govt on industrial relations
policies, assist employers in managing industrial relations issues).
Current employment/industrial framework- The Ten National Employment Standards (Fair Work Act 2009),
national minimum wage, modern awards, enterprise agreements.
Modern awards- industrial awards provide minimum wages and working conditions for employees specific to
their industry.
Enterprise agreements- Workplace agreement negotiated collectively through enterprise bargaining between
employers and employees.
Common Law Contracts- Simple agreement involving add-ons to relevant awards between an employer and
employee, enforced through court of law.

Preliminary Economics Topic Five Financial Markets

Types of financial markets
Financial Markets- Marketplace where buyers and sellers participate in asset trades- create products that
provide a return for those who have excess funds, making these available to those who need additional
money.
Financial Intermediaries- Firms that receive the savings of individuals/firms and redistribute them through
loans to those will use the funds.
Primary market- Markets in which firms raise funds by selling financial assets to investors.
Secondary market- Markets involving trade of financial assets between investors.
Sources of Saving Reasons for Borrowing
Proportion of household income not spent Demand for g/s exceeds capacity to purchase them
on consumption. Govt budget deficits
Govt budget surplus Lending to overseas borrowers
Accessing foreign savings Funding business expansions
Businesses not distributing parts of profits
to owners
Consumer Credit- Allows consumers to purchase g/s ahead of payment.
Housing Loans- Offered by financial institutions to purchase property.
Business Loans- Loan allowing business to invest in operations.
Bond Market- Where bonds are traded- A bond is a written document issued by the lender to the borrower
stating interest and initial loan. Lenders receive regular interest payments followed by the final payment of
the debt at the end of the allocated time.
Short term money market- The trading of financial instruments of high liquidity- temporary
shortages/surpluses of funds.
Financial Futures- Contracts to trade financial instruments for a certain price in a future transaction.
Forex Market- Market for buying and selling foreign currencies.
Superannuation- An obligatory account of retirement savings which is often invested into financial products
to gain profit.
Share Market- Financial market where investors buy and sell shares (financial assets providing the owner with
a part ownership of a company).
Share Market Roles are: Linking public companies needing equity for expansion and people wanting to invest
(aiming for capital gains/dividend income), and to provide a marketplace for share trading.
Domestic/Global Markets
Australia influences global market, global market influences Australia.
More integrated due to technology improvements.
Deregulation has encouraged higher participation in domestic market.
Forex Market, Global Debt Market- international borrowing/lending, equity markets- shares issued and
traded.
IMF oversees international financial market stability.

Regulation of financial markets

RBA Functions:
- Controlling banknote issuing- only issuing authority in AUS
- Conducting monetary policy- Influencing interest rates to affect economic activity levels.
- Systemic Stability- Creates guidelines for financial institution stability.
- Payment System Regulation- Ensuring efficiency of Payment Methods.
- Banker to the banks- Holder of financial institutions exchange settlement accounts allowing transactions
between banks.
- Advise Governments- through economic state and financial market assessments.
Australian Prudential Regulation Authority (APRA) - responsible for prudential supervision of deposit taking
institutions.
Australian Securities and Investments Commission (ASIC) - responsible for corporate regulation, consumer
protection and oversight of financial service products.
Australian Treasury- Advises Govt of financial stability issues and financial system framework (regulatory
and legislative)
Council of Financial Regulators- Coordinating body for regulators providing cooperation and collaboration.
Borrowers
Individuals- Personal purposes- Mortgages, Short term loans, credit cards
Businesses- Expansion, R & D Investment, Special Projects, Overcome cash-flow downturns.
Governments- Increase spending, tax cuts, spending outgrown revenue, Infrastructure project funding.
Factors affecting the demand for funds
The demand for funds driven by 3 motives- Transactionary motive (demanding funds for buying goods and
services), Precautionary motive (demanding funds for unpredictable circumstances), Speculative motive
(demanding funds to invest for capital gains.)

Lenders
Individuals- Lend to financial institutions for a return- may be through shares, bonds or an interest-bearing
deposit.
Businesses- Deposit funds into financial institutions if interest more lucrative than internal investment- or if
immediate plans do not involve expansion.
Governments- Whilst in surplus- a government may invest money (e.g international loans) to maintain
positive balances.
International- Known as foreign liability (must be repaid) - to finance domestic consumption & investment.
Financial aggregates measured by the RBA

Money- a financial management which is a medium of exchange, store and measure of value, and a standard
for deferred payments.
Aggregates: Currency- comprises holdings of notes and coins by the private non bank sector.
Money base- Currency+ Bank Deposits with RBA.
M3- Money Base + All Bank Deposits
Broad money- M3 plus non bank financial institution deposits + NBFI deposits in banks
Credit- system allowing for deferred purchases.
Money supply- Total amount of funds in the economy with the 4 characteristics of money.
Interest rates:
Interest Rate- The cost of borrowing money expressed as a percentage or the reward received for lending
money.
Monetary policy- use of interest rates to affect the level of economic activity. The RBA does this through
DMO.
Objectives of monetary policy: 2-3% inflation, full employment, long term economic growth to improve living
standards.
Lending Rate- The rate charged by financial institutions for a loan.
Short Term Loan Interest Rate usually higher than long term.
Borrowing Rate- The rate offered for the use of ones money.
Short Term Deposit Interest Rate usually lower than long term.
Real interest rate = nominal interest rate inflationary expectations
Factors influencing Interest Rates
- Investment/Capital Goods- Stronger Investment Demand Upward Pressure
- Savings- Higher Savings Downward Pressure
- Liquid Funds- Increased Preference Upward Pressure
- Inflationary Expectations- Higher Expectations Upward Pressure
- Govt Budget- If in debt Upward Pressure
- International- Higher rate overseas: overseas lending Upward Pressure Domestically
- DMO- RBA affects supply in Short-term money market to alter cash rate influencing loan returns.
DMO- Actions by RBA in the Short Term Money Market to buy and sell securities- outright or through
repurchase agreements (seller agrees to repurchase security at a later date) to influence the cash rate and
general level of interest rates to influence the overall level of economic activity.
- Conducted directly between RBA and financial institutions through Exchange Settlement Accounts (ESA).
- Banks hold a proportion of their funds in ESAs to settle transactions with the RBA and other banks.
- At the end of every day, the transactions cancel each other out and the balance is transferred- some banks
end the day in surplus (and can therefore lend) or in debt (therefore borrow funds).
Short Term Money Market (Market for settlement funds)- The market where banks exchange money through
either borrowing or lending funds depending on whether their ESAs are in surplus or debt.
When supply of funds in ESA is high, cash rate falls, when supply of funds is too low, cash rate rises.
When Money supply is high, Interest Rates are low and when money supply is low, interest rates are high.
 RBA affects cash rate by either buying or selling govt securities to
create a surplus or shortage in the short term money market
influencing cash rate.
Changes in the cash rate influence changes in interest rates as
the cash rate is an interest rate itself- the overnight interest rate
on ESAs; also a change in the cash rate will lead to a change in
costs of borrowing funds in the market and banks tend to pass
these onto customers.

Topic 6- Government and the economy

Government Intervention in the economy
Limitations of the operation of the free market
Under a completely free-market system, not all community needs and wants are satisfied.
Due to different income levels, inequalities worsen, free-market may cause economic instability.
Need for govt intervention by changing and influencing outcomes when not satisfying to all of
society to gain more favourable outcomes.
Govts need to be involved, but not over-involved.
Markets consider private economic interests, not broader social interests.
Provision of g/s, public goods, merit goods
Market Failure- Occurs as the operation of market forces creates unfavourable outcomes. Govt
intervention required to solve problems regarding market failure. Market failure can occur in five areas
of economic activity: provision of g/s, inequality in income distribution, negative environmental
externalities, monopoly power, and fluctuations in economic activity
Public Goods- A good which is difficult to prevent people (free-riders) consuming without payment-
impossible to exclude users, therefore individuals and businesses would receive no gain out of and have
no incentive to prove them, therefore the govt intervenes. They are non-diminishable goods (one
persons satisfaction doesnt impact anothers).
Merit Goods- Created for the community as a whole rather than for specific individuals due to the govt
feeling they benefit the community despite individuals undervaluing them- due to an inadequate
quantity of these, govt intervenes providing more.
Demerit Goods- Overly produced items which bring harm to the community which are restricted or
highly taxed by govt.
Collective Goods- Govt provided g/s which benefits the community.
Natural Monopolies- G/S which can only be provided by 1 supplier (govt) due to the required large
investment.

Inequality in Income Distribution- disadvantaged groups, relative poverty

Govt reduces inequality by interfering in market economy to add stability.

Some are disadvantaged as they are susceptible to poverty/low-education in a free-market
economy.
Govt attempts to create equality through universal free education, grants, tax changes, living
allowances, scholarships and increasing social mobility- most of which are classified under the
welfare state- a system of welfare benefits to attempt to create equality amongst society.
Absolute Poverty- People who receive less than the minimum income- below the poverty line.
Relative Poverty- People who do not receive enough income to have the average standard of living.
Externalities and the Environment (Market Failure in Externalities)

Externalities- External costs and benefits created by firms in the production process which arent
considered in the firms decision making as they dont directly affect the business (side effects
related to the supply/demand mechanism).
Positive externalities- Unintended positive outcomes (benefits) of operations.
Negative externalities- Unintended negative outcomes (costs) of operations.
Excessive exploitation of limited cost environmental items such as air and water leads to pollution,
exhaustion and/or degradation.

Monopoly Power- formation of and government ownership of monopolies, privatisation, corporatisation

and competition

Monopolisation- When a dominant firm uses market position to eliminate existing competition.
Price Discrimination- When a firm sells the same type of g/s in different markets at different prices.
Exclusive Dealings- When a firm sets conditions for supply that exclude retailers from dealing with
other competitors.
Collusion and Market Sharing- When firms agree on a pricing and market-sharing agreement that
reduces effective competition, inhibiting new entry.
Public utilities or public trading enterprises (PTEs) become natural monopolies if they supply the
entire market demand with an efficient scale of plant, their unit costs decrease as output increases,
making it difficult for new firms to enter the market.
With an absence of direct competition monopoly firms have the potential to abuse their market
power by restricting output or raising prices. Such actions may reduce effective competition and
consumer sovereignty.
Governments monitor and regulate monopoly behaviour through competition policy to regulate
prices, encourage competitive behaviour, and prevent anti-competitive conduct in markets and
consumer protection from deceptive/misleading conduct by firms in markets.
Government reforms to make PTEs more efficient include:
- Privatisation- the sale of part or all of a PTE to the private sector.
- Corporatisation- structuring PTEs like private sector enterprises by making them financially
independent.
- Deregulation- removing restrictions.
Fluctuations in economic activity- business cycle and adverse effects of booms and recessions
- Business Cycle- Fluctuations in economic growth levels due to domestic or international factors.
- Booms- Upper turning point, as resources have become scarce.
- Recessions- Where economic growth is at its lowest, indicators of
economic performance have bottomed out.
- Problems caused by the turning points of the business cycle are
the economic costs of higher rates of unemployment in recessions,
and higher rates of inflation in booms. Both of these economic
problems can cause living standards to fall in the community.
- Fluctuations are unfavorable as it leads to instability in consumer spending, inflations, production and
employment levels.
- Economic Stabilization- Minimization of business cycle fluctuations, through:
Fiscal Policy- Macroeconomic policy influencing resource allocation, distribution of income and
economic stabilization.
Monetary Policy- Macroeconomic policy influencing cost and supply of money to influence economic
outcomes.

Macroeconomic Policies Microeconomic Policies

Influence Entire Economy Individual businesses and firms

Examples Fiscal and Monetary Policies Competition and Trade Policies

Role of Govt in Aus

Functions of Local, State and Commonwealth Govt and Constitutional Powers

Powers, functions and responsibilities of the Commonwealth govt are defined in the Australian
Constitution (also defines legislation powers for federal and state govts).
Commonwealth- overall responsibility for the economy and most influence on economic performance-
have exclusive powers (power to make law over national responsibilities).
- Main revenue sources: Income Tax, GST, Excise Tax, Customs duties and non-tax revenue e.g interest.
- Main Responsibilities: Trade, Foreign Affair, Immigration, Defence, etc
State (6+2 territories)- Concurrent (shared with federal) and residual (powers controlled by states)
powers
- Main revenue sources: Fines, stamp duty, federal govt subsidies, and national agreements between
states.
- Main responsibilities: Roads, Public Transport, Police, Education, Housing, Health etc
Local (565) - Powers delegated from state legislation.
- Main revenue sources: Land Rates, Licences, Interest and Govt subsidies.
- Main Responsibilities: Footpaths, Parks, Local Roads, Libraries, garbage collection etc.
Making of an act of federal parliament:
- Bill proposed by govt
- Draft submitted to PM and cabinet then redrafted by relevant department
- Introduced into House of Reps- 1st reading (announcement),
- 2nd reading (Outline of purpose by controlling minister),
- Debated until motion to pass bill to a committee stage- considered clause by clause and amended
- 3rd reading (Vote and passing)
- Same process through senate to become statute/law
- Royal assent: signing of bill by Gov General

Size of the Public Sector

The public sector refers to the parts of the economy owned and controlled by the govt including
all tiers of the govt as well as Govt Business Enterprises (e.g. Sydney Water, City Rail). Size of
public sector measured through:
- Total public outlay- shows the proportion of total annual expenditure by all levels of government
compared with the expenditure for the economy as a whole.
- Public sector employment- proportion of Australian employees who work in the public sector; as
percentage of total employment.
- Employment levels in the public sector have declined due to the contracting of many activities to
the private sector.
Public sectors importance has increased due to 3 factors:
1. Change in approach to economic management from more active role to less through spending cuts.
2. Provision of govt g/s- pressure on improved services
3. Social Security Growth- Provision of basic standard of living through welfare lead to higher reliance
(welfare state), govt spending reduced by tightening access to benefits and superannuation changes.

Economic functions of Aus Govt

Reallocation of Resources- changes production patterns in the economy, through: Taxation
and Spending (influencing businesses and consumer behaviours) and production of public goods.
- TAXATION: Role of Taxation- Divert resources away from certain activities deemed undesirable and
towards others due to tax leading to the alteration of prices- through taxes, govt influence consumer
demand.
- Direct Taxes- Taxes paid by the individuals and businesses on which they are levied, e.g company tax.
- Indirect Taxes- Taxes levied on individuals and firms but are passed onto g/s- not paid directly by the
businesses.
- SPENDING: Govt spending can reallocate resources to a particular sector
- Govt spending may influence individuals to buy certain G/S by reducing an industrys costs & therefore
reducing selling prices.
- Govts can provide:

o Funding/subsidies for items seen as unprofitable.

o Grants to establishing businesses/growing industries that have low finance accessibility.
o Cash payments to private employment search businesses aiding the unemployed.
- Govt provision of G/S: Govts can intervene directly in production process to achieve better resource
allocation e.g NBN, postal networks, etc.
Costs Benefits

Inefficiency in separating their enterprises Minimising overpricing and less exploitation of consumers

Potential monopolisation issues Can provide to a large range of people for low price

Redistribution of Income- Done through Taxation and Social Welfare Payments:

-Progressive Tax- Higher income earners pay a greater proportion of their income as tax than lower
income earners. E.g Income Tax
-Proportional Tax- All income earners pay proportionally the same amount of tax.
-Regressive Tax- Higher income earners pay a smaller proportion of their income as tax than lower
income earners. E.g GST
-Tax Base- Items taxed by govt.
-Tax Threshold- Level of income below which income tax is not payable.
-Average Tax Rate- Average Rate of Tax- proportion of total income earned paid in the form of tax.
-Marginal Tax Rate- proportion of each extra dollar earned that must be paid in tax.
- Redistribution to lower socio-economic groups performed through social welfare payments
Stabilisation of economic activity: Policies designed to smooth economic fluctuations
- Govts play important role in stabilising economic activity and sustaining EG
Stabilisation occurs through monetary and fiscal policies:
Monetary Policy- action of RBA influencing level of interest rates and MS
- Main instrument- DMO (buying and selling govt securities by RBA to influence interest rates).

Tightening MP- during boom Loosening MP- during recession

Change to interest rate Increase Decrease

Demand for Money Decrease Increase

MS Decrease Increase

Consumption/Investment Decrease Increase

Spending

Eco Act Decrease Increase

Inflationary pressures Decrease Increase

Unemployment Increase Decrease

Economic Growth Slowing Stimulated

- Fiscal Policy- Action by govt altering Govt Expenditure, Savings and Taxation to manipulate economic
growth and unemployment.
Govt Business Enterprises-
- Businesses owned and managed by state or commonwealth govts.
Privatisation- Govt business enterprises sold off to private sector to increase efficiency e.g Telstra
Corporatisation- Public enterprises encouraged to act as private business enterprises with the removal
of govt bureaucratic interference with their operations and making managers independent and
accountable to increase efficiency and productivity. e.g Sydney Water

Other- Competition and Environmental Policies

Competition Policy-
- Govt aim to promote workable competition: The maximum level of competition compatible with the
market structure & specific conditions of the industry.
- Govt policies assume competition produces more efficient resource use, lower production costs,
increase product innovation, and lower selling prices.
- Must be balanced against economies of scale.
- Aim for contestable markets- minimisation of barriers to entry by eliminating anti-competition
practices- outlawed through Competition and Consumer Act 2010.
- ACCC monitors competition policy and upholds consumer protection legislation.
Consumer Protection-
- Competition and consumer act 2010- other outlawed practices include price fixing, misleading
advertising, price discrimination and mergers restricting competition.
- Australian Consumer Law 2011- Consolidation of older laws, new provisions strengthening consumer
warranties, additional product safety regulations & consumer protection against unfair contract terms.
- ACCC conducts enquiries into pricing structures, recommends industry changes and gives negative
 publicity to overpriced firms.
Environment Protection-
- Govt intervenes to ensure environmental sustainability through supporting alternative energy sources
and incentives for fossil fuel reductions. Main concerns are:

1. Non-renewable resource use- use of production inputs where stock of the resource is permanently
reduced due to production/consumption.
Renewable resources- production inputs which replenish over time- consumption has no impact on
future.
2. Externailites- external costs and benefits of production e.g air pollution leading to climate change or
water pollution from chemical spills, toxic waste etc

Federal Budget

The budget process

- The budget is the govt tool for the implementation of fiscal policy showing govts planned expenditure
and revenue for the next financial year
- Fiscal Policy- Macroeonomic policy influencing resource allocation, reduction of business cycle
fluctuations and redistribution of income.
The Commonwealth Budget is an official document which outlines the governments planned revenue
and expenditure for the coming year
Types of budgets
Budget Surplus- Planned Govt revenue> Planned Govt Expenditure
Balanced Budget- Planned Govt revenue< Planned Govt Expenditure
Budget Deficit- Planned Govt revenue= Planned Govt Expenditure

Revenue and expenses

REVENUE
- Income Taxes: Company (tax on profits), Resource Rent Tax (tax on minerals), Superannuation Tax,
Personal Income (PAYG) Tax, Capital Gains Tax (Tax on profits after selling assets).
- Taxes on g/s: GST (Tax of 10% on all g/s), Excise duty (Tax on undesirable goods), Carbon Pricing
Mechanism (environmental tax on carbon emissions), Miscellaneous taxes/charges/fees.
- Non-Tax revenue- GBE Profits, Interest, Dividends and Royalties.

EXPENSES
- Social Security & Welfare- Payments assisting the disadvantages attain an average standard of living.
- Education- Funding to schooling, universities and TAFES.
- Health- Funding for health care operations.
- Infrastructure- Funding for new/upgrades of infrastructure
- Environmental Protection- Funding for upkeep of environment
Economic indicators Boom Recession
Inflation Increasing Decreasing
Consumer Spending Increasing Decreasing
Demand Increasing Decreasing
Production Levels Increasing Decreasing
Economic Growth Increasing Decreasing
Unemployment Rates Decreasing Increasing
Savings Decreasing Increasing
Interest Rates Decreasing Increasing
Foreign Investment Increasing Decreasing
Currency Increasing Decreasing
- Change in budget outcomes occur due to fiscal policy changes.
- Contractionary Fiscal Policy Stance- Decrease economic activity through dampening aggregate demand
through either reduced taxation or increased expenditure.
- Expansionary Fiscal Policy Stance- Stimulating economic activity through aggregate demand through
either increased taxation or reduced expenditure.
- Neutral Stance of Fiscal Policy Stance- No changes in budget outcome from year to year, therefore no
effect on aggregate demand & eco act levels.
- Automatic stabilisers- Instruments inherent in govt budget which counter-balance economic activity. 2
main examples: progressional income tax system and unemployment benefits:

Increase in eco act Decrease in eco act

Income levels Increase Decrease

Taxation revenue Increase Decrease

Unemployment Decrease Increase

Govt expenditure Decrease Increase

Production Increase Decrease

Consumer Spending Increase Decrease