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Economic Notes First Semester

Economics (Western Sydney University)

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ECONOMICS NOTES - 2018

Chapter 1: What is Economics about?

The Economic Problem:

● Concerned with satisfying our unlimited wants with limited resources. Must make
choices about the allocation of resources and prioritise some over others.
● 4 Key principles:
○ What to produce?
○ How much to produce?
○ How to produce?
○ How to distribute production?
Opportunity cost:
● The real cost of satisfying a want; whenever we produce or consume something, we
give up the choice to produce or consume something else with the same resources.
PPF:
● Demonstrates how opportunity costs arise when individuals or the community make
choices:
● Four assumptions:
○ The economy only produces two goods
○ The state of technology is constant
○ The quantity of resources remain unchanged
○ All resources are fully employed.
● New technology - shift frontier outwards
● New resources - shift frontier outwards
● Unused resources (unemployment) - inside PPF
● Real PPF is curved - some resources are better suited to certain produces, becomes
less productive
Future implications of choices:
● Consumer goods: items produced for immediate utility of the individual and
community
● Capital goods: items not produced for immediate consumption but are used for
production of other goods and services.
● Individuals: overseas holiday vs mortgage
● Businesses: Focusing on area of business activity with limited amount of resources -
focus on product they think will succeed long term. More effective when perceptive of
future needs in economy.
● Governments: has to choose between satisfaction of immediate or long term needs -
conflict of interest. Immediate needs are welfare and healthcare, long term needs are
education and infrastructure.
Underlying factors of choices:
● Individuals: influenced by ​age, income, future plans, expectations, family
circumstances and personality​. Make choice about how much they save and how
much they spend
● Businesses: must make choices about price, how much to produce, what resources
to use and management of employees

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● Governments: influence choices of individuals and businesses by affecting costs of

choices, prohibiting certain activities and producing goods and services directly.

Chapter 2: How Economies Operate

The production of G&S:

● Goods and Services are the outcome of the production process - products that satisfy
our wants and needs.
● Goods = tangible things
● Services = intangible acts
● A factor of production is any resource used in the production of goods and services.
● Quantity/quality of economy’s factors of production can influence how wealthy that
country will be.
● Abundant, high quality resources = able to satisfy more wants, higher standard of
living

RESOURCE REWARD

Natural resources: everything provided by Rent

nature

Labour: human effort - mental and physical Wages

Capital: produced ‘means of production’ - Interest

used in production of other goods.
Increases productivity of other resources

Enterprise: organisation of other factors of Profit

production

● Natural resources: limited by land, fossil fuels, clean air, water

● Labour: limited by population size, labour market skills and willingness to work
● Capital: limited by extent to which governments and private sector are willing to
invest as well as level of domestic (or overseas) savings available for investment
● Entrepreneurial skills: limited by size of population, range of cultural and economic
factors, willingness of individuals to innovate and take risks.
● Market economy: decisions about allocation of resources made by consumer
spending patterns
The distribution and exchange of G&S:
● GDP: total market value of goods and services produced in an economy in a giver
year
● Market economies:
○ Provide people with income as reward to contribution to production process
○ Receive income based on value of their input or value of labour depending on
how much they work, skills, educational qualifications and bargaining power in
negotiations
○ Depends on how scare or highly demanded their resources are

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○ Provides incentive for people to work harder and obtain better skills-
improving resource base and encouraging innovation and advancement
○ Can be unfair for people who cannot contribute to production process
The business cycle:
● The Business Cycle refers to fluctuations in the level of economic growth due to
either domestic or international factors
● Economies usually experience overall trend in output
● Cyclical pattern of growth - Market Economies
● Recession: stage of business cycle where there is declining economic activity, two
consecutive quarters of negative economic growth

Recession (contraction) Boom (expansion)

Production of G&S Decrease Increase

Levels of consumption Decrease Increase

and investment

Unemployment Increase Decrease

Income level Decrease Increase

Quality of life Decrease Increase

The circular flow of income:

● S+T+I = I+G+X (equilibrium)

● Private sector: individuals, businesses, financial institutions
● Public sector: Governments

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Chapter 3: How economies differ

● A market is a network of buyers and sellers seeking to exchange a particular product

at a certain price
● The price mechanism is the process by which the forces of supply and demand
interact to determine the market price at which goods and services are sold, and the
quantity produced
● Market economy:
○ Economic decisions made by individuals pursuing self interest
○ Private ownership of property
○ Freedom of enterprise
○ Consumer sovereignty
○ System of competitive markets
● Mixed market:
○ Some government intervention (social welfare & progressive income tax)
○ Decisions are made by a combination of market forces and government
decisions
● Centrally planned:
○ Government makes decisions
○ Little individual choice
○ Public ownership
○ Government allocates resources
● Government intervention occurs due to 3 reasons: reallocation of resources,
redistribution of income, stabilising the economy
● Quality of life measured by HDI - income, life expectancy and educational levels.
Australia is 2nd
● Degree of inequality is similar to industrialised Asian economies, Korea and New
zealand
● Governments have paid more attention to environmental sustainability lately, the
concept that we should use resources at a rate where it can be maintained over a
long term without depleting natural environment

Chapter 4: Consumers in the market economy

Consumer Sovereignty:
● In a Market economy, consumers decide what goods and services will be produced
by exercising their freedom to choose their purchases
● Consumer sovereignty can be reduced by:
○ Marketing
○ Misleading/Deceptive conduct
○ Planned obsolescence
○ Anti-competitive behaviour

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Decisions to spend or save:

● Y=C+S
○ Y = Disposable (after tax) income
○ C = Consumption
○ S = Savings
● APC (Average propensity to consume):
○ proportion of income that is consumed (APS - vice versa)
○ APC = C/Y
○ APC + APS = 1
● Variety of factors influence decision to spend or save:
○ Cultural factors
○ Personality factors; spenders and savers
○ Expectations of the future: job security, may delay purchases
○ Tax policies: can make it more or less attractive to spend/save
○ Availability of credit: if credit is readily available, more spend
Income:
● As income rises, people tend to save a higher proportion of their income
● MPC: proportion of each extra dollar of earned income that is spent on consumption
● MPS: proportion of each extra dollar of earned income that is saved for future
consumption
● MPC + MPS = 1
● Younger people tend to earn less money due to a lack of skills, work or experience in
education - spend more than they have (dissavings)

● Individual demand is the demand of each consumer for a particular good or service.
● Factors influencing demand:
○ Level of income
○ Price of good itself
○ The price of substitute and complement goods
○ Consumer tastes and preferences
○ Advertising

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Chapter 5: Business in the market economy

Business firms and industries:

● Business firm: organisation involved in using entrepreneurial skills to combine factors
of production to produce a good or service.
● Industry: collection of firms involved in making a similar range of items that usually
compete with eachother
Production decisions:
● What to produce:
○ Skills and experience of business operator
○ Industries with strong consumer demand
○ Specific business opportunities - niche market
○ Amount of capital required
● How much to produce:
○ Assessment of consumer demand
○ Ability to convert demand into sales of items
○ Past trends in production
● How to produce:
○ Production process involves combining inputs to create outputs
○ Depends on efficiency of four factors
What business contributes to the economy:
● Growing private sector = higher rate of economic growth and stronger revenue base
● Reduces unemployment
● Increases nation’s productive capacity
Goals of a firm:
● Maximising profits: profit motive - lowest costs highest possible price of sale
● Meeting shareholder expectations: legally responsible
● Increasing market share - increasing sales not maximising profits
● Maximising growth - larger asset base = higher profits
● Satisficing behaviour: firms will attempt to purse a satisfactory level in all goals, not a
single one
Efficiency and production:
● Productivity: quantity of goods and services the economy can produce with a given
amount of inputs
● Productivity:
○ Less wastage of scarce resources
○ Lower production costs and higher profits for businesses
○ A lower inflation rate
○ Higher incomes
○ Improved international competitiveness of Australia’s industries
● Specialisation:
○ Specialisation of labour: occurs when businesses break production process
into sub-processes
○ Specialisation of natural resources: Large number of firms move to same area
to reduce production costs by sharing infrastructure requirements

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○ Specialisation of capital: when businesses grow so large they use highly

specialised capital
● Internal economies of scale: cost saving advantages that result from a firm expanding
its scale of operations. Output level < technical optimum - buying in bulk,
specialisation of labour
● Internal diseconomies of scale: cost disadvantages (per unit production costs
increase) faced by a firm as a result of expanding its scale of operations beyond a
certain point. Output level > technical optimum - management loses touch,
paperwork and duplication
● Technical optimum: most efficient level of production where average costs of
production are at lowest possible level
● External economies of scale: advantages of a firm due to growth of its industry and
not the firm’s own operations - increasing localisation of industry, special research
development
● External diseconomies of scale: disadvantages faced by a firm due to growth of
industry in which the firm is operating. - increased pollution, increasing demand of
raw materials forces up their price
● Ethical decision making: questions on what to produce and how to produce are
considered against social and environmental outcomes beyond objective of firm

Chapter 6: Demand

● Demand focuses on consumer behavior

● Demand: quantity of a particular G or S that consumers are willing and able to
purchase at various price levels at a given time
● Law of demand: the quantity of a good or service varies negatively with price.
Demand decreases as price increases
Factors affecting market demand:
● The price of the good or service itself
● The price of other goods and services
● Expected future prices
● Changes in consumer tastes and preferences
● The level of income
● Size of population and age distribution
Demand curve
● Contraction: increase in price of G or S causes decrease in demand. Upward
movement
● Expansion: decrease in price of G or S causes increase in demand. Downward
movement
● Increase: movement to right on demand curve - consumers are willing and able to
buy more of the product than they were before
● Decrease: movement to left on demand curve - consumers are willing and able to
buy less of product than they were before
● Increase or decrease in demand caused by factors that can affect demand OTHER
THEN price

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● Price elasticity of demand: responsiveness of quantity demanded to a change in

price. ​%Change in quantity/ %Change in price
○ Elastic demand: strong response to price change
■ Price increase, revenue decrease
○ Unit elastic demand: proportional response to price change
■ Price increase, revenue -
○ Inelastic demand: a weak response to price change
■ Price increase, revenue increase
○ Perfectly elastic: consumers are willing to pay a certain price for a infinite
amount good or service but not above
○ Perfectly inelastic: willing to pay any price in order to obtain a given quantity
of a good or service
● Factors affecting elasticity of demand:
○ Luxury or necessity?
○ Whether it has close substitutes
○ The expenditure on product as proportion of income
○ Length of time subsequent to price change
○ Addictive or not

Chapter 7: Supply

● Supply focuses on firms behaviour

● Supply: Quantity of a G or S that all firms in a particular industry are able to offer at
various price levels, at a given point in time
● Market supply: sum of the individual firm supplies of individual producers at various
price levels
Factors affecting market supply:
● Price of good or service itself
● Price of other goods and services
● State of technology
● Changes in cost of factors of production
● Quantity of good available
● Climatic and seasonal influences
Supply curve:
● Contraction: decrease of the price of a good or service causes a decrease in quantity
supplied. Downward movement
● Expansion: increase in price of good or service causes an increase in quantity
supplied. Upward movement.
● Increase: moves to right, firms are willing and able to produce more of a product at
each price level than before
● Decrease: moves to left, firms are willing and able to produce less of a product at
each price level than before
● Factors that cause increase or decrease in curve, all but price od good or service
itself

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Price elasticity of supply:

● Measures responsiveness of quantity supplied to a change in price. %change in
quantity supplied/ %change in price
○ Relatively elastic: change in quantity supplied is proportionally greater than
the change in price
○ Unit elastic: change in quantity supplied is proportionally the same as initial
change in price
○ Relatively inelastic: change in quantity supplied is proportionally less than
change in price
○ Perfectly elastic: producers are willing to supply an infinite quantity of G or S
at a particular price but nothing at all at a price below
○ Perfectly inelastic: producers are willing to supply a given quantity of good
regardless of price
Factors affecting elasticity of supply:
● Time lags after a price change
● The ability to hold and store stock
● When firms have excess capacity

Chapter 8: Market Equilibrium

● Price mechanism: process by which the forces of supply and demand interact to
determine the market price at which goods and services are sold and the quantity
produced
● Market equilibrium: situation where at a certain price level, the quantity supplied and
quantity demanded are equal. The market clears (there’s no excess supply or
demand) and there is no tendency for change
● Product market: interaction of demand for and supply of outputs of productions (G&S)
● Factor market: market for any input into the production process
● Market failure: when price mechanism fails to take into account indirect costs of
production and takes into account private benefits and costs of production

PROBLEM GOVERNMENT ACTION OUTCOME

Market price too high Price ceiling Reduces price, quantity

shortage

Market price too low Price floor Increases price, quantity

excess

Market quantity too Taxes Increases equilibrium price,

high, negative reduces equilibrium quantity
externalities

Market quantity too Subsidies Reduces equilibrium price,

low, positive increases equilibrium quantity
externalities

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Market doesn’t Government provides good or Gov’t collects taxation revenue

provide G or S service to finance its supply

● Merit goods: goods that aren’t produced in sufficient quantity by private sector
because the private sector doesn’t place sufficient value on those goods, they involve
positive externalities that aren’t enjoyed by the individual consumer
● Public goods: goods that private firms are unwilling to supply as they aren’t able to
restrict usage and benefits to those willing to pay for the good as they are
non-excludable.
Competition and market power:

Market # and size of Product Barriers to Examples

structure firms characteristics entry

Pure Many firms, Homogenous No barriers to Fruits, fish

competition very small product entry markets

Monopoly One firm only, No close Extremely high Water supply

generally large substitutes barriers to entry

Monopolistic Many firms, Differentiated Relatively easy Motels,

competition relatively small products entry restaurants

Oligopoly A few, relatively Usually High barriers to Banks, oil

large firms differentiated entry companies,
products airlines

Chapter 9: Labour demand and supply

● Labour market: where individuals seeking employment interact with employers who
want to obtain the most appropriate labour skills for their production process
● Labour is a derived demand
● Aggregate demand:
○ Total demand for goods and services within the economy.
○ C + I + G + (X - M)
○ C (consumption), I (Investment) (Government spending), X - M (net exports)
Size of workforce:
● Depends on overall size of population
● Age distribution
● Labour force participation rate
Productivity of labour:
● Defined as output per unit of labour per unit of time
● = total output / labour input

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Factors affecting labour demand:

Output factors Input factors

General economic conditions Productivity of labour vs other inputs

Conditions in firm’s industry Cost of labour vs other inputs

Demand for an individual firm’s products Cost of labour vs cost of foreign labour
Factors affecting labour supply:
● Pay levels
● Working conditions
● Educations, skills and experience requirements
● The mobility of labour
● The labour force participation rate
○ % = labour force/population aged 15 or over x 100

Chapter 10: Labour market outcomes

Wage outcomes
● Nominal wage: pay received by employees in dollar terms for their contribution to the
production process, not adjusted for inflation
● Real wage: measure of actual purchasing power of money wages, adjusted for
inflation
● Differ according to occupational groups, age, gender and cultural background
Non-wage outcomes:
● Non-wage outcomes: benefits that many employees receive in addition to their
ordinary and overtime payments, such as sick leave, superannuation, a company car,
study leave or other arrangements
● Superannuation: form of saving that individuals cannot access until retirement
The costs and benefits of inequality:
● Economic benefits:
○ Encourages labour force to increase education and skill levels
○ Encourages labour force to work longer and harder
○ Makes labour force more mobile
○ Encourages entrepreneurs to accept risks more readily
○ Creates potential for higher savings and capital formation
● Economic costs:
○ Reduces overall utility
○ Can reduce economic growth
○ Reduces consumption and investment
○ Creates conspicuous consumption
○ Creates poverty and social problems

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○ Increases cost of welfare support

● Social benefits:
○ Provides incentive for individuals to work harder and acquire new skills
● Social costs:
○ Social class divisions
○ Poverty
○ Lower levels of wellbeing
Unemployment
● Unemployment: situation where an individual is actively seeking work is unable to
find work
● Unemployment rate (%):
○ Number of persons unemployed / total labour force x 100
● Types of unemployment:
○ Cyclical: caused by downturn in the business cycle
○ Structural: caused by mismatch between skills demanded by employers and
those possessed by unemployed people
○ Long term: an individual who has been unemployed for 12 months or more
○ Seasonal: occurs due to the seasonal nature of some jobs
○ Frictional: occurs as people change jobs, moving from one job to another
○ Hard-core: individuals who might be considered unsuitable for work because
of personal reasons
○ Hidden: individuals who aren’t counted in official unemployment figures
because they have given up actively seeking work or have gone back to
school
○ Underemployment: individuals who are underemployed but want to work more
hours per week
● Casualisation of work: growth of casual employment as a proportion of the total
workforce

Advantages Disadvantages

Flexibility for employers to increase or Less job security

reduce staff

Employers may avoid paying non-wage More difficult for employees to plan for the
costs future without job security

Flexibility for employees with family Less staff loyalty and less development of
workforce skills

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Chapter 11: The changing Australian labour market

● The relationship between employees and employers is ‘industrial relations’

● Industrial relations system: involves the laws, institutions and processes established
to manage the relationship between employers and employees. It determines the
process of wage determination and conflict resolution
Role of unions:
● Trade union: association of workers that aims to advance the interests of its
members by improving their wages and working conditions
○ Occupational unions: draw members from persons who possess a particular
occupational skill, or range or skills regardless of their industry
○ Industry-based unions: cover workers in a particular industry
○ Enterprise-based unions: represent workers of one specific enterprise
○ General unions: cover a range of workers with many skills and from many
industries
● Significant decrease in trade union membership due to:
○ Changes to wage determination
○ Changes within industries
○ Changes in the nature of employment
● Role:
○ Representing employee interests
○ Exercising their bargaining power in negotiations with employers
○ Restricting the supply of labour
Role of employer associations:
● Employer association: organisation of employers that represents their interests by
helping them manage relationships with employees and unions by:
○ Lobbying the government on industrial relations policies
○ Assisting employers in managing industrial relations
● Main roles in the labour market:
○ Assisting members in negotiating wage agreements with employees
○ Providing advice, training and direct assistance to employers
○ Lobbying the government for changes to government policies
○ Representing employers’ interests in any hearings in industrial tribunals
Australia’s current industrial relations framework:
● Fair Work Commission: government agency that regulates industrial relations in
Australia. Establishes industrial awards, collective agreements and individual
employment contracts.
● Minimum employment standards: (set out in National Employment Standards)
○ Maximum weekly hours
○ Right to request flexible working arrangements
○ Leave
○ Notice of termination and redundancy pay
● Awards: set of pay and conditions that are specific to an employee’s work or industry.
Provide a safety net of minimum wages and conditions.

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● Enterprise agreement: most common agreement for setting wage outcomes. Wage
increases are negotiated between employers and groups of employees, usually
represented by unions.
● Common law agreement: an individual contract that adds to an award, often informal
arrangements, and are widespread between small businesses.
● Industrial relations system: changed from highly centralized system to decentralised
system, with most wage outcomes determined through bargaining either collective or
individual

Chapter 12: Types of financial markets

The role of financial markets in the economy:

● Financial markets create products that provide a return for those who have excess
funds, making these funds available to those who need additional funds for
consumption or investment
● Financial intermediaries: firms that receive the accumulated funds for individuals or
firms, then make loans to other firms or individuals who can make use of them
● Types of financial markets:
○ Primary markets: facilitate creation of financial assets, known as securities.
Businesses that want to raise funds - issue debt securities or expand
ownership of the company by selling new shares
○ Secondary markets: transactions with financial assets that have already been
issued on a primary market.
● Securities: any form of financial instrument, including shares and bonds, that
provides the holder with a claim over real assets or future income stream
● Main financial markets:

Share or equity market Where ownership shares in companies are issued or

exchanged

Debt market Where debt securities are exchanged, or cash is lent and
borrowed

Derivatives market Where people buy and sell financial assets that are based on
the value of other financial assets

Foreign exchange market Where financial assets defined in one country’s currency are
exchanged for assets defined in another country’s currency

● Other financial institutions:

Finance companies Obtain most funds by borrowing from general public through debt
securities
Funds are re-loaned to households or smaller businesses at
higher rate of interest

Investment banks Borrow on short term basis from companies with surplus funds

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(Merchant Banks) Lend to large companies

Provide financial advice to large companies on issuing securities

Credit unions Non-profit, cooperative organisations whose members belong to a

particular niche
People can deposit or borrow money, with any profits returned to
members

Permanent building Accepts deposit from public and provide funds for home loans
societies Interest rate structure is somewhat controlled by state gov’ts

Mortgage originators Offer home loans to consumers

Superannuation funds Receive contributions of employees and employers and invest

them in financial assets to provide retirement income

Financial market products:

● Credit: loans extended to individuals, businesses and governments for spending on
consumption and investment
● Housing loans:
○ Offered by banks and mortgage originators
○ Long-term loans used to purchase property, requiring repayments with
interest
○ Decreased since GFC
● Business loans:
○ Form of debt that allows businesses to invest in their business operations
● Short-term money markets:
○ Brings together people and businesses with temporary shortages or surpluses
of funds
● Bonds:
○ Longer term securities for which lenders receive regular payments (coupon
payments) from the issuing institution, and receive the principal value of the
debt (known as face value) at the end of the bond period (date of maturity)
● Financial futures and options:
○ Contracts to trade in financial instruments at a later date for a certain price
○ Allow investors to protect themselves from interest rates, share prices and
currency fluctuations
● The foreign exchange:
○ Market for buying and selling of foreign currencies
The share market:
● Share: a financial asset that provides an individual with part-ownership of a business
or company
● Limited liability: ​the condition by which shareholders are legally responsible for the
debts of a company only to the extent of the nominal value of their shares.
● Public company: an entity whose shares are traded freely on the share market and
are not subject to any restrictions on being transferred to other parties

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● Private company: restricts ownership of shares to only a few individuals and places
restrictions on share transfers

● Investors purchase shares to gain a stake in any company profits and to make capital
gains from increases in share prices
● Dividends: profit returns received by the shareholders of a business
● Capital gains: profits made by investors who sell their shares or assets at a price
above the level they originally paid for them
● Float: when a company lists itself on the stock exchange and offers its shares to the
general public for the first time
● Company’s share price depends on:
○ Confidence in management
○ Previous earnings
○ Expected earnings
○ General economic conditions
● All ordinaries Index: stock market index measuring changes in the overall value of
companies listed on the ASX
● Share prices are speculative; shares are bought with the intention of being resold
Domestic and global markets:
● Dramatic increase in the participation of foreign investors in Australian markets
● Dependent on foreign sources of capital
● Much closer integrated with global markets in past 3 decades
● Bank for international settlements: helps central banks promote financial stability
through appropriate market regulations
● Basel committee: sets standards for banking regulations
● International Monetary Fund: oversees general stability of the international financial
system
Regulation of financial markets:

Reserve Bank of Australia (RBA) Responsible for monetary policy, payments system
regulation and the stability of the financial system

Australian Prudential Regulation Responsible for prudential supervision and regulation

Authority (APRA) of all deposit taking institutions, life and general
insurance, and superannuation funds

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Australian Securities and Responsible for corporate regulation, consumer

Investments Commission (ASIC) protection and oversight of financial service products

Australian treasure Advises the gov’t on financial stability issues and the
legislative and regulatory framework for the financial
system
● Deregulation: removed many government controls over finance sector and exposed
the industry to greater influence and global markets
The Reserve Bank of Australia (RBA)
● Main roles are to conduct monetary policy, oversee systematic stability of the
financial system and ensure economic prosperity and welfare of people
○ Conduct monetary policy on behalf of the government
○ Systematic stability
○ Control of note issue
○ Regulation of payments system
○ Banker to the banks
○ Responsibility for holding Australia’s gold reserves and foreign currency
dealings
○ Banker and source of financial and economic advice to governments

Chapter 13: The money market

Borrowers: the demand for funds

● Individuals borrow for personal reasons and short term purposes
● Business sector does most borrowing

Factors affecting the demand for funds:

● liquidity : ease with which a financial asset can be transformed into cash so it can be
used as a medium of exchange
● Transactions motive: needing a certain quantity of currency for carrying out
day-to-day transactions
● Precautionary motive: numerous unpredictable circumstances and emergencies
● Speculative motive: if capital loss is suspected, will try to sell financial assets

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Money and money supply:

● 4 characteristics:
○ Medium of exchange
○ Store of value
○ A measure of value
○ A method of deferred payment
● Money base: all currency in circulation and all bank deposits in RBA. Measure of
most liquid financial assets, which can be used immediately
● M3: RBA’s definition of money supply.
● Broad money: More accurate measure of total money supply.

Interest rates:
● Interest rates: cost of borrowing money expressed as a percentage of total amount
borrowed. Brings about equilibrium in the economy
● Interest rate differential: difference between borrowing and lending rate
● Short term: interest rates with a maturity of less than a year. Treasury notes.
● Long term: interest rates with a maturity of more than a year. Treasury bonds,
mortgages, less liquid
● Factors that influence interest rates:
○ Demand for capital goods (investment)
○ Level of savings in an economy
○ Demand for liquid funds
○ Inflationary expectations
○ Government budget
○ International interest rates
Domestic Market operations:
● Actions by the RBA in the short term money market to buy and sell securities - either
outright or through repurchase agreements - in order to influence the cash rate and
general level of interest rates

Chapter 14: The limits of markets

Why Governments intervene:

● The free market has limitations
● Government intervention is needed to provide more just outcomes
● Market failure: when market forces create unfavourable outcomes in an economy
because the price mechanism fails to take into account social costs and benefits of
production

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Market failure in the provision of goods and services:

● Public good: good which is non-excludable and non-rival, they always attract free
riders
● Merit good: goods that are undersupplied and have benefits to the community that go
beyond the individual that enjoys them directly
● Demerit good: items that are harmful
Market failure in income distribution:
● Relative poverty: those whose standards of living are substantially lower than the
average for the economy as a whole, often defined as an income below 30% of
average earnings
● Absolute poverty: where individuals have just enough to enable them to survive
● Welfare benefits provided
Market failure in externalities:
● Externalities: external costs and benefits that private agents in a market do not
consider in their decision-making process.
Market failure in the abuse of market power:
● Monopolisation: firm uses its dominant market position to eliminate existing
competition, or prevent firms from entering market
● Price discrimination: firm sells same type of good at different prices in different
markets
● Exclusive dealing: when firm sets conditions for supply that exclude retailers from
dealing with other competitors
● Collusion: when firms get together and agree on a price and market-sharing
agreement
Market instability: the business cycle:
● Macroeconomic policies: stabilise the level of economic growth - fiscal policy and
monetary policy
● Microeconomic policies: improve work practices and productivity levels - competition
policy and trade policies

Chapter 15: The role of the Government in Australia

The structure of government:

● Constitutional monarchy; three tiered structure:
○ Commonwealth: overall responsibility for the economy and most influence on
economic performance
○ State: roles in developing infrastructure, delivering government services,
fostering regional development
○ Local: minor role, deliver to the community
● Australian constitution: document that provides overall framework for Australia’s
system of democratic government and relationship between the Commonwealth and
state governments
The public sector:
● Refers to parts of the economy that are owned or controlled by the government. It
includes all tiers of the government as well as government business enterprises.

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● Total public sector outlays: proportion of total annual expenditure by all levels of
government
● Public sector’s role has grown due to:
○ A change in approach to economic management
○ Provision of government services
○ Growth of social security
Reallocation of resources:
● Influences allocation of resources through:
○ Influencing way consumers and businesses behave through taxation or
spending measures
○ Producing goods or services themselves
Taxation​:
● Direct taxes: taxes that are paid by individuals or business firms on which they are
levied and cannot be passed onto someone else
● Indirect taxes: levied on individuals and business firms, can be passed onto someone
else
● Tax base: items that are taxed - income, wealth and consumption. Income is main tax
base
● Average rate of tax: proportion of total income earned that is paid in the form of tax
● Marginal rate of tax: proportion of any increase in income that must be paid as tax.
Represents how many cents in every extra dollar earned that must be paid to
government.
● Types of taxation:
○ Progressive: higher income earners pay a greater proportion of their income
than lower income earners. ART rises as individual’s income rises. - income
tax
○ Regressive: higher income earners pay smaller proportion of their income as
tax than lower income earners (ART falls as an individual’s income increases)
- GST
○ Proportional: all income earners pay the same proportion of their income as
tax - ART remains constant - company tax
Spending:
● Funding - for arts
● Grants - start up businesses
● Subsidies - where services are else unprofitable
● Cash payments - private employment search businesses
Government provision of goods and services:
● Privatisation: government selling public trading enterprises to the private sector
Redistribution of income:
● Tax
● Social welfare payments
Stabilisation and sustainable growth:
● Monetary policy - use of DMOs in order to affect cash rate in short term money
market and influence interest rates - takes 6-18 months for effect to be felt by
economy
● Fiscal policy - influencing of government spending and saving

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Public enterprises:
● Corporatisation: when the government encourages public trading enterprises to
operate independently from the government as if they are private businesses in order
to improve efficiency and profitability
Other roles in the economy:
● Competition policy - workable competition
● Consumer protection
● Environmental protection

Chapter 16: Government in action

The Budget:
● Fiscal policy: macroeconomic policy that can influence resource allocation,
redistribute income and reduce the fluctuations of the business cycle. Its instruments
include government spending and taxation and the budget outcome
Revenue and Expenditure:
● Revenue:
○ Personal income tax: 47% of tax revenue
○ Company tax: 17% of revenue
○ GST: 15% of total tax collection
● Expenditure:
○ Social security and welfare
○ Education
○ Health
○ Infrastructure and social overhead capital
○ Protecting the environment

Impact of budget outcomes:

● Fiscal policy stances:
○ Expansionary fiscal policy stance: reduce taxation revenue or increase
government expenditure, smaller surplus or larger deficit - increase economic
activity
○ Contractionary fiscal policy stance: increase taxation revenue or reduce
government expenditure, larger surplus or smaller deficit - decrease economic
activity
○ Neutral fiscal policy stance: doesn’t change the budget outcome from year
before

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● Automatic stabilisers: policies that operate automatically to counterbalance trend in

level of economic growth and that stabilise economy
○ Progressive income tax system
○ Unemployment benefits
○ Increase in economic activity - contraction in aggregate demand
○ Decrease in economic activity: stimulating aggregate demand
Influences on government policies:
● Parliament and political parties:
○ Policy changes must be authorized by an act of parliament; must be
supported in House of Representatives and the Senate
○ Have the objective of staying in power - take time to convince the public that
their strategies are the most effective
○ Decision making power rests in a few members of the executive branch of the
government
● Businesses:
○ Financial influence over political parties
○ Lobby governments and contribute to policy making
● Unions:
○ Union membership has declined by 40%
○ Mostly represent interests of members but also consult with government on
policy issues
○ Greater input in Labor Party policies
● Environmental groups:
○ Several interests groups that advocate for environmental protection, including
the Australian Conservation Foundation of Conduct research, provide
educational information and lobby governments and companies around a
wide range of issues that have implications on the environment at local,
national and global levels
○ Environmental concerns are given especially high priority by the Australian
Greens party, enjoying influence in the Senate.
● Welfare agencies
○ Seek to represent the most disadvantaged people in the community (aged,
people with disabilities, carers, unemployed people and people in work on low
incomes)
○ Australian Council of Social Services- peak welfare lobby group
● The Media
○ Whilst the media’s role is to report the news, in reality it can also influence
government policies.
○ Determining which issues receive coverage
○ How issues are presented to the public
○ The government influenced as they may make policies based on how the
media will react (avoid certain ones and choose policies that give positive
media coverage in spite of little benefits)
○ Distinction between fact and opinion - Alan jones & Ray Hadley , daily
telegraph/news corp.

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● Other Interest Groups

○ People with specific strong and often localised focus will often congregate into
groups to work towards common goals
○ NRMA, National Farmers Federation, National Union of Students
○ Other groups play a broader role in representing public interest concerns ◦
Choice (Australian Consumers’ Association) and GetUp! online
● International influences:
○ Impact of Economic Policy on international financial markets, in turn back on
the government and the economy = Resulted in lower budget deficits and
stronger commitment to microeconomic reform
○ If governments make decisions unpopular with international fin. markets, they
may lose confidence in the government’s mgmt. of the economy, causing a
fall in exchange rate, higher interest rates on govt. borrowing, and negative
media coverage.
○ Government Policy also affected by Financial Market Conditions During the
GFC, international credit markets almost collapsed Governments around the
world decided to buy bank shares, guarantee bank deposits and buy
securities

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