Economics Flashcards
1
Q
What does ESA stand for?
A
Exchange Settlement Account
2
Q
What is the economic problem?
A
How to satisfy unlimited wants and needs with limited resources.
3
Q
Define money.
A
Money is anything that is accepted in payment of a debt.
4
Q
Define monetary aggregate.
A
A measure of the amount of money in circulation within a country or economic sector.
5
Q
What is the production possibility frontier?
A
A curve that illustrates the variations in the amounts that can be produced of two products that depend on the same finite resources
6
Q
When will the production possibility frontier shift outwards?
A
- If resources increase
- If technology improves
- If there is better efficiency in production
7
Q
What is opportunity cost?
A
The cost of alternative choices when giving up something else.
8
Q
What are consumer goods?
A
Goods that are used by households to satisfy their wants and needs.
9
Q
What are capital goods?
A
Goods that are used by businesses in the production of goods and services to benefit the economy in the future.
10
Q
What is the boom stage in a business cycle?
A
A boom is a period of strong economic expansion where many businesses are operating at full capacity or above capacity, the unemployment rate is very low and income and production are at very high levels.
11
Q
What is the recession stage in a business cycle?
A
A recession occurs after the peak of the cycle when economic activity begins to decline and the unemployment rate rises.
12
Q
What is the trough stage in a business cycle?
A
A trough is reached when the economy hits a low point, with supply and demand hitting bottom. Unemployment is high, and income and production are low.
13
Q
What is the recovery stage in a business cycle?
A
A recovery is when economic activity improves. Gross domestic product (GDP) grows, incomes rise, and unemployment falls as the economy grows.
14
Q
Why is choice important in an economy?
A
Choice is important because of scarcity. It determines consumption patterns, production outputs, and ultimately influences market dynamics.
15
Q
What is monetary policy?
A
Actions taken by the RBA in order ot influence economic activity. (e.g. setting the cash rate on overnight loans in the money market.)
16
Q
What is the cash rate?
A
The interest rate which banks pay to borrow funds from other banks in the money market on an overnight basis.
17
Q
What is fiscal policy?
A
The use of government spending and taxation to influence the economy.
18
Q
What are wants?
A
A desire of an individual.
19
Q
What are collective wants?
A
A desire of a group of people, typically provided by the government.
20
Q
What are the four fundamental questions that must be addressed?
A
- What to produce?
- How much to produce?
- How to produce?
- To whom to distribute?
21
Q
What are the factors of production?
A
- Land
- Labour
- Capital
- Enterprise
22
Q
What is the need for choice between individuals and society?
A
There are limited resources between individuals, businesses and governments. The highest priority wants must be satisfied first and the lowest may be unsatisfied.
23
Q
What are the future implications of current choices by individuals, businesses and governments?
A
Consumer goods satisfy current wants, while capital goods satisfy future wants.
24
Q
What might change an individual’s wants?
A
- Age
- Income
- Technology
- Fashion
25
What are the economic factors underlying decision-making for individuals?
- Income
- Saving
- MPS/MPC
- Education
- Retirement
- Health
26
What are the economic factors underlying decision-making for businesses?
- Supple/Demand
- Legal Regulations
- Environmental Issues
- Ethical Issues
27
What are the economic factors underlying decision-making for Governments?
- Social Welfare
- Trade Relations (FTA)
- Natural Resources
- Demand of Collective Wants
- Population
28
How can goods and services be distributed?
- Directly to consumer
- Via retailer to consumer
- Via wholesaler and retailer to consumer
29
What factors influence distribution?
- Cost
- Nature of the market
- Extent to which the producer wishes to control how products are marketed
30
When is an economy in equilibrium?
When leakages = injections
S+T+M = I+G+X
31
What does X stand for?
Exports
32
What does M stand for?
Imports
33
What does T stand for?
Taxation
34
What does S stand for?
Savings
35
What does I stand for?
Investments
36
What does G stand for?
Government Spending
37
To whom to distribute?
Income and wealth determine the distribution of goods and services, although the government also steps in.
38
What is income?
The money received for employing resources (factors of production)
39
What are the four types of income?
- rent (land)
- Interest (capital)
- wages or salary (labour)
- profit for owners of the business (entrepreneurs)
40
What does profit equal?
Revenue - costs
41
What does disposable income equal?
Gross income - tax
42
What does final income equal?
Disposable income + social wage - indirect taxes
43
What is nominal income?
The dollar amount of income, unadjusted for inflation.
44
What is real income?
Income adjusted for inflation.
45
What are recurrent wants?
Wants that need to be satisfied over and over again.
- e.g. food, clothes, water
46
What are the influences on an individual's income?
- Skill
- Education
- Experience
- Age
47
How do you calculate the average GDP per person?
Total GDP / Population
48
What are the two main types of markets?
- Factor Market
- Product Market
49
What is a Factor Market?
Where factors of production are sold.
50
What is a Product Market?
Where goods and services are sold.
51
What are the industries a firm can operate in?
- Primary
- Secondary
- Tertiary
- Quarternary
- Quinary
52
What is the Primary Industry?
Extractions of natural resources.
- e.g. agriculture, mining, fishing
53
What is the Secondary Industry?
Converts raw materials into products.
- e.g. a baker turning wheat into bread
54
What is the Tertiary Industry?
The selling of services.
55
What is the Quarternary Industry?
Information services, intellectual property, consultancy, financial planning
56
What is the Quinary Industry?
Personal or domestic services
- e.g. daycare, cleaning
57
What are the Sectors in the Circular Flow of Income?
- Consumers / Households
- Producers /Firms
- Financial Sector
- Government Sector
- International Markets
58
What are the characteristics of a Market Economy?
- Freedom of enterprise
- Private property rights
- Profit motive and use of a system of
markets to allocate resources
- What to produce and how much to
produce are determined by the
operation of a price mechanism.
59
What are the characteristics of a planned economy?
- Government ownership of resources
- Production, distribution and
exchange takes place according to
government or state priorities and
targets.
- Heavily influenced by Karl Marx's
socialist theory of economics.
60
What are the characteristics of a mixed-market economy?
- The private sector takes the majority
of economic decisions
- The government also plays a role in
providing collective goods and
services, implementing policies to
stabilise economic activity
61
What is Consumer Sovereignty?
The power consumers have to determine what goods and services are produced, based on supply and demand (Consumer Sovereignty can strengthen or weaken depending on the situation).
62
In what ways can businesses reduce consumer sovereignty?
- Marketing (marketing and advertising can influence consumer spending patterns/ encourage purchases)
- Misleading or deceptive conduct (e.g. false or dishonest claims about a product)
- Planned Obsolescence (Firms sometimes produce products that won't last long or have an expiry date to encourage further purchases - this can take the form of needing the newest version e.g. iPhones)
- Anti-competitive behaviour (When there are only a few sellers in the market who have the ability to diminish what consumers really want)
63
What does Y = C + S represent?
Disposable (after tax) income = Consumption expenditure + Savings
64
What are Consumer Markets?
Where consumer goods are bought and sold.
65
What are Labour Markets?
Where the factors of production are bought and sold.
66
Where does market equilibrium occur?
Where demand is equal to supply, at a certain price level.
67
What is the Formula for APC?
Consumption (C) ÷ Disposable income (Y)
68
What is Average Propensity to Consumer (APC)?
The proportion of total income that is spent on Consumption
69
What is Average Propensity to Save (APS)?
The proportion of total income that is saved
70
What is the Forumla for APS?
Saving (S) ÷ Disposable income (Y)
71
What is Market Efficiency?
Where goods, services and resources are employed in their highest value uses.
72
What is Voluntary Exchange?
Where exchange occurs willingly between individuals, without coercion.
73
What does 'Ceterus Paribus' mean?
All other things being equal.
74
What can influence APS and APC?
- Income levels and future expectations
- Cultural factors
- Confidence and future expectations
- Life stage and age distribution
- Government policies
- Ability for credit
75
What is the consumption function?
A graphical representation of the relationship between consumption and saving (look up example)
76
What is Marginal Propensity to Save (MPS)?
The proportion of each additionally earned dollar that is saved.
77
What is the Formula for MPS?
Change in savings ÷ Change in income
78
What is Marginal Propensity to Consume (MPC)?
The proportion of each additionally earned dollar that is spent on consumption.
79
What is the Formula for MPC?
Change in consumption ÷ Change in income
80
What happens to somones Propensity to save and consume if their income increases?
If someone's income increases, they will save more as it will cost a lower proportion of their income to purchase necessities.
81
What is 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.
82
What factors impact individual consumer choice?
- Level of income
- The price of the good or service itself
- The price of substitute or complimentary goods
- Consumer taste and preference
- Advertising
83
What is Individual Demand?
The demand from an individual for a particular good or service.
84
What is Market Demand?
The sum of all individual demand in a market for a particular good or service.
85
What are the factors affecting demand?
- Price
- Income
- Population
- Tastes and Preferences
- Prices of Substitutes and Compliments
- Expected Future Prices
86
What is a Complimentary Good?
Something that is used alongside another good or service.
87
What is a Substitute Good?
An alternative to an existing good or service.
88
What is a complimentary good?
A good that is used in conjunction with another good (e.g. petrol and a car).
89
What is a substitute good?
A good that consumers may choose to purchase instead/ an alternative (e.g. Butter and Margarine)
90
What is the return on labour?
Wages
91
What is the return on Land?
Rent
92
What is the return on Capital?
Interest
93
What is the return on Enterprise/entrepreneurial skills?
Profit
94
What is Supply?
The quantity of a good or service that all firms in an industry are willing and able to offer for sale at different price levels at a given point in time.
95
What is the Law of Supply?
As the price for a certain good or service increases, the quantity supplied will also increase.
96
What is Individual Supply?
Supply from individual producers at various price levels.
97
What is Market Supply?
The sum of all the supply from an entire industry at various price levels.
98
What is social welfare payments?
Payments made to increase the incomes of individuals or families in need of assistance by the government e.g. unemployment benefits and family allowances.
99
What are the Factors Affecting Supply?
- Price of a good or service
- Price of other goods and services
- Price of resources (FOP)
- Technological Advancements
- Expectations of Producers
- Climate / Seasonal Influences
100
What is transfer payments?
The social welfare payments that are collected from taxation, then redistributed back into the economy in the form of payments to those in need.
101
What are some examples of transfer payments?
- Age pension
- Parenting payments
- Disability support pension
- Jobseeker payments
102
What are the 2 main sources of income for individuals?
- Returns from factors of production (land, labour, capital, enterpise)
- Government payments
103
What is an industry?
A collection of firms that make similar products
104
What are the 3 production decisions?
- What to produce
- How much to produce
- How to produce
105
What causes a change ALONG the supply curve? (An expansion or Contraction)
Price changes. Everything else shifts the supply curve (left or right)
106
What is the Price Mechanism?
The competing forces of supply and demand ct together to determine equilibrium price and quantity in a market.
107
What is capital?
The equipment and tools used in the manufacturing/ production process
108
What are capital goods?
Goods used to produce other goods e.g. machinery or a hammer.
109
When will the Government Intervene in an Economy?
When there is market failure.
110
What is Market Failure?
Undesired outcomes that arise as a result of the price mechanism failing to consider the social costs and benefits.
111
What are consumer goods?
Goods bought and used by consumers.
112
Why are capital goods important in the production of consumer goods?
Capital goods enable to production of consumer goods. Without capital goods there would be nothing to produce consumer goods with.
113
When will a Price Ceiling be imposed?
When the equilibrium price of a good or service is too high
114
What is the profit motive?
When businesses seek to maximise profits through using the cheapest combination of resources and charging the highest possible price.
115
What is Surplus?
Where supply exceeds demand.
116
What is Shortage?
Where demand exceeds supply.
117
How is Market Equilibrium achieved?
Through changes in price.
118
What are financial intermediaries
The firms that hold the accumulated funds (savings) of individuals or firms as deposits, and then make loans to firms or individuals who need additional funds (e.g. banks)
119
How do you calculate productivity?
Total output ÷ Total input
120
How does productivity improve our standard of living?
- Less waste of scarce resources
- Lower production costs and higher profits for the business firm
- A lower inflation rate (because of lower production costs)
- Higher incomes (firms can afford to pay better wages)
- Improved international competitiveness of Australia's industires
121
What is the role of financial intermediaries
In essence, financial intermediaries create a bridge between the savers and borrowers in the economy
122
What is a primary market
Primary financial markets facilitate the creation of financial assets, known as securities
123
What are the 3 ways a business can improve efficiency?
- Divison of labour (specialisation of labour)
- Localisation of industry (Specialisation of natural resources)
- Large-scale production (specialisation of capital)
124
What is division of labour (specialisation of labour)?
When the production process is broken down into a number of sub-processes in order to improve efficiency (e.g. a production line)
125
What is localisation of industry (Specialisation of natural resources)?
When a number of businesses who produce similar goods are located in the same location in order to share infrastructure requirements and reduce production costs/ improve efficiency.
126
What is Large-scale production (specialisation of capital)?
When businesses grow so large they can use highly specialised equipment in their production process (e.g. a winery using a machine that places lids on bottles).
127
What is internal economies of scale?
The cost-saving advantages that result from a firm expanding its scale of operations (e.g. being able to purchase a production machine that decreases labour costs of each unit). This occurs when a firm's output level is below the technical optimum.
128
What is internal diseconomies of scale?
The cost disadvantages (particularly the increase in marginal cost per unit) faced by the firm as a result of increasing the scale of operations (e.g. a big company needing to hire more managers to oversee the greater scale of production). This occurs when the firm's output level is above the technical optimum.
129
What is a secondary market
Secondary financial markets involve transactions with financial assets that have already been issued on a primary market some time in the past
130
What does technical optimum mean?
The most efficient level of production for a firm. At this point, the average cost of production is at their lowest possible level.
131
What is external economies of scale?
The advantages that are accumulated by a business due to the growth of the industry in which the firm is operating in. This is not a result of the firm changing its own scale of operations.
132
What is the Debt Market
Where debt securities (such as bonds) are exchanged, or cash is lent and borrowed
133
What is external diseconomies of scale?
The disadvantages that are accumulated by a business due to the growth of the industry in which the firm is operating in. This is not a result of the firm changing its own scale of operations.
134
What is the Derivatives Market
Where people buy and sell financial assets that are based on the value of other financial assets (e.g. purchasing futures)
135
What is the Foreign Exchange Market
Where financial assets defined in one country's currency are exchanged for assets defined in another country's currency
136
What is Credit
It is the loans extended to individuals businesses and governments for spending on consumption and investment
137
What does technological change and ethical decision-making change in a business?
- Production methods
- Prices
- Employment
- Output and profits
- Types of products
- Globalisation
- Environmental sustainability
138
What is a Housing Loan
It is a long-term loan used to purchase property which require periodic repayments with interest
139
What are Business Loans
It is a form of debt that allows businesses to invest in their business operations
140
What is Bond
Bonds are written record of debt, in which the holder of a bond receives interest payments and the final repayment
141
What is the labour market?
Where individuals seeking employment interact with employers who want to obtain the most appropriate skills for their production process.
142
What is derived demand?
When the demand for a good or service is 'derived' from the demand for another good (e.g. the demand for labour is derived from the demand for goods and services in the economy).
143
What is aggregate demand?
Aggregate demand is the total demand for goods and services within the economy.
144
What are the components of aggregate demand?
- Concumption (C)
- Investment (I)
- Government spending (G)
- Net exports (X-M)
145
What is labour productivity?
The output per unit of labour per unit produced, in reference to time (the output of each individual worker over the same time period)
146
How can labour productivity be calculated?
Total output ÷ Labour input (number of employees)
147
When is a firm's demand for labour elastic?
- When labour can easily be substituted for capital
- When labour is a relatively high proportion of the business's total costs
- When it is harder for a business to pass on the additional labour costs to consumers (e.g. cant raise product prices)
148
What are the output factors influencing labour demand?
- General economic conditions
- Conditions in the firm's industry
- Demand for an individual firm
149
What are the input factors influencing labour demand?
- Productivity of labour versus other inputs
- Costs of labour versus other inputs
- Costs of labour versus costs of foreign labour
150
What is human capital?
The total sum of knowledge, skills, training and experience that workers contribute to the process of production (reflects the quality of the labour force).
151
What factors effect the supply of labour?
- Pay levels
- Working conditions
- Education, skills and experience requirements
- The mobility of labour
152
What is geographical mobility?
The ability for labour/ workers to move locations in response to better wages and employment opportunities.
153
What is occupational mobility?
The ability for labour/ workers to move between different occupations in response to better wages and employment opportunities.
154
What is the working-age population?
The number of people in an economy that are at least 15 years old (of working age).
155
What is the labour force/ workforce?
The number of people who are employed or seeking work in the country at any given time (does not include those under 15 or not wanting to work).
156
How do you calculate the labour force participation rate?
Labour force ÷ Population aged 15 or over x 100
157
What is the labour force participation rate?
The ratio of those in the labour force to those of working age (calculated how much of the working age population is in the labour force).
158
What factors influence the participation rate?
- The state of the economy
- Ageing of the population
- Social attitudes
- School retention rates
159
Define unemployment?
Those who are seeking work but are unable to find employment
160
What are discouraged workers?
Those who are not employed and not seeking work
161
What factors effect the size and quality of the workforce?
- Population size
- Age distribution
- Educational patterns
162
Define equilibrium
When supply equals demand at a certain price point (where the supply and demand curve instersect).
163
What is meant by normal wage?
The dollar amount workers earn for their labour, not considering inflation.
164
What is meant by real wage?
Normal wages considering the effects of inflation (measures the actual purchasing power of money wages).
165
What factors influence the level of wages/ income earned?
- Type of occupation
- Skills/ value of employees
- Gender (discrimination)
- Migrant status and cultural background
166
Define enterprise bargaining
Negotiations between employers and employees regarding pay and working conditions.
167
Define Income distribution
How an economy's incomes are spread amongst different social and socio-economic groups.
168
What is superannuation?
A form of saving that individuals cannot access until they are of retirement age.
169
What are non-wage outcomes?
The benefits that employees recieve in addition to their wages.
170
What are different examples of non-wage outcomes?
- Salary packaging
- Bonus cash payments ontop of employees normal wages
- Improving work flexibility and hours
171
What are the economic benefits of income inequality? (Note - While it's income inequality, the textbook simply calls it inequality)
- Encourages labour force to increase skill level and education
- Encourages the labour force to work longer hours and harder
- Makes the labour force more mobile (incentive to move)
- Encourages entrepreneurs to accept risk more readily
- Creates potential for higher savings and capital formation (encourages savings in the future when they make more money)
172
What are the economic costs of income inequality? (Note - While it's income inequality, the textbook simply calls it inequality)
- Reduces overall utility
- Reduces economic growth
- Reduces consumption and investment
- Creats conspicuous consumption (purchasing brands to display your level of wealth)
- Creates poverty and social problems
- Increases the cost of welfare support
173
What are the social costs of income inequality? (Note - While it's income inequality, the textbook simply calls it inequality)
- Wellbeing
- Social class divisions
- Poverty
174
What is a Financial Future/Option
They are contracts to trade in financial instruments at a latter date for a certain price, often times to avoid movements in inflation
175
What is a Share
A type of financial asset that provides an individual with ownership over part of a company
176
What is the Unemployment Rate?
The percentage of people in the labour force that are unemployed
177
How do you calculate the unemployment rate?
Number of persons unemployed ÷ Total labour force x 100
178
What are the different types of unemployment?
- Cyclical unemployment (downturn in business cycle)
- Structural unemployment (changes to the economy cause a change in demanded services)
- Long-term unemployment (Unempoyed for 12-months or more)
- Seasonal unemployment (Seasonal nature of jobs)
- Frictional unemployment (changing jobs/ moving from one job to another)
- Hard-core unemployment (Considered unsuitable for work due to personal reasons e.g. mental health, disability or drug addiction)
- Hidden unemployment (Given up seeking work or gone back to school)
- Underemployment (Seeking more hours or not utilising their skills/ experience in their current position)
179
What is meant by structural change?
The process by which the patterns of production in the economy are altered over time, and certain products, processes of production, and even industries disappear, while others emerge.
180
Why is there higher unemployment in some areas than others?
- Less infrastructure/ job opportunities
- Slower economic growth (less demand for labour)
181
What is part-time employment?
Employees regularly working less than 35 hours a week.
182
What is meant by casualisation of the workforce?
Refers to the growth of casual employment (and decline of full-time employment/ permanent jobs) as a proportion of the total workforce.
183
What is outsourcing/ subcontracting?
When a business pays another business to perform a function that it does not regard as part of the businesses core focus.
184
What are the advantages of the casualisation of the workforce?
- Flexibility for employees to change staffing levels as business demands change
- Employees may avoid paying some non-wage costs such as penalty rates or redundancy entitlements
- Flexibility for employees with family or other commitments
185
What are the disadvantages of the casualisation of the workforce?
- Less job security
- More difficult for employees to plan for the future, obtain home loans etc, without a secure income
- Less staff loyalty and less development of workforce skills
186
What is a Trade Union
A trade union is an association of workers that aims to advance the interests of its members by improving their wages and working conditions
187
What is the main role of Trade Unions
The main role for unions is to represent their member's interests by negotiating wage increases
188
What are the main forms of unions
- Occupational unions - draw members from workers who possess a particular skill set
- Industry-based unions - cover workers in a particular industry, regardless of the type of work
- Firm-based unions - represent only the workers of one specific enterprise
- General unions - cover a whole range of workers with many different skills across various industries
189
What are Awards
Awards are a set of pay and conditions that are specific to an employee's work or industry
190
What are Enterprise Agreement
A collective workplace agreement that sets out pay and conditions for employees, which are generally negotiated between an employer and a group
191
What are Common Law Contracts
An individual agreement between an employer and employee that sets out pay and conditions for work
192
What is a Public Company
It is an entity whose shares are traded freely on the share market
193
What are Dividends
The profit returns received by the shareholders (owners) of a business
194
What are Capital Gains
The profits made by investors who sell their shares or assets at a price above the level originally paid
195
What is a Float
A float occurs when a company lists itself on the stock exchange and offers its shares to the general public for the first time
196
What is the RBA and its main roles
The Reserve Bank of Australia (RBA) is Australia's central bank, its main roles are to conduct monetary policy and oversee the stability of the financial system
197
`What is APRA
The Australian Prudential Regulation Authority (APRA) is the government body established to regulate all deposit taking institutions, life and general insurance organisations and superannuation funds
198
What is ASIC
The Australian Securities and Investments Commission (ASIC) is the government body with responsibility for corporate regulation, consumer protections and the oversight of financial service products
199
What are the demands for funds in the economy
Individuals:
- Home loans
- Personal loans
- Credit cards
Governments :
Borrowing occurs when expenditure exceeds revenue
Businesses:
- Starting up a business
- Expanding a business
- Managing cash flow
200
What are the supply of funds in the economy
Individuals:
Saving up for future needs
Governments:
Savings occur when surplus exists in budget
Businesses:
Savings if profits are strong and there's no immediate use for funds
International Sector:
The investment from overseas in both Australian businesses and banks
201
What are the main functions of money
1. A medium of exchange
2. A measure of value
3. A store of value
4. A method of deferred payment
202
What is money supply
The total amount of funds in an economy that can be used as a medium of exchange, measure of value, a store of value and a method of deferred payment
203
How is money supply measured
Currency - consists of all currency in circulation held by the general public
M1 - consists of currency and deposits held in transactional bank accounts (physical money and deposite that can easily be accessed i.e. bank accounts)
M3 - consists of M1 plus all non-transaction deposits at banks (M1 + harder to access deposits such as savings accounts and time deposits)
Broad money - consists of M3 plus deposits in non-bank financial intermediaries (M3 + bonds and treasury bills/ all money supply)
204
What are interest rates
Interest rates are the cost of borrowing money expressed as a percentage of the total amount borrowed
205
Factors that effect the level of interest rates
Any factor that affects the supply or demand of funds in the financial markets will also affect the level of interest rates such as:
- The demand for capital goods
- The level of savings in the economy
- The demand for liquid funds
- Inflationary expectations
- Government budget
- International interest rates
The Reserve Bank, in its conduct of monetary policy
206
What is the cash rate
The cash rate is the interest rate paid on overnight loans in the short-term money market
207
What is the meaning of Ceteris Paribus
"All other things being equal" or assuming that everything else is held constant
208
What is the policy interest rate corridor
The deposit and lending rates set around the cash rate target. The deposit rate is set 0.1 percentage points below the cash rate target (price ceiling) while the lending rate is set 0.25 percentage points above the cash rate target (price floor).
209
What is the Australian Treasury
The the Australian Treasury is the main source of economic policy advice to the government, advising on macroeconomic and financial stability issues as well as the legislative and regulatory framework for the financial system
210
What is the Price Elasticity of Demand?
The price elasticity of demand measures the responsiveness of the quantity demanded to price changes.
211
What is Elastic Demand?
A strong response to a change in price.
212
What is inelastic demand?
A weak response to a price change.
213
What is Unit Elastic Demand?
A proportional response to a price change.
214
What is the Total Outlay Method?
A way to calculate the price elasticity of demand by looking at the effect of changes in price on the revenue earned by the producer. If price and revenue move in the same direction, demand is inelastic and vice versa.
215
What is the curve for perfectly elastic demand?
A horizontal straight line.
216
What is the curve for perfectly inelastic demand?
A vertical straight line.
217
What factors affect the Elasticity of Demand?
- Whether the is a luxury or a necessity
- Whether the good has any close substitutes
- The expenditure on the product as a proportion of income
The length of time subsequent to a price change
Whether the good is habit-forming (addictive)
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What is Price Elasticity of Supply?
It measures the responsiveness of the quantity supplied to changes in price
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What is the curve for perfectly elastic supply?
A horizontal straight line
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What is the curve for perfectly inelastic supply?
A vertical straight line
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What are the factors affecting the Elasticity of Supply?
- Time after a price change
- The ability to hold / store stock
- If the firm has excess capacity
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What is the Council of Financial Regulators
The Council of Financial Regulators (CFR) coordinates cooperation and collaboration among its four members - the RBA, APRA, ASIC and Treasure and is an informal body that only allows information sharing and coordination of advice
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What is a price floor?
The minimum price that can be charged for a particular commodity
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What are examples of social costs (negative externalities)
- pollution
- health risks
- environmental damage
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How does the policy interest rate corridor affect the cash rate
The policy rate corridor affects the cash rate because the ceiling and floor of the corridor are automatically set so that the cash rate target is in the middle of the corridor, so if the RBA were to change the cash rate target, banks would be immediately incentivised to borrow from each other within a new range that is consistent within the new cash rate target
226
What does intervention by the government lead to?
Market Disequilibrium
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What are examples of social benefits (positive externalities)
- museums
- public parks
-national defence
- cleaning waterways
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What are characteristics of perfect / pure competition?
- many small sellers, none able to affect market price
- all firms sell the same product
- no barriers to new firms entering or existing firms leaving
- sellers can sell as much as they like, at the market price
- price takers
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What are characteristics of a Monopoly?
- only one firm selling the product
- no competition at all
- product sold has no close substitutes
- significant barriers to entry, preventing competitors from entering the market
- price setters
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What are characteristics of Monopolistic Competition?
- large number of relatively small firms
- products sold are similar, but not identical
- small barriers of entry
- some degree of price setting power
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What are the characteristics of an Oligopoly?
- a few, relatively large firms, each with a large market share
- similar but differentiated products
- significant barriers to entry
- cannot price cut as it would start a price-cutting-war which would result in decreased profits
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Why do banks borrow within the policy rate corridor
No bank has an incentive to complete transactions in the overnight money market outside of this corridor, because if the rates for exchanging ES funds were beyond of that the corridor, banks would simply exchange ES funds with the RBA outside of the overnight market
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What is the flow on effect for the loosening of monetary policy
- RBA reduces the policy rate corridor
- Banks receive less interest from loans of ES funds
- Cash rate decreases
- To maintain margins, banks decrease market interest rates
- Consumers and businesses have to pay less on existing debts; new borrowers find it easier to borrow funds
- Consumption and invest spending increases
- Economic activity increases
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What is the flow on effect for the tightening of monetary policy
- RBA raises the policy rate corridor
- Banks pay more to borrow ES funds
- Cash rate increases
- To maintain margins, banks increase market interest rates
- Consumers and businesses have to pay more on existing debts; new borrowers find it harder to borrow funds
- Consumption and investment spending decreases
- Economic activity decreases
235
What are Domestic Market Operations
Domestic market operations (DMO) refers to the purchase and sale of financial securities by the RBA in exchange for ES balances
236
What is Unconventional Monetary Policy
A response by the RBA that involves using tools other than the changing a policy interest
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Transmission Mechanism
The process by which the changes to interest rates are transmitted through the economy to impact aggregate demand 6 to 18 months after the change
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What are the tools of unconventional monetary policy?
Forward Guidance
Asset Purchases
Term funding facilities
Adjustments to market operations
Negative interest rates
