Exam Flashcards
Economic Problem
Focuses on how a society can satisfy the unlimited wants of individuals with the limited resources available.
Individual Wants
Are the wants of each person according to their preferences and income, such as the types of food, clothing and shelter they prefer and can afford to buy with their income.
Collective Wants
Are the wants of the whole community. What is desired will depend on the preferences of the community as a whole, and not only those of the individual person. Collective wants are usually provided by the government.
Basic Wants
Are needs that all individuals must satisfy to some degree to survive, such as food, water, clothing and shelter. Without these basic wants being satisfied, individuals might not survive in their environment or at the very least experience a very low standard of living, or live in poverty.
Recurring Wants
Are those wants that must be continually satisfied, or satisfied at regular intervals, such as food and water so that people can survive.
Substitute Goods
Are those wants that are interchangeable, such as a consumer wanting to buy a second hand car instead of a new car because it is within the consumer’s budget or income.
Complementary Goods
Refer to those wants which are derived from other wants such as cars and petrol, knives and forks, computers and laser printers. These goods are all complementary in use.
Luxury Goods
Are the desires for goods and services which satisfy needs in excess of basic goods and services needed for survival, such as the desire for holidays, computers, entertainment and cars.
Resources
Refers to the factors of production in economics. The factors of production are bought and sold in factor markets and are used in the production process to produce goods and services to satisfy the needs and wants of consumers
Return for Land (Natural)
Rent
Return for Labour
Income
Return for Capital
Interest
Return for Enterprise
Profit
Scarcity
Implies that people must make a choice. Either forgo something to gain something else.
Questions that need to be answered due to Scarcity
What Goods need to be produced?
How much needs to be Produced?
How are the Goods/Services to be produced?
How are these goods and services to be distributed among the population?
Current Living Standards
A society that places a higher value on current living standards and consumer goods production might allocate more resources to the production of food, clothing, houses, cars and other luxurious, and less on capital goods production such as building new factories, shops, offices and farms.
Future Living Standards
A society that places a higher value on future living standards, might allocate more resources to investment in capital goods production in the present, rather than consumer goods production.
Opportunity Cost
Whenever we satisfy one want, we are giving up the opportunity to satisfy an alternative want.
Production Possibility Frontier (PPF)
Is a graphical representation of all the possible combinations of the production of two goods or services (or two types of goods or services) that the economy can produce at any given time.
4 Assumptions made with the PPF
- Two Goods: the economy produces only two goods
- Fixed Resources: the quantity of resources available remains unchanged
- Fixed Technology: the state of technology is constant
- Technical Efficiency: all resources are fully employed
Impacts on the PPF
New Technology Technological Improvement New/More Resources Decline in Resources Unemployment
Consumer Goods and Services
Are items produced for the immediate satisfaction of individual and community needs and wants
Capital Goods
Are items that have not been produced for immediate consumption but will be used for the production of other goods.
Economic Factors Underlying Individuals
Spending and Saving
Work and Education
Retirement, Voting and Particpation
Economic Factors Underlying Businesses
Pricing and Production
Resource use and Industrial Relations
Economic Factors Underlying Governments
Resource Allocation and Stabilising Activity
Taxation and Regulators of Economic Activity
Gross Domestic Product (GDP)
Is the total value of finished goods and services produced in an economy, in a given time period.
Market Economy
Does not attempt to distribute output equally; rather to reward households and firms for their contribution to the production process in the form of income (Y).
Individuals do not all receive the same level of wages. Workers’ income levels are influenced by how much they work, their skills and expertise, educational qualifications and their bargaining power in wage negotiations with employers.
Free Market Economy
Is an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth.
Mixed Market Economy
Is an economic system that features characteristics of both capitalism and socialism. It allows a level of private economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims.
Command Economy
Is a system where the government determines what goods should be produced, how much should be produced and the price at which the goods will be offered for sale. The command economy is a key feature of any communist society.
Business Cycle
Displays the fluctuations of economic growth over a period of time. Overall, there is usually an overall upward trend in an economy’s output.
Household Sector
Consists of all individuals in the economy who earn an income by selling productive resources to firms.
With the income earnt, households purchase goods and services from the firms sector to satisfy their needs and wants and improve or maintain their standard of living and quality of life.
Firms Sector
Consists of all private businesses which produce and distribute goods and services to consumers.
Firms buy productive resources (labour, land) from the household sector and then make income payments (wages, rent, interest profits, etc.) in return for the use of these resources.
Finance Sector
Consists of all financial institutions (banks and non-bank financial intermediaries) who engage in the borrowing and lending of money and the sale and purchase of financial assets and services to firms and households.
Financial institutions attempt to maximise profits by charging a higher rate of interest to borrowers than they pay to the public for depositing funds.
Government Sector
Consists of all economic activities of local, state, territory and federal governments in Australia. Governments raise revenue through taxes, rates, feeds and charges, and the profits of public trading enterprises (PTEs). This revenue is used to provide collective goods and services to the community such as law and order, defence, education, health, social security and community services.
Overseas Sector
Consists of the exporters and importers of goods and services from the rest of the world. Trade flows refer to exports of goods (e.g. iron ore and natural gas) and services (e.g. education and tourism) sold by Australian firms to foreigners, and imports of goods (e.g. food and machinery) and services (e.g. freight and insurance) purchased by Australian residents from foreigners.
Circular Flow of Income
A model that describes how economic activity occurs between the different groups in an economy. Saving, taxation and spending on imports represent ‘leakages’ from the circular flow. Investment, government spending and export revenue represent ‘injections’ into the circular flow.
Equilibrium
Leakages = Injections
Consumer Sovereignty:
Refers to how the pattern of consumer spending determines the pattern of production and resource allocation.
Effects of Consumer Sovereignty
Marketing + Deceptive & Misleading Conduct + Planned Obsolesce + Anti-Competitive behaviour
Average propensity to consume (APC)
Refers to the proportion of an individual’s income that is spent on consumption rather than on savings.
APC = C/Y
Average propensity to save (APS)
Refers to the proportion of an individual’s income that is saved rather than spent on consumption
APS = S/Y
Factors Influencing Spending & Saving
- Cultural factors
- Personality factors
- Confidence and future expectations - economic outlook
- Any specific future spending plans - e.g. real estate purchase
- Tax policies - lower tax rates for superannuation contributions
- Availability of credit - spending increases if credit is available
Consumption Function
The relationship between consumption spending and disposable income
Marginal Propensity to Consume (MPC)
Is the proportion of each extra dollar of income that goes to consumption.
Marginal Propensity to Save (MPS)
Is the proportion of each additional dollar of household income that is used for saving.
Factors Affecting Individuals Consumer Choice
Level of Income Price of Good itself Price of Substitute/Complementary Goods Consumer taste/preference Expected Future Pricing Advertising
Social Welfare Payments
Assistance to the Aged
Family Payments
Disability Support Payment
Unemployment Benefit
Business/Firm
Is an organisation involved in using entrepreneurial skills to combine factors of production to produce a good or service for sale. Their size, behaviour and performance influence overall productive capacity.
Industry
Is the collection of firms involved in making a similar range of items that usually compete with each other
Goals of a Firm
Maximising Profit Meeting Shareholder Expectations Increasing Market Share Maximising Growth Satisfying Behaviour
Production
Refers to the total amount of goods and services produced. We can increase production by increasing the amount of resources we use, or working those resources for a longer period of time.
Productivity
The ratio of the quantity and quality of units produced to the labour per unit of time
Benefits of Productivity
- Able to satisfy more wants
- Increase in the living standards
- Less wastage of our scarce resources
- Lower production costs and higher profits for the business firm
- A lower inflation rate
- Higher incomes
- Improved international competitiveness of our industries
Achieving Productivity
- Division (Specialisation) of Labour
- Specialisation of Natural Resources (Location of Industry)
- Specialisation of Capital (Large Scale Production)
Internal Economies of Scale
Are the cost saving advantages that result from a firm expanding its scale of operations. This occurs when the average costs per- unit of production fall as the size of output grows. This occurs when a firm’s output level is below the technical optimum.
Internal Diseconomies of Scale
Are the cost disadvantages (specifically, the increase in marginal costs per unit) faced by a firm as a result of the firm expanding its scale of operations beyond a certain point. The firm’s output level is above the technical optimum.
External Economies of scale
Are the advantages that accrue to a firm because of the growth of the industry in which the firm is operating, and are not the result of the firm changing its own scale of operations.
External Diseconomies of scale
External diseconomies of scale
Are the advantages faced by a firm because of the growth of the industry in which the firm is operating, and are not the result of a firm changing its own sale of operations.
Demand
Can be defined as 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.
Law of Demand
States that, all else being equal, as the price of a product increases, quantity demanded falls; likewise, as the price of a product decreases, quantity demanded increases.
Individual Demand
Refers to the demand of each individual consumer for a particular good or service
Market Demand
Refers to the demand by all consumers for a particular good or service.
Demand Curve
A graph of the relationship between the price of a good and the quantity demanded.
Factors Affecting Market Demand
- Prices of other goods and services
- Expected Future Prices:
- Consumer Incomes:
- The size and age distribution of the population
Price Elasticity of Demand
Measures the responsiveness of quantity demanded to a change in price.
Elastic Demand
A situation in which consumer demand is sensitive to changes in price
Inelastic Demand
A situation in which an increase or a decrease in price will not significantly affect demand for the product
Unit Elasticity
Demand or supply for which the elasticity coefficient is equal to 1; means that the percentage change in the quantity demanded or quantity supplied is equal to the percentage change in price
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; If price and revenue move in the a different direction, demand is elastic; and if revenue remains unchanged in response to a price change, demand is unit elastic
Perfect Elasticity
horizontal or flat, any price change results in zero or an infinite quantity demanded/supplied
Perfect Inelasticity
the demand curve is a vertical straight line; quantity demanded remains the same regardless of price
Factors Affecting Elasticity of Demand
- Whether the good 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 a good is habit-forming (addictive) or not
Supply
The amount of goods and services that producers are able and willing to sell at various prices during a specified time period
Market Supply
Refers to the sum of all individual firm supplies of a good or service.
Assumptions of Supply
- Has the resources and technology to produce
- It can profit from producing it
- Plans to produce it and sell it
Law of Supply
States that, all else equal (Certeris Paribus), an increase in price results in an increase in quantity supplied. In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes.
Factors Affecting Market Supply
Price of goods itself Price of Other Goods Expected Future Prices State of Technology Change in Cost of Factors of Production Quantity of good Available Climatic Condition
Contraction of Supply
When a decrease in the price of a good or service causes a decrease in quantity supplied. It is shown by a downward movement along the supply curve
Expansion of Supply
When an increase in the price of a good or service causes an increase in quantity supplied. It is shown by an upward movement along the supply curve
Increase in Supply
Products become cheaper for firms to produces. This would encourage them to supply more quantity at the same price, or same amount for a cheaper price. The supply curve shifts to the right. This is due to: utility costs decrease, company taxes decrease, wages decrease, exchange rate increases (cheaper to buy capital from overseas), and lower interest rates.
Decrease in Supply
Products become more expensive for firms to produce. This would encourage them to supply less quantity at the same price, or same amount for a higher price. The supply curve shifts to the left. This is due to: utility costs increase, company taxes increase, wages increase, exchange rate decreases (more expensive to buy capital from overseas), and higher interest rates.
Market Equilibrium
Is the situation where, at a certain price level, the quantity supplied and the quantity demanded of a particular good are equal.
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. In a market economy, the price mechanism attempts to solve the economic problem in product markets for goods and services.
Primary vs secondary markets in the sharemarket
The primary market is where securities are created, while the secondary market is where those securities are traded by investors.
In the primary market, companies sell new stocks and bonds to the public for the first time, such as with an initial public offering.
The secondary market is basically the stock market and refers to the New York Stock Exchange, the Nasdaq, and other exchanges worldwide.
Minimum superannuation
9.5%
Superannuation over 18 and paid $4500
Life insurance companies
The purpose of life insurance is to provide you and your family with a financial security if you were to pass away, become terminally ill, or in some cases if you become unable to work.
Raise funds by selling securities
Higher rate thank bank interest rates
Unit trusts
Large range of investors pull funds and the trusts invest money in a variety of different assets (shares, property, etc.) invest the money as income which can be leaned out to business
Non-excludable
Non-paying consumers cannot be prevented from accessing a good.
Non-rivalrous
A good whose consumption by one consumer does not prevent simultaneous consumption by other consumers.
Free riders
Groups or individuals who benefit from a g/s without contributing to the cost
Public good
- A public good is a good which, once provided is difficult to prevent anyone from using, regardless of whether they pay for it or not
- examples of public goods include:
o clean air
o street lighting
o national defence
o public parks
The characteristics of public goods are that they are
non-excludable and non-rival.
Merit goods
They have benefits to the community that go beyond the individual who enjoys them directly. An example is healthcare and art.
What is the reward for land
rent
What is the reward for labour
wages
What is the reward for capital
interest
What is the reward for enterprise
profit
Australian economy compared to indonesia
Australia Labour force: 13577500 Teritary sector: 87% Distribution of income: lower 10% Education: $36.3B S. Welfare: 36% GDP
Indonesia Labour force: 129900000 Teritary sector: 47.9% Distribution of income: top 10-20% Education: > 3.6% GDP S. Welfare: 26.2% GDP
Consumer sovereignty
The manner through which consumers, collectively through market demand for goods and services determine what is produced and the quantity of production
Internal economies of scale
Internal economies of scale are the cost saving advantages of a firm expanding its scale of operations. They occur when a firm’s output is below the technical optimum.
Diseconomies of scale
It will eventually reach a point where the cost per unit of production will rise again. This is known as internal diseconomies of scale.
Technical optimum
The most efficient level of production for a firm. At this point, they average cost of production is at the lowest possible.
Ceteris Paribus assumption
‘Other things being equal’
Analyses the response of demand to a change in price
All other factors remain constant
Price ceilings
The maximum price that can be charged for a good or service.
Price ceilings will redistribute money from sellers to buyers.
Price floors
The minimum price that can be charged for a good or service.
Price floors will redistribute money from buyers to sellers.
Market failure
When the price mechanism takes into account private benefits and costs of production to consumers and producers, but it fails to take into account indirect costs like damage to the environment.
Public goods
Goods that private firms are unwilling to supply, as they are not able to restrict usage and benefits to those willing to pay for the good. Because of this, government should provide these goods.
Market Failure- Social costs and benefits
Social costs and benefits are referred to as externalities and are not taken into account in the operation of the price mechanism. Social costs are negative externalities and social benefits are positive externalities.
The government may intervene in order to encourage the provision of merit goods and services that have positive externalities, through subsidies to consumers to lower prices and increase consumption.
Price elasticity
The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Elastic demand
A strong response to change in price
Unit elastic demand
A proportional response to a price change (total amount spent by consumers remains unchanged)
Inelastic demand
A week response to a price change
Price elasticity of supply
- Elastic supply
- Inelastic supply
The price elasticity of supply measures the responsiveness of the quantity supplied of a product to change him changes in price.
Elastic supply = When a rise in quantity supplied is proportionately greater than the increase in price.
Inelastic supply = When there is a price change and it is proportionately less than the change in quantity supplied.
- Cyclical unemployment
Caused by a downturn in the business cycle.
- Structural unemployment
A mismatch between the skills demanded by employers and those possessed by unemployed people.
- Long-term unemployment:
An individual must have been unemployed for 12 months or more.
- Seasonal unemployment:
The seasonal nature of some jobs.
- Frictional unemployment
As people change jobs, moving from one job to another.
- Hard-core unemployment
Those individuals who might be considered unsuitable for work.
- Hidden unemployment
Those individuals who are not counted in the official unemployment figures because they have given up actively seeking work.
Trade unions
An association of workers that aim to advance the interests of its members by improving their wages and working conditions. They represent their members interests.
Their role: they protect and improve wages and working conditions of its members. They can represent specific occupations e.g. Electrical trade unions, workers in an industry e.g. transport workers union and can represent workers across occupations and industries called general unions e.g. Australian workers union.
The LABOUR COUNCIL (NSW) represents unions at a state level.
The AUSTRALIAN COUNCIL OF TRADE UNIONS (ACTU) represent all unions at a national level and they:
1. coordinate union activities across Australia
2. conduct campaigns and research
3. provide input to government policies
4. they negotiate minimum wages (2018, won the biggest increase ever 3.5%)
Employer associations
They represent the interests of their members in lobbying government for industry assistance and other industrial/trade/tax related policies. They assist employers in managing industrial relations issues, such as by representing their members in the various industrial tribunals set up to settle industrial disputes.
At the federal level, there are 3 important employer associations:
- Business Council of Australia (BCA)
- Australian Industry Group
- Australian Chamber of Commerce and Industry (ACCI)
Minimum employment standards
- Australia has 10 minimum employment standards which are set out in law through a document called the national employment standards
Provisions include = - Maximum weekly hours of work: a full-time employee must not work more than 38 hours a week
- The right to request flexible working arrangements: parents can request a change in working conditions to assist them caring for a child.
- Leave: employees have the right to paid annual leave, public holidays, and carers and compassionate leave.
- Notice of termination and redundancy pay: employers are required to give between 1 and 4 weeks’ notice of job termination. Workers are entitled to redundancy pay, determined by the duration of employment.
Industrial awards (the safety net)
- Awards are a set of pay and conditions that are specific to an employee’s work or industry sector and establish minimum wage and working conditions for employees
- Awards set the absolute minimum rates of pay and entitlements
- Australia has different minimum pay rates in 122 different awards
- The Fair Work Commission sets the minimum award wage rates and casual loadings
- Around 21% of workers have their pay set directly through award rates
- 38% of employees have “award-based” pay arrangements
- Awards extend the protections of the National Employment standards, with provisions tailored to the needs of the specific industry or occupation
Enterprise agreements
- Enterprise agreements are workplace agreements that is negotiated collectively through enterprise bargaining between an employer and employees, usually represented by unions
- They cover 38% of employees
- All agreements must comply with the National Employment standards and cannot offer pay rates below that mandated by the equivalent award
- Workplace agreements must also pass the “better off overall test” (BOOT), requiring the employees to be made better off overall by an agreement compared to an applicable award
- Unions negotiate these agreements on behalf of all employees in a workplace, even though in most workplaces less than half the employees belong to the union
- Since the early 1990s, collective agreements have generally produced annual wage increases averaging around 4%, although more recently annual increases have fallen to around 2.5%
- National Employment standards and modern awards together provide the basis for the three main ways of determining pay and conditions for employees
Common law contracts
- Individual employment contracts have always been an important part of wage determination in Australia
- Under the Fair Work act, there is only one type of individual contract in the industrial relations system, and this is known as a common law contract
- Common law contracts, also known as unregistered individual agreements, are not part of the formal industrial relations system, but they comply with all of the minimum standards in the system and around and apply to around 37% of the workforce
- Historically most individual contracts have been common law contracts and they remain overwhelmingly the most common form of individual employment agreements especially in small businesses
- They cannot offer pay rates and conditions that are below the rate that they would be paid by the equivalent award
- Common law contracts are generally enforced through ordinary law courts rather than through industrial tribunals which usually involves greater expense for employees and employers
- One form of common law contracts that is become more common in recent years is the short-term work contract in particular contracts which under which workers are employed by a labour hire company that sells their labour hire services to other companies
Primary financial market:
New financial products (securities) are sold for the first time
Secondary financial markets: existing goods created in the. Primary financial market and are forever traded
The share market
A share is a financial asset that provides an individual with ownership over a part of a company. Specific financial market where investors buy and sell certain types of shares.
Public companies can trade shares on a share market
Share transactions take place through stock exchange. Usually online. Australia’s share market is called the Australian Securities Exchange (ASX)
Matches sellers desired selling price with buyers desired buying price, within a regulated environment.
Reserve bank of Australia
Australia’s central bank, different to commercial banks as it does not deal with ordinary customers of make profit. 3 board objectives: 1. Stability of the Australian currency 2. Maintince of full employment 3. Economic prosperity and welfare
The main way the RBA does this is my targeting an inflation rate of 2-3%
7 main functions
1. Monetary policy: policy that influences the cost and availability of money through influencing interest rates. RBA can indirectly determine how much lending and borrowing can occur in the economy.
2. Stability: overall stability of the financial system through using bank rules to institutions
3. Control of bank note issues: RBA has sole issuing authority of Australian currency
4. Regulation of the payment system: regulates all payment systems in Australia: credit cards, electronic cash, travellers’ cheques and stores value cards
5. Banker of banks: allow banks to settle debts between themselves and the RBA through exchange settlement accounts.
6. Holding reserves: holds and manages Australian foreign currency reserves and operates in the FOREX market
7. Advises governments: provide banking and financial services to the government, both federal and state
• Australian Prudential Regulation Authority
APRA
Regulate all banks, superannuation funds, insurance companies, credit unions and building societies.
- Regulates institutions to ensure that they are able to meet their obligations
- Intervenes to ensure people can receive as much money owed as possible
• Australian Securities and Investments Commission
ASIC
Responsible for corporate regulation, consumer protection and improving the performance of the financial system. Investigates illegal acts of individuals or unethical investments
Australian Treasury
Plays an important role in updating he government with emerging developments. Main source of economic policy advice to the Australian government (government budgets, tax rates, expenditure allocation, monetary and fiscal policy)
Council of Financial Regulators
Made up pf the previous organisations (RBA, APRA, ASIC and the treasury). Encourages cooperation and collaboration, the sharing of information and coordinating policies among the four members
Liquidity
Ease with which a financial asset can be transformed into cash.
Transactions motive
Need to carry out day to day transactions
Precautionary motive
Need to have liquid funds available for emergencies and unforeseen events
Speculative motive
To take advantage of investment opportunities financial assets may be purchased or converted into liquid funds – possibility of making capital gains. (but losses may also result)
Money base
All currency in circulation, physical notes and coins and private bank deposits. Measure of the most liquid financial assets
M3
Money base combined with bank deposits external to the RBA. Definition of money supply the RBA uses
Board money
M3 plus the deposits in non-bank financial intermediaries minus those intermediaries’ deposits with banks. Broad money is more accurate as a measure if the money supply but this is a complicated price for the RBA when calculating relevant statistics
Credit:
Allows for payments for goods and services To be deferred and paid back at a later date
Relative poverty
In Australia the most common form of poverty is relative poverty which refers to those who standard of living is substantially lower than the average for the economy as a whole and is often defined as a level of income below 30% of average earnings.
Disadvantaged groups
- There are particular groups within Australian society that is susceptible to inequality and poverty including those with low education levels, migrants from non-English-speaking backgrounds, indigenous Australians and single parent families.
Monopolisation
When at which occurs when a firm uses its dominant market position to eliminate existing competition or prevent new firms from entering the market.
Price discrimination:
Which occurs when a firm sells the same type of good or service in different markets at different prices.
Exclusive dealing
Occurs when a firm takes conditions for supply, they exclude retailers from dealing with other competitors. Under the competition and consumer Act 2010, suppliers are prohibited from imposing on their customers an obligation not to purchase goods or services from other suppliers.
Collusion and market sharing
Occurs when firms get together and agree on a pricing and market sharing arrangement that reduces effective competition between them and tends to inhibit the entry of new competition into the market for example petrol stations.
What would happen if there was no government intervention
- Without any government intervention a free market economy is likely to experience severe fluctuations in the level of economic activity.
- Market forces can bring on boom periods when where excess demand for goods and services caused price increases inflation.
- High inflation can distort business decision-making, reduce consumers purchasing power and force an increase in interest rates which can lead to a recession, a severe downturn in the level of economic activity.
- Recessions increase unemployment, business failures and other economic and social problems.
Macroeconomic policies include:
o fiscal policy
o monetary policy
The aim of macroeconomic policy is to counterbalance the business cycle so as to stabilise their level of economic growth.
- During periods of economic growth, the government tries to reduce economic activity by spending less increasing taxation or increasing interest rates.
- In a recession the government tries to stimulate growth with increased government spending, tax cuts and low interest rates.
- Macroeconomic policy measures are therefore designed to have an impact on the economy as a whole.
- The government also uses microeconomic reform policies which are designed to improve work practises and productivity levels with structural adjustment of individual firms and industries.
Taxation
- The main purpose of taxation is to raise revenue to allow for government spending, but taxes and charges on producers can also be used to influence the price of goods and services, thus influencing consumer demand and production
- The influence of the taxes and resource allocation is indirect
- By changing prices, tax policies may change the pattern of consumer demand, and indirectly change resource allocation.
- Direct taxes are those that are paid by the individual or business firms on which they are levied, example: company tax and capital gain tax
- Indirect taxes are levied on individuals and business firms, but they can be passed on to someone else, example: GST
- the government also uses indirect taxes on products such as cigarettes to divert resources away from the production of those goods
- This is meant to deter people from smoking and encourage them to quit
Spending
- Government spending is used to directly reallocate resources to a particular sector of the economy, and to influence the decision of consumers and businesses
- The government aims to redress a failure of the market to provide resources that fit with the community’s broader needs and wants
- Examples include:
o Funding for arts
o Grants for start-up businesses
o Subsidies to telecommunication companies like Telstra
o Cash payments to private employment search businesses - These forms of gov spending may not be sufficient to substantially change the allocation of resources in the economy
- They can affect the decisions of private businesses and consumers, who make up the majority of the Australian economy
Government provision of goods and services
- Governments have generally played an important role in Australia’s economy, with governments providing a substantial amount of basic infrastructure such as
o the roads
o railways
o public transport systems
o electricity distribution
o Postal and telecommunication networks - It was widely thought that the government could operate enterprises better than the private sector because they would have the interests of the wider public in mind rather than the aim of making profits.
- For example, Commonwealth bank
- Governments were considered better able to provide important goods and services to a larger number of people at a lower price.
- Attitudes have shifted and it was widely felt that governments were inefficient in operating their enterprises and that this inefficiency increased costs for consumers.
- As a result, governments have largely sold their businesses to the private sector known as privatisation and reduced their direct involvement in the provision of goods and services.
- Privatisation occurs when the government sells public trading enterprises to the private sector.
- Tax base
The items that are taxed e.g. income, wealth and consumption
- Average rate of tax (ART):
The proportion of total income earned that is paid in the form of tax
- Marginal rate of tax (MRT):
The proportion of any increase in income that must be paid as tax
- Progressive tax
Higher income earners pay a greater proportion of their income as tax and lower income earners
- Regressive tax:
Higher income earners pay a smaller proportion of their income is tax than lower income earners
- Proportional tax:
All income earners pay the same proportion of their income as tax
- Australia’s progressive personal income taxation system also known as PAYG tax, is the main instrument of taxation that is used to redistribute income
Social welfare payments
- The government redistributes its taxation revenue to lower income earners via social welfare payments
- These payments are the major policy instrument for reducing income inequality in Australia
- Social welfare payments account for around 1/3 of government expenditure each year and therefore considerably impact upon the distribution of income in the economy
- Payments are often ‘means tested’ which means the people on higher incomes or those with a large amount of assets may be ineligible to receive specific benefits highlighting the fact that the social welfare payments are designed to reduce income inequality
- Examples include
o unemployment benefits
o family benefits
o age pension
o disability pension - The largest area of social welfare payments is the age pension because Australia is an ageing population
- Most Australians rely on the age pension for financial security in their retirement and this will continue to be the case in coming decades even though Australia has compulsory superannuation
Monetary policy
- Action by the Reserve Bank of Australia, on behalf of the government, designed to influence the level of interest rates and the supply of money.
- The main instrument of monetary policy is the use of domestic market operations (DMOs) which involves the buying and selling of government securities by the Reserve Bank in order to affect the cash rate in the short-term money market and influence the level of interest rates in the economy.
- Tight monetary policy: to slow down the level of economic activity, it could do so by tightening monetary policy and putting upward pressure on interest rates. This will reduce demand for money and urban consume consumer and investment spending, resulting in a lower level of economic activity.
- Loose monetary policy: to increase the level of economic activity, it could do so by loosening monetary policy by putting downward pressure on interest rates. Lower interest rates would increase the demand for money and boost consumer and investment spending resulting in a higher level of economic growth activity.
Monetary policy can either be tightened or loosened depending on whether the government wishes to dampen or boost the level of economic activity. Fiscal policy plays an important role in influencing economic growth and unemployment especially when the economy is in a downturn.
- Externalities
- The use of energy resources such as coal and oil leads to huge emissions of carbon dioxide which is a gas that causes climate change.
- Externalities often involve air and water pollution.
- Both atmospheric and water pollution are extremely serious issues because their consequences cannot be contained.
- In 2014 the carbon tax was abolished by the Abbott government and replaced with an ERF (emissions reduction fund) to directly subsidise measures to reduce carbon emissions.
An expansionary fiscal policy stance
The government might reduce taxation revenue or increase government expenditure creating either a smaller surplus or bigger deficit than it has previously had.
Contractionary fiscal policy stance
The government would be planning to increase taxation revenue or decrease government expenditure creating either a smaller deficit or larger surplus than it had previously.
A neutral fiscal policy stance:
Occurs when the government does not change the budget outcome from the previous year’s level.
Automatic stabilisers
Definition: policies operate automatically to counterbalance the trend in the level of economic growth and to stabilise the economy.
- Even without deliberate decisions by the government to change its policies from one year to the next, the level of revenue and expenditure change automatically in response to changing economic conditions.
- This reflects the operation of policies known as automatic stabilisers
The two main automatic stabilisers are: The progressive personal income tax and system and unemployment benefits.
- An increase in the level of economic activity
when the economy is growing, income levels increase leading to a rise in taxation revenue for the government. Unemployment falls reducing government expenditure on unemployment benefits. The budget outcome is a smaller deficit or bigger surplus. The automatic stabilisers would lead to an automatic contraction in aggregate demand thus having a stabilising effect even without any deliberate government policy action.
- A decrease in the level of economic activity
in times of recession income levels fall leading to a fall in taxation revenue. Unemployment rises increasing government expenditure on unemployment benefits. The budget outcome is a small surplus or bigger deficit thus automatically stimulating aggregate demand even without any deliberate change in government policy.
Injections
Investment, Exports, Government spending
Leakages
Taxation, Savings, imports
LRAC Curve
A movement up is internal, a movement down is external
A movement down to the left is economies, a movement up to the right is diseconomies
How do you calculate total workforce?
Employed persons + unemployed persons
How do you calculate total Participation rate?
workforce/ working age population x 100/1
How do you calculate total Unemployment rate?
unemployed persons/ workforce x 100/ 1
Factors influencing individual consumer choice
- income
- price
- price of substitutes
- price of complements
- preferences/tastes
- advertising
Factors that may cause an increase/decrease in demand
- The price of the good and service
- The price of substitute/complementary goods
- Expected future prices
- Changes in consumer taste and preferences
- Level of income
- Size of population and age distribution
Elastic demand
A strong response to a change in price
Unit Elastic demand
A proportional response to a price chnage (total amount spnet by consumers remains unchanged)
Inelastic demand
A weak response to a price change
price increases, revenue increases explains
inelatsic demand
price increases, revenue decreases explains
Elastic demand
price increases, revenue decreases remains the same explains
Unit elastic demand
Perfectly elastic demand
Demadn curve is a horistonal straight line
- Consumers will demand an infinate quanitity at a certain price, but nothing at all abive this. (therortical)
Perfectly inelastic demand
Demadn curve is a vertical straight line
sonsumers are willing to pay any price in order to obatin a given quantity of good or service. e.g. someone with a life threatening illnesss who is willimng to pay any price to be treated with a particular drug.
Factors affecting elasticity of demand
- necessities and luxuries
- existence of close substitutes
- proportion of income spent on the good
- the length of time since a price change
- weather the good is habit-forming (addictive) or nit
Factors affecting market supply
the price of the good itself the orice of other goods or servicies the state of technology changes in the cost of factors of production qunatity of good avaliable climatic and seasonal influence
factors of production
land, labor, capital, and entrepreneurship
supply definition
Supply is the quanitity of a good or service that all firms in particular industry are willing and able ti offer for sale at different price leveks at a given point in time.
Factors casuing an increase in supply curve
- A fall in the price o f other goods, which makes production of other goods less profitable
- An improve,ent in technology used in the production process
- A fall in the cost of production such as labour or captital
- An increase in the quantity of resources avaliable to be used in production
- Climatic conditions or seasonal changes that are more favouable to the production process
Factors casuing an decrease in supply curve
- A rise inthe price of other goods
- A. certain techjnology no longer avaliable
- A rise in the cost of factors of production
- A decrease in the quantity of resources avaliable
- Regulations restricting the sale of a good because of its risks to heath and saftey
- CLimatic conditions or seasonal changes that are less favourable to the productuon of a particular good
What does an increase in supply indictaue
firms are willimh and able to supply more of a product at each price level than before
Perfectly elastic supply
Is where producers are willing to supply an infinate quantity of a good or service at a particular price but nothing at all at a price belwo this. This situation if represeneted by a horizontal supply curve.
Perfectly inelastic supply
Where produvcers are willing to supply a given quantity of good or service regardless of price. this situtation is represnted by a vertical supply curve.
• Monopoly
- One producer in the industry
- Only one firm selling the product and there is no market competition at all
- Product has no close substitutes
- Significant barriers for new firms entering the market
- Monopolist has greatest control over market price
- Can set product at whatever price it likes in order to maximize profit
- Advertising done for product image
- Market for water supply – one of few remaining monopolies in Australia
• Oligopoly
- A small number of large firms dominating the industry
• Pure market conditions
- Many small buyers and none of them are sufficiently large enough to be able to affect market price
- All firms selling one product
- No barriers to new firms entering or existing ones leaving the market
- Can sell as much as they want at the market price
- Must sell at the market price determined by supply and demand
- No one would purchase their product if it was above that price
- Firms wouldn’t sell below because they wouldn’t be maximizing profit
- Theoretical- not many real-life examples of pure competition
• Monopolistic competition
- many firms in the industry
- A large number of relatively small firms
- Similar products sold
- Products differentiated= some degree of price setting power
- Small barriers for firms entering the market, existing firms have loyal customers, consider their firm supplies the best products
- Some control over price setting because of product differentiation
- Aware of many close substitutes and competition is fierce
- Advertising – bringing in new customers and maintaining existing
Factors affecting elasticity of supply
- Time lags after a price change
- The ability to hold and store stock
- Excess capacity
economics Cost of inequality
- Reduces overall utility.
- Can reduce economic growth.
- Reduces consumption and investment.
- create conspicuous consumption (designer purchases).
- create poverty and social problems.
- Increases the cost of welfare support.
social Cost of inequality
Lower levels of wellbeing: social problems such as mental illness, crime, lower levels of life expectancy and lower levels of social mobility are all related to a countries level of inequality.
social class divisions: the distribution of income and wealth creates class distinctions in modern economies such as between groups broadly described as upper class, middle class and working class.
Poverty: inequality results in higher levels of poverty. Many Australians live in relative poverty which trap families in a vicious cycle of low incomes and limited economic opportunities.
economic benefits of inequality
- encourages the labour force to increase education and skill levels.
- Encourages the labour force to work longer and harder.
- Makes the labour force more mobile.
- Encourages entrepreneurs to accept risks more readily.
- Creates the potential for higher savings and capital formation.
social benefits of inequality
- Existing inequality in the distribution of income and wealth it tends to perpetuate inequality of opportunity.
- not everyone has the same mental and physical attributes in the same potential with regard to the acquisition of income and wealth.
- People who acquire wealth through inheritance have a much greater opportunity to build up their wealth through investments, as opposed to those who start with no wealth
- people may not have access to the same networks of people that may lead to new opportunities.
Goverent 2019-20 budget and sources of taxation
$514, 93% of commonwealth goverements revenue comes from taxation sources. the sources of taxation revenue are dividied into direct taxes (persoanl income tax and company tax) and indirect taxes (sales taxes)
ACCC
(Australian competition and consumer Commission)
- The Competition and Consumer Act 2010 deals with:
o consumer protection
o anti-competitive conduct of firms
o access to essential facilities for all businesses
o mergers and takeovers likely to reduce competition in the market.
Labour force
everyone 15 or unemployed seeking work
Labour force participation rate = labour force/ population 15+ x 100
Financial Insitutions
-RBA conducts monetary polcy, banker for the banks
-Treasury, ecomic policy advice
APRA, reglate insitutions and encourages good behaviour
-ASIC, gov body responsible for corporate regulation, consumer protection
Sources of income
Wages + salaries = 55% Business profits +captial investmnet = 18% Property income = 12% Goverment benefits = 9% Other = 6%
Goals of the firm
- Maximising profits
- Maximising growth
- Increasing market share
- meeting shareholder expectations
- satisfying behaviour
Internal and extermal diseconomies of scale
external diseconomies of scale: the advantages faced by a firm because of the growth of the industry in when the firm is operating.
internal diseconomies of scale: the disadvanatges fdaced by the firm as a result of the firm expanding its operations beyond a certain point (under technical optimum)
internal and extermal economies of scale
External economies of scale: Advantages that accrue to a firm because of the growth of the industry in which the firm operates
Internal econonomies of scale: the cost saving advantages that result from a firm expanding its scale of operations. the avergae cost per unit falls as output grows
Law of supply
As price increases, the quantity supplied also increases
Law of demand
As price increases, the quantity demanded decreases
The business cycle
Boom: increased production of g/s falling unemployment rising income rising quality of life Recession: falling production of goods and services rising unemployment falling quality of life falling income
Expandsionary + contractionary monetray policy
expansionary: a cut in the cash rate supports economic growth
contractionary: an increase in the cahs rate reduces inflation
Unemployment rate
- current
- previous
7.4% in September 2020
(Australia’s highest jobless rate has been since 1998)
5.2% in march
inflation
- current
- previous
Inflation of -0.3% (deflation
2.2% in January 2020
Cash rate
- current
- previous
0.25% (emergency rate in mid-march 2020 from 0.50 to 0.25.
likely to be dropped to 0.1% by the end of the year
- 75 febuary 2020
- 00 in September 2019 (one year ago)
Budget
$85.8 billion deficit
Expected surplus of 5 billion
Household saving to income ratio
19.8 per cent (the highest rate since June 1974)
