Unit 1 Flashcards
1
Q
Good
A
A material that is bought to satisfy customers need. (tangible and can be touched)
Types:
1) Public - good supplied that benefits multiple
people such as parking spaces
2) Individual - Individually owned good such as a
teacher
3) Complementary - goods that work together, one
doesn’t work without another such
as petrol for a car. When one of the
economies is impacted then it affects
the other. Petrol prices increase causes
demand for cars to go down
4) Competitive - When one prices go up the demand
for the other also goes up. Coca Cola
prices go up therefore people decide to
buy pepsi.
2
Q
Service
A
A transaction of a non-physical value from seller to buyer (not giving a physical product)
3
Q
Land
A
All resourced found in nature
The reward to the owners of this resource is called rent
4
Q
Labour
A
Human effort… Includes both physical and mental effort.
The reward to the owners of this resource are wages…
5
Q
Enterprise
A
The organisation of the other factors of production
The reward for enterprise is Profit
6
Q
Capital
A
Goods used in the production of other goods and services.
Funds for the purchase of capital goods are made available for loan by the savings of consumers.
The rewards to the suppliers of these funds is interest
7
Q
Infrastructure
A
Systems, services, and physical structures that facilitate economic activity E.g Communication systems, roads, networks of electricity wires, police services
8
Q
Diminishing Return
A
A decrease in the return on each new unit added. Eg. 1 tractor increased my production massively but when im bought another it had less effect on my ability to increase income. Still helped but not as much.
9
Q
Opportunity cost
A
The value of your choice’s next best alternative.
We know we have limited resources - limited budgets, limited resources, limited time. We want unlimited resources (this is the economic problem)
Rational decision makers ask themselves; is this the best use of my money?
Eg - Using your holiday time to visit one country costs you the fun you have had in another.
Consuming one good or service reduces our purchasing power and prevents us from consuming another good or service.
The monetary cost of eating a sausage roll is five dollars but the opportunity cost is the enjoyment of eating a sausage roll for example
Producing one good means foregoing the production of another good.
10
Q
Retail trade
A
Retail is the process of selling consumer goods or services to customers through multiple channels of distribution to earn a profit. Retailers satisfy demand identified through a supply chain.
11
Q
GDP per capita
A
Gross Domestic Product divided by population
GDP per capita is a measure of a country’s economic output that accounts for its number of people. It divides the country’s gross domestic product by its total population.
12
Q
y=c+m
A
disposable (after tax) income = total consumption + imports
13
Q
3 types of Specialisation
A
1) division of labour
2) location of industry
3) Large Scale Production
14
Q
Division of Labour
A
When businesses break down their production process into multiple sub-process. Allows labour to specialises in particular part of the process, therefore avoiding time and effort of moving from a process to another.
15
Q
Location of Industry
A
When a large number of businesses produce similar goods and services congregate in the same area to reduce production costs. They share common infrastructure requirements.
16
Q
Large-scale production
A
Occurs when businesses grow so large they can use highly specialised capital equipment in their production process
17
Q
Inflation
A
The general prices of goods and services of an economy increases for a significant period of time: money becomes worth less. Should be around 2-3%
18
Q
Deflation
A
The general prices of goods and services of an economy falls for a significant period of time: Money becomes worth more
19
Q
Hyperinflation
A
Extraordinary high (rapid) rates of inflation. money loses its value
20
Q
CPI
A
consumer price index
The CPI measures changes in the prices of a “basket” of goods and services consumed by an average household.
21
Q
Disequilibrium
A
Sum of leakage > sum of injection
When leakages area greater than injections, there is a downturn in economic activity (recession of business cycle)
income falls, production falls, unemployment rises
less income = less saving, less imports, less taxes
leakages fall until equal to injections. Therefore, equilibrium or sum of leakages < sum of injections
22
Q
Inflation Rate
A
percentage change in the general prices of goods and services over time (usually a year)
23
Q
Pro cyclical
A
Something that moves in the same direction as the business cycle
eg international tourism
24
Q
countercyclical
A
something that moves in the opposite direction to the business cycle
eg. domestic tourism
25
sector
part of the economy where the participants are all engages in similar economic activity
financial sector - link between savers and burrowers of money
government sector - role is to satisfy collective wants
international sector - includes all trade + money flows eg leading/borrowing foreign aid, remittances
26
circular flow of income
```
S - saving
T - taxation
M - imports
I - investment
G - government expenditure
X - exports
Y - Income
E - consumption expediture
```
27
Equilibrium
STM (leakages) = IGX (injections)
28
Boom
increasing production of goods and services (output)
- increases consumption and investment
- inflation rises (increase in prices)
- falling levels of unemployment
- rising income levels
- rising quality of life
29
Recession (or downturn)
Falling production of goods and services (output)
- falling consumer and business confidence
- falling levels of spending and investment
- sluggish rates of inflation
- rising or high unemployment
- falling wage rates
- falling quality of rights
occurs when there are 2 economic quarter of negative growth
30
Depression
A retained recession
31
Consumer Sovereignty
As a collective group, what consumers spend their money of directly determines.
- What is produced by their actions. Firms that meet consumers demand will make sales; firms that are not producing what consumers want will not make sales.
- How much product is produced
- The price of the product
Marketing can influence consumer sovereignty. The drive for businesses to seek profit. Rather than responding to the wants of consumers, marketing often attempts to create and/or intensify consumer wants.
32
Consumer Sovereignty and Income
As income level changes, so does consumer demand for different types of goods and services, thus changing what is produced in the economy.
33
Product Market
the market for the outputs of production (goods and services)
34
Factor Market
Is a market for any input into the production process (factors of production - land, labour, capital and enterprise)
35
Product Markets
consumers: consumers within the constrain of their income choose what to buy from product market based on the relative price of each good or service.
36
Types of Demand
Individual demand: is the quantity of the good or service that a consumer is willing and able to purchase at a given price.
Market demand: is essentially the sum of all individual demand - the demand by all consumers for a particular good or service
Influenced by: price, income, tastes, expected future prices, prices of other goods and services, population
37
The law of demand
The law of demand states there is an inverse relation between price and quantity
38
Ceteris Paribus
with other conditions remaining the same; other things being equal
39
Demand for Labour (markets)
PRODUCT FACTOR MARKET
- In most markets, Demand comes from consumers who belong to household
- supply comes from producers, who belong to firms
LABOUR MARKETS
- "backwards" compared to product factor market
- in labour markets, Demand comes from the employer of labour, which area firms
- supply comes from the owners of labour which are households in exchange for wages
*demand for labour is "derived demand"
40
How to analyse a graph
TEEA
- trend/average
- evidence (specific statistics)
- explanation (low modality)
- anomaly (if relevant)
41
Factors influencing demand for labour
Due to "derived demand", the amount a firm produces (its output) directly influences the amount of labour the firm demands.
INFLUENCED BY:
Aggregate Demand
- GDP
- Higher GDP = more output = more labour
Industry Conditions
- changing tastes of consumers
Selling Techniques
- Ultimately, the effectiveness of the individuals firm's
selling techniques determines their output
*Firms decide how to produce their product by combining F.O.D. If capital is cheap relative to labour, firms will choose to substitute away from labour
42
Productivity of Labour Formula
total output
----------------- = productivity of labour
Labour Input
43
The Economic Problem
An economy's finite resources are insufficient to satisfy all human wants and needs
44
Share
A financial asset which represents ownership over part (a 'share') of a business or company
*transactions occur over the digital stock exchange
45
Primary Financial Market
Where new financial products (securities) are offered for the first time.
46
Secondary Financial Markets
Where existing financial products (securities) are traded after their initial sale.
47
Shareholders/Investors
- Owning share gives investors the right to vote for company's board of directors and voice opinions
- If the company turns a profit the shareholders may receive dividends.
- If you sell for - more = capital gains
- more = capital gains
- If company falls bankrupt, shareholders may lose their investment, but aren't liable for company debt.
48
Publicly Listed Company
- The share market allows businesses that are public companies and incorporated businesses to raise funds.
- Managers have an ethical duty to manage company in best interests of shareholders (known as fiduciary duty)
49
Bull Market
Prices rise and investors can't keep up (buying spree)
50
Bear Market
Prices fall and investors cant get out of the way (selling spree)
51
How are Domestic Australian Financial Markets Linked to global financial Markets?
Due to
- Improved technology
- news/media to inform investors
- Australia is increasingly seen as a "safe heaven" for money
52
Superanuation
- Is money saved during your working life to help support your financial needs when you retire
- Superannuation decreases the amount that the gov needs to pay in pension
- Our average propensity to save is one of the highest in the world
53
Deferred consumption
we are consuming something in the future. Put trade-able resources aside now to save for later
54
Debt Market
1) Bonds
2) Consumer Credit
3) Housing Loans
4) Business loans
5) Short term money market
55
Derivatives Market
Future = you pay a small brokerage fee to enter a futures contract to buy shares.
- High risk
- No advance payment needed apart from the brokerage
- no limits on profits or loss
Options = You pay a large upfront premium to buy "options"
- limited to the premium amount only
- a small premium amount needs to be paid up front before the contract activates
- high profits and limited loss
56
Market Structures
1) Perfect Competition
- Many firms, low concentration, homogenous products (identical), low profit, low barrier to entry, low price and quantity, incentive to be innovative/efficient is high
2) Monopolistic Competition
- Low market concentration, product is slightly different, low/mid economic profit, medium barrier to entry, mid/low price with mid/high quantity but still a high incentive to be innovative and efficient.
3) Oligopoly
- Mid market concentration. Homogenous and product differentiation. Mid economic profit. High barriers to entry. Price-high and quantity-low. Incentive to be innovative or efficient is high.
4) Monopoly
- High market concentration. Product has no close substitutions, high economic profit, high barriers to entry, price high, quantity low, incentive to be innovative or efficient is low.
57
Council of Financial Regulators (Australia)
1) Australian Treasury = Provides advice to governments on budget, taxes, expenditure and policy
2) Australian Prudential Regulation Authority (APRA) = Overseas and writes legislation for ADI's (authorised deposit taking institutions and super funds with the purpose of: ensuring institutions are able to meet obligations
3) Australian Securities and Investments Commission = Monitors, investigates and intervenes in financial markets with the purpose of: protecting consumers from scams, regulating offences such as insider trading, educating the public about all things finance, regulate consumer credit and the ASX
RBA = aims to: stabilise the Aus currency, full employment, economic prosperity
- set monetary policy
- producers and distributes Australia's bank rates (prints money
- Banker for the Australia government and other banks
- Operates Australia's payment system
- Financial stability
- Manages Australia's FOREX
58
Definition of Money
1) A medium of exchange = do people generally accept it as payment for good/service
2) A unit of Account (a measure of value) = Is it the standard unit to price and compare goods
3) A store of value = does it retain value over time
4) A method of deferred payment = Is it an accepted way to value a debt
59
Currency
Notes and Coins
60
Broad Money
Currency + everything else considered money eg. bank deposits
61
Cash Reserve
The amount of money that you keep
62
Reserve ratio
The percentage kept of cash reserve in proportion to the amount distributed
63
Loan Reserve Ration
Initial Deposit x 1/LRR
64
Public goods
goods private firms are unwilling to supply as they are not able to restrict usage and benefits to only those willing to pay
Non-Excludability = Once provided you cannot stop anyone from benefitting from the good -> leads to free rider problems = individuals have an incentive to use goods without contributing towards cost
Non-Rivalry = If someone benefits from a good, it doesn't reduce the amount available to others
65
Externality
when a third party who was not involved in choosing to incur the cost/benefit is effected
66
Merit and Demerit Goods
Merit Good = people underestimate benefits, Has positive externalities (education)
Demerit Goods = people underestimate costs. Has negative externalities (drugs, alcohol)
67
Borrowers: The Demand For Funds
- Individual Consumers
- The business sector
- The government sector
Why hold/borrow money?
1) Transactional Motive - Easy access to funds to cover daily transactions
2) Precautionary Motive - Emergency funds for unpredictable circumstances
3) Speculative Motive - this is to allow the quick purchase of assets to chase capital gains
68
Market for Loanable funds
As interest rates decrease, demand for money by individuals, businesses , and governments expands due to the three factors affecting demand for funds.
69
Lenders: The supply of funds
Individual = saving deposits (used by banks)
Business = If they aren't profitable and decide to deposit excess
Governments = That are running a budget surplus. Deposit/pay back funds
The international Sector = Important in Aus due to low saving
70
International Interest Rates
Domestic Lenders sends finds overseas, reducing domestic supply, and domestic demand increases as domestic borrowers take advantages of relatively low domestic rates
71
Borrowing Versus Lending Rates
Financial Institutions offer different "deals"
Borrowing rates = when they borrow from you by accepting your deposits
Lending Rates = When they lend those deposits
Short-term interest rates = loans with maturity of less than a year
Long-term interest rates = mortgage rates > 1 year, lower interest rates
72
Monetary Policy
Cash Rate = The cash rate is the interest charged on overnight loans in the short-term money market
Contractionary Monetary Policy = Raising Interest Rates slow down an overheating economy
Expansionary Monetary Policy = Lowering interest rates, speed up a sluggish economy
73
Exchange Settlement Accounts
Banks have special bank accounts (The exchange settlement) with the RBA where they transfer money between themselves *Every payment in Aus goes through this account
- Happens once a day
- Banks normally end up with either a short-fall or a surplus of funds for the night
74
Factors that (in theory) influence interest rates
1) Level of saving in the Economy: higher savings = increases supply
2) Demand for liquid funds: more liquidity = hold money in currency rather than as a bank deposit = decreased supply of Loanable funds
3) Investment Demand: More investment means more business borrowing for capital construction = Increased demand for loanable funds
4) Government Budget: Gov revenue not enough to cover all gov expenditure, difference must be borrowed = increased demand for funds
75
Specialisation
Type:
1) Division of labour = when businesses break down their production process into multiple sub-process's. Allows labour to specialise in particular parts of the process, increasing productivity
2) Location of Industry = When a large number of business's produce similar goods and services congregate in one area to reduce production costs. They share common infrastructure requirements.
3) Large scale production = Occurs when businesses grow so large they can use highly specialised capital equipment in their production process
76
Long Rung average Cost: curve diagram
External Economies of Scale = The average cost of production for an individual firm falls due to the influence of external growth
- Growth of an industry often leads to specialisation of natural resources/location of industry (firms gathering in same area, reducing costs e.g. Vet coming to visit
External Diseconomies of Scale = The average cost per unit of production for an individual firm increases due to the influence of external growth
- Growth of an industry may lead to increased pollution
- Large industries increase demand for products therefore others can increase prices
77
Maximising Growth
Aim to maximise growth, sacrificing profit potential with the goal of higher profit in the future
78
Maximising Profits
Making the biggest possible profit, or the smallest possible losses
79
Meeting Shareholder expectations
The company directors aim to serve the interest of the shareholders
80
Increasing Market Share
Shareholders take on the function of risk, their capital on the line with the aim of reaping maximum 'profit'
81
Productivety
How much is produced with a given quantity of resources, per unit of time
82
Why does the RBA set the inflation rate
- 2-3%
- They don't want the quantity of goods and services to go down with the price of the product staying the same.
- It achieves price stability, setting the cash rate to influence economic activity and inflation to achieve this.
83
Pro-cyclical
Something that moves in the same direction as the business cycle (international tourism)
84
Counter-cyclical
Something that moves in the opposite direction to the business cycle
85
Sector
Part of the economy where the participants are all engaged in a similar economic activity
- starts with two sectors; households, business (not financial)
86
Lorenz Curve and Gini Coefficient
The area between actual income, distribution curve and the line of perfect income equality.
0 is perfect equality
1 is perfect inequality
87
Production Possibility Curve (PPC)
graph showing all the efficient combinations of two goods/services that can be produced by an economy given the available resources and level of technology
88
What is Supply
Individual Supply = the quantity of a good or service that a single firm is willing and able to sell at a given price
Market Supply = The sum of all individual firms supply for a given good or service
89
The Law of Supply
```
According to the law of supply, the higher the price, the larger the quantity produced and vice versa
Affected by:
- Price
- State of technology
- Costs of FOP
- Quantity Available
- Expected future prices
- Climatic and seasonal influence
```
90
The Price Mechanism
The system by which the forces of supply and demand determines the prices of goods and services and the quantity produced
- price set too high = surplus: producers will have to lower price to sell their product
- Price set too low = shortage: producers will see the opportunity to raise prices
91
Unemployment
Occurs when people who are willing and able to work (supply of labour) cannot find a paid job (cannot match with demand for labour)
Unemployment rate = Unemployment workers/total labour force x 100
92
Factors influencing Supply of Labour
- Remuneration (wage and non-wage incentives)
- Working conditions (flexible work hours, holiday leave etc)
- Education, skills, experience requirements
- Mobility of labour -> occupational mobility, geographical mobility
- labour force participation rate (working age >15)
93
Labour Force
- part time, full time, unemployed
94
Casualization
the transformation of a workforce from one employed chiefly on permanent contracts to one engaged on a short-term or casual basis.
Advantages:
- more flexible in response to changing conditions
- Cost-saving to firms from non-wage costs. May improve profitability (avoids paternity leaves etc)
- work insecurity increase productivity
Disadvantages:
- Firms have less incentive to invest in education and training
- Insecure incomes make life relatively more stressful for workers
- workers who feel insecure about their job may be less emotionally invested within the firm
95
Labour Market institutions
1) Unions (supply side)
- Seek to further the interests of their members by: advocating for wage increases, advocating for better, safer working conditions; assisting members when industrial relation issues arise
- eg. The Australian workers union
2) Employer Associations (demand side)
- seek to further interest of members by: lobbing government, negotiating with trade unions, assisting members when industrial relation issues arise
- Eg. Australian Industry Group
The relationship between them is know as industrial relations
96
Wage Discrimination
being paid differently based on race, age, gender etc
Positives:
- Higher income earners have a higher average propensity to save and therefore improves pool of savings for capital investment
- Incentive for labourers to increase human capital (productivity of labour)
- High wages for remote locations, improves geographical mobility of labour
- Increases quantity of entrepreneurship
Negatives
- Higher income earners have lower average propensity to consume
- can create poverty traps
- Can encourage crime which increase size of informal economy and reduces taxable revenue
97
Long term unemployment
Someone who is unemployed for 12 months or more
98
Structural Unemployment
Mismatch between a workers skill set and the type jobs available in the economy
99
Cyclical Unemployment
When unemployment goes up and down, following the business cucle
100
Seasonal Unemployment
The nature of some jobs means that the unemployment in the economy rises and falls with the seasons
101
Frictional Unemployment
When people move between jobs, they are unemployed while they attend job interviews, complete paperwork etc
102
Hardcore Unemployment
Individuals considered unsuitable for work due to personal reasons (eg disability)
103
Hidden unemployment
Those who have become so discouraged they have given up actively looking for work
104
Geographical Unemployment
Although jobs may exist in the labour market that match your skills set, you live too far away to take the job
105
Underemployment
Those who are employed, but who do not work as many hours as they would like or do not work in a job that fully uses their skills
106
Natural Rate of Unemployment
frictional + structural
| *aims to have 4.5% unemployment
107
Underutilisation rate
unemployed + underemployed
108
Types of Employment
Employees - with paid leave (7 million), without paid leave (2.2 million)
Independent contractors = own their own business (1.1 million), subtractors (contracted by contracting company)
Other Business Operators = Operate their own businesses earn though sales revenue, or managing other labour
109
Private Costs and Benefits
Private Cost
- monetary cost of good or service being consumed
- Production costs
Private Benefits
- Enjoyment of good or service being consumed
- profit
110
Price Elasticity of demand
How responsive quantity demanded is to a changing price
Factors that influence price elasticity of demand to be:
1) Relatively more price inelastic (change in price = little change in quantity demanded) - necessities, few or no substitutes, price change is recent, insignificant in proportion of income spent on goods
2) Relatively more price elastic (change in price = large change in quantity demanded) - Luxuries, close substitutes available, price change occurred a while ago, large proportion of income spent on goods
inelastic ⎮
elastic ---
111
Why is price elasticity of demand important
helps businesses with pricing strategies to predict response to price change
Total Outlay Measure
calculate total outlay = price x quantity
112
Types of elasicity
1) Elastic ---
2) Unit Elastic = price changes do not change in total outlay
3) Inelastic ⎮
113
Cyclical Component of the Budget
the change in government spending and taxation that occurs without purposeful government action due to the process of automatic stabilisation.
E.g. “Bracket creep”
A sustained slowdown in economic activity would lead to higher cyclical budget spending. Due increased unemployment
114
Structural Component of the budget
deliberate action by the government
| E.g. A decision to increase the tax rate
115
Types of Expenses
- Funding
- Grants
- Subsidies
- Cash Payments
116
Taxation
Consumers and businesses behaviour can also be influenced through taxation
* The federal or commonwealth government have "exclusive powers" to make laws in areas specified by the constitution
* State and local governments have 'residual powers' to make laws ( and taxes) in any area not covered in constitutions
```
1) Direct Taxes
Taxes paid directly by an individual or firm which they are levied
- Personal income tax
- Corporation tax
- Wealth Tax
- Gift tax
- expenditure tax
```
```
2) Indirect Taxes
The firm or individual has passed them on to someone else
- GST
- Sales tax
- Excise duty
- Vat
- Service tax
```
117
Redistribution of Income
What is meant by "market failures in income distribution"
1) When people see little benefit to working, our labour resources are utilised less efficiently
- absolute and relative policy
2) Resources being distributed according to needs and wants of the wealthy instead of society as a whole.
- consumer sovereignty
3) Inequality is also correlated with social tensions, crime rates, health issues
4) The amount of inequality created by the free market is not socially optimal, and therefore income redistribution is needed.
118
Absolute Poverty
Income is just enough to survive or less
| *Australia has <1% absolute poverty
119
Relative Poverty
Income is considerably lower then the average for the economy of whole
*35.5% of Australia's pensioners are living through relative poverty
120
Network Externalities
the good/service is more useful the more people are using it. I.e instagram
121
Corperisation
Running a government business enterprise like its a private business
122
Privatisation
When. a government business enterprise gets sold to the private market
123
Reallocation of Resources
Fiscal Policy = the government uses government spending and taxation to influence resource allocation, income distribution, and business cycle fluctuations
Government Provision = The government can use GBE's to directly provide a good/service to the economy. This causes factors of production to be reallocated away from what they would have been used for in the free market
Influencing Consumer and Business Behaviour = The government can influence consumers consumers and businesses into using certain resources
- can be done through government spending: social welfare payments (makes up a significant part of taxpayers money $180.1 billion which mainly goes to aged population
124
The Taxation System
Take money away from people who the government thinks has 'too much'
* Individuals income tax: ($234.1 billion) is most effective in redistributing income as higher income brackets are taxed harder than those with little income. It works on the basis of equity.
