UNIT 2: Core: The Economic and Business Environment Flashcards
Understanding the Interdependence of the Economy and Business
Introduction
* The economy is interconnected and interdependent, with individuals, businesses, and governments all contributing to it.
* Advancements in technology have made it possible to buy goods and services 24/7, presenting opportunities but also challenges.
The Five-Sector Circular Flow Model
* This model shows the connections between consumers, businesses, financial institutions, the government, and the overseas sector.
* It reveals where money is injected into the economy and where it is leaked.
Consumer and Business Sectors
* The household sector comprises consumers who hold economic resources like land, labour, capital, and enterprise.
* The firms sector uses these resources to produce goods and services, known as production.
* Households use their income to buy various goods and services, known as consumption.
Two-Sector Circular Flow of Income Model
* Vanessa’s two-sector model of the economy is balanced when income (Y) = consumption (C).
* This model highlights the interdependence of consumers and businesses in the economy.
Understanding the Circular Flow of the Economy
Financial Sector
* Financial institutions act as intermediaries between savers and borrowers.
* Saving (S) is a leakage from the circular flow of income, while investment (I) is an injection into the circular flow of income.
Government Sector
* Local, state, and federal governments play two significant roles in the circular flow of income.
* Taxation (leakage) and government expenditure (injection) are significant roles in the circular flow of income.
Four-Sector Circular Flow of the Economy
* Vanessa’s four-sector model includes:
- Goods and services
- Income (Y) - wages, rent, interest, profit
- Consumption (C)
- Savings (S)
- Investment (I)
- Government
- Taxation (T) expenditure (G)
- Economic resources
- Household (sector)
- Firms (sector)
- Financial (sector)
- Government (sector)
Overseas Sector
* The overseas sector details global influences on a nation’s economy.
* Trade consists of exports (X) and imports (M).
Five-Sector Circular Flow of the Economy
* The overseas sector deals with what Vanessa knew as trade - bringing in imports and selling exports (X).
* The circular flow of income measures changes in economic activity within an economy.
* The government’s role is to manage and maintain a balance within the economy by altering money flows and influencing decisions within sectors.
Vanessa’s Economic Models and Interdependence
* Vanessa used the fish tank model to illustrate the interdependence of different sectors for economic success.
* She used the example of a fish tank to illustrate the balance between savings, taxation, and imports, and injections of investment, government expenditure, and exports.
* The effect of these injections and leakages is to raise or lower the level of economic activity.
Government’s Role in Consumer Protection
* The Australian Securities and Investments Commission (ASIC) regulates the financial sector, monitoring the financial services industry, provision of financial services, and providing consumer protection.
* ASIC’s main roles include monitoring the financial services industry, providing investment advice, and providing consumer protection in financial services.
Role of Financial Sector in Facilitating Business Investment
* Financial institutions act as intermediaries between savers and borrowers, collecting deposits and using them to lend to others.
* Most businesses borrow money, especially when expanding their business, known as investment.
Business Cycle
* The Australian economy experiences a cycle of ‘booms’ and ‘busts’, periods of high and low economic activity.
* A recession is when an economy gets smaller for a period of six months or longer.
Understanding the Business Cycle and its Impact on Economic System
- A depression is a severe recession that ends with a recovery, completing the cycle.
- Economic activity fluctuates, affecting total production, incomes, spending, and employment.
- Fluctuations are caused by changes in total spending within the economy.
- Key features of contraction and expansion include falling levels of production, decreasing consumer spending, falling inflation rates, generally falling wage rates, rising interest rates, and falling unemployment levels.
- The Great Depression, a financial crisis in the USA in 1929, was a significant event that led to the US economy toppling and dragging down other national economies.
- The business cycle does not follow a regular pattern, with periods of expansion ranging from several months to several years.
- A contraction can not result in a recession or depression if a recovery begins before the economy falls too far.
- A downturn may occur in only one kind of production, but changes in any direction tend to spread due to the interdependent nature of the economy.
Recessions and Booms: Causes and Impacts
Recessions:
* Caused by lack of spending, not the inability of the economy to produce goods and services.
* Key features include low income and production, high unemployment, low inflation rate, slow wages and salaries, low consumer demand, frequent bankruptcies, unused resources, low interest rates, and reduced investment opportunities.
* The number of business closures increases during a recession.
Booms:
* Caused by too much spending, with each dollar bought less and less, leading to increased spending and prosperity.
* Key features include high income and production, full employment of labor and resources, relatively high wages and salaries, businesses operating at full capacity, high interest rates, and a sharp rise in inflation.
* The 2008 global financial crisis led to a severe global economic recession, the worst since the Great Depression of the 1930s.
* Governments implemented expansionary fiscal and monetary policies to stimulate consumer spending and business investment.
Case Study: Economic Stimulus Packages and the 2011 European Union Debt Crisis
Economic Stimulus Packages
* Rich nations launched economic stimulus packages in response to the 2008 global financial crisis.
* Australia’s Rudd Government injected $53 billion into the economy through two budgetary stimulus packages.
* In the US, President Obama introduced a $1.21 trillion stimulus to create or protect 3.5 million jobs.
* World central banks cut interest rates to stimulate consumer spending and business investment.
The 2011 European Union Debt Crisis
* Five smaller European Union countries — Portugal, Italy, Ireland, Greece, and Spain (PIIGS) — struggled to repay their national debts.
* Loans were organized to bail out the PIIGS on condition they adopt cost-saving measures to ensure the bailout money was repaid.
* The PIIGS faced difficulties in paying off the debt while trying to expand their economies.
The Price Mechanism and the Interaction of Demand and Supply
* The price of goods and services changes due to the interaction of demand and supply.
* Demand is the quantity of a product that consumers are willing to purchase at a particular price at a given point in time.
* The law of demand states that as prices increase, demand for that good or service decreases.
* The demand curve for blueberries illustrates this relationship.
Understanding Supply and Demand in Business
Supply in Business
* Supply refers to the quantity of a good or service that businesses are willing to offer for sale at a given price, at a given time.
* The law of supply states that as prices increase, the quantity supplied will increase.
* If the price decreases, the supply of that good or service will decrease.
Supply Curve for Blueberries
* The supply curve shows that when the price of blueberries changes, the quantity farmers are willing to sell also changes.
* An expansion in supply occurs when the price of blueberries increases to $7 per punnet, increasing the quantity farmers are willing to sell.
* A contraction in demand occurs when the price of blueberries falls from $6 to $5 per punnet, decreasing the quantity supplied.
Price Mechanism
* The point at which the demand and supply curve intersect is called market equilibrium.
* The price mechanism refers to the forces of demand and supply in determining the price and quantity of a good or service.
* The equilibrium price for blueberries is $6 a punnet and the equilibrium quantity for blueberries is 600 punnets.
Blueberry Demand and Supply Factors
Reasons for Increased Demand:
* Rise in consumer income: Higher incomes enable more blueberry purchases.
* Changes in consumer tastes and preferences: The popularity of blueberries as a superfood has increased demand.
* Increase in population size: The number of people who can buy blueberries has increased.
* Increase in substitute goods: Rising prices of strawberries and milk can lead to fewer blueberry purchases.
* Expected future price rise: If prices of blueberries are expected to rise, consumers will buy more blueberries.
* Fall in consumer income: Lower incomes reduce the amount of blueberries consumers can afford, decreasing demand.
* Changes in consumer tastes and preferences: Blueberries may become less popular if consumers realize they are not the superfood they once thought they were.
* Decline in population size: A decrease in population can lead to a decrease in blueberry demand.
Changes in Supply:
* Increases in supply shift the supply curve to the right, resulting in a decrease in price and an increase in quantity.
* Decreases in supply shift the supply curve to the left, resulting in an increase in price and a decrease in quantity.
Factors Caused by Changes in Supply:
* Increased efficiency: New technology can increase the amount of blueberries grown.
* Fall in production cost: Lower wages can increase output.
* Improved climatic conditions: Increased rainfall could increase blueberry harvests.
* Increase in suppliers: More people may start blueberry farms due to their superfood status.
* Decreased efficiency: A new bug eating blueberries could reduce crops.
* Increased production cost: Increased fertilizer costs could limit blueberry production.
* Unfavorable climatic conditions: Droughts could reduce the amount of blueberries farmers can grow.
SkillBuilder: Communicating Information in Tables and Graphs
Understanding Price Setting
* Price setting involves interaction between buyers and sellers.
* Buyers want to pay as low as possible, while sellers want to charge as high as possible.
* The market usually arrives at a price that is acceptable to both buyers and sellers.
Example of Price Setting in a Fruit and Vegetable Market
* In a fruit and vegetable market, sellers agree on the price of potatoes.
* Buyers want to buy at the cheapest price possible.
* As the price rises, suppliers supply more, consumers demand less.
* As the price falls, consumers demand more, suppliers supply less.
Data Analysis
* Seller’s preferences: Price Quantity supplied: $2 20 kg.
* Buyer’s preferences: Price Quantity purchased: $10 20 kg.
* The data can be entered into a graph to plot the preferences of both buyers and sellers.
* The point at which the two lines intersect will be the market price.
Understanding Markets in Australia
Retail Markets
* These are the primary markets for buying goods and services.
* They include shopping areas in CBDs, suburban shopping malls, local shopping centers, shopping strips, and online shopping websites.
* Online shopping in Australia was worth over $23 billion in 2019, representing 6.6% of all retail sales.
* The proportion of goods bought from overseas businesses is expected to increase due to increased awareness of global choices.
Labour Markets
* The labour market involves the combination of buyers and sellers of labour.
* It operates through various communication means, including signs in shops, newspaper advertisements, and online job boards.
* Employers pay a fee to advertise their vacancies, and many can apply online.
Wage and Salaries
* Wages and salaries are highly regulated in Australia.
* A minimum wage is required for all employees over 21 years, adjusted annually to account for rising living costs.
Financial Markets and Stock Markets Overview
Financial Markets:
* Intermediaries between savers and borrowers in an economy.
* Banks act as intermediaries between savers and borrowers.
* Interest is the price of access to money that belongs to someone else.
* Banks charge higher interest rates to borrowers than depositors.
Stock Markets:
* Brokers buy and sell shares on behalf of their clients.
* Shares are units of ownership in a company.
* Businesses can raise money for investment by selling shares, while individuals or businesses can invest their savings by buying shares.
* The Australian Stock Market is the Australian Securities Exchange (ASX).
* Share value can fluctuate based on demand for shares.
* A successful year may increase share prices, while a company’s performance may decrease share prices.
SkillBuilder: Contesting and Debating Ideas
- Economic and business issues are complex and diverse, requiring examination of various aspects.
- These include events like the global financial crisis, individuals like entrepreneurs or world leaders, policies of Australian or overseas governments, business decisions, and agreements like free trade agreements.
- Contesting involves generating opposing ideas on an issue, while debating involves communicating these opposing ideas.
- To contest an idea, consider the impacts of an issue on all stakeholders, including owners/shareholders, employees, suppliers, the Australian federal government, the Indonesian government, and consumers.
- Each stakeholder may have different views on the planned relocation, requiring debate to contest or challenge the perspective of others.
- As an economics and business student, it’s crucial to contest and debate issues and express ideas clearly.
Case Study: Car Manufacturing in Australia
- Car manufacturing in Australia has been a significant employment source and export earnings contributor for over 90 years.
- By 2017, Toyota, Holden, Mitsubishi, and Ford ceased motor vehicle production in Australia.
- Two main perspectives exist: the need for more government support to keep car manufacturers in Australia, and the inefficiency of the Australian car manufacturers.
- Employees’ main interest is job security and challenging work, aiming for production to stay in Australia.
- Shareholders’ main interest is maximizing return on investment, potentially supporting closures if they result in increased profit.
- Consumers’ main interest is quality and reasonable pricing, potentially supporting closures if they result in cheaper cars.
- The federal government’s concern is job losses from closures, while suppliers aim to retain customers and expand into new markets.
- The study encourages considering personal views, comparing views with others, and communicating perspectives effectively.
Customary Trading Practices of Aboriginal and Torres Strait Islander Peoples
Trade Practices
* Aboriginal and Torres Strait Islander peoples traded items to improve their living standards and access new ideas.
* Trade routes linked Aboriginal and Torres Strait Islander communities across Australia, often following natural features.
* Trade routes often crossed long distances, sometimes thousands of kilometers.
* Rituals, chants, and ceremonies were also traded, including accompanying words.
Partic Ipation in Historical and Contemporary Markets
* The items produced or collected by Aboriginal and Torres Strait Islander peoples depended on their location.
* Coastal groups exchanged resources like fish and shells, while inland groups exchanged resources like herbs and stones.
* Trade also included exchanging technology and ideas.
Trading Rare and Valuable Goods
* Pre-European settlement, Aboriginal and Torres Strait Islander peoples produced many items to trade, including stones, shells, tools, and ceremonial items.
* Foods like fish, crab, dugong or turtle meat, yams, bird eggs, turtle eggs, snake skins, mats, spears, and wood carvings were also traded.
* Wilgie Mia in Western Australia, the largest and deepest underground ochre mine in Australia, is still in operation for ceremonies and trade.
Changes in Technologies and Ideas
* Trade was a method of sharing resources and traditions, requiring respect for cultural differences.
* Aboriginal and Torres Strait Islander peoples have utilized their cultural knowledge in innovative ways, forming businesses in art and craft, cultural tourism, land management, finance, and mining.
* The Aboriginal and Torres Strait Islander art and craft market has grown significantly over the last few decades.
The Role of Tourism
* Tourism is worth billions of dollars annually in Australia, with many Aboriginal-owned and operated enterprises.
* Aboriginal Tourism Australia (ATA) provides leadership and a focus for the development of Aboriginal tourism.
Government Intervention in the Market
* Governments may intervene in the market to reduce negative outcomes for society and the environment due to profit-seeking businesses.
Prevention of Environmental Degradation
* Governments can reduce environmental degradation by imposing regulations restricting environmental damage.
* Examples include laws banning littering, using certain chemicals in manufacturing, and restrictions on building developments.
The Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act)
* The Act aims to balance environmental protection with social and economic needs, ensuring ecologically sustainable development.
