1.1. THE ECONOMIC PROBLEM AND THE ROLE OF CHOICESthe economic problem: trying to satisfy a society of unlimited wants ( of the individual or community) with the limited resources available. Our wants are limited, resources to satisfy our needs are scarce, because we cannot satisfy all of our wants we must choose, choosing our heist presference first and leaving some wants unsatisfied.

UNDERSTANDING WANTS

Humans are fundamentally greedy, whilst there are goods and services that we need ( means essential for human survival) there are some wants for goods and services that we want to make our lives easier or for pleasure.

Wants can be the material desires of a community, wants derive utility (satisfaction) from the consumption of goods. Some wants maybe classified as needs or non essential e.g. holidays and extra food. Individual wants are the desire of each person. A persons desires depends on on their ability to gain the good or service ( e.g. the level of their income) poorer people suffer the most from the economic problem since they can satisfy less wants. Collective wants are the wants of the community and are based on the preferences of the community as a whole. They are usually provided by the government. The local government provides local wants such as parks and libraries. The state provides for the wide community hospitals and schools. Whilst the state government provides the nations wants e.g. military.

Due to our unlimited wants we have to choose which ones will be satisfied, the most pressing wants will be satisfied first e.g food over expensive clothes. Some wants are recurrent and will occur again and again ( e.g. food) . Whilst some wants are complementary and will follow after one want is satisfied ( such as getting petrol for your new car) . Our wants change over time as as we age, change our income, advance technology and fashion changes. E.g. now we need to have mobile phones .

THE KEY ECONOMIC ISSUES

All economies must answer there questions

What to produce? – due to our unlimited wants it must decide what wants it will satisfy and what it will leave unsatisfied.

How much to produce? – in order to maximize wants and the limited resources an economy must choose an amount that will not leave wants unsatisfied or waste too much resource due to over production.

How to produce? - an economy must decide how to allocate its resources and look for the most efficient method of production that uses the least amount of an economies resources so that the greatest amount of wants is satisfied.

How to distribute production? - economies must choose whether they want to distribute the production more inequitable ( uneven) or equitable (even). Those with higher incomes can afford to by more therefore receive a a higher share of the production.

OPPORTUNITY COSTS In order to satisfy our wants we need to sacrifice an alternative want, the missed opportunity is known as the opportunity cost. Opportunity costs apply to:

Individuals - an individual may choose a car over a holiday, the opportunity cost is the holiday.

Business - a business must choose where it will allocate its resources, when it chooses what to produce the business is given up the opportunity to produce other goods.

Government - they have to choose which wants of the community it will satisfy for example the building of a school may sacrifice the want of a new road.

1.2. THE PRODUCTION POSSIBILITY FRONTIER

Production possibility frontier: this 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.

When we make the PPF we assume that it is ceteris perabis , meaning that technology does not advance, resources are at a fixed amount and all resources are used to their full capacity ( e.g. all resources are fully employed) in .

A SIMPLE PRODUCTION POSSIBILITY FRONTIER

The amount of production of each of the two products depends on how much of each is desired. The points on the line shows when the economy is operating at full capacity if the dot is producing at a point inside the curve it would be producing less than the maximum out put and resources would not be fully employed. When society wants to produce more of one product there is usually an opportunity cost involved.

NEW TECHNOLOGY AND THE FRONTIER

Advancements in technology allows us to develop better methods of production, letting us produce a higher amount of goods using the same amount of resources. E.g. the maximum limit of producing foods maybe 200 now it can be 250. This would cause the PPF to move out wards.

NEW RESOURCES AND THE FRONTIER

New resources such as a rise in immigration or the discovery of new resources. This would allow us to produce more goods and push the PPF outwards.

UNEMPLOYMENT AND THE FRONTIER

If resources are not fully employed the economy would be producing below or within the PPF . This indicates an inefficient allocation of resources and not achieving the maximum amount of of wants with the minimum opportunity costs thus producing an inefficient outcome.

THE SHAPE OF THE PRODUCTION POSSIBILITY FRONTIER

When a PPF is a straight line we assume that the opportunity costs are constant. However in most cases this is not true and sometimes when resources are moved there can be a loss of productive capacity and vice versa. Thus increasing the oppostunity costs of producing another item when resources are shifted, meaning that the PPF not becomes a curve.

1.3 THE FUTURE IMPLICATION OF CHOICES

2. Consumer goos and services: items that satisfy the immiedicate wants and needs of the community.3. Capital goods: items used for the production of other goods, that cannot be consumer immediately

An economy can choose whether they want to satisfy consumer demand immediately or ( consumer goods) or produce that will increase productive capacity in the future. In the long run an economy that produces more capital goods wil; increase its productive capacity and experience a higher level of growth in the future a country that produces at a higher point on the frontier will satisfy more wants. A country that produces more capital goods foregos wants of today to satisfy more wants in the future. E.g.

Inidivudal - you may forego the holiday you want in order to pay off the mortgage. Paying the mortgage will ensure future financial security and give children an asset.

Business – there is only a limited amount of land, labour, capital and entreprenuriel skill there fore business need to schoose one area of business activity over another. Business want to choose the area of business where they will gain the most success, which involves predicting what business activity will be successful in the long run. Whilst operating in area that are already successful maybe too late.

Governements - a government must choose whether or not they will choose to meet immediate needs ( e.g. welfare and health care) or invest in capital goods ( e.g. educations, infrastructure and research) . although more money in to consumer goods means that there will be weaker infrastructure, and lower skill levels. However satisfying more immediate wants makes them more popular.

1.4 THE ECONOMIC FACTORS UNDERLYING CHOICES

Individual: factpprs such as their age, income, expectations, future plans and future circumstance. It also depends on personality, some people are willing to take more risks whilst other prefer secuirity. Indiciduals also have oto choose whether they will spend oor save, this will depend on their age and whether they expect thir income to rise or fall. Plans in education , work, family and retirement also play a role in economic decision making e.g. the decision to further with further schooling means foregoing income for a few years.

The political also contribute to economic decisions by voting in elections, individuals try to choose the party with the best policies to ensure a low unemployment, interest and inflation rates.

Businesses: firms make decisions regarding prices, which depends they’re trying to sell to a mass or niche market. Businesses also make decisionsconcerning production and resources, business try to produce products of the highest quality at a minimum price. Busineses normally op for the cheapest choice but may pay more to ensure reliability. Business also consider ethical issues such as the environment ( e.g. usin recyclable paper) . Buseineses need to decide how to manage industrial relations, such as choosing wage levels, and whether or not they will encourage union representation.

Governement: the government tries to influences the economic decisions of individuals and businesses. ( e.g. taxes on cigerrettes to discourage smoking) . they also make sure that individuals and businesses are acting ethically by imposing penalties for those who break the law and setting laws for businesses e/g/ businesses are nin the same industry are not allowed to comtogether and set prices. The government also tries to encouragecertain economic activity. E.g.health insurance, the government imposes a medicare levy surcharge for higher income earners who don’t take out private health insurance and a tax rebate for middle and lower income earners.

2.1 THE PRODUCTION OF GOODS AND SERVICES

Factors of production: any resources that can be used in the production of goods and services. The four main types are natural resources ( or land), capital, labout and enterprise.

Goods and services are the out put of the production process. Goods are tangible things e.g. food and cars. Whilst services a intangible acts that give us benefit e.g.. medical help. Factor of production = resource. A higher quality and quantity of the factors oof production will mean a higher standard of living. Due to the linittem number of resources producers have to desicde how to use each factor, this will depend the stress of environmentlal damage and the standards of education.

NATURAL RESOURCES

These are resources provided by nature e..g. cosoi, water or minerals. The reward derived from the use of natural resources is known as rent.

LABOUR

This is physical and mental human effort. The amount of labour available depends on the population size ( birth rates, death rates and immigration rates) . the quality and availability is also influenced by the school leaving age, the retirement age and social attitudes towards woman. Wages are the reward for labour this includes executive salaries, commissions and fees for professional.

CAPITAL: Capital is the produced means for production. This does not include financial assessts such as money, shares, stocks and bonds. Capital includes, machinery, tools, factories and computers. This also includes in frastricture like roads and railways.

A higher amount of capital can a higher earning capacity of an economy. Entrepreuneurs burrow money ( use consumer savings) to pay for capital. So that by saving consumers are putting money into capital goods. Thus the rewards for capital is interest. Interest is also paid for burrowing.

ENTERPRISE

Enter prise involves coordinating and organisisn the factors iof production. This involves making importantant decisions concerning the factors and assuming all risk of each decision. Profit is the reward, this is the income that is earned on top of all the other rewards.

Each of the resources used in the factors of production are scarces, this displays the problem of scarcity.

- There are limits to the amount that the land can produce of natural resources and regulation when using the environment.

- Limits in labout due to population, labut market and people’s willingness to work- Capital is limited by the sector’s and the government’s willingness to invest as well as the amount of saving

available for domestic o r overseas investment

Businesses will usually opt for the cheapest resourcces in order to produce the most amount of goods at the cheapest price and maximise profit. Hence businesses choose combinations of different reouces e.g. the methofd of production maybe more labout intensive or more capital intensive

2.2 THE DISTRIBUTION AND EXCHANGE OF GOODS AND SERVICES.GDP: The total market value of all final goods and services produced in an economy over a period

Economies need to decide how they will distribute and exchange goods and services produced by the economy. This is done by assigning an income to each individual depending on their level of output. This income can then be used on goods and services.

The owners of the factors of production rewards depend on their income to deterimmine the level of out put. Howeever the istribution of this income can change depending on the value and quality of the resource. For example the rent of land in the city and highly skilled entrepreuneurs involve a larger sum of money.

Unlike the other factprs of production not all individuals receive the same level of wages. The level of wage is determined by the individuals skills, educational qualifications and bargaining power. this way it enocourages individuals to work hard and encourage innovation.

How ever we have an inequitable ( unequal) market, because people who are disabled, old or sick are unable tosuppky little or no labour. This is where the government tries to help and tax high income earners and give money to low income earners through social secuirity payments.

Most of the time indivudals and businesses use money as a medium for exchanging goods and services, as opposed to bartering ( the non cash exchange of goods) . New digital alternatives such as bit coin are increasing in popularity.

2.4 AN OVER VIEW OF THE ECONOMY : THE CIRCULAR FLOW OF INCOME

The five sector flow of income described the operation of an economy and the linages between the main sectors of the economy.

Individuals - the individual is the owner of productive resources and the consumers of the economy. They supply labour and enter prise ( inputs) which are used to create goods and services as a rewar they revcieve, rent, wages, interest or profit. Which is then used on locally produced goods, savings, tax or imports.

Businesses - this sector is concerned with the product ion of goods and services ( except financial services) . businesses buy factors of production and use them to produce goods. Businesses and individuals are interdependent, Businesses depend on indivudlas to provide them with the resouces for the factors of production whilst indivudla rely on businesses for goods and services and wages.

Financial instituitions - this sector is concerned with the burrowing and lending of money. E.g. banks, Building societies, finance companies, credit unions, super annuation fund and life insurance companies. They allow for investment and saving hence is also called the capital market. They mobilise savings so that they can be used for investment

Leakages: this is items that are removed from the circular flow of income, thus decreasing aggregate income and the level of economic activity (STI)

Leakage fall in expenditure of goods and services fall in demand of resources fall in income for the owners of these resources. IN jections are used to prevent the economy from collapsing.

Injection: money that in crease aggregate income and level of economic activity . ( GIX)

Leakages can be good as it provides us money for capital goods, thus allow us to produce moregoods in the future

Investment = expenditure that is used to obtain benefits in the future.

It increases the circular flow of income Demand for capital goods firms that produce capital goods demand more resources more indivudals

employed more demand for consumer goods and services.

Public sector

Governments: governements try to to satisfy the collective wants of a community. E.g. roads and railways.

Taxation reduces the consumers money to spend on goods and services Gov expenditure income for government employees and employees for private businesses where the

gov purchases goods and services or in welfare

International trade and Financial flows: this sector all the transactions the economy has with the rest of the world which includes exports, imports and international money flows ( financial transactions such a s burrowing , lending and income payments between Australia and the rest of the world).

Imports: goods and services produced overseas but sold in australia. This is a leakage is because it is coming out of the Australian economy in to over seas economies.

Exports: goods and services produced in Australia and sold over seas. This is an injection because it is international money being in jected in to the Australian economy.

Injections Leakages The size of the economy decreases The level of economic activity falls Falling income Falling out put Falling employment opportunities

Increases the size of the australina economy Increases level of economic activity Rising income Rising out put Rising employment opportunities

Equilibrium

Equilibrium: when the sum of all the leakages is equal to the amount of injections

Disequilibrium is when there is an inequality in the amount of leakages and injections. Howveer the economy eventually moves towards equilibrium.

o When leakages are greater than injection: down turn in economic activity falling incomes and rising unemployment. However with inidividals having less money , they have less money to save, to pay tax and on on imports. Thus the leakages and injections eventually become equal

o When injections are greated tan leakages. Economic activity rises, rising production and rising employment. This means eventually people will save more, put more money on taxes and on imports, creating equilibrium again.

Thus, government can manipulate injections and leakages to offset any undesirable savings and investment. It can stimulat e or dampen the economy.

3 HOW ECONOMIES DIFFER

3.1. THE MARKET ECONOMY

Market: A network of buyers and sellers, that seek to exchange goods at a certain price.

Product Market: the market for goods and servicesit involves the interaction of demand for and supply of yythe outputs andproduction.

Factor market: A market for any input into the production process, including natural resoucees, labour capital and enterprise.

Consumer sovriegnty: Consumers , collectively through demand determine what is produced and the quantity. ‘

Compeition: The pressure on businesses in a markey economyto lower prices or improve the quality of out put to increae their sales of goods and services to cusstomers

Market economy: all major economic decisions are made by individuals and private fir,s, who are both motivated by self interest. Most of the economic resourcfees are owned by the private sector and inididuals are allowed to seek their own wealth without government intervention and the distruption of business activity.

Centraly planned economy: this is where the government owns all economiuc resources and there is little allowance for government intervention in the economy. Individuals own the factors of production whilst the government allocates resources. E.g. I the past Russia, Eastern Europe and china

However no fully planned or market economy exists.

Characteristic s

The market system - in a free market economy inidivduals can but from a product market and a factor market. The price mechanism determine the price of goods and services. The price mechanism is the interaction between the forces of supply and sdemand to determine the

price and quantity that they are produced at. Supply being determined out put decisions. E.g. its summer and there is llots of sun more people buy sunglasses the price of sunglasses increases

as consumers compete for limited stock businesses encouragesd to make more supply Changes in supply and demand in the product market also influences the suppky and demand in the

factor market. E.g. more demand for sunglasses more demand from businesses for more resources e.g. businesses offer labourers higher wages to work longer.

Private ownership:

Individuals can own factors fof production and use it to create their own wealth Inidivudals can also sell or transfer assets under whatever conditions

Consumer sovriegnty:

Consumers decide what goods and services are produced by excising their freddom to choose what they want to buy, thus businesses cater to the emand of the good/ service.

Freedom of enterprise:

Entrepreuners have the freedom to make their own profits, they can choose what goods and services to produce and how they will produce .

Workers can choose where they work whether or not they want to/

Competition:

Competition is the force that allows the price mechanism to work effectivelu It ensures that one seller or buyer influences the market price In a pure free market economy businesses in the same industry compete against each other e.g. Samsung

and apple Where there is less competition large businesses can charge higher prices

3.2. AUSTRALIA A MARKET ECONOMY WITH A ROLE FOR GOVERNMENT

Mixed economy: an economic system where the decisions concerning production and distribuition are made by a combination of market forces and government decisions.

Merit goods: goods and services that are not provided in suffie cient quantity by the private secor because individuals do not place suffieicient value in them.

A mixed economy contains elements of both a planned and market economy, where decisions concerning production and distribuitino are made by a combination of market forces and government decisions.

Governments intervene because a free market doesn’t always provide the most efficient allocation of resources. There are 3 considerations:

The government provides collective goods and services such as parks, roads or national defense. They provide which goods that are beneficial to the whole community , impractical to charge on a daily basis

It is safer for the government to control essential goods and services, e.g. defense. When markets operate freely they don’t always act in favour of the consumer. The government might

provide laws that protects businesses from exploiting individuals and provide regulations on the distribuitions of demerit goods and ensure safety standards in a market.

The government will also intervene in the distruittion of output ( income) because in a free market they will not always provide a fair distribuition. \

Social welfare payments - under the price mechanism, those who do not earn an income ( e.g. pensioners, the chronically sick or unemployed) would be no income earned. Thus the government overrides market forces by taxing high income earners and distribuiting it to those who are earning no income through payments s uch as age pesons or unemployment benefits,

Progressive income tax - this ensures that there is a more quitable share of out put. Where who earn more pay a portionaly higher tax than those who earn less.

The government also invertevening throhgh macro economic ( counter cyclical) policies in order to sooth the effectsof fluctuations in the business cycle. Governements also intervene durin g major economic or financial problems e.g. the credit card crisis of 2008.

Why governements intervene in the market economyResource allocation Restrict the production of demerit goods

Provide important things that wouldn’t be allocated

Income distribuition Create a fairer society and look after peopleEconomiuc stability Smooth out sharp fluctutations in the

economic cycle Ensure stability in the economy and the

financial system

How the mixed economy aims to solve the economic problem:

In a mixed economy the government will intervene in serveral ways in modifying the answers to the 4 important questions: what to producte, how much to produce, how to produce and how will be shared.

What to produce: The goverment can be a producer, supply goods and services such as schools and roads, e.g. ABC tv. It can also encourage some forms of production through subsidies and tax incentives or limit or prohibit the production of certain goods and services

How Much to produce?: the government can limit the number of godoa and services produced, e.g. it may reduce the number of taxi drivers in order to ensure long term sustainability. The government encourages the production of merit goods e.g. education subsidies also by granting subsidies and rimport restructions to improve the competitivesness of Australian businesses.

How to produce? The government influences the cost of the factors of production and the how the factors are used in the production process. E.g. industrial laws provide a frame work for minimum wage levels and working conditions. As wellas through laws that place safety rules, environmentak controls ad prohibitation of child labour so that businesses will not act unethically in order to maximise profit.

How to distribute? - higher income earners pay more tax and resdistributed through welfare, or the government may intervene in redistruition through imposing mimmum wages.

3.3. Comparing economies

We compare the Australia with Asian economies becaue:

Australia’s trading relations with mainly Asian economies Australias strong performance in the late 200s where australia’s fortunes are linked to asia’s fortunes. Rising living standards in asia and shift towards market oreiantated countries

Also aisia has a diverse group of economies ( from big economies such as a china to small ones such as tonga)

The quality of life is usually measured by the by the HDI

HDI( human development index) : A measure of economic development, devised by the united nations tthat takes in to account life expectancy at birth, adult literacy, and educational levels.

Australia uis ranked second in the world not only because of its statistics but also facourable conditions such as good climate, political freedom, and cultural diversity.

The differentce between economic growth and economic development

The Australian Economy vs The North Korean Economy

Australia North KoreaTypes of Economy Mixed economy Centrally planned ecomnomyHDI 0.933 (2 nd ) HDI (0.733) 156thPopulation 23.13 million 24.9 millionGDP $43,000 per capita $1800 per capitaRate of economic growth 2.5% 1.3%Participation rate 64.7% 78.1%Female

CONSUMERS IN THE MARKET ECONOMY 4.1 CONSUMER SOVEREIGNTY

Consumer sovereignty is when the consumers determine whatever goods and services are produced by the business. Which is one of he benefits of a market economy where production is determined by the people’es wants.

Consumers also determine how resources are allocated because when a product is demeanded the most businesses will produce more of that product to increase profit. Thus, also shift resources in to the forms of production used for that good, thus resource allocation is determined by the consumer.

Consumer incomes also determine the production and demand for luxury goods, thus in times where the economy is more prosporous demands for designer clothing in creases, hence in times of economic downturn production will fall.

Aspects that reduce consumer sovereignty ( aka business sovereignty) :

Marketing - business do research in to the wants, desires, and fears of consumers, in order to manipulate the behaviours of the consumer. This is done through either mass marketings ( marketing to a large audience e.g. social media) or direct arketing, ( e.g. advertising in emails)

Misleading or deceptive conduct is when consumers are persuaded into buying a product they don’t really need e.g. weaight loss programs and investement schemes.

Planned obcolence - this is when a business designs a product to particularly wear out or become out of fashion by a certain date. E.g. car manufactures changing the look of new cars so that old cars become undesirable even though they still function well.

Anti competitive behaviour - this occurs in industries where there are few other businesses and consumers limited in choice. E.g. a business may only make a battery that is only c ompatible with their own devices or a low quality assistance may be given where consumers have not many other competitirs,

4.2 DECISIONS TO SPEND OR SAVE: When consumers received an income and paid their tax they need to choose whether they want to spend or svav, this is expressed in the following equation:

Y=C+S

Where

Y = disposable ( after tax) income

C = consumeption expenditure

S = savings

This means that:

An increasing consumption will reduce savings An increase in savings will reduce consumption A change in the leve; of income will change the levels opf consumption and savings

Average propensity to save: The proportion of total income that saved for future consumption

The average propensity to consume: The proportion of total income that is spent on consumption.

= APC = APS

Those in a a higher per capita incomes tend to save more, but the relationship between and income is weak economically.

Factor that influences whether to save or spend Explanation Cultural For example people from east Asian back grouns tend

to save more and this generation tends to spend more

Personality factors Some people are cautiiours a prefer to save whilst some people can be easy going want enjoy immediate benefits

Confirence and future expectations If consumers have are worried about their economic out look they will spend less and save more. Whilst those who expect a rise in income may increase spending

Furture spending plans Those saving up for a car may choose to save now

Tax policies Tax policies can make it more atrtractive to save e.g. super annuation. Or spend e.g. medicare incentives or tax aboloition

Availability of credit Fi people have a higher amount of credit they are more likely to save less knowing they have credit to depend on

INCOME

When incomes rise people will save a larger proportion. ( ie as APS rises, APC falls) consumers on lower incomes tend to spend a higher prroption of their income e.g. if you earn $300 as opposed to $3000. . those with higher incomes have more money to pay off debts and save for retirement. Consumption also slightly rises ,for example. If lower income levels rely on the use of credit, in the event of an increase in income they can use more of their income to pay of for their expenses.

The consumption function: a graphical representation of the relationship between income and consumption for an individual or economy. It is usually up ward sloping with a gradient less than one, and with a positive y intercept. This graph however is not a true representation of consumer behaviour, because as an income rises the the marginal propensity tends to rise and to consumer falls. Thus the function is less steep.

ADD GRAPH

This is in relation to every dollar earned:

The marginal propensity to consume: the proption of each extra dollar earned that is spend onconsumption ( this is also the slope of the consumption function)

Marginal propensity to save: the proportion of every extra dollar of earned income saved.

There fore MPC+MPS = 1

AGE

The average propensity to save and consume changes with age and as incomes fluctuate. F ro example if someone earns a high income now and expects a low income later their average propensity to save will increase.

When epoepole are youn they earn low incomes thus, tend to consume most of their income and even dissave( burrow). At a midldle age people consumer a small proportion of their income and start saving for retirement. When people reach ritement they earn no income and rely on savings or pension.

Add life cycle graph

4.3 FACTORS INFLUENCING INDIVIDUAL CONSUMER CHOICE

In expenditure deicisions consumers aim to maximise utility or welling

Utility: the satisfaction or pleasure hat indivudals derive from the consumption of goods and services.

However consumer are limited in their abilitytoo maximise utilty because of the price of the good and their level of income.

Indivdual demand: the demand of each consumer for a particular good or service.

Factor effecting consumer expenditure ExplanationLevel of income Those with a higher income have a greater ability

tomaximise utility.The price of the good or service itself Depending on their level of income consumers will

choose whether or not they will pay the nominated price for the good or service. However, with necities if the pruce increase people will still demad for it. Whilst an increase of price in luxury items will reduce demand more significantly

The price of a substitute and complement goods Iif the price of a good rises the demand for the substitute rises. If the price of a good lowers then the demand for the complement increases.

Consumer tastes and preferences Some goods and services achieve a higher level of utility than others. If you like cha time more than smoothies you buy chatime. Some goods reduce consumer satisfaction e.g. going to a classical concert when you hate classical music. And can be changed with experiementation and learning. They also change over time and because of technological progress. Make consumers demand the latest technology e.g. there are double the number of internet sub scriber than there was 5 years ago/

Advertising Advertising g can greatly increase the demand for a product and comes in various forms such as phone calls, bill boards and sms. Advertising can lessen the response to price increases as it builds customer loyalty.

A substitute: A good that a consumer chooses o buy in place of another good, such as butter and margarine or tea and coffee.

A complement: A good a good that is used in conjunction with another good e,g, petrol for a car.

4.4 SOURCES OF CONSUMER INCOME

Consumer income mainly comes from the factors of production or insome cases from the governemnet in the form of social welfare.

RETURNS TO FATPRS OF PRODUCTION

Consumer income: the rewards to the owners of the factors of production. Consumers receueve income from the sales of these factors of production.

Wage: this is the main source of income that comes in the form of wage or salary payments. It can also include fringe payments, employer contribuitinos oto super and workers compensation

Rent from land: rent from land that is e.g. a property investement

Interestt from capital: people with greater wealth have an ongoing income from owning capital. Capital can be indirectly through superannuation and investement funds or the ownership of shares.

Profit from entrepreneurial skills. If the business you own earns a profit it is considered return for entrepreunorial skills.

SOCIAL WELFARE: Social welfare is also known as transfer payments because it is essentiall income collected through taxation and then transferred from governements to consumers.. transfer payments include:

Social welfare payments: payments made to increase the incomes of individuals or families in need of assistance by the government. .e.g. unemployment benefits, family allowances.

Assistance to the aged: people 65+ and retired. Unemployment benefits: people seeking work but unable to find it. Disability support payment: people who are not able to work because of personal factors such as

physical illness. Family ppayments: for families with children.( depends on income levels)

Soial welfare allows a minimum safety nets for individuals to purchase basic necesiitties. In times of economic down turn consumers might increase consumer demand and help economic growth/.

CHAPTER 5 : BUSINESS IN THE MARKET ECONOMY

5.1 BUSINESS FIRMS AND INDUSTRIES

Industry: the collection of firms involved in making a similar ramge of items that usually compete with each other, such as financial service industry or the car industry.

Business firm: an organisation involved in using entrepreneurial skills to combine factors of production to produce a good or service for sale.

Business firms are the major production units in out economy, thus their sizem behaviour and performance influence our productive capacity.

5.2 PRODUCTION DECISIONS

Niche markets: a segment of a mass market for a good or service that can be defined by the tastes or characteristics or the target customer.

WHAT TO PRODUCE: ( factors that in fluences businesses decisions).

The skills and experiences- businesses are more successful when they have experience in the industry and know the demands of consumers, nature of production, how to maintain quality and have personal contacts

Consumer demand - there is a greater changce of experiencing rapic growth in areas where there is a high consumer demand, e.g. the mining boom in which investors gained instant fortunes. Or businesses

might opt to a poorly run or under valued sector, in order to consolidate the business and runit more effectively

Business opportunities: an indivudla might find opportunity through a region demanding a business, family contacts or they may find a niche market.

Capital - access is a constraint and may require them to sacrifice asstes, thus may choose a business with a lower start upo cost to minimise risk

Capital: the manufactured products used to produce goods and services commonly described as the prodced means of production’

Once the product is decided businesses will ocontinue to produce the product in or der to expand and get to know the field well so that new opportunities open up.

HOW MUCH TO PRODUCE:

Based on the level of consumer demand businesses will decide what to produce/ Tthey must make sure that they don’t produce too much that that the goods will spoil or too little that it will harm relationships with potential customers.

The pressure to produce a large quantity is affected by a businesses access to capital and produce the extra goods efficiently businesses such as cafes are able to respond quicker.

How much to produce is harder to determine when the business is a start up. . They can try to determine this by looking at past trends, however it is difficult to predict changes in external conditions

HOW TO PRODUCE:

The production process involves combining resources ( aka inputs) in order to create goods and services ( aka out puts) . this depends on the relatice effiency of the factors of production. Whoch change over time and which combinations of factors are the most efficient.

Natural resources New resouces can be discovered and new technology can in crease productivity Natural resources can be dimished through exploitation like deforestation

Labour Investement in education can increase work force productivity An aging population and declining birth aret will affect the people available for work

Capital There is an increase in the economy’s capital when there is an investment of goods used in the production process Capital will wear out over time, this is known as depreciation

Enterprise Innovators and risk takes will increase favourable political and economic conditions and provide more opportunities to make profitEconomic down turn and political instability can reduce the willingness of individual to innovate and

take riskjs

5.3 WHAT BUSINESS CONTRIBUTES TO ECONOMY

The performance of businesses impact the economy, because business that have higher growth produce more revenue to fun government services. For example the queends land economy experienced more growth because businesses in the minin and resouces industry had a greater demand and led to a sharp increase in prices. Thus experienced high growth than other states.

bGorwing businesses also reduce unemployment. For example in Sydney there is a greater amount of job gcreation because of the growing technology sector , however in smaller cities there is higher unemployment

griwing businesses ekead to regionial development by increasing tourism and economic developeement which can lead to improved roadsm transport, shops and more.

Production capacity - a business can cause an out warrd shift of the production possiblility frontier and thus improve living standards.

Thus, because businesses great contribuition the government offers assesstance to businesses through programs such as a information, cash payments, training and guidance on over seas marketing.

THE GOALS OF A FIRM: Profit motive refers to the process by which a business seeks to maximise profit by using tlowest cost combination of resources and charging the highest possible price.

Also known as the motives of the entrepreuner/ s

Maximising profits The biggest motive is gaining the most profut or the smallest possible loss.

Meeting shareholders expactations Company directors aim to make decisions atht best serve the interests of the shareholders. Certain company directors are incharge of certain share holders, thus conflict between actions that maximise share prices and dividends. Which can hinder and firms value in the long run. Share holders are interested in maximising short term retruns.

Austrade:

The audtralian trade commission ( austrade) which is the federal govenrement’s export and invvestement facilitation agence, provides advice to companies on starting amd maintiant a strong prescence in over seas markets. One form of asstance is the EMSG scheme which provide partial payments of businesses expenses such as over seas representative, marketing visists, free samples,

trade fairs and marketing consutlatnts.

Increasing market share Entrepreunorial function is split between owners ( shareholders) and paid managers. Shareholders risk their capital thus seek maximum profit for this risk. Whilst managers seek to increase sales in order to increase salariers, power and prestiege. Thuse entrepreuners must try to find a compromise.

Maximising growth In the long run maximising growth can lead to higher profits in the future and can gain amangerial reqards such as higher salaries and prestige. However incsome cases lead to business failure. E.g. starbucks, is a really successful coffee chain and hoped to bring this success to Australia. Thus, to take out proper research and didn’t realise the strong competitive nature of café’s in Australia thus ended up closing most of its stores

Sacrificing behaviour This means that a business tries to achieve an adequate level of attainment in each area. E.g. a business will compromise maximising profit to prevent new competitors or government regulations. They may also try to attain a positive social and evironomental impact e.g. acting green.

CHAPTER 7: SUPPLY Supply: the quantity of good or service that all firms, in a particular industry are able to offer for sales at different price levels.

Market supply: the sum of the individual firm supplies, of individual producers at the vairious price levels

5.5 EFFICIENCY AND PRODUCTION: Productivity - refers to the quantity of goods and services the economy can produce with a given amount of inputs such as capital and labour.

PRODUCTIVITY:Businesses want to minimise costs there fore aim to be as efficient as possible in the production process. Productivity refers to how much we can produce with a given amount of resources per unit of time.

Productivity increase =

An increase in production per factor of production ( input) , per unit of time. firm makes efficient uses of resources with its limited resources firms can now satisfy more wants with the same level of resourcces

Production - the total amount of goods and services produced production is increased by increasing the amount of resuorces or working with the same resources for a long period of time. the concretor can concrete more when he works longer hours and increases labourers.

Increase in productivity is when there has been an increase in what has been produced per unit of labour per unit of time. e.g. double the work is done in the same amount of time when double the labour is put in. Living standards ( our ability to satisfy our wants) increase when we increase our level of productivity. In the long run, an economy who improves in productivity is more likely to increase living standards in a country.

Producivity’s impact on the standard of living:

Less wastage of scarce resources – we can produce more with the given resources Lower production costs and higher profits for the business firm A lower inflation rate.: lower production costs means that firms do not need to increase prices Higher income: Improved international competitiveness of our industries: - more productivity in the Australian

economy will lead to Australian goods becoming more competitive on local and international markets.

SPECIALISATION OF PRODUCTIVITY:

Firms can increase productivity by using a factor of production more intensly.

Type Definition ExampleDivision of Labour ( specialisation of labour)

Breaking down labour in to sub processes so that no time is loss moving from one process to another.

A car assembly line

Location of industry ( the specialisation of natural resources)

When a large number of businesses congregate in the same area to share infrastructure and redusce production costs

The Macquarie park industrial area has a high concentration of advanced technology industries

Large scale production When business grow so large they use highly specialised capital

V a large win produces uses specialised label maker

7.1 FACTORS AFFECTING MARKET SUPPLY

Satisficing behaviour: the idea that firms will attempt to pursue a satisfactory leve; in all goals ( profit maximisation, sales maximisation etc.) rather than maximising any single goal

Factor Explanation The price of the Goods itself If the price is too ow on a good then the producer

would not be able to produce . it is also influenced by the expectations for the fute price of the good/ service. If the producer believes there will be a rise in supply then, the supply will increase.

The price of other Goods and services If a substitute good increased it’s prices and decided to supply more goods, then it will make more profut. Therefore firms, will be more willing to supply the substitute good/

The state of technology Advancements in technology have allowed businesses to produce more with the lower production costs, thus have allowed businesses to supply more goods at a given price. It also allows the firm to be more flewible to demand.

Changes in the cost of factors of production A fa;l in the price of a fact or production would result

in a grater supply of a particular good whilst a rise in a factpr will make it more difficult for firms to supply that good. Thus, goods and services that rely heavily on a factor of production will change with changes in the cost of production. E.g. if the price of movies went up then sinemas who buy the movies maybe forced to buy less movies.

The quan tity of goods and servoces available Goods that are scarce ( e/.g. a painting) would be harder to supply than a good that is high in abundance. E.g. the amount of oilin an oil researve determines the amount of oil that can be sold. Similar industries with limited suppliers determines the quantity of goods and services.

Internal economies of scale: The cost saving advantages that result from a firm expanding its scale of operations> they occur when a firms level of out put is below the technical optimum.

Average cost: the per unit cost of production, obtained by dividing the total cost pof producing a certain level of output by the quantity produced.

INTERNLISED ECONOMIES OF SCALE

Total costs can be reduced when outpur increases, this is often the case for large firms that require large out put. When businesses in crease their production to eeduce costs this is known as totlal economies of scale. Thus whilst there is demand businesses will continue to increase out put.

Internal economies of Scale The cost saving advantages from expanding the scale of operation

The firm can break up the process and receive benefits of specialisation Can invest in more capital Can buy in buld, which reduces the per unit costs Large companies find it easier to find a market for its by producte because it produces more waste A large firm in creases research and development to deveolope new production texhnique and improve

the skills of its employees. Easier to expand.

However, there reaches a point where the costs of in creasing out put will cause the cost of production to rise. Thus causing internal diseconomies of scale.

Internal diseconomies of scale The causes of a diseconomies

Losing tousch with the day to day running of the business May lead to a duplication and paper work Management no longer know staff personally thus increase tensions between employer and employee

relationships, as the employee is unaware of the employees issues and lead to mis understandings and disputes.

Internal diseconomies of scale: the cost saving disadvantages ( specifically, the increase in marginal costs per a unit) faced by a firm expanding its scale of operations beyond a certain point. The firm’s output level is above the technical optimum.

Technical optimum: The most efficient level of production for a firm/ At this point, average costs of production are at their lowest possible levels.

Shows:

Increasing the level of output before nthe technical optimum will cause a fall in the long term average costs

A firm increasing their output beyond the technical optimum will cause the cost of production to rise The technical optimum means that the average costs of production is at its lowest possible level

LEARNING BY DOING:

By repreating the same process multiple times businesses can increase the level of perunit production costs at each level of output. Thus causing a downward shift in the Long run average costs.

EXTERNAL ECONOMIES AND DISECONOMIES:

External diseconomies of scale: are the advantages that accure to a firm because of the growth pf the industry in which the firm is operating, and are not the result firm changing its own scale of operations.

External economies of scale - the cost saving that occurs because of outside influences

External diseconomies - growth in the industry or economy infwhich the firm is operating - not the result of changing its own level of operations

The localisations of industries – businesses enjoying the cost saving advantages of operating in an area of high ly skilled labour, plentiful supply and a major consumer market

When an industry growts the government might provide extra help such as research and development. E.g. t CSIRO created a new disease resistant wheat that helped wheat farmers

A growing, competitive and more sophisticated capital market will provide cheaper investement funds.

Factories and restrictions put in place to

decrease pollution as it contributing to

increased illness and death. E.g. in china,

radpid industrialisation has lead to huge air

pollution problems andresulted in closure and

restrictions on factories

The growth of an industry in one central area

leads to eventual transport bottle necks e.g. in

Tokyo because of rigin house prices in the city,

people now live in out religion and have to

travel serveral hours to work. ( labour feel

more tired and produce less)

The cost of raw material increases, as the

demand for it increases. ( especially when

there is a limited supply of that resource.

5.6 INVESTMENT, TECHNOLOGICAL CHANGE AND ETHICAL DECISIONS MAKING

Ethical decisions making: when business decisions about production methods, employment and other matters are made taking into consideration the impacts on broader society and the environement, and not simply to maximise profits for the firm.

PRODUCTION METHODS:

Technological changed production methods leading to lowers costs and increased efficiency. However also a reduction of the work force and larger p[roduction runs

PRICES:

Search enines allow consumers to access world wide businesses, compare prices As a result squeezed profit margins and forced firms to reduce costs to compete with over seas firms

EMPLOYMENT:

Made previous jobs redundant Competitive from over seas companies has lead to businesses to move over seas. New job opportunities e.g. higher demand for employees who can computer program Hiring women and epoepl from groups that have traditionally suffered disadvanateg

OUT PUT AND PROFITS

Respond faster to market demand Able to offer better quality products at lower prices However businesses must be properaed to invest more in technology Not all technology guaranteed to give benefits e.g. a business may invest in an new technology and then

find that a few years later it is out of date

TYPES OF PRODUCTS

New technologies can expand the range of goods thus businesses must constantlyupdate their product and giving them a greater ability to customize products to consumers wants

Ethical issues arise about the production of gooods that are made for profits such as organic food that is only bought for health and taste benefits

GLOBALISATION

Made it possible for businesses to attract investment funds from all over the world Access to more information that allows businesses to make more informaed decisions Businesses have more access to foreign markets therefore, thus allows bsuesinesses to produce them in

an economy with fewer regulations This overseas labour normally involves low wages and dangersou work environmemts

ENVIRONEMENTAL SUSTAINABILITY

A concept that involves minimising pollution and waste, preserving the natural environment, and increasing the use of renewable energy

Influenced by consumer demand and regulations Most companies are not adopting environementally friendly policies e.g. quantas now provides

passangers the option to fly carbon neutral

6 DEMAND

Demand: The quantity of a particular good or service that consumers are willing and able to purchase at various price levels at a given point in time.

FACTORS THAT EFFECT MARKET DEMAND:

Consumers are more willing to buy goods at any price if iut is a necessity The demand is likely to reuce if there is anincrease in the price of luxurygoods

THE PRICE OF OTHER GOODS AND SERVICES

Demand is effected wif there is an increase or decrease in a substitute If the priuce of a completment rises then the demand for that good is likely to decrease

EXPECTED FUTURE PRICES:

If the consumer expecta the price to rise in the future they will buy more now, thus bring forward their demand

E.g. before the implementation of the goods and services tax ther e was a larger demand in the homebuilding products\

CHANGES IN CONSUMER TASTES AND PREFERENCES

Changes in trends Technological innovation and progress lead to consumers to damand new and updated products

THE LEVEL OF INCOME:

Higher income means a greater ability to buy more products Rising income increases the demand for luxury goods Demand can be impacted by a change in income distribuition e.g. if higher incomes were charged a

lower proportion of tax then they would find an increase in the demand of luxury goods

Consumer expectatsions about income

THE SIZE PF THE PPOPULATION AND ITS AGE DISTRUITION:

age distruition e.g. australia has an aging population thus there is a higher demand for retirement

CETRIS PARIBUS ASSUMPTION

Ceteris paribus : an assumption used to in economics to isolate the relationship between two economic variables. It is a latin phrase that means ‘other thigs equal; or assuming that nothing that nothing else changes.

Ceteris parabis allows us to isolate the relationship between particular variables. In order to make the analysis simpler/

6.2 Movements along the demand curve

The demand schedule

Demand scheduale : a table showing the quantity of a good that will be demanded across a range of prices

The table shows the relationship between the price and quantity demanded

The law of demanded: the quantity demaded by consumers falls as price rises

\ when the price of the good falls, consumers would be more inclined to buy the priooduct andtehe product would be cheaper compared to other goods and services. Exceptions are luxury goods.

The demand curve

The demand curve slopes downward left to right. as the price increases the demand decreases.

Movements along the demand curve A change in the price of a good will lead to a change in the quantity demanded thus, price changes cause movements along the demand curve which are known as expansion and contractions in demand.

Contraction of demanded: when an increase in the price of good or service causes a decrease in quantity demanded. It is shown by an upward movement along the demand curve.

Expansion of demand : when a decrease in the price of the good or service causes an increase in the quantity demanded. It is shown by a downward movement along the demand curve.

Only a change in price causes expansion and contractions

6.3 Shifts of the demand curve

When we look at the movements in price, we assume it to be ceteris parabis, however a change in one of the influencing factors will cause a shift in the demand curve. Which is known as an increase or decrease in demand.

Increase in demand: when the demand curve moves to the right . it means that :

Consumers are willing and able to buy more of a product at the same price.

Consumers are willing to buy a given quantity at a higher price than befoire.

Decrease in demand a movement to the right . It means that:

consumers are willing and able to buy less of a of the proiduct at each possible price.

Consumers are willing and able to buy a given quantity at a lower price.

Factors that cause an icrease in demand Factors that may cause an decrease in demand Prices of other goods and services: rise in the

price of substitute goods consumers demand more goods, fallin the price of complementary goods

Expected future prices : if consumers expect the price to increase ( e.g. a new tax)

Consumers tasts and preferences: a particular good becomes more fashionable more people want to buy at the same price, New technology

Consumer incomes: rise in the level of income consumers can buy more at the same price

A change in income distribuition : Income increase for high income earners may cause an increase in luxury goods, improved customer expectation would increase demand

The size and age og the population:

Basically the opposite Prices of goods and services : the fallin the

price of a substitute goods, rise in the price of complementary goods.

Expected future prices: Expected decline in the price of a product

Consumer tastes and preferences _ products becoming less fashionable, technological process causes a good to superseded

Consumer incomes: a fall in the general level of income, a change in the income distribuition, ( crash in share pricess = less money for luxury goods) or deteriorating consumer epectations about economic prospects

The size and age distribuition of the population : a decrease in the population

6.3 Price elasticity od demand:

The price elasticity of demand : measure of the responsiveness or sensitivity of the quantity demanded of a particular product to changes in it price.

As a figure the price elasticity of demand sows the percentage change in the quantity of a good demanded resulting from a 1 percent increase in its price

Relatively elastic Is the increase in the quantity demanded is proportionately greater than the fall in price. Then

demand is very responsive to changeRelatively inelastic A less proportionate change in quantity demandedUnit elastic The proportionate change in quantity demanded is the

same as the proportionate change in priceElastic demand A strong response to changeUnit elastic demand A propotional response to a price chande ( total

amount spent by consumers remains unchanged)

Inelastic demand A weak response to a price change

The importance of price elasticity

Businesses To decide optimal price strategy If it was relatively elastic they would know that lowering the price would expand

the volume of sales increase total revenue If demand was relatively inelastic --. Increase reveue because the reduction in

slaes would be less than a price increase.The government Determing the price of goods and services that it provides for the community e.g

public transport fares To predict the effects of changes in the level of indirect taxesm e.g. sales tax ,

excise duty on demerit goods. Understating price elasticity can help determine the amount of revenue they’ll

receive E.g. charging taxes on tobacco, alcohol etc because they have a relatively inelastic

demand

Measuring price elasticity

Total outlay method : a way to calculate the price elasticity of edemand by looking at the effect of changes in price on the revenue earned by the produced, If price and revenue move in the same direction demand is inelastic; if price and revenue move in the opposite direction demand is elastic; and if revenue remains unchanged in reponse to price change, demand is unit elastic.

Total outlay is found by multiplying the price by the quantity that would be demanded at that pruce. The total outlay = thettotal revenue sellers of the product would receive at that price.

If the out lay moves in the same direction it would be relatively inelastic.

Price elasticity and the slope of a demand curve

In the upper part of the demand curve ( where prices are high) demand will be relatively elastic, whilst at low prices, demand will be relatively inelastic e.g. a decrease in price can take the qyuantity from 10 tto20 , causing the total outlayto increase from 40 to 60. Whilst if is was a change from $4 to $3 for a bigger quantity and demand rises from 70 to 80, the total outlay will fall from $280 to $240 then it will be relatively inelastic.

Perfectky elastic demand

Perfectly elastic demand: When demand is perfectly elastic consumers will demand an infinite ( unlimited) quantity at a certain price but nothing above or below.

This may occur in a perfectly competive market where there are many buyers and sellers , all selling the same product. No seller would be able to raise

prices because then they would risk losing customers.

Perfectly inelastic demand:

Perfectly inelastic demand: where consuemrs are willing to pay any price for a good to obtain a given quantity of a good or service. It is shown by a vertical demand curve.

It can apply to some circumstances such as a person with a life threatening disease who can only be treated using a particular drug would be willing to pay any price.

6.5 Factors affecting elasticity of demand

Factor Explanation Whether the good is a luxury good or a necessity

Goods that are a nececisity and for daily life will rexperience relatively inticity because even if there is a change in price peple are still going to buy it. However if the good is a luxury, if there is a change in price people are not obliged to buy so they will experience relative elasticity.

Whether the good has any close substitutes

If the good has a close substitute, then there will it will have high elasticity demand. Since there are so many close close substitutes, people will opts for a different brand.

The expenditure on the product as a It also depends on how much the item costs. If a an expensive luxury

proportion of income good increases by 10%, then it will experience more elacitiy then a goods and services that only take up a small percentage of someones income such as a pen that increase by 10 %.

The length of time subsequent to a price change

It takes time for people to adjust to a price change. For example if the price increased, then it takes for time to seek out alternatives or realise that the price has gone down. Also it depeneds on the durability of the product, for example if there is a price in creasein new cars, people may not buy now but after a while people will buy the product because they need a new car.

Whether the good is habit-forming (addictive) or not

Goods and service such as ciggerettes and alcoholic breverages , tend to have a relatively inelastic demand. People just continue with the same habits.

7 SUPPLY 7.1 factors effects market supply

The price of the good itself: the producers willing ness and ability to provide the good influences the supply, e.g. if the supply was too low the producers wouldn’t be able to cover the costs of supply and not supply them . This is also infleuenced by the suppliers expectations about the fyuyture price of a good or service. E.g. if theyr believe there will be a rise in demand then they will supply more. Vise versa.

The price of other goods and services: if the price of good X increased whilst the price of good Y increased it would be more profitable to product good Y. the production of good X would decrease

The state of technology: technology allows firms to produce more goods at a given price. It also allows the firm to easily adjust supply to coincide with demand. E.g. the motor vehicle industry.

Changes in the factors of production: a fall in the cost of the factors of production would allow firms to produce more of a good. However if it rises it becomes difficult form firms to maintain supply. Especially for those heavily relient on the factor input. E.g. if Hollywood decided to increase the price of their movies, small businesses might not be able to keep up and go out of business. Causing a decrease in the market supply of movies.

The quantity of the good available : it limits supply. E.g. a rare painting or the quantity of oil from oil researves. It is also effected by the number of suppliers. As more suppliers enter , supply increases and vise versa. E.g. the supply of energy drinks has increased with more suppliers

Climatic and seasonal influences: e.g. drought would cause agricultural supplies to decrease.

7.2 Movements along the supply curve

Changes in price: movements along the supply curve

Assuming that all factors remain the same a supply schedule can be created to show the relationship between the quantity supplied and the price of the good / service.

The law of supply: as the price of a certain good rises , the quantity supplied by producers will rise. Because

Firms can be more profitable High prices for the good make it more profitable and attract more supplier which will increase the

quantity supplied.

The supply curve:

The typical supply curve slopes upwards from left to right. Assuming that all factors remain the same any change in the price of a good will lead to a change in the quantity supplied in the same direction.

Contraction of supply: when a decrease in the price of a good or service causes a decrease in the quantity supplied and is shown by a downward movement along the supply curve.

Expansion of supply: When an increase in the price of a good or service cause an increase in the quantity supplied. It is shown by an upward movement along the supply curve.

7.3 Shifts of the supply curve

Shifts are known as increase and decrease and brought on by external conditions on the business firm, not price changes.

Increase in supply:

Increase in supply: a movement in the supply curve to the right.

An increase in supply means that firms are willing and able to supply more of product at a given price level than before.

An increase in supply means that firms are willing to supply a given quantity at a lower price than before. Originally they were supplying 1Q at 1P , now they can cupply 1Q at a lower price.

Decreases in supply:

Decrease in supply: movement in the supply curve to the left.

Firms are willing and able to supply less of a good at each price level Firms are only willing and able to supply a given quantity at a higher

price than before.

Factors that cause a shift in the supply curve

Increase DecreaseA falling the price of other goods-> production of another good becomes less profitable

Rise in the price of a certain other goods suppliers want to produce other goods and services because it is more profitable

An improvement in technology A certain technology no longer being availableA fall in the cost of factors of production e.g. labour and capital

Rise in the cost of the factors of production

Climatic conditions or seasonal changes some climates moreuseful than others

Decrease in available resources

Regulations restricting the sale of a good because of health and safety risks e.g. fireworksClimatic conditions or seasonal change.

7.4 Price elasticity of supply

Price elasticity of supply: a measure of the responsicemness of a quantity supplied to a change in price. It is calculated as a percentage of a change. It is calculated as a perecentage change in the quantit supplied divided by the percentage change in price.

Relatively elastic: a rise in the quantity supplied is proportionately greater than the increase in price.

Relatively inelastic: less than proportionate change in quantity supplied . e.g perishable goods where only a certain amount is made , so a price in crease wouldn’t make that much of a change to supply

Unit elastic: the quantity supplied rises in the same proportion as a price in crease.

Price elasticity and the slope of the supply curve:

Perfectly elastic supply: where producers are willing to supply an infinite quantity of a good or service at a particular price but nothing at all at a price below this. This is represented by a horizontal supply curve. highly unlikely

Pperfectly inelastic supply: where producers are willing to supply a given quantity of a good or service regardless of price. This situation can be represented by a verticak supply curve e.g. a house auction

7.5 factors effecting elasticity of supply

Factor explanationTime lag after price change

In the time immediately after the supply would be perfectly inelastic., because producers have not yet increased their inputs as the producer has to increase production with existing workers ad equiptment. . Therefore the in the Short run whilst the elasticity of supply is meant to increase in reality it is relatively inelastic. In the long run, the producer would be able to increase input and facilitate greater production for the price change.

The ability to hold stock

Inventory: the total stock of goods and services held by a firm at a particular point in time., which is inteneded for sales to consumers. In times of down turn and when the price falls some goods maybe held in inventory, the ability of the producer to hold stock, the more elastic the supply ( they can supply faster ) .

it also depends on the nature of the product e.g. fresh fruit is hard to holdExcess capacity Excess capacity exists when a firm is not using its existing resources to their full capcity

supply will be elastic when there is an excess capcity, because they can quickly respond to a price increase

8. MARKET EQUILIBRIUM

8.1 the concept of the price mechanism

The concept o fthe market equilibrium focuses on how the price mechanism determines the price equilibrium.

Price mechanism : the process by which the forces of supply and demand interact to determine the market price at which goods and services are sold and quantity produced.

Market Equilibrium: the situation where at a certain price level, the quantity supplied and quantity demanded of a particular commodity are equal. There is no excess supply or demand ( the market clears) and there is no tendency towards change. It has the following factors:

Quantity demanded = quantity supplied The Market clears There is no tendancy to change

8.2 Establishing the market equilibrium

Excess demand: this is when the quantity demanded exceeds the quantity supplied. Competition among consumers for the low quantity means that consumers will start bidding up the price. The rise in price will cause an expansion in supply and a contraction of demand which will continue as long as there is excess demand.

Excess supply: also known as a glut in the market is when the quantity supplied exceeds the quantity demanded. In order to remove excess supply sellers will offer to sell at a lower price. The fall I price will lead to an expansion of demand an contraction of supply

8.3 changes in the equilibrium

The equilibrium can be changed by shifts in the demand or supply curves ( or both) .

Equilbrium: this is achieved in an individual market when any customer who is willing to pay the market price for a good or service is satisfied, and any producer that offers their good s or services at market price is able to sell their produce. It occurs when the quantity demanded is equal to the quantity supplied.

How an increase in demand can change the equilibrium

An increase in demand means that more of a good will be demanded at any given price causing the demand curve to shift to the right

If price remained the same despite this shift the quantity demanded would be more than the quantity supplied, causeing an expansion of supply and te price equilibrium to increase

Increase in demand = increase in equilibrium quantity

A summary of other conditions that can change equilibrium

Decrease in demand will lower the equibrium price and quantity An increase in supply lowers equilibrium price and raises equilibrium quantity A decrease in supply raises equilibrium price, and lowers equilibrium quantity

8.4 The role of the market

The price mechanism is important in determining the answer to questions about production, distribuition and exchange of goods and services in the economy.

The product market: the interaction of demand and supply of the outputs of production i.e. goods and services.

The interaction of the supply the price and quantity that best satisifies the priuc aand quantity wants with limited resources. The taste and predferences of consumers is conveyed between consumers and producers in the economy through relative price changes and without any central coordination or need to obtain information from consumers. The price mechanism also determines the price paid for the factors of production and the total amount of output that is received by consuemrs.

Factor Market: A market for any input into the production process, including land, labour, capital and enterprise.

The price mechanism is also said to ensure allocative efficiency.Which means thatproduction continues to increase until the point where the value to consumers of the last good produced is equal to the cost to producers.

Allocative efficiency: this refers to the economy’s ability to allocate resources to satisify consumer wants

The rpcie mechanism is effective because :

Any consumer willing to pay the market price foor a good or service will be satisfied Any producer offering goods or services at the market price will be able to sell al they produce

8.5 Governement intervention in the market place

When left to operate on its own the market can produce undesirable goods and services e.g. the market price or the equilibrium quantity that results from the free interplay of goods and services, may be too high or too low and some goods and services may not be produces. This is known as market failure as the price mechanism fails to take into account the social costs and benefits.

Market Failure: occurs when the price mechanism may take in to account the private benefits and costs of production to consumers and producers , but, it fails to represent the indirect costs such as damage to the environment.

The figure on the left shows society’s supply curve ( the one that considers all costs of production) which lies above the supply curve. The social cost equibrium is above the private cost indicating that the price mechanism undervalues the natural natural environment.

Price intervention

Sometimes the government may feel that the market determines price is either too high or too low thus will implement :

Price ceilings: a maximum price that can be charged for a particular commodity( indicated below the equibrium) . IN order to distribute money from sellers to buyers. E.g. bus fares or recessionary cards.

Price floors: the minimum price that can be charged for a particular commodity. ( indicates above the price equilibrium) . in order to distribute money from buyers to sellers. ( e.g. wages, the factors of productions that the government wants businesses to invest more in )

If Price equilibrium is too high = price ceiling = eexcess demand

Price equilibrium is too low = price floor = excess supply

However these methods are not as effective as they create a disequilibrium.

Quantity intervention

The quantity of some goods services provided may be too high or too low, because there is no consideration of the social costs and benefits ( externalities) in the price mechanism. E.g. production may be too high producing a high amount of pollution ( negative externalties) so the government will restrict production through implementing taxes, laws e.g. pollution emission permits etc.

Similarly, the consumer may undervalue the social benefits ( positive externalities) that come with some goods and services. E.g. museums, galleries, transport. Thus, the government will encrouage consumers through subsidies.

Merit good: Goods that are not produced in sufficient quantity by the private sector because private individuals do not place sufficient value on those goods i.e. they involve positive externalities that are not fully enjoyed by the consumer. E.g. education or health care.

Internalising the externality: making businesses pay for the social costs and beneits of production e,g imposing taxes.

Public good: the goods that private firms are unwilling to supply as they are not able to restrict usage and benefits to those willing to pay. Because of this, governements should provide these goods.

Problem Government action OutcomeMarket price is too high Price Ceiling Reduces price quantity shortageMarket price is too low Price floor Increases price quantity excessMarket quantity is too high ( negative externality)

Taxes Increases equilibrium pricereduces equilibrium quantity

Market quantity is too low ( positive externality)

Subsidies Reduces equilibrium price, increase equilibrium quantity

Market does not provide goods or services

Governement provides good or service

Governement must collect taxation revenue to finance its supply of a good.

8.6 Competition and market power

Purse/ perfect competition: when there is a large number of firms who have the ability to pprices without losing their customers to competitors. No firm has market power.

In most industries firms enjoy some degree of market power which results in a higher equilibrium price ( an lower equilibrium quantity). The degree of market competition is determined by the market structure.

Four main market structures

Pure competition Theoretical model of perfect competitionMonopolistic competition Many small firms in the industryOgliopoly A small number of large firms dominate the industryMonopoly Only one producer in the industry

Pure competition:

Firms operating under pure competition have the following market conditions:

Small buyers cannot effect market price ( e.g. arranging bulk buying discounts) Buyers and sellers know that the same product and prices are being offered/ sold throughout

the market Buyers do not incur costs from moving to one supplier to another There are no barriers for firms existing or entering the market Sellers can sell as much of their product as they like

Firms are the price takers and must accept he market price as if they try to sell above that price buyers can get the product else where cheaper. Firms would not sell below market price because it would not be maximising profit. E.g. advertising would be a waste of money

Monopoly

Almost the opposite of pure competition and shown through these conditions:

One firm selling the product and no market competition There is no close substitutes There are significant barriers to entry which prevents potential customers from entering the

market

The monopolist is the price setter as they do not have to worry about winning customers from competitors. E.g. water supply

If the market was to be produced by a monopolist then the market competition would increase and prices are likely to fall and out put increase. ( as the monopolist woud restrict supply to maximise profit)

Monopolistic competition

Monpoistic competition: a form of imperfect compeitions characterised by the following conditions:

A large number of relatively small firms Firms engage in product differentiation Price differentiation gives firms some degree of price setting power Barriers for new frims e.g. brand loyalty

Product differentiation: when firms try to make their good or service look different from competitors( such as through packaging or product image) to increase brand loyalty and give the firm some degree of price setting power.

However, product differentiating does not give the firm the same price setting power as monopolist. Thus, advertising plays an important role in luring customers and maintaining existing ones. E.g. restruants and hair dressers.

Ogliopoly

Ogliopoly is a common market structure and a type of imperfect competition characterised by the following:

There are only a few number of huge firms that share the market Sell similar but differentiated products Barriers that prevent entrybecause of the small number of firms

The few firms in the industry must carefully watch compeitiors especially in regards to prices and out put polices. E.g. price cutting wars which can dramatically reduce profits

Wool worths and coles Qantas and virgin blue The 4 big banks