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Preliminary Economics 2017 Henry Chapman

The Market Economy Table of ContentsIntroduction to economics

Consumers and Business

Markets

Labour Market

Financial market

Government Intervention in the EconomyTopic 1: Introduction to Economics

The Nature of Economics

Preliminary Economics 2017 H Chapman

1.1- The economic problem and the role of choiceso Economic problem- unlimited wants but we have limited resourceso Resources are scarce – a challenge to allocate these resources to

our unlimited wantso Different types of economies make the decisions about collective

wants differentlyo Individual wants- desire of each persono Collective wants- wants of the whole communityo Can change overtime, be recurring and complementary (if you need

one of the other)o Ecos is a study of how people choose to use their scarce resources

in an attempt to satisfy their unlimited wants.o Concerned with four key principles:

1. What to produce2. How to produce it3. How much to produce4. How to distribute what we produce

Opportunity cost The real cost of satisfying a want as the alternative we want to give

up (e.g spending money on a chocolate bar rather then a coke) Foregoing an alternative want for another For the government, might be putting more money into education

over health services Can be applied to:1. Individual- Individual consumer with limited resources (income)

choosing between a car and an overseas holiday. If she chooses the car, the real cost is the overseas holiday that she has to forego.

2. The business firm- Must make a choice in allocation of its scarce resources. An entrepreneur who decides to produce shoes gives up the opportunity to produce something else (e.g furniture)- with those available resources

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3. The government- limited resources to satisfy community wants. If it allocates resources to construct a new motorway, it may be at the expense of a new public hospital

1.2 The production possibility frontier (PPF) Used to demonstrate how opportunity costs arise when individuals or

the community make choices Shows the various combinations of two alternative products that can

be produced Four assumptions of a PPF1. The economy only produces two goods2. The state of technology is constant3. The quantity of resources remains unchanged4. All resources are fully employed

If new technology creates efficiency, we can produce more products. This will shift the frontier outwards

New resources will also shift the frontier outwards. (e.g an increase in the population through immigration workers)

If there are unused resources (e.g unemployment- labour) then that is indicated inside the PPF

The PPF will be curved (concave)- as you move resources from producing one good to the other they become less protective

^^^^ Opportunity cost increases Example of a PPF

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1.2- Further implications of our choices Consumer goods- items produced for the immediate satisfaction of

the individual and community Capital goods- items not produced for immediate consumption but

are used for the production of other goods and services Consumer goods satisfy our wants now; capital goods will help satisfy

our wants into the future

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For the economy- an economy that focuses on producing capital goods will experience a higher level of economic growth. Choosing to satisfy more wants into the future

Current choices Current Implications Future ImplicationsSpend money and resources

Higher living standards

Lower living standards

Save some resources

Lower living standards

Higher living standards

Individuals

May choose to go without an overseas holidays or extravagant lifestyle and instead take out a mortgage and purchase a house

Although paying off a mortgage is a sacrifice for individuals, home ownership will improve individuals financial security and pass on this asset to their children

Example of how immediate wants need to be given up for future prosperity

Businesses:

Must choose to focus one area of the business over another Limited amount of resources – must focus on the products in which

areas they are going to have the greatest success Most likely to be effective if they can identify where the next wave of

business growth is coming from E.g – businesses that invested in communications/information

technology achieved extraordinary financial success (idea of thinking forward)

Governments

Difficulty for governments is that in the short term it may be more politically popular to satisfy immediate wants rather than to plan for future needs

Immediate needs (consumer goods): increased welfare benefits and health care

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Long term needs (capital goods): education, infrastructure and research development – if satisfying immediate wants, can result in a lower level of economic growth

1.3- The economic factors underlying our choicesIndividuals

Economic choices shaped by a variety of factors: Age Income Expectations Future plans Family circumstances

Personality factors in decision making- some keen to take risks, others prefer security and avoiding risk

Key decision for individuals: how much income will they spend and save

Education –further education may forego income for several years, but rewarded with a higher income later

Family- If starting a family, cutting down on personal expenditure Retirement- Adjusting to a much lower income at a time where

there may be more time for individuals to consume All factors in how much an individual can spend

Contribute to economic decision making by voting in Central feature of political debate in Australia- economic policies Elections involve individuals making a choice about who will get

their votes – economics policies a major influence in voting behavior

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Businesses

By choosing a higher price, businesses are hoping that they will maximize profits and only have a small impact on the levels of sales

Marketing strategy- whether to target the mass market or an exclusive group of consumers

Production and resource use minimize cost, maximize quality

Generally choose cheapest available resources, but if supply is not assured, they may pay slight more for an input which has a more reliable supply

Choices in industrial relations: Employ people on wage levels set by awards Negotiate agreements with whole workforce Negotiate individual contracts Encourage union representation /involvement from employees in

decision making

Government

Significant influence over the economic choices of individuals/businesses

Making something more/less expensive (e.g taxing cigarettes) Influence economic behavior by prohibiting certain activities May wish to encourage certain economic activity and provide

incentives for them Regulates business/individual spending Government influence on the economy: Influencing individual/business decisions Providing goods and services directly

The Operation of an economy

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2.1- The production of goods and servicesFour types of resources:Resource ReturnLand (natural) RentLabour (workforce) IncomeCapital (machinery) InterestEnterprise (organization of all factors for the purpose of producing g’s and s’s

Profit

- A factor of production can be defined as any resource that can be used in the production of goods and services (another name for resource)

- Quantity/quality of an economy’s factors of production can influence how wealthy or poor that country will be

- The people in a country with abundant, high-quality resources would be better able to satisfy their wants and have a much higher standard of living, compared to those who don’t (fewer, poorer-quality resources

- All four resources are limited in its supply:- Limits to the amount of natural resources available for production,

including land, fossil fuels or clean air and water- Our supply of labour is limited by our population size, labour

market skills and people’s willingness to work- Our supplies of capital are limited by the extent to which the

governments and the private sector are willing to invest, as well as the level of domestic (or overseas) savings available for investment

- Entrepreneurial skills are also limited by the size of the population and a range of other cultural and economic factors, including- most importantly- the ability and willingness of individuals to innovate and take risks

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- Market economy – decisions about how scarce resources are allocated in production are largely determined by consumers’ spending patterns

- Firms respond to consumer demand- obtainment of resources to produce the items consumers want.

- To make profits, firms pay for the resources and labour skills necessary to produce in demand g’s and s’s

- Efficient industries that face growing consumer demand and higher prices will be able to attract more resources

- Business firms can use several different combos of resources- The method of production may be more labour intensive or more

capital intensive- depending on which factor is used in greater proportion

2.2- The distribution and exchange of goods and services

6 Economic Objectives

- Environmental sustainability

- Income distribution

- Economic Growth (GDP growth rate)

- Economic development (HDI, Health)

- Unemployment rate

- Inflation

- GDP- The total market value of the goods and services produced in an economy over a period of time (in full: Gross Domestic Product)

- One of the main functions of an economic system is to how to distribute and exchange goods and services provided in the economyo Economies like to distribute g’s and s’s using a mean of

exchange ($AUD)

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o Income is the return (output) to the factors of production. Flow of money that reflects the contribution of an individuals/firms to the production process

o Workers are paid according to the value of their input, or value of labour- often reflects how scarce/highly in demand their labour is

o Market economies don’t attempt to distribute output equally within society- provide people income as a reward for their contribution to the production process

o Benefit of this system- incentive to develop skills, education and take risks- thus improving the resource base and encouraging innovation

o Can be unfair for people who are unable to contribute to production- because of illness, age or disability

o Less bargaining power- unable to secure a fair return for their labour

o Inequitable market outcomes- government influences distribution of goods and services through the welfare system (higher income earners to lower income earners through taxation)

o Individuals and businesses- use money as a medium for exchanging of goods and services

o When only one party is interested in what the other has to offero Existence of money as the basis of exchange allows individuals

to specialize in how they contribute to the production processo Bartering- non cash exchange of goods and services, rare in an

advanced economy as well as stable

2.3- The Business Cycleo The Business Cycle refers to fluctuations in the level of

economic growth due to either domestic or international factorso Market economies, such as Australia’s, are subject to ups and

downs through a cycle known as the business cycleo Economies usually experience an overall trend of growth in their

output

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o Continuing pattern where a period of strong growth is followed by an economic slowdown- level of economic activity falls

o Cyclical pattern of growth recurs in market economies

Peak

o Confidence: Optimistico Spending: High (high borrowing, low saving)o Income: Higho Unemployment: Low, skills shortageo Inflation: Higho Investment: High, firms expanding production

Contraction

o Confidence: fallingo Spending: Falling (less borrowing, more saving)o Income: fallingo Unemployment: Starting to riseo Inflation: Fallingo Investment: Only essential investment

Trough

o Confidence: Pessimistico Spending: Low, paying off debts insteado Income: Lowo Unemployment: High, skills surpluso Inflation: Stable, v/ low, maybe deflationo Investment: none, falling

Expansion

o Confidence: Risingo Spending: Increasingo Income: Slowly risingo Unemployment: Slowly fallingo Inflation: Stable, slight riseo Investment: Only essential

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Impacts of the Business Cycle

Recession BoomFalling production of g/s’s Increasing production of g/s’sFalling levels of consumption and investment

Rising levels of consumption and investment

Rising unemployment Falling unemploymentFalling income levels Rising income levelsFalling quality of life Rising quality of life

- Main economic aim of the government is to smooth out the cycle- Governments step in to stimulate economic growth during periods

of recession to restore the economy to growth and improve employment opportunitieso During the late ‘00’s, Australian government created a large

intervention in order to fight the threat of an extreme recession. In Aus, a recession was avoided altogether

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2.4- The Circular Flow of Incomeo The five-sector circular flow of income model describes the operation

of the economy and the linkages between the main sectors in the economy

o Five sectors: Individuals, Businesses, Financial Institutions, Government and International Trade

o Leakage: Items that remove money from the circular flow of income, decreasing aggregate income and the general level of economic activity. The three leakages are: saving, taxation and imports

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o Injection: Flows of money that increase aggregate income and the general level of economic activity. The three injections are: investment, government spending and exports

Two sector modelo Households supply businesses with labouro Businesses pay households incomeo Households spend income on consumptiono Businesses supply households with output

Individuals

o Activities in earning an incomeo Spending on goods and services

Businesses

o Buy factors of production (resources)o Use these resources to produce goods and service

Three Sector ModelFinancial institutions Sector

o Institutions that are engaged in the borrowing and lending of moneyo Allows consumers to save some of their income and deposit savingso Financial institutions then lend these savings to businesses for

investment purposeso Saving-leakage- decreasing the level of economic activityo Investment- injection- increasing the level of economic activity

Four Sector ModelGovernment Sector

o Satisfies collective wants such as roads, railways, schools, hospitals and defense force

o Obtain the resources to do this through taxation

Two major roles in the circular flow of income:

1. Imposing taxes on individuals and businesses

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2. Uses this this tax revenue to undertake various government expenditures

o Taxation- leakage- Individuals spend less on g/s’s after they have paid tax. Also comes from businesses but majority of tax is from individuals

o Spending revenue- injection- On collective goods and services, providing income to businesses and government employees. Transfer payments (social welfare, pension) gives income to those recipients for them to spend in the economy

Five Sector ModelInternational sector

o Transactions that our economy has with the rest of the worldo Only includes imports and exportso Imports- g/s’s produced overseas but sold in Australiao Exports- g/s’s that are produced here and sold overseaso Imports- considered a leakage as money is withdrawn from the

Australian economy and paid businesses overseaso Exports- considered an injection because of the inflow of money

stimulates production and employment in Australiao A country will try obtain more exports then imports, as this stimulates

the economy more and is put back ino Equilibrium- occurs in the circular flow of income when sum of all

leakages = sum of all injections into the economyo Disequilibrium- When there is an inequality between total leakages

and total injections into the economyo Economy tends to move back to equilibrium- change in the level of

income

Total leakages are greater then total injections-

o downtown in level of economic activity, o falling incomes,o falling production o rising unemployment

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When level of economic activity falls:

o total leakages will also fallo consumers have less income to saveo less spending on importso to have collected as taxes

Leakages and injections eventually become equal and the economy will again be restored at equilibrium but at a lower level of income in the circular flow

Total Injections greater then total leakages

o upturn in level of economic activityo rising incomeso rising production o rising employment

When level of economic activity increases

o total injections will fallo consumer have more income to saveo spend on importso to have collected by taxes

Leakages and injections will eventually be equal and the economy will again be restored to equilibrium, but at a higher level of income in the circular flow

o Government can have significance influence on the circular flow- can change levels of taxation and government revenue

o Able to manipulate the size of total leakages and injections and overall level of economic activity

o Can stimulate the economy by increasing injections in relation to leakages, or dampen the economy by increasing leakages in relation to injections

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Economies; Their Similarities and differences3.1 - Different types of economies

Centrally plannedo Government makes decisionso Little individual choiceo Public Ownershipo Government allocates resourceso Example: North Korea

Pure market

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o Buyers and sellers free to exchange productso Price mechanism is paramounto Private ownershipo Consumer sovereigntyo Competition o Freedom of enterprise (set up profit making opportunities)

Mixed marketo Some government interventiono Decisions are made by market forces and governmentso Attempt to make a balance between markets and government o Consumer is still king

Why governments intervene in the market economy

Resource allocationo Providing important things that would otherwise not be providedo Restrict production of harmful goods

Income Distributiono Creates a fairer society and looks after people

Economic stabilityo Smooth cut shape fluctuations in the economic cycle o Ensure stability in the economy and the financial system

Comparing Economies- Japan

Economic growth :o Australia: 2.4% (annual GDP growth rate) and total GDP $1340 U.S

billion. Average yearly growth rate of 3.3%o A decline because the mining boom is over and an increase in

household priceso Japan: 1.7 % (annual GDP growth rate) and total GDP of $4,123 U.S

billion

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o Stronger pace of consumption, showing that higher wages are translating to higher spending by consumers of G’s and S’s and increased exports

o Encouraging sign because Japan’s economic growth has fluctuated a lot since the industrialization period, with a rate of 2.03% since 1980, whereas Australia has been quite consistent with ours averaging 3.49%

Quality of life:o Australia’s HDI is 0.935- second in the worldo Japan’s HDI is 0.891- 20th in the worldo Both have good quality of lives, with Australia’s higher due to a

thriving education systemo GDP per capita- Australia: U.S $50,962, Japan: U.S $32,486

Employment and Unemployment:o Australia’s participation rate: 64.6%/ unemployment rate: 5.8 %o Japan’s participation rate: 60.1%/ unemployment rate: 3.1%

Income distributiono Gini Index- used to measure how effective an economy is in

distributing incomeo Australia: ranked 32o Japan: ranked 31o Both have effective taxation systems that redistributes income to

lower classes

Environmental Sustainabilityo Australia: 17 tonnes of carbon dioxide per person- one of the highest

in the Asian regiono Japan: 3 tonnes of carbon dioxide per person- much more

responsible with their natural resources

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Role of the governmento Measure by the percentage of GDP which is spent by the

governmento Australia: 37% in 2016o Japan 39% in 2016o Australia- 6.3% of their GDP on public health care, Japan 8.6%o 4.9% of GDP spent on public education, Japan 3.8%o 4.9% of GDP spent on social welfare, Japan 9.2%o The percentages are far more even in Australia, as Japan has to

cater for their ageing population through increased spending on public health care and social welfare.

Topic 2: Consumer and BusinessThe role of consumers in the economy4.1- Consumer sovereignty

Consumer is KINGo The manner through which consumers, collectively through market

demand for goods and services, determine what is produced and the quantity of production

o Consumers send signals to producerso Where demand is high, prices rise, producers increase productiono Income levels also determine what is produced. o Y rises, more C of luxury goods.

Four factors that diminish consumer sovereignty:o Marketingo Misleading/Deceptive conducto Planned obsolesce o Anti-competitive behavior

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4.2- Decision to spend or save Consumers either spend or save their income

o Y=C+S o Y= Disposable (after tax) incomeo C= Consumption expenditureo S= savings

APC (Average Propensity to Consume)o The proportion of our income that is consumed o APS= C/Y

APS (Average of Propensity to Save)o The proportion of our income that is savedo APS= S/Y

Because every part of our income is spent or saved, the APC and APS must had up to 1

o i.e APC+APS=1 Factors influencing the decision to spend or save

o Cultural factors- previous generations (e.g Asian economies)o Personality- spenders and saverso Expectations for the future- if you think income will rise, you will

spend. If you are worried about job security, may delay major purchases

o Tax policies- can make it attractive to save via superannuation or they can encourage to spend by removing taxes

o Availability of credit- ready credit brings forward purchases

Income

As we grow older, our income tends to rise Consumers with a low income spend proportionally more of their

income because they need the necessitates to survive. Dissavings occurs

Hence, APC is usually quite high on a low income- unable to save as much or spend on luxury goods

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As income rises, consumption still rises (expenditure on luxury goods) but not at the same rate as income rises

Hence, APC falls as income increases – the APS must rise as income increases because of more saving

THE MORE INCOME WE HAVE, THE MORE WE CAN SAVE

The Consumption Function

A graphical representation of the relationship between income and consumption for an individual and an economy

MPC (Marginal propensity to Consume)o The proportion of each extra dollar of income that goes into

consumptiono The rule: as income rises, the extra consumption falls (luxury

goods) and the individual will end up saving. A lower percentage will be spent on necessities

o MPC= (P)C/(P)Y (P=portion)

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MPS (Marginal Propensity to Save)o The proportion of each extra dollar of income that goes into

savingo As income rises, less spent on consumption and the individual

will end up saving more of the extra income. MPS increaseso MPS= (P)S/(P)Y (P=portion)

Age

Younger people tend to earn less money due to a lack of skills, work or experience in education

They spend more than they have, creating dissaving’s As people enter the workforce, income typically rises, hence they

save more then they spend (APS increases.) Individuals realize they may enter a period of low income later and tend to save for this.

Aus. Government has forced people to save since 1992 through superannuation- 9.5% of income

In retirement, people stop earning a regular income and consume from their past savings or form government pensions. Much like younger people, dissaving’s occurs

Idea of MPS increasing when income is larger

Life-cycle theory of consumption

MPC important for the government because it gives the government and RBA a guide as they attempt to steer the economy with fiscal and monetary policy

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E.g: Gov talks about a tax cut, determining how much of this extra income will result in extra spending

4.3- Factors influencing individual consumer choice Utility

o The term economists use to represent satisfaction/pleasureo Consumers choose g’s and s’s that maximize their utility

Individual demando The demand of each consumer for a particular good or service

Level of incomeo The higher the income, the more spent on higher quality.

Compare what a person on a carer’s pension would spend compared to a managing director of a large public company

The Price of the good or service itselfo Considering whether the good or service is actually worth its

price, based on level of incomeo Necessities- purchased regardless of price- we need them

The Price of substitute goodso A substitute is a good that consumers may choose to buy in

place of another good which is similar, such as tea or coffeeo Comparing and judging prices- looking for the best priceo If the price of one rises, the substitute will increase in demand

by consumers The Price of complimentary goods

o A compliment is a good that is used in conjunction with another good. One relies on the other to function- eg. PlayStation and PlayStation games

o If the price for the PlayStation decreases, demand will increase as well as for its complement- the games

o The complement tends to be purchased regardless of price Consumer tastes/preferences

o Changes overtime e.g fashion trendso Demand for different goods changes over timeo Innovation and technological progress- change in spending on

mobile phones, internet

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Advertisingo Creates demando Builds up brand loyalty of consumers and makes the product

more resistant to price changeso Makes products attractive

4.4- Sources of consumer income Returns of resources:

o Labour- Wages – main source of income for consumerso Land- Rento Capital – Interesto Entrepreneurial skills – profit from businesses

Social welfareo Income collected through taxation and then redistributed to

consumers Types

o Assistance to aged careo Family paymentso Disability supporto Unemployment benefits

Aim is to provide a minimum income safety net, allowing consumers to purchase basic necessities- helps ensures quality of life.

Sources of income statso Wages/Salary 55%o Business profits and capital investment 18%o Property Income 12%o Government Benefits 9%o Other 6%

The Role of Business in the economy5.1- Business Firms and Industries

A business firm is an organization involved in using:o Entrepreneurial skills

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o To combine factors of productiono To produce a good or service for sale

An industry consists of those firms involved in making similar range of items that usually compete with each other

5.2- Production decisions What to produce

o The skills and experience of the business operatoro Industries where there is strong consumer demand (or where

they think there will be in the futureo Where they see specific opportunities- might find a niche

market to focus on the tastes of specific set of consumers, have contacts or family experience

o The amount of capital required to start How much to produce

o Assessment of consumer demando May research what price and what likely sells at differing priceso How to use resources (scarcity)?o Past trends in production

How to produceo Production process involves combining inputs (a range of

resources) to create outputs (goods and services)o A firm’s decision to produce will depend upon the efficiency of

the four factors of production Efficiency Natural resources

o New ones can be discovered (uranium, wind, new technology can improve productivity and existing ones depleted (overfishing, deforestation)

Labouro Investment in education and training can increase productivity

and increase participation rateo Decline in birth rate and ageing population can negatively

impact the use of this resource Capital

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o Investment in capital goods can increase efficiencies (digital platforms) but needs updating

o The worn out or discarded part of capital is known as depreciation

Entrepreneurso Supply increases under favorable economic and political

conditionso Political instability and economic downturn discourages risk

taking and investment

5.3- Businesses Contribution to the economy Economic growth (WA mining investment) Reduces unemployment (financial services in Sydney) Increases a nations productive capacity (outward shift in the PPF)

5.4- Goals of a firm Maximizing profits

o Main objective of a firmo Difference between total revenue and costs of production

Meeting shareholder expectationso Legal responsibility of directors

Increasing market shareo Paid managers take on organizational function and their

perceived managerial ability, thus their rewards, may be more dependent on increasing sales

o Advertising and changing prices in order to achieve this Maximizing growth

o Maximizing assets- larger assets=larger productivity=larger profits

Satisficing behavioro A firm cannot have it all

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o Attempt to achieve a satisfactory level in all goals rather than particularly maximizing any single goal

o To ensure there are acceptable shareholder returns, decent market share, some environmental goals etc.

Conflicting goalso Increasing market share and meeting shareholders

expectations- may decrease price to increase market share and this may impact on profits. This is because managers of the firm may seek sale rewards over profit

o Increasing market share and maximizing profito Maximizing growth and maximizing profits- Compromise

between short term- dividends and long term reinventing for growth opportunities. By trying to grow the business geographically (through marketing) this will incur increased expenses will affect the profitability of a business in the short term negatively as business expenses are rising in the pursuit of growth.

5.5- Efficiency and the production process Productivity refers to the quantity of goods and services(output) the

economy can produce with a given amount of inputs such as capital and labour

Increasing productivity:o Produce more given the same amount of inputso More efficient use of limited resourceso Satisfy a greater number of wants using same level of

resources Productivity will:

o Reduce waste of scarce resources due to efficiencyo By using resources more efficiently, increasing profitso Lowering costs also increases profitso Lower inflation rateo Increases income as labour is more productive (firms can afford

to pay more without increasing prices

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o Improve international competitiveness (we don’t have to put prices up)

Specialization Specialization increases productivity, by specializing in certain areas:

o Division of labour- breaking down production process into a number of sub-processes, allowing labour to specialize in a particular part of the process

o Location of industry- (specialization of natural resources)- occurs when a large number of businesses that produce similar g’s/s’s congregate In the same area to reduce production costs by sharing common infrastructure requirements

o Large scale production (specialization of capital- occurs when businesses grow so large they can use highly specialized capital equipment in their production process

5.6- Internal and External Economies of Scale Firms that produce on a large scale are usually able to reduce their

cost per unit costs to a certain point Internal economies of scale are the cost saving advantages of a firm

expanding its scale of operations. They occur when a firm’s output level is below the technical optimum.

It will eventually reach a point where the cost per unit of production will rise again. This is known as internal diseconomies of scale.

Technical optimum- the most efficient level of production for a firm. At this point, average costs of production are at their lowest possible level.

Assuming there is demand for a product, manufacturer will continue to make product whilst it can lower cost per unit to as it will increase profitability

Achieving internal economies of scale:o Specialization of labour- breaking the production process into

different stages o Invest in more efficient capital

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o Can buy its raw materials in bulk, recues per unit cost of these inputs

o A large firm can invest in research an development and expand new product lines. This reduces per unit cost and can also invest in human capital improving skills

o A large firm will find it easier and cheap to obtain finance for a business expansion.

Achieving diseconomies of scale o Management lose touch with day to day runningo More paperwork to fill outo Management doesn’t know staff, tension, misunderstandingo Overall a decrease in managerial and administrative efficiency

which outweighs benefits from achieving the next level fo economy of scale

Learning by doingo Benefits of continuously repeating production processo Firms get more practice and become more efficient at

completing the same tasks of production over time. o Results in a downward shift of the firms long-rung average cost

curve= lower per unit production costs at each level of input

External economies of scale: advantages that accrue to a firm because of the growth of the industry in which the firm is operating and are not a result of a firm changing its scale of production.

Achieving external economies of scale:o Increasing localization of industry- where there is asupply of

skilled workers, inputs and consumer marketo Government or private enterprise may provide specila research

and development to help promote the industry- eg CSIRO helping wheat industry

o Growing competitive, more sophisticated capital market – cheaper investment funds from a wide variety of sources.

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External diseconomies of scale: disadvantages faced by a business because of the growth of an industry in which the firm is operating and are not a result of a firm changing its own scale of production.

Achieving external diseconomies of scale:o Growth of industry- increased pollution- government regulations

on pollution control- additional costs for all firms o Transport bottlenecks from increased concentration of industry

and people – increased transport costs for all firms.o Increasing demand for a firms raw materials forces the prices

up especially if there are a limited supply of resources

5.7- Impact of other factors Globalization- can recce production costs via cheaper inputs and

outsourcing (investment) Technology that allows transfer of global finance and new technology

(factors imparting productivity and production costs) Businesses investing in technology can:

o Change production methodso Substitute capital for labouro Increase output per unit input

Increased productivity through globalization technology and investment can:

o Increase output (improved products)o Increase types of products (variety)o Increase competitiveness and respond to changes in the

market (decrease price, increase share, increase profit)o More knowledge of prices due to technology so firms must be

carefulo Reduce employment (unless output increases significantly)

Topic 3: MarketsThe role of the market

Price reflects the scarcity of goods and services

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Price helps to allocate resources Price acts as incentives Prices act as a rationing device Prices act as an equilibrium device

o Equilibrium= demand equals supply= price does not change o Disequilibrium= Demand is greater than supply = price riseso Disequilbrium

Demand and SupplyNumber 1 rule:

Demand focuses on consumer behavior

Supply focuses on firms behavior

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

Law of demand: The quantity of a good or service varies negatively with price: i.e when price increases, demand decreases

Individual demand: The demand of each individual consumer for a good or service

Market demand: The demand for all consumers for a particular good or service

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The demand curve is a graph showing how the demand for a commodity or service varies with changes in its price

A demand schedule is a table that represents the quantity of a good that will be demanded over a range of prices at a given point in time

6.1- Factors affecting market demandMain factors are:

o Price of the good service itselfo The price of other goods and services (substitutes, compliments)o Expected future price changeso Changes in consumer tastes or preferenceso Level of incomeo Size of population and age distribution

6.2- Movements along the demand curve

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Any change in the price of a good or service will lead to a change in quantity demanded in the opposite direction of price change

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

Only price of the good itself will cause movements along the demand curve

6.3- Shifts of the demand curve A shift in the demand curve will occur if there is a change in ALL

other factors apart from the price of the good itself A movement in the demand curve to the right is called an increase in

demand o Increase in demand means consumers are willing and able to buy

more of a product at each possible price

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(Increase in demand)

A movement in the demand curve to the left is called a decrease in demand o A decrease in demand means that consumers are willing and

able to buy less of a product at each possible price

(Decrease in demand)

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6.4- Price Elasticity of Demand The price elasticity of demand measures the responsiveness and

sensitivity of the quantity demanded on a particular good Elastic demand: A strong response to a change in price Unit elastic demand: A proportional response to a price change (total

amount spent by consumers remains unchanged) Inelastic demand: A weak response to a price change (can be

positive or negative. N/B- weak does not mean a decrease in demand)

Significance of price elasticity of demand

Businesses and firms use this concept to determine optimal pricing strategies

If demand was elastic, can reduce prices, increase their volumes ( by as lot as its elastic) and increase revenue

If they know its inelastic (not much change in quantity when the price is changed) they could increase prices and earn more revenue

Government needs to understand elasticity when its pricing goods and services it provides for the community

Needs to predict the effects of changes in demand when it charges indirect taxes (sales tax- tobacco, petrol, alcohol

Need to estimate total revenue they will raise Gov. tends to do this on relatively inelastic products- like addictive

goods (cigarettes and alcohol)

Total outlay method Measure elasticity by total outlay method Price multiplied by the quantity that would be demanded at that price

o If total outlay moves in same direction as the price change- demand is relatively inelastic

o If total outlay moves in the opposite direction as the price change- demand is relatively inelastic

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o If total outlay remains the same following a price change- demand is unit elastic

Elasticity changes as it moves along the demand curve o At the upper point where prices are high demand, will be

relatively elastic (responsive to price changes)o At lower price levels demand will be relatively inelastic

Perfectly Elastico Consumers will demand an infinite quantity at a certain price

but nothing at a price above (mostly theoretical)o For an individual seller, the demand curve could be perfectly

elastic under circumstanceso Fruit stall for example – one price, same good, many sellers

Perfectly Inelastico Consumers are willing to pay any price in order to obtain a

given quantityo Hard to obtain for a whole marketo Appropriate for some products over a range of prices- eg a

drug for a life threatening disease

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6.5- Factors affecting the elasticity of demand Whether the good or service is a luxury (relatively elastic) or a

necessity (relatively inelastic) Whether the good or service has any close substitutes (if it does then

the price will become elastic because can mix between products) The expenditure on a product as a proportion of income. Goods that

take up a small proportion of income are relatively inelastic (a 10% increase on coffee) vs large proportion that are elastic (10% increase on cars)

The length of time subsequent to a price change Whether the good is durable- more elastic after a price change. Then

the price change gradually gets accepted as the elasticity declines Whether the good is habit forming or addictive – relatively inelastic

demand. Price is not a barrier

Supply Supply- The quantity of a particular good or service that firms are

willing to offer for sale at a particular point in time The market supply is the sum of the individual firms supplies of

individual products at various price levels Law of supply: As a price of a certain product rises, the quantity

supplied by producers will rise

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7.1 - Factors affecting market supply: The price of the good or service itself- if it goes up, supply increases

so that the business can try make profit Expectations about future price The price of compliments, substitutes and other goods- finding the

most profitable to produce The state of technology- improves lower production costs, increase

efficiency, change production runs Changes in costs of factors of production- a fall will enable producers

to increase supply over a range of prices, whereas higher prices will force producers to reduce their supply

Quantity of the good available- some goods are rare hence less supply

Number of suppliers- more firms in the industry, less supply needed unless the market is growing

Seasonal influences- agriculture

7.2- Movements along the supply curve Any change in the price of a good or service will lead to a change in

quantity supplied in the opposite direction of price change As price increases, the good becomes more profitable so firms

increase supply The higher the price makes producing this good more profitable-

more firms attracted to the industry. Increases quantity supplied. Contraction of supply: if the price decreases, there will be a

contraction in quantity supplied. This is shown as a downward movement along the supply curve

Expansion of supply: If price increases there will be an increase in the quantity supplied. It is shown as an upward movement on the supply curve

Only price of the good itself will cause movements along the supply curve

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6.3- Shifts of the supply curve A shift in the supply curve will occur if there is a change in ALL other

factors apart from the price of the good itself A shift in the supply curve to the right is called an increase in supply

o Increase in supply means firms are willing and able to supply more of each product at each price level then before

A shift in the supply curve to the left is called an decrease in supply

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o A decrease in supply means that firms are and able to supply less of each product at each price leval then before

7.4- Price Elasticity of Supply Measures the responsiveness of quantity supplied to a change in

price It is calculated as the percentage in quantity supplied divided by the

percentage change in price- but we don’t need to know this Supply is relatively elastic if the change in the quantity suppliued is

proportionately greater than the change in price. E.g if the price of new cars rose by 5% and the supply of new cars increased by 5%

Supply is relatively inelastic if the change in the quantity supplied is proportionately less than the change is price. E.g price of cigarettes rose by 5%, supply rose by 1%

Supply is unit elastic if the change in quantity supplied is proportionately the same as the initial change in price. Price of tomatoes rose by 10%, supply rose by 10%.

Perfectly elastic supply

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o This is where producers are willing to supply an infinite quantity of a good or service at a particular price but nothing at all at the price below this.

Perfectly inelastic supplyo Where producers are willing to supply a given quantity or

service regardless of price

7.5- Factors affecting elasticity of supply

Elastic InelasticPrice increase- producers increase inputs and change production

Immeditaley after a price increase

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methodsWhen inventory is able to be held When inventory cannot be held When firms have excess capacity When resources are being used to

full capacity

Market Equilibrium8.1- The concept of market equilibrium

Bringing supply and demand together and seeing how t6he market economy determines how much of a good or service is produced and at what price it should be sold.

Market Equilibrium: A situation where, at a certain price level, the quantity supplied and the quantity demanded of a particular good/service are equal. At this point, the market clears and there is no tendency for a change in either price or quantity

8.2- Establishing market equilibrium Role of price mechanism

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o The process by which the forces of supply and demand interact to determine the market price at which goods and services are sold and the quantity produced

o When there is excess demand, the quantity demanded (Qd) exceeds the quantity supplied (Qs). Competition amongst buyers for the scarce goods and services would force the price up. This results in an expansion in supply and a contraction in demand, creating movements on both curves towards equilibrium until the market clears at (P*)

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o Where there is excess supply. the quantity supplied (Qs) exceeds quantity demanded (Qd). In this instance, sellers will lower their prices in order to try increase sales. As a result, the fall in price results in an expansion in demand and a contraction in supply, creating movements along both curves towards equilibrium at (Q*) until the market clears

8.3- Changes in market equilibrium Caused by factors other than price- equilibrium of price AND quantity both change

The effect of a change in demand or supplyo The effect is that it will cause an increase in the equilibrium

price and quantityo More will be demanded at any given price and more will be

supplied at any given quantityo An increase causes the demand or supply curve to shift to the

right, from D1 or S1 to D2 or S2o When consumers demand more of a product and it exceeds the

quantity supplied, competition for the product will rise- causing

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an expansion in supply. This continues until the market clears and the new equilibrium price is found.

8.4- The role of the market

Price mechanism determines solutions to the economic problem The interaction between supply and demand determines a price and

quantity that best satisfies individual wants with the limited resources available to firms

Relative price changes convey information about consumer preferences to producers- there is no need for central co-ordination

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Two types of marketso Product market: goods and serviceso Factor markets: inputs in the production process (land, labour,

capital and enterprise) Individuals with resources or who produce goods that are scarce and

in high demand will command higher incomes (price mechanism) and a greater proportion of total output

Allocative efficiency: the economy’s ability to allocate resources to satisfy consumer wants

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

Competition amongst producers for a greater share of demand means that they will attempt to minimize their costs of production- most cost efficient method will be used (best use of scarce resources)

8.5- Government Intervention when the market fails Market failure occurs when the price mechanism takes into account

the private costs/benefits to consumers and producers but fails to take into account the social costs/benefits

Some goods may not be produced at all- the quantity from the equilibrium price may be too high or low

The equilibrium price may be too high and affect the demand Two major reasons for government intervention:

o Equity: The market does not always distribute resources fairly-what about people who would receive resources if he market was the only mechanism as they do not earn an income? (E.g sick and aged care)

o Social efficiency: The market may not provide sufficient things that society considers important- such as education

Quantity intervention

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o The market may produce quantities that are too high or low because firms and consumers do not consider the social costs and benefits

o These social costs and benefits are called externalitieso Producers consider the obvious costs (such as inputs) but not

the social costs (such as pollution and the environmental impacts) These are known as negative externalities

o The government can restrict production levels of these goods and services by imposing a tax and/or laws. (E.g taxes on cigarettes and alcohol to reduce health costs)

Supply curve will shift to the left because the government is encouraging the firm to produce less

o There are also positive externalities where consumers and producers do not consider the social benefits that come with some goods or services

o The market does not produce enough quantity as there is no incentive for private production or the market is too small

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o Collectively it is valued – (e.g. a better educated society) has benefits for productivity

o Merit goods: Those good which the individual undervalues The goods are not produced in sufficient quantities by the private sector as individuals do not place sufficient value on them. E.g. health care and education

Public goodso Goods that the private firms are unwilling to produce and supply

as they are not able to restrict the usage and benefits to those willing to pay for that good. I.e.- a price cannot be placed on these products

o A free rider is someone who gets benefits without paying for it o E.g- defence force, national parks, public roadso Government will intervene and supply these goods as there is

insufficient profit for private producerso Also allows for maximum community use and protects

exploitation of the resource o Government finances these goods through tax revenue

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Price intervention When the government feels the market determined price is not right,

they will intervene with floors and ceilings Price ceiling

o Government will impose a maximum price that a business can charge for a product. It is designed to protect the consumer from exploitation by firms or where the product is a necessity (like water or pharmaceutical drugs)

o A price ceiling will redistribute money from sellers to buyers

(imagine equilibrium is at p* and q*, where the two curves meet)

o At market equilibrium, quantity demanded is at p* and quantity supplied is at q*. Because demand is being affected (excess demand) the government will introduce a price ceiling in order to lower prices on the product and encourage more consumer spending

Price flooro Government will impose a minimum price that a business can charge

for a product. It is designed to protect a business by guaranteeing them a minimum price and therefore a minimum wage. It tends to be applied to agricultural prices to protect the large number of Australian farmers

o Protects workers and businesses from exploitationo A price floor will redistribute money from buyers to sellers

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o At market equilibrium, demand is at p* and supply is at q*. The

government intervenes because a business is not paying the minimum wage and price has increased. This means that there is excess supply because of the price increasing and to reduce supply, the price is lowered through a price floor.

8.6- Competition and market power Degree of competition determined by market structure:

o Number and relative size of firms in a particular industryo Nature of producto Ease in which new firms can enter the industry

In short:o Pure competition- theoretical model of perfect competitiono Monopolistic competition- many firms in the industry o Oligopoly- A small number of large firms dominate the industryo Monopoly- One producer in the industry

Pure market conditionso Many small buyers and none of them are sufficiently large

enough to be able to affect market price

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o All firms selling one product o No barriers to new firms entering or existing ones leaving the

market o Can sell as much as they want at the market priceo Must sell at the market price determined by supply and demand o No one would purchase their product if it was above that priceo Firms wouldn’t sell below because they wouldn’t be maximizing

profito Theoretical- not many real life examples of pure competition

Monopolyo Only one firm selling the product and there is no market

competition at allo Product has no close substituteso Significant barriers for new firms entering the marketo Monopolist has greatest control over market priceo Can set product at whatever price it likes in order to maximize

profito Advertising done for product imageo Market for water supply – one of few remaining monopolies in

Australia

AS THE LEVEL OF COMPETITION WITHIN A MARKET INCREASES, PRICES ARE LIKELY TO FALL AND OUTPUT INCREASES

Monopolistic competitiono A large number of relatively small firmso Similar products soldo Products differentiated= some degree of price setting powero Small barriers for firms entering the market, existing firms have

loyal customers, consider their firm supplies the best products o Some control over price setting because of product

differentiationo Aware of many close substitutes and competition is fierce o Advertising – bringing in new customers and maintaining

existing

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o Examples: hairdressers and restaurants Oligopoly

o Only a few relatively large firms, each of which has a significant share of the market

o Sell similar but differentiated productso Significant barriers for entry o Always monitoring behavior of other firms in the industryo Fiercest competition- always changing its output policieso Compete through advertising campaigns to promote products,

rather than price cutso Supermarkets: Coles and Woolieso Airlines: Qantas, Virgino Banks: NAB, Westpac, CommBank, ANZ

Topic 4: Labour MarketsDemand curve Supply Curve

Product market Demand by consumers Supply by businessFactor market Demand by business Supply by industry

A labour market is where individuals seeking employment interact with employers who want to obtain the most appropriate labour skills for the production process

Many different types of labour markets. Include:o Different industrieso Occupations

9.1- Demand for labour Businesses demand labour They attract labour through wages and remuneration packages The demand for labour is a derived demand

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o Demand for labour comes about because people demand goods and services. If more goods and services are demanded then generally there will be a higher demand for labour

o If the economy slows down, less goods and services are demanded= lower demand for labour

Factors causing a shift in demand curve

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Changes in the output of the firmo The level of economic growth (GDP growth) in the economyo The level of growth in a particular industry o The level of consumer interest in a particular products of the

firm

WHEN CONSUMER DEMAND MORE FOR THEIR PRODUCT, FIRMS WILL NEED TO INCREASE PRODUCTION

Changes In input of the firmo Productivity of labour (can increase labour if labour id

productive, otherwise will switch with capital if improvements in technology occur)

o Cost of other inputs (e.g capital)o Cost of labour vs cost of foreign labour (i.e shifting labour

overseas because its cheaper)

FACTORS AFFECTING THE SUPPLY OF LABOUR

INDIVIDUALS SUPPLY LABOUR Pay (won’t work if their wage doesn’t meet their job description) Working conditions (e.g amount of leave they can gain etc, working

environment Geographical/Occupational Mobility (ability to move between different

jobs and in different areas) Educational skills (ability to attain a job based on skills possessed) Participation rate

o State of the economyo Ageing populationo Changing social attitudeso School retention rates

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Labour Market Outcomes

10.1- Wage outcomes Real wage vs nominal wage

o Nominal wage- pay received by employee in dollar terms. Not adjusted for inflation or other factors

o Real wage- A measure of the actual purchasing power of money wages- adjusted nominal wage for the effects of inflation

Inflationo Inflation is the sustained increase in the general level of prices

over a period of time, usually one yearo Measured by the consumer price index which measures price

changes in a basket of goods and services bought by Australian households

Adjusting the nominal wageo Real wage= Nominal wage/ (1+ inflation rate)

Wage differentials between different occupationso Different occupation- requires different levels of education and

skills. E.G CEO’s of large companies received 93 times the average pay of their workers

o Working conditions – some are less appealing to others (dangerous, dirty, long working hours for minimal pay)

o Occupational mobility- easy to change, easy to supply, don’t have to raise prices to attract labour

Wage differentials in the same occupationso Age: Between ages 35-44, have the highest mean income of

$1393 a weeko Gender: Men vs women- average weekly earnings for women

are two thirds of that of males. In the same occupation, men on average earn 19% more than women

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o Ethnicity- Those born overseas- if you are from a English speaking country than fifth/sixth generation Australian. Recent immigrants tend to earn less

o Geographic mobility o The productivity of labouro The capacity of the firm to pay their workers

10.2- Trends in the distribution of income from work

1980’s- More centralized wage system, set by the Fair work Commission- differences between wage outcomes between and within occupations were smaller

Shift towards enterprise bargaining since early 1990’s- where employers and employees negotiate wage increases at a workplace level

This has resulted in a creation of considerable differences in income distribution between sections of the community

Different wage outcomes across different industries are also results of changes in the structure of the economy

o Emerging industries that require skilled labour (which may be in short supply) are likely to pay higher wages

Income distribution within occupationso Recent years have also seen an increase in the dispersion of

earnings within occupations- a few factors have contributed to this:

o Shift away from centralized wage determination o Declining union membership in Australia – unions tend to

create more similar wage outcomes for workers doing similar jobs.

o Lower union membership = greater variation in wage levels within industries

10.3- Non-Wage Outcomes The benefits that many employees receive in addition to their ordinary

and overtime benefits, such as:

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o Sick leave o Holiday leaveo Paternity leaveo Superannuationo A company car o Study leave o Arrangements for employees to work part of the week from

home Top quintiles set more benefits

10.4- The costs and benefits of inequality Inequality encourages the labour force to (economic benefits)

o Increase education and skills- as long as low income recipients can afford to pay for education

o Work longer and harder- if extra income is valuable than their leisure time

o Be more mobile- more efficient allocation of resources- move to where it is needed most

o Encourages entrepreneurs to take risks- necessary rewards for extra risk

o To increase savings- high incomes save, reduce reliance on foreign debt

Economic costs of inequality o Reduces overall utility- higher the income, less utility from each

increase compared to increase on low incomeso Reduce consumption/investment- low income earners spend a

higher proportion on necessity. Less for consumption and investment= lower growth

o Creates conspicuous consumption-sense of worth via classo Creates poverty and social problems- underclass suffers health

problems with limited access to education- cycle of disadvantage, reduces participation rate

o Increases the cost of social welfare- low incomes may require government assistance, strain on revenue

Social benefits of inequality

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o If our productivity was reflected through wealth then there would be an incentive to increase skills and work harder. Could create a more desirable social structure (less at bottom.) However there is inequality of opportunity

Inequality of opportunity exists due to:o Inequality perpetrates itself- higher the income, better the

access to education et.o Different manual and mental strength- nominal wage outcome

is lowero If you inherit wealth- have better opportunityo Better networks= better opportunities. Informal barriers- like

same school, same social background. Hard for migrants Social costs of inequality

o Inequality creates lower well-being, manifests itself in mental illness, crime etc

o Social class divisions can create tension and lead to economic stability

o Inequality leads to higher levels of poverty- trapped in a cycle of low income, limited economic opportunity

10.5- Unemployment To be classified as unemployed, a person must be over the age of

15, without a job, but actively seeking part of full time work Types of unemployment:

o Cyclical unemployment: unemployment that arises as a result of a downturn in the business cycle

o Structural unemployment: A mismatch of skills between the skills a business has and those that employers demand

o Long term unemployment: more than 12 months out of the workplace

o Frictional unemployed: between jobso Hardcore unemployed: Those individuals that are not suitable

worko Hidden unemployed: not actively seeking work or who have

gone back to school to school or uni to re skill

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o Underemployed: currently working but want to/ have the potential to work more

10.6- The movement away from full time work Part time work in Australia

o Employees regularly working less than 20 hours a week Over the last 30 years, the workforce has become increasingly

“casualised” as a result of the following factors:1. Changing Employment Structures2. Change in Industries3. Changes in Employee Lifestyle

Contractors: Firms engaging contractors pay the individual to provide a service for the business that required permanently.

o Are not considered employeeso Covered by commercial laws

Outsourcing (sub-contractors): Firms pay another business to perform a function that it does not consider a core part of operations

Other reasons for casualizationo Changes in employee demand- increasing amounts of

employees would like part time work in order to balance time to tend to family and domestic responsibilities

o Changes in industries: Australia does not do much manufacturing, and now has become increasingly dependent on service based industry

Advantages and disadvantages of casualization

Advantages Disadvantages Flexibility for employers to

change amount of staff required

Less job security

Employers may avoid paying some non-wage costs

More difficult for employees to plan future, obtain home loans (without secure income)

Flexibility for employees with family and other commitments

Less staff loyalty and development of new skills in the workforce

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The Changing Australian Labour Market Industrial relationships

o The relationship between employees and employerso The Industrial relations system involves the law, the institutions

and processes established to resolve the conflict between employers and employees

Equity vs efficiencyo Historical union strength in Australiao Shifts between political parties have meant recent changes

(Labor= equity, Liberal= efficienct)o Moved towards negotiation between employers and employeeso Not a free market- institutional forces affect the market

operation and improves wage outcomes

11.1- Role of Trade Unions A trade union is an association of workers that aims to advance

the interests of its members by improving their wages and working conditions

Mainly negotiates wage increases Present employees interests in training, safety, and organizational

changes (such as company restructures) Different types of unions

o Occupational Unions (Electrical Trade Union)o Industrial Unions (Transport Workers Union)o Enterprise Based Unions (Represent the workings of only one

enterprise- very rare)o General Unions (Australian Workers Union)= membership from

across all industries ACTU (Australian Council of Trade Unions)

o Affiliated with most unions o Formed in 1927- national voice of the trade union movemento Coordinates union activities across Australia such as:o Wage claims and industrial actions

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o Conducts campaigns and research o Provides input Government policies

Union membershipo Mid 1970’s – 55% of workerso 1986- 46% of workerso 2011- 18% of workers o 2016- 15.6% of workers o Overall, demonstrates a gradual decline in union membershipo 41% in the public sector, 14% in the private sector

Reasons for Union Declineo Casualization of the workforce in the service sector where

union presence is lowo Decline in manufacturing employment, a traditional stronghold

of unionismo Decentralization of wage determinationo A general fall in confidence in the union movements ability to

deal with industrial issues Role of Unions

o Can restrict the supply of labour to only unionized workers (like the old Builders Labourer federation used to do) then the supply curve shifts to the left= resulting in a higher wage but less quantity demanded which creates unemployment

o Employees used their combined bargaining power to negotiate a wage above market equilibrium creating a wage floor. Supply exceeds demand- unemployment

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11.2- The Role of employer associations Represent business groups in similar industries or with similar aims in

industrial relations matters Lobby the government for industry assistance and industrial relations

policies Assist in managing industrial relations matters to protect the interests

of their members in negotiations with trade unions and various disputes

Provide advice and training Role in the Labour Market

o Via government lobbying can gain industry protection and assistance and gain larger share of domestic market

o Increased demand for output, increased demand for labouro Demand curve shifts to the right- higher wage, higher quantity

supplied.o Australian Chamber of Commerce and Industry, Australian

Industry Group- major input to National Minimum wage and Modern Awards

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11.3- Australia’s current industrial relations framework Now governed by the Fair Work Act 2009 National Employment Standards with 10 guaranteed employment

conditions Maximum weekly hours of work- not exceed 38 Leave- annual, public holidays, care and compassionate, unpaid

parental and long service leave Termination and redundancy pay- one to four weeks notice and

redundancy pay depending on time at firm Industrial awards

o Awards are a set of pay and conditions specific to an industry- 122 of them

o Set by Fair Work Australia (specific commission)- 15% of workers

o National minimum wage for any employee not covered by an award

o Have provisions tailored to the needs of the industry such as superannuation, leave related matters and procedures for dispute settlement

Enterprise agreement

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o A workplace agreement that is negotiated collectively between an employer and employees who are usually represented by unions

o Must comply with the National Employment Standards, cannot offer pay rates below the award and must past BOOT- Better Off Overall Test

o Normally cover wage increase, loadings for extra hours, changes to workplace practices and productivity improvements

Common law contractso Individual employment contracts- negotiated between employee

and employero Comply with all minimum standardso Covers 37% of the workforceo Enforced through ordinary law contracts

Topic 5: Financial Markets Types of Financial Markets

12.1- The role of financial markets in the economy Why do we need financial markets?

o Brings together those with excess funds and those with a shortage of funds

o Allows these funds to contribute to aggregate demand, which leads to increased production, and as a result increased GDP!

Role of Financial markets o Markets provide returns to those that have excess money o Make these funds available to those who need additional

money o Financial intermediaries create a bridge between savers and

borrowers in the economyo Lenders don’t have to assess risk

Sources of Savingo Household income that is not spent o Business profit not distributed to ownerso Government surplus (money left from unspent taxes)

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o Borrow from overseas and access foreign savings Reasons for borrowing

o Consumers borrow when their demand exceeds their capacity to pay (real estate, cars, shares)

o Businesses borrow to expand their business (increase production, take opportunities)

o Government borrows for deficits (fund overspending)o Australian financial institutions can lend money to overseas

borrowers

12.2- Primary and secondary financial markets Primary market

o Creation of financial assets or securities that can be sold in the economy

o Equity- New share issue or the first offering of shares. A company offers a small ownership and receives the money directly to the business in return

o Debt- New bonds- new debt by a business or the government. The company/government issues the bond and receives the money directly in return

Secondary markets o Transactions with assets that have already been issuedo Businesses and governments don’t get any money o The owners of the assets exchange them on a market for

various prices- normally different times Share/Equity market- share issued and exchanged Bond market- bonds issued and exchanged (now the ASX) Derivatives market- Buy and sell assets based of the value of each

others assets Foreign exchange market: Exchanging assets defined in different

currencies Financial institutions

o Finance companies: obtain most of their funds by borrowing from the general public, through the issue of debt securities

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o Investment banks: generally borrow on a short term basis from companies with surplus funds and lend these funds to large companies for business expansion purposes and to government agencies

o Credit unions: nonprofit, cooperative organizations whose members belong to a particular trade, industry, profession or live in a particular area

o Permanent building societies: accept deposits from the public and provide funds mainly for home loans. They can also offer other personal and business loans, although their interest rate structure is controlled to some degree by state governments

o Mortgage originators: Aussie Home Loans, RAMs, offer home loans to consumers

o Superannuation funds: receive the contribution of employees and employers and invest them in financial assets

12.3- Financial market products Consumer Credit- primarily credit cards. Buy goods now and repay at

a later date with interest added Visa and mastercard: linked to a financial institution Amex- independent of a financial institution Coles or Qantas- linked with credit card companies Personal loans: offered by banks and credit unions Housing loans

o Long term loans to purchase property o Require regular payment with interest o Big four banks took over smaller operators after the GFC

(Westpac- RAMs and St George, Commbank- Wizard, Aussie Home Loans and Bankwest)

o Typically 1-2% higher then the cash rate o Two main types- fixed and variable

Business loanso Form of debt that allows businesses to invest in their business

operationso Rates typically higher than household lending rates

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o Large companies may pay around 1% more than housing loans, while small businesses pay as much as 5% more

o Small businesses borrow from finance companies and bankso Large companies borrow from investment banks

Short Term Money Marketo Individuals or businesses with temporary shortages or surplus

of funds.o Surplus funds issued by the banks in various forms of debt

securities Bonds

o Longer term securities for which lenders receive regular fixed payments from the issuing institution and receive the principal value of the debt at the end of the bond period

o Issued by the government and a small number of companies and banks

Financial futures and optionso Contracts to trade in financial institutions at a later date for a

certain priceo Allows investors to protect themselves against adverse

movements in interest rates currency fluctuations or share prices

o Options give their holder the right to make such transaction, but not the obligation

The foreign exchange marketo Market for buying and selling of foreign currency o Investors and businesses require foreign currencies when they

do business with people overseas.

12.4- The Share Market The financial market where investors buy and sell shares, which are

financial assets that give part ownership of a company Firm must be a company to issue shares- i.e – an incorporated a

separate legal entity from those individuals who own or manage the business

Incorporated companies can either be public or private:

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o Public: Shares are traded freely on the share market and not subject to any restrictions on being transferred to other parties

o Private: Restricts ownership of shares to only a few individuals and places restrictions on share transfers so that the ownership cannot be freely bought or sold

Buyers and sellers meet in a medium of exchange- known as the stock exchange

Shares mostly traded through computer networks and over the Internet

Australian Securities Exchange (ASX)- largest share market in Australia

The institutional framework through which new share capital is issued (primary market) and through which existing shares are bought or sold (secondary market)

Regulated environment to buy and sell shares. Main regulator is ASIC Role and function

o Investors- purchase shares and gain a stake in any company profits

o make capital gains from increases in share prices o Receive dividends “the profit returns received by the

shareholders of a business”o Shareholders are entitled to share in the success of the

businesso Ordinary shares differ from debt in that they are ownership

claims rather than contractual claims on a firm- have lowest priority in claims on the firms income and assets

o Companies-provide opportunity to raise funds for investment and business growth (as a form of equity financing)

o Companies going on the share market for the first time (Float/IPO) [generally applies to private companies who want to raise funds and increase business growth]

o Companies can also access further equity funds through the issuing of new shares – reduces control of existing

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shareholders because they hold a smaller proportion of the company

o Companies share prices set by the forces of supply and demand (value placed by share holders)

o Based on confidence in management, previous earnings, expected earnings and general economic conditions

Effect on the economyo Share market values are often an indicator of a country’s

economic conditionso Share market prices rise means:

- Peoples wealth grows. Increases their ability to borrow against this increased security

- Property prices rise - Firms are able to expand cheaply and easily as funds are

freely available - Rising share prices indicate people are optimistic about

the economic futureo Vice versa for a decline in share priceso Overall, an indicator of the conditions of the economy and

future predictions/confidence

12.5- Domestic and Global Markets Australia’s financial markets integrated with global financial markets Recent decades- dramatic increase in foreign investors Australia more influenced by developments in markets around the

world More closely integrated because of increasing technology and ability

ti transfer payments electronically Foreign exchange markets enable the movement of funds around the

world Australia has been opened to foreign markets since 1983, when the

exchanged rate was floated and most exchange controls were abolished

Global debt markets- important for Australians economic development because of its reliance of foreign borrowing

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Equity markets- regulated by national governments so they exist primarily exist within individual countries (such as the New York stock exchange)

Limited functions performed by international organizations in the regulation of global financial markets:

o The Bank of International Settlements- an international organization that helps central banks promote financial stability through appropriate market regulations

o The International Monetary Fund- oversees the general stability of the international financial system, through monitoring economies and markets and assisting countries having difficulty meeting their international financial obligations

o International Organization of Securities Commission (share markets

o International Association of Insurance Supervisors (insurance markets)

Global financial markets allow Australian to access foreign capital to invest in housing and business

Regular disturbances in other economies are transmitted to Australia- slight disadvantage

12.6- Regulation of financial markets Four regulators- meet as a Council of Financial regulators Competition regulator- Australian Competition and Consumer Act

2010 which regulates all businesses in Australia and therefore impacts on participants in Australia’s financial markets

Reserve Bank of Australia (RBA)o Australia’s central bank o Created in 1959 Reserve Bank Act

Board objectiveso Stability of currency o Maintenance of full employment o Economic prosperity and welfare of the people of Australia

Functions of the RBA include:

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o Conducting monetary policy on behalf of the government (designed to influence the cost and availability of money in the Australian economy. Target rate 2-3%)

o Systematic stability: Provides guidelines for which financial institutions to operate within, enforced by the RBA

o Issues currency: makes money o Regulations of the payments system: Ensures the efficiency

and stability of payment methods such as credit cards , travelers cheques .

o Banker to the Banks- Hold exchange settlement accounts which allows banks to settle debts between themselves

o Holds Australia’s reserve and foreign currency: can be used for international payments

o Banker and source financial and economic advice to governments

o Banker to the government Australian Prudential Regulation Authority (APRA)

o Government body established to regulate all deposit taking institutions, life and general insurance organizations and superannuation funds

Main regulatory roleso Encourages behavior by institutions that allow them to meet

their obligationso Doesn’t guarantee banks but sets rules for prudential

management (Capital Reserve Ratio- 12%). Sets required levels and types of assets that must be held. Banks sometimes have to raise additional capital to meet these

o Oversee intuitions that get into difficulty to ensure that policy holders receive their funds. Have investigative powers to ensure they can trace funds.

Australian Securities and Investment Commission (ASIC)o Responsible for corporate regulation, consumer protection and

the oversight of financial services

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o ASIC has the power to monitor, investigate and act in situations where the integrity of the financial system has been undermined

o The net result is that investors have more confidence in the market and therefore participate

o Includes monitoring of the ASX Australian Treasury

o Source of guidance for economic policy and regulatory settingso Prepares budget to calculate the impacts and forecasts of

policy determined by the government o Keeps government up to date with overseas markets.

The Money Market

13.1- Borrowers: the demand for funds Individuals, businesses and governments borrow money for different

reasons Individuals

o Borrow for personal reasonso Most common form is a mortage (long term investment)o Short term purposes: purchasing a car, international travel or

educational courseo Credit cards: mostly unsecured loans, why the interest rates are

a lot higher compared to mortgage interest rates Business sector

o Does the most borrowing in the economyo Needs these funds to achieve operations goals (expanding

production, investment in research or completing special projects)

o Can be done through raising equity by issuing shares or raising debt by issuing bonds

o Also can be done by borrowing money from a financial institution

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o Will also borrow throughout the course of a year in order to manage cash flow, based on economic conditions of the time

Governmento Deliberately borrow to raise the level of economic activity,

provide for just outcomes and better economic conditions for society

o May also borrow because their spending grows unintendedly faster than their revenue

o Borrow for major infrastructure projects

13.2- Factors affecting the demand for funds Choice for individuals to either keep surplus funds as money Can keep it as money or buy a financial asset Advantage of holding money is liquidity: cash can be used to buy

anything) Advantage of buying a financial asset is that it offers a return. The

rate of the return is attached to the risk: i.e.- higher the return, higher the risk. Buying shares- derivatives etc.

Two reasons why people hold money:o Transaction motive: Day to day need for money to complete

transactionso Precautionary motive: Unexpected occurrences- such as

sickness for which people need to have liquid funds Reason for buying financial assets

o Speculative motive: Making capital gains and losses- selling a non cash asset as they are concerned the value will reduce

Businesses also decide how to use surplus fundso Generally based off economic conditions and cash flow

generated by operationso More likely to invest when interest rates are low

13.3- Lenders: The Supply of Funds Individuals, businesses and governments all participate in the

financial market as lenders

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Individuals- placing despots in financial institutions lending their money to that institution. Will also save up for future needs

Businesses- Savings if profits are strong and have no immediate use for the funds (i.e business expansion)

Governments- Savings occur when the budget is in a surplus- i.e.: its revenue exceeds its spending

International sector: Australia has historically had low savings rates and has relied upon overseas savings to finance domestic consumption and investment.

13.4- Money and the Money Supply Financial aggregates

o Fractional reserve banking- a banking practice in which banks keep only a fraction of their deposits in a reserve (as cash and other highly paid liquid assets) and will lend out the remainder

o Must maintain their obligation to redeem all these deposits by borrowers upon demand

o Current rate is 12% Four characteristics of money:

o A medium of exchange: Goods, services and resources are exchanged for money

o A measure of value: Can be used to compare the relative value of goods, services and resources

o A store of value: Money can be held over time and used for future exchanges

o A method of deferred payment: Allows the development of a system of lending and borrowing

Measuring money supplyo Money Base: All the currency in circulation and all bank

deposits with the RBA. The most liquid financial assets, can be used immediately by financial institutions to expand their lending activities

o M3: Consists of all the currency in circulation and all bank deposits (with RBA and private sector.) The RBA’s measure of money

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o Broad Money: Consists of M3 plus deposits in non-banking financial intermediaries (e.g credit unions and building societies) minus their holdings of bank deposits

Broad money is the more accurate measure however takes longer for the RBA to calculate, and thus use M3

13.5- Interest Rates Interest rates are the cost of borrowing money as expressed as a

percentage of the total amount borrowed Financial institutions act as borrowers of funds when they accept

savings deposits- make money for themselves by lending these funds onto other borrowers

Difference between the borrowing rate and lending rate is known as interest rate differential

Short and long term securities: based on the length of maturity of the financial assets/securities

Longer term securities often seen as riskier due to the potential of money to change over time and less liquid

Factors influencing the general level of interest rates:o Demand for capital goods: Stronger investment demand,

leading to increased borrowing by firms, puts upward pressure on interest rates

o The level of savings in the economy: Higher level means there is an increased supply of loanable funds, puts downward pressure on interest rates

o Demand for liquid funds: Individuals may be willing to forego the returns from buying securities. Means supply of loanable funds is lower and would create an upward pressure on interest rates

o Inflationary expectations: Inflation reduces the value of money and financial assets. If inflation is expected to rise: lenders would require a higher interest rate to be paid for compensate for their financial assets. Therefore inflation rises will lead to higher interest rates.

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o Government budget: If the government has a budget deficit, can result in higher interest rates. If the government is a net lender, this puts downward pressure on interest rates

o International interest rates: If the domestic rate of interest is lower relative to overseas rates, domestic lenders may invest their funds overseas to take advantage of the higher returns. Puts upward pressure on interest rates

o Domestic operations: in the influencing of the cash rate in the STMM- directly affects short term loans and indirectly affects longer term loans

13.6- Domestic Market Operations by the RBA DMO’s are the instrument of monetary policy, conducted by the RBA The actions taken by the RBA in the Short Term Money Market to buy

and sell securities- in order to influence the cash rate and the general level of interest rates

Cash rate: Interest paid on overnight loans in the short term money market

Conducted through exchange settlement accounts, with the RBA and the banks

o Banks need to hold a certain proportion of their funds with the RBA in ESA’s in order to settle payments with other banks. E.g- a customer of NAB buys a good or service from a business that has a bank account with ANZ.

o Banks usually try to minimize the amount they store in ESA’s- if they excess funds, will put it on the Short Term Money Market because there must be only 0.25% difference

STMM: the market where banks borrow or lend money to either add to their ESA or if it beyond what they need in their ESA

RBA influence the cash rate by the tightening and loosening of monetary policy

Direct influence on the level of economic activity and behavior of both consumers and businesses in the economy

BUY TO BOOM/ SELL TO SLOW Loosening monetary policy- done to increase economic activity

through stimulation

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o RBA buys securitieso Excess of borrowable funds in the marketo Cash rate lowerso To maintain margins, banks lower market interest rateso Consumers/businesses have less to pay on existing debtso Consumer consumption and business investment increaseo Thus, leading to increased economic activity o BUY TO BOOM

Tightening monetary policy- done to slow down growth and rate of inflation in order to manage the flow of money in the economy

o RBA sells securitieso Shortage of borrowable funds in the market o Cash rate increaseso To maintain margins, banks increase market interest rateso Consumers/businesses have more to pay on existing debtso Consumer consumption and business investment decrease o Causes economic activity to decreaseo SELL TO SLOW

Topic 6: Government in the EconomyThe Limits of Markets

14.1- Why governments intervene The free market has limitations Government intervention is needed to provide more just outcomes for

society Market failure occurs when the market forces fails to create favorable

outcomes in the economy The price mechanism fails to take into account social costs and

benefits of production

14.2- Market failure in the provision of goods and services

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Government will step in to provide non-rival and non-excludable goods. They attract free riders, because the market fails to provide these goods

No incentive for private sector to provide them Non rival: Ones enjoyment of a public good does not diminish the

potential for others to enjoy this good Non-excludable: No incentive for firms to produce public goods if

consumers aren’t willing to pay for them Free riders: Group of individuals who benefit from a good or service

without contributing to the cost of supplying a good or service Public goods: Goods that the private firm are unwilling to supply and

hence are provided by the government such a defense, lighthouses and historic monuments

Merit goods: Goods that are not provided in sufficient quantity by the free market because individuals do not place sufficient value on the goods despite the positive externality they provide

Demerit goods: The opposite of merit goods. The free market produces too much of the good and the government acts to restrict or prohibit their use. They generally have negative externalities and including things such as gambling, tobacco and alcohol

The government has a monopoly over these products Monopolization: When a firm uses its dominant market power to

eliminate existing competition or to prevent new firms from entering into the market

Government owned monopolies: Often a natural monopoly will exist where the government provides a public good. These monopolies often arise as the infrastructure required to compete is prohibitive. E.G Australia Post, Citadel

Corporatization: The operation of a government owned business so that it is run along the same principals as a private sector business, although retaining government ownership

Privatization: The sale of a government owned enterprise to the private sector (E.g- Qantas, Comm Bank)

14.3- Market failure in income distribution

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The free market would produce a substantial level of inequality in this distribution of income without any government intervention

Firms reward those with the highest skills and education levels Would be vast differences in levels of income without the labour

market and taxation regulation Governments can improve equality by providing health and education

services to those on the margins to improve quality of life Government redistributes income via taxation and welfare payments,

in order to reduce the poverty gap in Australia

14.4- Market Failure in Externalities An externality is a positive or negative consequence that a firm does

not consider when they make production decisions Negative externalities: Negative consequences of private production

decisions that have harmful effects, usually on the environmento Carbon emissions from electricity generationo Transport or noise pollutiono Environmental degradation from incorrect disposal of waste

14.5- Market Failure in the Abuse of Market Power Markets are competitive: there will be times when the market fails Firms may abuse their market power in order to reduce costs or

eliminate competition in an illegal manner Key forms of abuse are:

o Monopolization: When a firm uses its dominant market power to eliminate existing competition or prevent new firms from entering

o Price discrimination: When a firm sells the same type of good or service in different markets at different prices

o Exclusive dealing: When a firm sets conditions for supply that exclude retailers from dealing with other competitors

o Collusion/market sharing/price cartels: When firms get together and agree on pricing and market sharing agreement

14.6- Market Instability: The Business Cycle

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The business cycle describes the tendency of economic growth rates in a market economy to fluctuate between boom periods of high economic growth and bust periods of harsh recession

Government has the goal of sustaining economic growth and severe fluctuations in the business cycle make it difficult to achieve this goal

Boom periods with excess demand causes inflation. Impacts business investment decisions and recued consumers purchasing power

Leads to an increase in interest rates and a recession or bust can begin- (e.g unemployment, business failure etc)

Governments intervene with economic stabilization policies

Gov Macro Policies Gov Micro PoliciesInfluence Entire economy Individual firms and

industriesExamples Fiscal policy

Monetary PolicyCompetition policyTrade policy

The role of government in Australia

15.1- The structure of government Commonwealth, State and Local governments all have different roles

within the economy Commonwealth: Has overall responsibility for the economy and has

the most influence on economic performance State: Play an important role developing infrastructure, delivering

government services (i.e health and education) and fostering regional development

Local: Play a relatively minor role, mainly relating to local community facilities. State governments will delegate to local councils where they see fit

15.2- The public sector The public sector refers to the parts of the economy that are owned

or controlled by the government. It includes all tiers of the government as well as GBE’s

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Two important indicators: public sector outlays (spending) as a % of GDP and public sector employment as a % of total employment

Increased public sector outlays as a % of GDP over the last few decades

Reduction in public sector employment reflects government trend in privatizing businesses.

Community has had higher expectations of government as time has evolved

Provision of government services: governments have been required to deal with problems created by economic growth, including pollution and the depletion of natural resources

Known for social security and welfare programs – 1980’s with increased population, a more ageing population and unemployment rises: government had to reduce welfare entitlements and target benefits to those most in need.

15.3- Reallocation of resources Government reallocates resources for three main reasons

o Direct resources away from the production of undesirable G&S, and thus towards production of desirable G&S

o To promote a more efficient use of scares resources in the economy

o To improve overall efficiency and equity in the economy Gov can affect the allocation of resouces in two main ways:

o Influencing the way businesses and consumers behave in the market through taxation/spending measures

o By producing G&S’s itself (i.e public goods) A few main ways the government can reallocate resources:

o Taxationo Gov Spending o Provision of public G&S’s

Taxationo Can influence consumer demamd for a product, throuhh taxes

and other charged levies on producers

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o Taxes add to costs – thus can divert resources away from certain types of economic activity (e.g – taxes on tobacco and alcohol, as well as the carbon tax)

o Governments can also specifically reduce the rate of tax, or tax concessions, which will attract resources to that specific sector

o Often- influence of taxation system indirect on resource allocation

Two forms of taxeso Direct taxation: paid by individuals/firms on which they are

levied. (Egs personal income tax, capital gains tax, company tax)

o Indirect taxation: levied on individuals and business firms, but can be passed onto someone else. Generally attached to a G&S- (i.e GST tax – levied on the seller, but passed onto the consumer in the form of a higher price)

Spendingo All gov spending from taxationo Gov spending can be used to directly reallocate resources to a

particular sector of the economy, or influence decisions of consumers and businesses

o Gov attempting to address an area that the market failed to provide an allocation of resources that didn’t fit society’s needs and wants.

o Gov may provide:- Funding for the arts- might otherwise be unprofitable (i.e

funding for art galleries)- Grants- start up businesses or new growth industries-

might lack access to finances- Subsidies- telecommunications companies (i.e Telstra) to

provide broadband services in regional areas where they might not be profitable for private sector

- Cash payments- private employment search businesses, which find jobs for unemployed people

Gov provision of G&S’so Direct involvement in the production process

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o Govs provide a substantial amount of basic infrastructure (e.g roads, public transport and railways, electricity distribution and postal/telecommunication networks

o Gov went through a stage where they were trusted then the public sector- as their production was directly worried about meeting societys needs

o Changed attitudes recently- gov became too inefficient and thus that increased prices- so the government privatized a lot of businesses

o A key part of fiscal policy

15.4- The Redistribution of Income Important because it maintains a certain equality in the wealth of

citizens Reducing the poverty gap Stimulates economic growth and allows everyone to participate in the

economy Main way: taxation and social welfare Automatic stabilizers: components of fiscal policy that are non-

discretionary (i.e no change from government but help reduce fluctuations in the business cycle.)

- The automatic stabilizers are income tax and social welfare payments

Three types of taxation that allow for the redistribution of income o Progressive: higher income earners pay a greater proportion of

their income as tax than lower income earners. Personal income tax is a progressive tax

o Regressive: higher income earners pay a smaller proportion of their income as tax than lower income earners. GST is a regressive tax

o Proportional: all income earners pay the same proportion of their income as tax. Company tax in Australia is a proportional tax

Government redistributes its taxation revenue to lower income earners via social welfare payments

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Social welfare expenditure accounts for around one-third of government expenditure – considerable impact upon income distribution in Australia

Payments “means tested”- i.e- people on high incomes may be ineligible to receive specific benefits

Examples of social welfare include:o Aged persons- largest single area of social welfareo People with disabilities o Unemploymento Single parents

15.5- Stabilization and Sustainable growth Government plays an important role in stabilizing the economic and

sustaining economic growth Managing fluctuations in the business cycle (i.e booms and busts) Policies are called macroeconomic policies (policies that apply to

the whole economy Monetary policy

o Influencing level of interest rates and the supply of money o Buying and selling of government securities to affect the cash

rate on the STMM = impact on interest rates in the economy o Tightening monetary policy: slowing down growth, selling

securities, putting downward pressure on agg demand o Loosening monetary policy: increase level of economic

activity, buying securities, increasing agg demand Fiscal policy

o Influences economic growth and unemploymento Direct effect of the governments overall level of spending,

taxing and borrowing in a yearo Budget stances will impact on the economy o Contractionary fiscal policy: creating a bigger surplus, smaller

deficit, slowing down growth o Expansionary fiscal policy: decreasing surplus, increasing

deficit, aiming to pick up growth in the economy o Budget outcomes: deficit, surplus and neutral

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- Gives an overall indication on the state of the economy- does not change level of economic activity

15.6- Public Enterprises Government Business Enterprises (GBE’s): businesses owned and

managed by the government at either a commonwealth or state level Corporatization: When the government encourages GBE’s to operate

like a business- in order to improve efficiency and profitability Privitization: Company is no longer apart of the public sector and now

a private business (Telstra has been privatized recently) Examples of remaining GBE’s are: Australian Post, state transport

authorities Recent trends have seen the government privtiizse a lot of

businesses, because there has been significant improvements in both prices and productivity in a number of industries

People’s attitudes towards government have shifted: government is less efficient and with population growth goods became more expensive

15.7: Other roles in the economy Competition policy

o Government aims to ensure that markets operate efficientlyo Aim to promote “workable competition” in an industry (i.e max

level of competition compatible with the market structure and specific conditions of the industry.

o Goal with increasing competition much be balanced against the goal of achieving economies of scale

o Workable competition policies aim to achieve a situation where markets are contestable- i.e entry barriers to industries should be kept at a minimum

o Competition and Consumer Act 2010- sets out a code of behavior for firms, which outlaw certain practices that would tend to work against the idea of workable competition.

o Act is administered by the Australian Competition and Consumer Commission (ACCC)

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16.4- Influences on government policies

Parliaments and political partieso Measures such as the Budget, taxation reform, industrial

relations reforms require the support of parliament o Major policy changes must be authorized by an act of

parliament o For a bill to pass, must be supported in both the House of Reps

and the Senate o Rare for governments to enjoy the majority in both the House of

Reps and Senate- slows down the law making processo Australian voters support the role of the government o Governments also have the objective of staying in power- which

is why they take plenty of time explaining economic policy and convincing the public their strategies are the most effective

o Within political parties, most decisions made by party leadership, policy usually developed by party members in local branches

o Decision making power rests in a few members of the executive branch of the government

Businesseso Large say in a market economy – successful and growing

businesseso Financial influence that businesses have over political partieso Involved in lobby governments and contribute to policy making

across a wide range of issues that may affect their activities o Businesses dedicate significant resources to lobbying

governments. Australia has three key business groups:o Business Council of Australia

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o Australian Industry Group represents businesses from a wide range of industry sectors

o Australian Chamber of Commerce and Industry represents chambers of commerce across Australia including smaller businesses

o Lobbyists generally represent individual companies and advocate for the interests of those specific firms on issues such as tax, regulation, privitisation, outsourcing of government services and spending programs

Unionso Union membership has declined dramatically from 55% of the

workforce in the 1970s to around 15 % now. o Unions mostly represents the interests of their members in

individual workplaces, but they are also involved in consultations with governments on many policy issues

o Participate in public debates and consultations regarding the future of Australia’s manufacturing industries

o Peak organization is Australina Council of Trade Unions, which coordinates campaigns and policy advocacy among unions nationally.

o Much greater input into Labor Party Policieso Specific measures that affect the interests of people on lower

incomes Environmental groups

o Several interests groups that advocate for environmental protection, including the Australian Conservation Foundation

o Conduct research, provide educational information and lobby governments and companies around a wide range of issues that have implications on the environment at local, national and global levels

o Environmental concerns are given especially high priority by the Australian Greens party, enjoying influence in the Senate.

Welfare agencies

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o Seek to represent the most disadvantaged people in the community (aged, people with disabilities, carers, unemployed people and people in work on low incomes)

o Australian Council of Social Services- peak welfare lobby group

The Media• Whilst the media’s role is to report the news, in reality it can also

influence government policies. ◦ Influence operates at many levels▪ Determining which issues receive coverage▪ How issues are presented to the public ◦ The government influenced as they may make policies based on

how the media will react (avoid certain ones and choose policies that give positive media coverage in spite of little benefits)

◦ Distinction between fact and opinion - Alan jones & Ray Hadley , daily telegraph/news corp.

Other Interest Groups• People with specific strong and often localised focus will often congregate

into groups to work towards common goals◦ NRMA, National Farmers Federation, National Union of Students• Other groups play a broader role in representing public interest concerns ◦ Choice (Australian Consumers’ Association) and GetUp! online

political advocacy group

International• Impact of Economic Policy on international financial markets, in turn back

on the government and the economy —> Resulted in lower budget deficits and stronger commitment to microeconomic reform

◦ If governments make decisions unpopular with international fin. markets, they may lose confidence in the government’s mgmt. of the economy, causing a fall in exchange rate, higher interest rates on govt. borrowing, and negative media coverage.

• Government Policy also affected by Financial Market Conditions◦ During the GFC, international credit markets almost collapsed◦ Governments around the world decided to buy bank shares,

guarantee bank deposits and buy securities • Decreasing Protectionism in line with overseas policy trends

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◦ World Trade Organisation (bans au. from directly assisting exporters)

◦ Trans Pacific Partnership foreign companies allowed to sue national governments if they change their policies in ways that harm their business and breach the TPP.

Organisation for economic cooperation and development (OECD) - working with other OECDs to respond to challenges of globalisation, ageing population, growing pressures on government services, and pressures to reduce tax rates.

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