Topic 1: The nature of economics Economics is the study of factors affecting production, consumption and distribution of goods & services involving individuals, businesses and government.

The economic problem – wants,

resources, scarcity

Economic Problem: Scarcity - Efficient allocation of limited resources to satisfy unlimited and

competing wants

Resources: Factors of Production (FOP)Used to produce goods and services to satisfy our needs and wants. The quality and quantity of these resources will determine the standard of living of a community

- Land (rent), labour (wages), capital (interest), enterprise (profit)

Needs - Individual (each person), collective (community), basic

(essential), luxury, recurring (continually satisfied), substitute (interchangeable/substitutional), complementary

The need for choice by

individuals and society

- Our wants are unlimited but resources are scarce – not adequate to satisfy all our wants; we must choose which wants to satisfy in order of preference

Opportunity cost and its

application through

production possibility

frontiers

Opportunity cost - Cost of the alternative foregone by choosing the current

consumption/production decision - Opportunity cost = what is foregone/what is gained

PPF (Production Possibility Frontiers) - Maximum production potential of the economy given finite amount

of resources

Assumptions 1/ Only two goods are produced 2/ All resources are fully employed

3/ Level of technology is fixed

4/ Resources are fixed; can be used to produce both goods

- Outward shift of the PPF represents economic growth; maximum potential of production has increased as curve moves outwards

Future implications of

current choices by individuals,

businesses and governments

Aim: Maximise returns from existing resources Allocative efficiency: maximising use of limited resources to produce maximum output

Consumer goods: Items produced for the immediate consumption 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

Current Choice Current Implications Future Implications Individuals Spend money/use resources higher living standards lower living standards Save money/resources lower living standards higher living standards

Business Invest in capital reduced cash flow, less increased production, profit to owner, high risk potential profit/growth

Government Increase gov. spending higher debt improved quality of life +

economic growth

Economic factors

underlying decision-

making by: Individuals,

business, government

Individuals Business Government - Spend vs save - Work vs study - Retire vs work

Voting: What party will manage unemployment, inflation and interest rates

Depends on: - Pricing of

products - Levels of

production - Resource use

(FOP) - Industrial

relations (pay/conditions of workers)

Influence individuals/businesses:

- Taxes/subsidies influence purchasing and production

The operation of an economy

Production of goods and

services from resources –

natural, labour,

capital and entrepreneurial resources

4 key economic issues: 1. What to produce: Resources are finite, must choose what to produce 2. How much to produce: Allocate resources efficiently to maximise

production 3. How to produce: Method of production; in any economy most efficient

will be used 4. How to distribute production: Who will have access to the goods

Factor Factor Income/Return

Description Limitations

Land Rent Natural resources/physical ground used for production

The amount of natural resources available for production

Labour Wages Human skills utilized to produce goods and services

The supply of labour: production size, labour market skill and people’s willingness to work

Capital Interest Equipment used to produce other goods and services

The supplies of capital: willingness of government and the private sector to invest, level of domestic saving available for investment

Enterprise

Profit Risk in utilizing the other factors of production for business ventures

The supply of entrepreneurial skills: size of the population and the ability and willingness of individuals to innovate and take risks

Distribution and

exchange of goods

and services

GDP (Gross domestic product): Total value of goods and services produced by an economy within a given period

- Money is a medium of exchange; it creates efficiencies in transactions

Market Economy Mixed-market Economy

Commander Economy

Private incomes of individuals

Private Incomes + government welfare

Governments choose who get what

Provision of income

and employm

ent

- Market economies tend to have uneven distriution of income: individuals accumulate wealth/income; ability to earn income depends on education, training, sklls, experience

- Government provide minimum income to financialy unstable; pensions, allowances, etc, funded through progressive taxation

Primary Involved in raw material extraction: agriculture, mining, forestry

Secondary Process raw materials/input into finished goods: food processor

Teritary The provision of a service: teaching, nursing Business

cycle

- Trend line is less volatile and more stable with effective government spending

- Recession: 3 consecutive quarters of negative GDP growth - Depression: A serious and continuing recession

Impact during expansion Impact during contraction Individuals Consumer confidence rises

Increased output Consumer confidence falls Decrease output

Increased wage growth Lower unemployment Higher inflation Increased quality of life

Lower wage growth Higher unemployment Lower inflation Decreased quality of life

Business Increased production Increased investment in new equipment/expansion Increased profits

Decreased production Decreased investment in new equipment/expansion Decreased profits

Government

Increased collection of company and personal taxes Reduced spending on social welfare payments (unemployment)

Decreased collection of company and personal taxes Decreased spending on social welfare payments (unemployment)

The circular flow of income

Equilibrium (S + T + M = I + G + X) The state with no tendency to change

Disequilibrium: injections/ leakages imbalanced Leakages > Injections

- Shrinkage of income/employment/GDP

- Falling economic growth Injections > Leakages

- Increase in income/employment/ GDP

- Rising economic growth

International Trade/Financial Flows: Transactions with the rest of the world (imports/exports)

Equilibrium: Injections = leakages

Topic 2: Consumers and Business The Role of Consumers in the economy

Patterns of consumer

spending and saving/dissav

ing

Consumer sovereignty: Consumer demand for products determines production and resource allocation.

Consumers can either spend or save: - Y = C + S; Income=Consumption+ Savings- Dissaving; Consumption > Income

Average Propensity to consume and save

APC: Proportion of total income that is spent APS: Proportion of total income that is saved APC = Consumption/income APS = Saving/income

- As income rises, average propensity to consume decreases, as a smaller proportion of income is spent on autonomous consumption in order to satisfy basic needs

- Low income households have a higher APC, as a larger proportion of income is spent on autonomous consumption

Marginal Propensity to consume and save How much of an extra dollar of income would individuals consume or save

MPC: Proportion of every extra $ earnt that is spent MPC = consumption/ income (where means change in amount) MPS: Proportion of every extra $ earnt that is saved MPC = saving/income

MPC + MPS = 1

- Individuals and economies with higher incomes have a higher APS and MPS and lower APC and MPC, vice versa is true

Relationship between consumption and disposable income Consumption Function Consumption = autonomous consumption + (MPC x disposable income) C = Co + cY

Lifecycle theory of income consumption and spending

Individuals fund consumption by borrowing when their income is low (young years) and saving when income is high (working years) in order to afford retirement during non-working years

Factors influencing

individual consumer

choice

Consumer Incomes

As incomes increase, so does total consumption

Price of product/service

If a produces price increases demand decreases

Consumer taste and preference

As trends in society change, so does patterns of consumer spending

Advertising Increased advertising increases consumer consumption

Price of substitutes

If price increases, consumers will buy cheaper alternatives

Price of complements

As prices of goods increase, demand for that product and its complementary products decrease

Source of income Income The return for resources

Wages Income from labour supplied

Rent

Income from land supplied

Interest Income from capital supplied

Profit Income from enterprise (return from investments)

Social Welfare Income supplied by government for those in need of assistance including elderly, disabled and unemployed.

The Role of Businesses in the economy Definition of a

firm and an industr

y

Firm: Any business which uses resources to produce goods/services to satisfy consumers, usually in return for profit. Industry: A group of firms producing a similar range of products - Quaternary: Provide knowledge and information. - Quinary: Firms and individuals who provide personal services.

A firms production

decisions

1. What to produce: Must be profitable. Based on products with high consumer demand.

2. How much to produce: Aiming for maximum profit with little to no shortages/surpluses, based on market research, demand and access to capital. o Break-even point (BEP): The point in which revenue meets total costs.

It shows the minimum number of sales required to cover costs.

3. How to produce: Resources and technology required to efficiently produce output at a minimum cost.

Businesses as a source

of economic

growth and increased

production capacity

- When the private sector is healthy, higher economic growth occurs and government receives stronger taxation revenue to fund expenditure

Main goals of the firm Profit Maximisation

Maximising revenue & minimising expenses. The greatest positive difference between total revenue and total cost- Increase revenue by rising prices and/or increasing

amount sold - Minimise expenses through efficient allocation of

resources

Growth Maximisation

Maximising market share at the expense of some profit- Increasing investment into the business - Merging two businesses or vertical/horizontal

expansion - Changing legal structure

Increasing Market share

Being the dominant firm in an industry - Expanding product range through

diversification/differentiation - Introducing more effective marketing - Developing better relationship with customer base to

satisfy needs

Meeting shareholder expectations

- Ensuring business success in order to provide dividends

Satisficing behaviour

Balancing and satisfying all goals simultaneously.- Attaining minimal expectations in order to reduce

maximum exertion that is unnecessary to achieve acceptable outcomes

- Suffice expectations rather than exceed them (bare minimum)

Efficiency and the

production process

Efficiency: Minimise costs whilst maximising output Technical Producing goods at the lowest costAllocative Allocating resources to maximise satisfactionDynamic Responding to changing consumer preferences

Productivity: How much is produced with a given quantity of resources per unit of time. Productivity = output/input

1. Less wastage of scarce resources 2. Lower production costs and higher profits for firms 3. Higher incomes due to more productive labour 4. Improve international competiveness due to increased productivity

Technical Optimum - Point where a business is able to produce the maximum output at the lowest

cost per unit - Increases in production beyond the technical optimum will lead to rising

average costs- Advantage of large scale production: lower average cost per unit

Law of Diminishing Returns - At a certain point, employing an additional factor of production will increase

output in the short run, but decline in the long run

Economies of Scale Reduction in cost per unit of output as output increases Economies Business increasing in size, reducing cost per unit Diseconomi Business increasing in size, increasing cost per unit

es Internal economies/diseconomies of scale

Externalveconomies/diseconomies of scale

Impact of technological change, investment and ethical decision making on a firm

Production Methods

- Labour intensive capital intensive - Increased efficiency leading to lower costs

Prices - Lower production costs passed onto consumers through lower prices

- Generic and non-generic brands increase range of consumer choice

Employment - Specialist labour skills and increased need for retraining - Structural unemployment due to capital based production

methods Output - New investment and technology may result in increased

output and opportunity for improved range/quality of products

Profits - Better investment and production process may lead to increased profit

Types of Products

- Technological change creates new products and industries

- Horizontal/vertical integration or diversification of product base

Globalisation - The process by which businesses or other organizations develop international influence or start operating on an

international scale.- May increase profits for business

Environmental sustainability

- Firms must ensure production methods limit environmental destruction

- Ethical production process may increase customer base due to social attitudes

Topic 3: Markets Market Where buyers and sellers exchange goods and/or services at a

particular priceProduct markets

Where produced goods and services are bought and sold

Factor markets

Where factors of production are bought and sold. (land, labour, capital)

The role of the market

Determining

solution to the

economic problem

Solutions to the economic problem- Allocative Efficiency- Allocation of resources to satisfy maximum number of consumer wants. - Goods/services are allocated to consumers who value them most - Only the lowest cost producers supply goods

Importance of relative

price (reflecting

opportunity costs)

Factor markets determine opportunity costs of productive resources - Relative price reflects the opportunity cost of selecting one alternative

relative to another alternative.- Relative price can be used to help determine the best way to allocate

scarce resources

Demand and Supply

Demand: Law of demand,

Law of Demand: As price increases, the quantity of demand decreases

Law of Supply

As price increases the quantity supplied increases

Law of Demand

As price increases the quantity demanded decreases

individual and

market demand,

the demand

curve

Factors affecting demand

Price Price rises demand contracts (A to B)Prise falls demand expands (A to C)

Increased Income Increased demand for luxury goods (right shift)

Increased Population

Increased demand for goods (right shift)

Increased Taste/preference

Increased demand (right shift)

Increase of substitute goods

Increased demand (right shift)

Expected future price increase

Increases demand for goods today (right shift)

Increase complement goods

Decrease demand for good (left shift)

Movements along the demand

curve/shifts of the

demand curve

Increase/decrease NON-PRICE factors - Contraction/expansion PRICE factors Increase in demand: entire demand curve shifts horizontally to the right Decrease in demand: entire demand curve shifts horizontally to the left

Expansion of demand: larger quantity demanded as price falls (A C) Contraction of demand: smaller quantity demanded as price rises (A B)

Supply:Law of

supply, individual

and market supply, the

supply curve

Law of Supply: As price increases the quantity supplied increases

Demand A consumers willingness and ability to pay a particular price for a certain product or service

Individual Demand

Demand for a product by an individual consumer

Market Demand Combined demand of all consumers

Supply Quantity that producers are ready, willing and able to supply for purchase at a given price at a given time.

Individual Supply Supply of an individual business Market Supply Combined supply of all producers

Factors affecting

supply

Price Price rises supply expands (A to C) Price falls supply contracts (A to B)

Number of suppliers Increased supply as market supply increases (right shift)

Cost of FOP Decrease in supply of goods (left shift) Changes in technology

Increased productivity reduces cost of production Increase in supply (right shift)

Expected future price

Decreases supply producers may sell the good later at a higher future price (left shift)

Price of other goods Decreases supply of first good as producers may switch to producing other good’s who’s price have increased (left shift)

Movements along the

supply curve/shifts

of the supply curve

Increase in supply: entire supply curve shifts horizontally to the right Decrease in supply: entire supply curve shifts horizontally to the left

Contraction of supply: reduced quantity supplied as price falls (A B) Expansion of supply: larger quantity supplied as price rises (A C)

Market Price:

Market equilibrium

Market equilibrium: Quantity supplied and quantity demanded of a particular commodity are equal- Market clears (no excess demand or supply) - Demand = supply

Price Mechanism: Forces of supply and demand, which determine the prices of products.

Movement to equilibrium

Excess demand - Price is too low - Sellers increase prices to

contract demand - Increased prices = sellers supply

more

Excess supply - Price is too high - Sellers reduce price to encourage

expansion in demand - Lower prices = sellers supply less

Effects of change in

supply/demand on

equilibrium price and quantity

(diagrams)

Increase Demand - Increases equilibrium

price/quantity (right shift)

Decrease Demand - Decreases equilibrium

price/quantity (left shift)

f

Increase in supply - Decreases equilibrium

price/quantity

Decrease in supply - Increases equilibrium

price/quantity

Changing levels of

competition and market

power

Greater competition among sellers results in a lower product market price- Market price mechanism equalises changes in forces of demand or supply

through allocative efficiency - equilibrium price/ quantity adjust to remove surplus or shortage in the market’

Market power: Ability of a firm to influence, raise and maintain prices within its industry - Leads to reduced output

Ceiling prices and ceiling

floors

Ceiling Price

Maximum price set by government that can be charged for a product - When price is considered too high - Results in excess demand below equilibrium price

E.g: Medicine Ceiling Floor

Minimum price set by government that can be charge for a product - When price is considered too low - Results in excess supply above equilibrium price

E.g: labour market minimum pay

Market failure

The inability of businesses to act appropriately in all circumstances, leading to government intervention.

Market Failure

Summary

Problem Government Action OutcomeMarket price too high

Price ceiling Reduces price- Quantity Shortage

Market price to low

Price floor Increases Price- Quantity Excess

Negative externalities

Taxes Increases Equilibrium Price, Reduces Equilibrium Quantity

Positive externalities

Subsidies Reduces Equilibrium Price, Increases Equilibrium Quantity

Public goods Government provided g/s: nonrival/excludable

Government collects taxation revenue to fund supply.

Price elasticity of supply/dem

and:Significance

of price elasticity of

demand – market

research

- Allows producers to accurately predict how changes in price will impact total revenue and profitabilityE.g: slightly increasing cost of bread/milk will not decrease demand as it is essential

- Governments can effectively predict the outcomes of indirect taxes on prices, market demand, resource allocation and taxation revenueE.g: higher taxes imposed on addictive goods will not significantly impact demand

Elastic, inelastic, unit

elastic supply/

demand

Elastic demand/supply

Strong response to change in price - Price increases, demand/supply contracts, revenue

decreases Perfectly elastic

Consumers will demand an infinite quantity at a certain price but nothing at all at a price above this.Producers will supply an infinite quantity of the good at a certain price but nothing if the price increased

Inelastic demand/supply

Weak response to change in price - Price increases, demand/supply remains, revenue

increases Perfectly inelastic

Consumers are willing to pay any price in order to obtain a given quantity of a good or service. These are considered necessities.Producers are willing to supply the exact same quantity of the good regardless of price

Unit elastic No response to change in price - Price increases, revenue remains the same

Calculation of elasticity

Total outlay method: Total outlay = price x quantity demanded

Factors affecting

elasticity of demand

Luxury or necessity good

Price elastic demand (sensitive to price change)

Existence of close substitutes

Absence of close substitutes: price inelastic demand Lots of close substitutes: price elastic demand

Whether the good is habit forming

Addictive goods: price elastic demand

Time since price increase

Long time since price increase: price elastic demand as new cheaper products are brought it

Proportion of income spent on the good

Smaller proportion: price inelastic Larger proportion: price elastic

Factors affecting

elasticity of supply

Time since price increase

Longer time: price elastic supply Might take a long time for producers to responds (changing schedules/equipment) – supply more responsive after a longer period

Ability to store stock

If inventory can be stored, supply tends to be more price elastic- Stock can be taken from storage to supply market

quickly Excess production capacity

Excess capacity: price elastic - Production can be increased to respond to more

demand

Variations in Competition Market

structures Market Structure

Number and size of firms

Product characteristics

Barriers to entry

Pure Competition

Many small firms Homogenous product

No barriers to entry

Monopolistic Competition

Many relatively small firms

Differentiated products

Relatively easy

Oligopoly Few , relatively large firms

Differentiated products

Extremely high

Monopoly One large firm No close substitutes

Extremely high

Inflation

- Healthy between 2-3% - Inflation represents rise in demand firm’s increase production

Topic 4: Labour Markets The Demand for labour by individual firms

Labour – a derived demand

- Derived from the consumer demand for goods and services - Increased in demand for products = increase in demand for labour for

production - Demand for labour varies inversely with the price for labour

Factors affecting demand

Price Price increases: contraction of demand Price decreases: expansion of demand

Microeconomic factors (non-price) 1. Economi

c Activity

Rise in aggregate demand causes higher levels of economic activity increased demand for labour - AD = C + I + G +(X-M).- Downturns/recessions: decrease - Upturns/booms: increase

2. Nature and size of industry

- Labour intensive: lots of employees (construction) - Capital intensive: fewer employees (mining)- The manufacturing industry has become significantly

more capital intensive 3. Producti

vity of labour

Labour productivity = Output/Labour UnitsIncreased total productivity: raises demand for productive workers extra units of labour hired produces increased output at a lower cost

Decreased total productivity: decreases demand for workers. Extra potential output is more costly with every additional labour unit hired

- Employers will demand labour until the Law of Diminishing Returns sets in

4. General wage rates

- Labour cheaper than capital: increased demand for workers

- Capital cheaper than labour: decreased demand for labour. (capital deepening)

5. Structural change and expectations

- Tariff cuts decreased workforce - E.g. : less competitive reduced their workforce - Shift towards demand for employees in the services-

based sector

- Expected rise in demand more people employed

6. Industrial relations

- Rising ‘on-costs’ (leave entitlements, superannuation, etc.) results in lower demand for labour

climate - Restrictive regulation results in lower demand

The Supply of labour Factors affecting

the supply of labour

1.Wage rate - Substitution effect: As wage increases, workers are

more willing to sacrifice leisure time for work increased supply

- Income effect: When income is sufficient, workers are less willing to sacrifice as much leisure time decreased supply

2. Working conditions

- Working conditions improve more likely to offer labour (flexible working hours, fringe benefits, superannuation, leave entitlements)

- Government policies like paid parental leave and benefits increase labour supply

3. Education and training

Higher skill: lower supply of labour (limited pool of suitable applicants) Lower skill: larger labour supply

4. Mobility Geographic

Ability of workers to move from one job location to another- Mining workers willing to relocate cause

of attractive remuneration

Occupational

Ease with which workers are able to move from one job or occupation to another- Transfer skills across different

occupations - Higher rates of labour mobility will increase the

elasticity of supply of labour

5. Size of population

- Increase in population increases labour supply

6. Age distribution

- Countries with populations in the working age group of 15-65 will tend to have a larger workforce

7. Participation rate

- Measure of the proportion of the working age population who are either employed or looking for work.

Participation Rate=Employed+UnemployedWorking Age Population

- Determined by school leaving age, wage levels, retirement, women in the workforce

8. Labour market institutions

- Influence labour supply E.g: advocating for higher wage rates encourages increased supply of labour

The Australian workforce Definitions Employed Work for more than 1 hour a week

Unemployed

Working less than 1 hour a week but actively seeking and available to work

General characteristics

- Around 11.9 million people employed - > 65% work full-time - 46% are female- 39% are aged > 45 - 16% aged 15-24 years

Labour market outcomes - Differences in reward that different types of workers receive in exchange for

their labour Wage outcomes 1. Income

groups - Wages/salaries, major source of income (56%

2019) - Dividends - Gov. transfers (welfare) - Property incomes (rent)

2. Skills Higher skilled job = higher income - Skills are less-common, in higher demand, harder

to attain (uni, more study, etc) Lower skilled job = lower income

- Skills are more common, in less demand, easy to attain

- Unattractive working conditions = higher rate of

pay3. Age - Younger males and females earn less income than

older adult male and female workers (less experience, etc)

- Income for males and females is maximum in the 35-54 age group

4. Migrants - Migrants from English speaking countries earn more

- Migrants from non-English speaking countries have difficulty finding jobs lower incomes

- Employment/income levels relate to length of residency in Australia

- Participation rate of migrants is significantly higher (96-98%) compared to 65.7% for the rest of the population.

5. Indigenous Australian’s

- Amongst the lowest income earners in the Australian community

- Heavy reliance on government welfare payments for income

6. Gender Gender pay gap: difference between men’s and women’s average weekly full-time equivalent earnings expressed as a percentage of men’s earnings.

- The full-time pay gap for women is 13.9% less than men

Reasons for differences in outcome for women: - Glass Ceiling (barrier preventing women from being promoted to

higher roles)- Discrimination and bias in hiring and pay decisions- Female-dominated industries and jobs attract lower wages- Women’s disproportionate share of unpaid caring and domestic

work- Lack of workplace flexibility to accommodate caring and other

responsibilities, especially in senior roles- Women’s greater time out of the workforce impacting career

progression and opportunities.

Non-wage outcomes

Non-monetary benefits that employees receive - Superannuation, company car, holiday leave, other fringe benefits

Trends in distribution of

income from work overtime

- Much greater since the early 1990’s when enterprise bargaining became more popular. - -

- Family benefits have offset/balanced increase wage differentials. - Declining union memberships lead to more inequality amongst

occupations.

Arguments for/against more

equitable distribu

For:- More consumer satisfaction among the poor - Reduces social class divisions

tion of income - Less corruption and illegal activities for financial gain- Prevent higher tax burden on taxpayers and reduce government

welfare spending Against:

- Potential reduction in allocative efficiency - Lack of incentive effect on workers and producers to work for higher

wage

Labour market trends Unemployment - Cyclical: rising to peaks of > 10% in 1980/90s recessions

- MB1: significant decrease in unemployment due to investment - MB2 (post GFC): rising commodity prices high levels of

investment, decreasing unemployment - 2012: commodity prices decline, slowed economic growth and

rising unemployment - 2017: decreasing unemployment due to rise in women working full-

time in NSW

Types of Unemployment Frictional People moving between jobs Seasonal Caused by season change Structural Mismatch of labour skills due to changing

industry/technology Cyclical Contraction in labour demand, workers who are let go

due to lowered g/s demandLong-term Unemployment for over 12 months

- May experience problems finding work due to loss of skills

Hard-core People deemed unemployable/experience regular periods of unemployment

- Severe mental/physical disability, substance abuse, criminal record

Hidden Have difficulty or are discouraged from actively finding work

- Not looking, therefore considered unemployed Underemployment

People who want and are available to work more hours - Due to the rise in part-time employment

compared to full-time work - Underemployment rising steadily (more people

working but want longer hours) - 27% of part-time workers consider themselves

underemployed Underutilization Underutilisation rate = unemployment rate + underemployment

rate - More resources available in the economy to use (potential economic

growth)

- Underutilisation greater for women than men (more casual employment)

- Steadily rising: 1.8 million workers unemployed/underemployed = under-utilised

Casualization - More part-time jobs created than full-time jobs - Wages rates are usually higher to compensate for lack of other

entitlements (paid, leave, etc) - 35% of jobs in the economy are part-time (teenagers higher

represented) Outsourcing - Outsourcing non-core business functions to external organisations

(school outsourcing cleaning) - Helps reduce costs and improve focus on core business functions

Off-shoring: Work is done overseas Outsourcing: Someone else does work for you

Contractors/ Subcontracting

Contractors Run their own business and sell their services to others (employ subcontractors)

Subcontractors

Carries out work for a company as part of a larger project

Labour market institutions Unions, employer

associations, current

employment/industrial framework

Unions Represent workers on a collective basis. - Aim to increase rights, entitlements and working

conditions- Australian Council of Trade Unions (ACTU) peak

union body

Trade Union memberships steadily declining 46% in 1986, 20% 2012

- Increased corporisation, decline of manufacturing industries, decentralization of wage determination, general fall in confidence of union ability

Note: Critics of union action to raise minimum wage argue that it creates unemployment among low skilled/paid workers

Employer associations

Represent business groups in similar industries/aims in industrial relations matters

- Seek to protect the rights of members in negotiations with trade unions.

- E.g: Australian Industry Group (AIG), Business Council of Australia

Influence - Seek wage moderation to maintain profitability

and competitiveness of businesses. - Enterprise bargaining with employers provided

higher wages for more productive employees

demand for productive labour has risen along with wages.

Fair Work Aus. Institutions

(Aim to settle disputed between employees and employers)

Fair Work Australia - Vary awards, make minimum wage orders,

approve agreements, determine unfair dismissal claims, order good faith bargaining and industrial action

Fair Work Ombudsman - Enforce the laws through the court system if

needed - Inspectors investigate breaches

Current employment

/industrial framework

Ten National Employment Standards (Fair Work Act 2009)

Minimum employment entitlements that have to be provided to all employees

- Max. weekly hours, request flexible arrangements, leave, etc

National minimum wage

Currently $19.84

Employment contracts Modern awards

Provide minimum wages and working conditions for employees specific to their industry

Enterprise Agreements

Workplace agreement negotiated collectively through enterprise bargaining between employers and employees.

Common law Contracts

Simple agreement between an employer and employee, enforced through court of law

- Must satisfy BOOT test

Topic 5: Financial Markets Types of financial markets Markets,

Domestic/global markets

Primary Money from an investor goes directly to the borrower. - E.g. When shares are first floated and bonds and

debt securities are purchased directly from the issuerSecondary Securities already issued in the primary market are

traded between investors. Companies who issued securities do not receive any money. - E.g. Trading on the ASX

A Financial Market consists of agents, brokers, institutions, and intermediaries, facilitating the sale and purchase of financial products.

Domestic Supply/demand of goods and services within a single country

Global Supply/demand of goods and services in the entire world

Consumer credit

Allow an individual to buy now and pay back the original amount with interest at a later date - Aus. credit card debt $42.6 billion (ASCI,Jan 2020)

Housing loans/mortgage

Offered by financial institutions to purchase property.

Business loans

Loan allowing business’ to invest in operations- Support start up, expansion and cash flow

management Short term money market

Enables individuals, business’, financial institutions or government agencies to borrow or lend money for short periods of time- Usually under 6 months but almost always under 1

year

Bond market /Commonwealth Government Securities (CGS)

Instrument of debt issued to raising funds through borrowing.

Face value Size of the loan; written on the bond document.

Coupon rate

Fixed income that the bond holder receives. Similar to an interest rate.

Yield Yield=Coupon Rate x FaceValuePrice of the Bond

- Interest rates falls, yield falls bond traded for less

Generally issued by government/large businesses to raise money - Bond auctions; bid on interest rate/how much to

invest - Australian office of Financial Management allocates

bond to bidders with the lowest interest rates

Financial futures/derivatives

Futures Contract

Contract to buy/sell a specific asset at a predetermined price for a fixed quantity at some future date. - Buyer and seller are obligated to

fulfil the terms of the contract at the future date

Options Contract

Option to buy or sell asset on or before the option’s expiration time at the pre agreed price

- Not an obligation, so typically more expensive

‘Hedge’: minimising potential losses in the futureForeign exchange

Value of a currency in terms of another currency- International transactions currency must be

converted - Traded for purpose of travel, trade, investment,

speculation - Fluctuate with changes in demand/supply of currency

Depreciation: downward movement of one currency against another - Lowers value of AUS $ compared to foreign

currencies - Each foreign unit buys more AUS, One AUS $ buys

less foreign $Winners Losers

• Exporters of goods/services more profitability

• Tourists visiting AUS • Aus. tourism industry

• Importers of goods/services

• Aus. tourists travelling overseas

• Australian consumers

Appreciation: Upward movement of one currency against another - Rises value of AUS $ compared to foreign currencies - Each foreign unit buys less AUS $, One AUS $ buys

more foreign $Winners Losers

• Importers of goods/services

• Aus. tourists travelling• Australian consumers

• Exporters of goods/services less profitability

• Tourists visiting Australia

The Share Market Market in which securities are bought and sold; a stock exchange.

Role Shareholders

- Primary reason for investment: capital gains - Right to vote for board of directors/receive dividends

from profit- Management fiduciary duty: run company to benefit

shareholders - Share price rise anticipation of future capital gains

Business - Publicly listed companies trade on stock exchange - Float: selling shares for first time on ASX - Business can raise funds through equity finance, not

debt finance- Issuing new shares dilutes control of existing

shareholders - High share price confidence in management etc- Low share price expose company to a take over bid

Economy - Share-market performance indicator of country’s economic performance

- Indicator of ‘confidence/sentiment’ in the economy - ‘bullish’ share market results in greater investment by

shareholders increase investment, higher growth rates - Share markets are efficient allocators of scarce resources

companies with growth potential usually raise more funds in ASX

Function Facilitates: - The sale of new shares or equities (primary market) - called a float- Buying and selling of pre-existing shares (secondary market)- Trading of other securities, eg. Options, futures and bonds- Allows businesses to raise funds for establishment and growth

Share price set by market forces of demand and supply Higher share price indicates a business is doing well Low share price forces management to improve performance

Impact 1. Efficient investment and market capitalisation

- Healthy share markets result in higher share liquidity (buy and sell shares easily invest more)

- Preferable to avoid debt - Easier access to investment funds higher investment

spending increased production, GDP, economic growth- Impact how companies manage investment

(equity/finance)- Efficient share market: more Equity instead of Debt

Financing2. Investors Rising share prices measured by the share market index

(ASX 200). – - Rising index indicates rising business confidence and

investmentFalling share prices can result in the wealth effect (investors feel less wealthy due to a fall in their share values).- May lead to lower spending, higher leakages downturn

3. Share market and investment assets

- Share market rising: investors demand more shares, pushing up prices in comparison to other investment assets

- Share market falling: investors move funds to other investments

- In a bullish (rise) share market, investors might choose to speculate in shares in anticipation of quick profits speculative bubble

Regulation of financial markets Reserve

Bank Australia

RBA - Conducting Monetary Policy- Systemic Stability- Control of Notes Issue/currency - Regulation of the Payments System- Banker to the bankers- Responsible for holding Australia’s reserves of Gold and

Foreign - Banker and source of economic advice to the

governmentAPRA Regulates and enforces guidelines set by the RBA for all

deposit taking financial institutions. E.g: Banks, Insurance, Superannuation Funds, Credit Unions, Building Societies

- Issuing or withdrawing bank licenses- Setting standards regarding debt, risk and liquidity- Approving changes to structures and operations- Reviews of systems and management- Enforcement of regulations if needed

APRA’s main responsibility is to ensure that all institutions are capable of repaying the people who hold deposits and funds with them.

ASIC Responsible for monitoring the functioning of companies operating in Australia. - Works to protect consumers and investors and maintain

integrity in company processesCompanies Securities Industry and Markets - Formation - ASX - Registration - Bonds markets - Reporting - Futures

markets Australian Treasury

Anticipate and analyse policy issues, understand government/stakeholder circumstances and respond rapidly to changing events - E.g: Manage Australian GovernmentFunction - Provide policy advice regarding budget, taxation, financial

sector, foreign investment, etc- Manage federal financial relations - Work with state governments on key policy areas

Council of Financial Regulators

Crisis management – promote stability of the Australian financial system and efficient regulation by Australian regulatory agencies - Regulate all four other regulators (RBA, ASIC, APRA,

treasury) Function - Identify important issues/trends in financial systems which

impact financial stability - Ensuring appropriate coordination among agencies to respon

to financial instability - Engage with work of international institutions, forums and

regulators which relate to financial system stability BorrowersBorrowers Individual

s Personal purposes (purchase products) mortgages, loans, credit

Business Expansion, R & D investment, overcome cash flow downturns Government

Running budget deficits (more spending than taxes) infrastructure, tax cuts

Factors affecting the demand for funds Transactions

and speculative

motives

Transactions motive

Funds are held for day to day transactions + regular payments

Precautionary motive

Funds are kept aside to provide for future emergencies

Speculative motive Funds are kept aside to be invested in expectation of a higher return.

Financial innovations

Changes in payment options reduce demand for cash money for transactions (apple pay)

Lenders Individuals Lend to financial institutions for return shares, bonds, interest-bearing deposit

Business Deposit if interest rates are more lucrative than internal investment

Government

Whilst in surplus- a government may invest money (e.g international loans) to maintain positive balances

International

Known as foreign liability (must be repaid) - to finance domestic consumption & investment

Financial Intermediari

es

Holds funds from lenders in order to make loans to borrowers - Bank, building society, insurance company, superannuation funds

Financial aggregates measured by the Reserve Bank of Australia Meausring

money supply

Money Base All currency (notes and coins) in circulation + bank deposits with the RBA

M3 Money Base + Bank Deposits Broad money

M3 + NBFI deposits – NBFI deposits in banks

Interest rates Types of

rates in the short/long

term

Lending rates

Interest rate which banks charge for loans to their customers. This is higher than the borrowing rate.

Borrowing rates

Interest rate which banks pay their deposit holders for their funds. This is lower than the lending rate.

Note: Profit is made by having a higher lending rate than borrowing rate. The difference between the borrowing and lending rate is called the interest rate differential/margin

Short term Generally lower than long term rates due to low risk

Long term Generally higher than short term rates due to higher risk

Role of the RBA in

determining the cash rate

Cash rate: interest that every bank has to pay on the money it borrowsLiquidity: Amount of funds available in the cash market

Summary: determine cash rate by altering supply of money Influence of

the cash rate on interest

rates

Interest rates usually mirror changes in the cash rate to some extent

• Cash rate rises banks raise interest rates less consumption/investment decreases economic activity inflation decreases

• Cash rate falls banks reduce interest rates more consumption/investment increases economic activity rising inflation

Topic 6: Government and the Economy Government intervention in the economy Free market: Operates without government intervention; prices determined by unrestricted competition between individuals and businesses.

Provision of goods and

services

Goods and services

- Underproduction: not at the socially optimal position because they are not valued sufficiently by consumers

- Overproduction: cause negative externalities because costs associated with the production/consumption are not included in the price mechanism

Public goods

Goods not provided by private sector as they annot make profit selling them- Nonexcludable/non rival (electricity) - Government collects taxation revenue to fund these

services

Merit goods Positive unintended consequences of consumption/production of the good

Distribution of income

Disadvantaged groups

Free market result in wider difference in income and higher income equality. - The aged (no pensions or medicare) - Disabilities (no NDIS)- Young (no youth wage, minimum wage) - Hard re-entry into labour market (no paid parental leave) - Structural unemployment (no ov. Training)

Increasing cash rate

RBA sells government securities/bonds decreases liquidity/ supply of funds in banks Exchange Settlement Accounts (ESA) cash rate increases

Decreasing cash rate

RBA buys government securities/bonds increases liquidity/ supply of funds in banks Exchange Settlement Accounts (ESA) cash rate decreases

- No unemployment benefits - Indigenous worse off (no funding on welfare, training,

healthcare) - Lower income/jobs for migrants (no gov. support)

Relative poverty

Lives on less than 30% of the average income within the economy

Free market: Households do not pay taxes and do not receive welfare payments. - No laws in relation to minimum wage and conditions- Advantages people with high income jobs Gov intervention improves: - Equality: taxes higher income earners more which reduces difference - Redistribution: tax used to fund welfare for low earners, reduces

difference in income

Monopoly Power

Formation 1. Natural: may be due to limited infrastructure (Sydney water gov. owned)

- Not feasible/cost worthy to establish competition 2. Owernship of scarce resource: owner has exclusive

control over a physical resource (only supplier of raw metal)

- Exclusive control of intellectual property 3. Acquistion/merger: after acquisition there is only one

supplier. - If Coles and Woolworths merged

Risk of high pricing, no incentive for productivity improvmenets and less innovation. Achieve higher profits through the absence of competition

Privitisation The transfer of a business, industry, or service from the Government sector to private ownership and control.

Corporisation

Change a government owned organisation into a privately owned company. - Shares owned by Government - Commerical funding arrangements (interest paid on

loans/expectation of return from dividends)

Competition

If there are no laws that prevent anti-competitive behaviour firms may pursue profit maximisation to increase price and profit - Buyout/takeover: Possible if company has large market

share. Establishes monopolist supplier with no competition can increase prices and profit

- Collude with competiton: Collectively agree on higher prices to be charged by all suppliers. Reduces competition, increases prices, negatively impacts customers

Fluctuations in economic

activity

Booms (econoimc growth)

Increases inflationary pressures Reduces international compeitiveness reduces exports, increases imports Eroders real wages/value of savings Increased wages must be greater than inflation to maintain living standards

Recession (reduced growth)

Decreases inflationary pressures Lower levels of demand lower demand for labourUnemployment rises quickly in recession and reduces slowly in expansion No social/unemployment welfare lower living standard for unemployed

Without government intervention, there can be no moderations in economic activity.

The Role of GovernmentLevels of Government

Local State Federal

Constitutional powers

Size of the public sector

Rellocation of resoruces Direct Tax Taxes where impact and incidence are the same.

- Income tax, corporate tax Indirect Tax Tax which is imposed on one entity but is passed on to

another entity. Incidence and impact are different. - Goods and services tax

Expenses

Redistribution of income Progressive Tax rate increases as the taxable amount (income) increasesRegressive Tax rates higher for low-income earners than high-income

earners Proportional

Same rate of tax from each taxpayer, irrespective of income

Gov. welfare

Government funded services (education,healthy) and provision of minimum income (Newstart Allowance, Pensions)

Stabilisation of econoimc activity

Government business enterprises

Other Competition Environ. Policy

Influences on government policies in Australia Political parties Business Unions Environmental groups Welfare agencies Media Other interest

Monetary policy

- Open market operations (buying/selling of CGS) - Transmission mehchanism

Fiscal policy

- Adjustment of government spending and taxation through the Federal Budget

- Aims to ensure internal and external stability of the economy

Budget Stance Expansionary

Net increase in government expenditure- May be due to lower tax or increased gov.

spendingContractionary

Net decrease in government expenditure- May be due to higher tax or lower gov.

spending Neutral Government Expenditure = Taxation

Revenue

Budget Outcomes - Surplus - T > G- Balanced – T = G - Deficit - T < Gs

Automatic Stabilisers

Features of budgets that moderate the economy without direct intervention by policymakers.- Taxation and Welfare

Discretionary spending

Deliberate changes in government spending or taxation in response to domestic or global economic events - NDIS funding

groups International