ECONOMICS
ECONOMIC PROBLEMS:
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Our wants are unlimited
Resources are scarce
We must choose between them
Wants: - Material desires of individuals or the community.
- Individuals derive utility (satisfaction or pleasure) from the consumption of
goods and services
Individual wants: desires of each person
Collective wants: wants of the whole community
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Our wants change over time
1.
2.
3.
4.
What to produce?
How much to produce?
How to produce?
How to distribute production?
OPPORTUNITY COST:
- The alternative use of resources
- Foregoing one want in order to satisfy another
- Can be applied to the individual, business and government
Individual:
- Limited income (resources) to choose between many wants (in the form of
goods and services)
The Business:
- A firm gives up opportunity to produce an alternative good when they make
the choice to produce something else with its scarce resources
The government:
- Limited resources to satisfy community (collective) wants
-
Opportunity costs is the term used to represent the true cost of an economic
decision and can be defined as the value of the next best alternative
foregone.
Production possibility frontier
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Concept of opportunity cost illustrated by
the PPF
Demonstrates how opportunity costs arise
when individuals or community choices
are made
Shows all combination of goods and
services that can be produced by an
economy given the available resources
and level of technology
In other words, it shows the two
alternative products that can be produced
C onsumer Go ods (units )
C apit al Go ods (uni ts)
A simple PPF:
It is assumed:
- That an economy’s resources are fixed in both quantity and quality
- Technology is fixed
- Economy can only produce 2 types of goods
- Shows us all the possible combinations of production
New Technology -> allows for new
technologies to develop more efficient
methods of product, allowing for higher
quantity of a good with the same
resources, represented by an outward
shift of the PPF. This new technology is
more suited towards the consumer
good, aka food.
New Resources -> may be changed by
anything that increases the inputs
available for production, such as the
discovery of new resources or expansion
of population through immigration ->
increasing the number of people
available to work -> increase in the
production of both goods and an
increase in economic growth.
Insufficient Resources -> Point A
represents either inefficient resource
usage or unemployed resources
Unattainable -> Point B is unattainable
because it lies outside the frontier
insufficient resources
.B
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At any point on the production possibility curve is considered efficient, as all
resources are being efficient as all resources are being full utilised.
HOWEVER
- If the economy required more consumer goods then the economy should
produce closer to the consumer good axis
- If the economy requires more capital, then the economy would be better
suited producing higher up the frontier towards the capital goods
FUTURE IMPLICATIONS OF CHOICES
Economic choices today can influence economic outcomes in the future
- Consumer Goods: Satisfy consumer demand in the present
- Capital goods: Increase productive capacity in the future
Economic factors underlying choices:
Individuals: Income, Age, Experience, Future plans/expectations, Family, Personality
- Must make decisions between spending or saving.
- Spending satisfied present wants, while saving raises future living standards
Business: Pricing decisions, Production, Resource use, marketing strategy
- Make choices about price, how much to produce, what resources to use and
how to manage their employees
Government: Influence individuals and business; tax, prohibiting goods, incentives
- Can influence the choices of individuals and business by affecting the cost of
choices and other factors underlying their decision-making process
PRODUCTION OF GOODS AND SERVICES
Good and Service:
- The outcome of the production process
- Products that satisfy our wants and needs
Factors of Production:
- Defined as any resource that can be used in the production of goods and
services
- A factor of production is another word for resource
- Quantity and quality of an economy’s factors of production can influence
how wealthy or poor that country will be.
- People in a country with better resources, will be able to satisfy their wants,
resulting in a higher standard of living
- There are four factors of production in the economy: natural resources,
labour, capital and enterprise
Factor
Return
Description
Natural
Rent
- Include all resources provided by nature, used in
Resources
the production process aka LAND
- E.g. Soil, water, forests
Labour
Wages
- Human effort, both physical and mental
- Population size will be influence by birth rates,
death rates and immigration, important in
determining how much labour is available
Capital
Interest
- Produced means of production
- Not produced for immediate consumption, but to
be used in the production of other goods and
service
- E.g. Machinery, tools, factories, Infrastructure
including roads, bridges, railways, etc.
- Capital equipment can increase the productivity of
other resources – how much output they can
produce per factor of production per unit of time
- Using capital goods can increase the level of
production from the existing workforce and natural
resources, enabling us to satisfy more wants
- When entrepreneurs borrow excess savings in the
economy, they pay interest on their loans.
Enterprise Profit
- Involves organising the other factors of production
for the purpose of producing goods and services
Problem of Scarcity:
- Limits to the amount of natural resources available for production, including
land, fossil fuels or even clean air and water.
- Supply of labour is limited by population size, labour markets skills and people’s
willingness to work
- Supply of capital is limited to the extent by which governments and the private
sector are willing to invest, as well as the level of domestic savings available for
investment
- Supply of entrepreneurial skills is limited by the size of the population and a
range of other cultural and economic factors, including the ability and
willingness of individuals to innovate an take risks
DISTRIBUTION AND EXCHANGE OF GOODS AND SERVICES:
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Total amount of goods and services produced in a given year is known as GDP
or Gross Domestic Product
It measures the total income of society that is received for the production of
goods and services
Market Economies do not attempt to distribute output equally within society
Instead, they provide people with income as a reward for their contribution to
the production process
Owners of natural resources, capital or entrepreneurial skills used in production,
receive income based on the value of their input
Workers are paid according to the value of their labour (how much they work,
their skills, expertise, educational qualifications and their bargaining power in
wage negotiations)
The benefit of this system is that it provides incentives for people to obtain
better skills and work harder in order to improve their share of output, or to
develop entrepreneurial skills -> improve the resource base and encourage
innovation and technological advancement
Negative of this system of distribution is that it can be unfair, for people who are
unable to contribute to production because of age, illness or disability
Therefore, government may intervene to help people who would not receive an
adequate level of income, through welfare payments
Governments can influence the distribution of goods and services by taking
money from higher income earners through taxation – redistributing it to lower
income earners through social security payments
Individuals and businesses use money as a medium for exchanging goods and
services
Barter: Non-cash exchange of goods and services
PUBLIC VS. PRIVATE SECTORS:
Public: Government sector
Private: Individuals, businesses and financial institutions
Domestic sector: Combination of public and private sector
Business cycle:
-
Fluctuations in the level of
economic growth due to either
domestic or international
factors
• Upswing (expansion)
o Increasing economic
activity (increase in
GDP)
• Boom (peak)
Increases demand for labour, leading to falling unemployment levels
Increasing the disposable income available to most consumers +
improvement of life
Downswing (contraction)
o Decreasing economic activity (decline in GDP)
Trough
o The lowest point in the business cycle
o Forming after a period of contraction ends, before a period of expansion
begins
Recession
o Two consecutive quarters (six months) or negative economic growth
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Note: Not all downswings and eventual troughs lead to recession
Im pacts of the Business cycle:
Recession
- Falling production of G + S
- Falling levels of consumption and
investment
- Rising unemployment
- Falling income levels
- Falling quality of life
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Boom
- Increasing production of G + S
- Rising levels of consumption and
investment
- Falling unemployment
- Rising income levels
- Rising quality of life
Governments may intervene to stimulate economic growth during periods of
recession to restore the economy to growth and improve employment
opportunities
Australia is in its 25tth year of consecutive economic growth, having avoided
recession since 1991
CIRCULAR FLOW OF INCOME:
-
Five sector flow of income describing
the operation of an economy and the
linkages between the main sectors of an
economy
Leakages:
- Items that remove money from the
circular flow of income = decreased
aggregate demand
- E.G. Savings (S), Taxation (T), Imports
(M)
Injections:
- Flows of money into circular flow of income = increased aggregate demand
- E.G. Investment (I), Expenditure (G), Exports (X)
Stop+ that + moaning = It’s + getting + xcruciating
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When the sum of leakages in our equality is equal to the sum of all injections we
say that the economy is equilibrium.
Whenever there is disequilibrium, there will be a change in the level of economic
activity.
MARKET ECONOMY
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Pure m arket econom y – all economic
decisions made by individuals and private
firms, both motivated by self interest
o Mostly private ownership of means of production
o Free to seek wealth without govt. intervention
o AKA capitalist, free enterprise, unplanned or laissez-faire
Contrast with centrally planned economy - government makes
economic decisions, individuals little scope to influence economy, public
ownership of factors of production (Russia, Eastern Europe & China in past)
No fully planned or pure m arket economies exist today
Characteristics of a market economy:
• M arket – network of buyers and sellers, seeking to exchange a particular
product at a certain price
- Com m odity markets – markets for goods and services – buyers are
consumers (constitute demand) and sellers are businesses- Factor markets – market for factors of production
• Price affects level of demand & supply
• Price m echanism – brings supply & demand together to determine market
price.
• Private ownership of property – right to own and sell means of
production
• Freedom of enterprise – right to use resources as choose
Consum er sovereignty – consumers ultimately decide what will be
produced by exercising their freedom to choose which wants they will satisfy.
• Com petition
- Regulator enabling price mechanism to work effectively
- Large number of buyers & sellers so no one alone has enough power to
influence the market price
Australia:
• Today’s economies – m ixed econom ies – market forces and governments
together make decisions concerning production and distribution.
• Since 1980’s trend away from govt intervention towards reliance on market
forces.
•
Government intervention:
• In production: free market does not always provide most efficient
allocation of resources:
– Some necessary goods & services may not be provided eg collective
goods – large capital outlay
– Some essentials better provided by govt – eg defence security/stability reasons
– Government regulations prevent producers exploiting consumers
through misleading information or joining to raise prices. Also ban
undesirable goods & ensure safety standards of products sold.
• To provide socially desirable or fair distribution of output (income):
– Transfer paym ents – Govt redistributes income by taxing higher
income earners & making transfer payments to those who don’t
contribute to production process (under price mechanism, no income
if don’t contribute to production process).
– Progressive income tax – overall redistribution of income to
achieve more equitable share of output – high incomes pay
proportionately more tax.
• Intervene to smooth out fluctuations in the business cycle – reduce
unemployment and inflation problems.
Mixed economies aim to solve the economic problem: .
1. W hat to produce? – Govt provides collective goods, competes directly
with private enterprise (eg ABC TV), encourage some production (eg
subsidies) & limit/ prohibit production of undesirable goods.
2. How much to produce? – Limit production of certain goods eg through
quotas; encourage greater provision of certain goods that would be
otherwise underprovided (merit goods eg arts & education); import
restrictions to reduce overseas competition.
3. How to produce? – Influence cost of factors of production eg minimum
wage laws, safety regulations.
4. How to distribute production? – Taxation to redistribute income;
intervention in factor markets eg minimum wages in labour markets.
5.
ROLE OF consumers IN THE ECONOMY:
CONSUMER SOVEREIGNTY:
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Consumers refer to all individuals in an economy who consum e goods
and services to satisfy their needs and wants.
Consum er sovereignty refers to how the pattern of consumer spending
determines the pattern of production and resource allocation.
Through their spending decisions, consumers express their preferences in
the market place.
Businesses attempt to maximise profits by producing the goods and services
demanded by consumers.
Therefore, consum er spending determ ines what is produced .
Consumer sovereignty is very important because it guarantees that firms will
attempt to not only maximise profits, but will do so by achieving efficiency in
production
If firms are efficient they will:
o Produce goods at least cost (i.e. technical efficiency)
o Allocate resources in such a way as to satisfy consumer preferences in the
market place (i.e. allocative efficiency)
o Respond to changing consumer preferences and technological
improvements over time (i.e. dynam ic efficiency).
However, consumer sovereignty is not absolute. There are several aspects
that can reduce the sovereignty of consumers:
o Marketing
o Misleading or deceptive conduct
o Planned obsolescence
o Anti-competitive behaviour
Decisions to Spend or save:
• Consumption is that portion of disposable income that households spend
on goods and services.
• Personal saving is portion of disposable income that is not spent.
• Dissaving occurs when the consumption of an individual or household (or
even an economy) is m ore than the level of disposable income.
• Consumers decisions to spend or save can be expressed in the following
equation
– Y = C + S
Where:
– Y = Disposable (after tax) income
– C = Consumption expenditure
– S = Savings
• Therefore, for a specific level of income, any increase in consum ption
will cause any equal reduction in the level of saving.
Similarly, a rise in saving will bring an equal reduction in consumption.
It also indicates that any change in the level of income will result in a change
in the levels of both consumption and savings.
The proportion of an individual’s incom e that is spent on
consum ption is called the average propensity to consum e (APC).
The average propensity to save (APS) is the proportion of an
individual’s that will be saved.
In general, those on higher incomes tend to have a higher APS than those on
lower incomes.
This is because middle and low income earners often find it difficult to save
because they need all of their income to meet their basic needs.
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APS = Total savings divided by income
APC = Total consumption divided by income
Or
APS + APC = 1
FACTORS INFLUENCING THE DECISION TO SPEND OR SAVE:
1.
2.
3.
4.
5.
6.
Cultural factors
Personality factors
Expectations of the future
Any specific future spending plans
Tax policies
Availability of credit
INCOME:
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As income rises, people tend to save a higher proportion of their
income.
That is APS rises and APC falls.
Consumers on lower incomes spend proportionately more of their
disposable income than people on higher incomes.
As income rises people do not need to spend as much of their income on
essential items.
Economists have developed terminology around the concept of a person’s
propensity (or tendency) to consume or save for each extra dollar they earn.
The m arginal propensity to consum e (MPC) is the proportion of an
increase in an individual’s incom e that will be consum ed.
The m arginal propensity to save (MPS) is the proportion of an
increase in an individual’s incom e that will be saved.
M PC = Change in consumption divided by Change in Income
M PS = Change in Savings divided by Change in Income
Or
M PS = M PC = 1
FACTORS INFLUENCING CONSUMER CHOICE:
1. Level of income
• Disposable incom e is an important determinant of the amount of
consumption spending of each household and for the economy as a
whole.
• A consumer has limited amount of disposable income to spend.
• The consumer thus faces the choice of what to buy with a limited income.
• Therefore, every choice made by the consumer has an opportunity
cost.
• Every consumer is faced with a budget constraint.
• That is, consumers have a limited amount of money to spend and would
likely buy a lot more goods and services than they can afford.
2. The price of the good or service itself
• When determining whether or not to purchase a good, consumers must
decide whether or not they are willing to pay the nominated price for the
item, given their level of income
• Some goods are deemed as necessities, essential for daily life
• The price of goods will determine what will be purchased by the
consumer.
• Consumers must decide whether or not they are willing to pay the
nominated price for the item.
• Consumers are willing to pay a higher price for goods from which they
gain a higher satisfaction.
3. Price of substitute and complement goods
• Consumers consider some goods to be close substitutes, E.g. Butter and
Margarine. If the price of margarine rises, consumer demand for butter
will also tend to increase
• Some goods are considered to be complements, meaning that
consumers tend to purchase them together. E.g. DVD players and DVDs
4. Consumer tastes and preferences
• If a consumer likes something, they will disregard the price and purchase
it
• E.g. Fashion is an example of consumer tastes and preferences changing
over time
• Preferences are the individual’s attitudes about goods and services.
• An individual will decide to purchase those goods and services that give
them the highest utility.
• A consumers taste and preferences change over tim e.
• Innovation and technological progress leads to more demand for
new and better products.
5. Advertising
• May create demand for a particular good or service, especially if none
existed before
• Advertising is designed to change the preferences of consumers and
to influence consumption patterns.
SOURCES OF CONSUMER INCOME:
Defined as the rewards to the owners of the factors of production
1. Wages from labour:
- Main source of income
- In the form of wage or salary payments for labour when consumers
participate in the labour market
- Includes non-wage income such as superannuation, compensation, fringe
benefits, etc
2. Rent from land:
- Consumers own land as a form of investment, with the return from land,
used as income
3. Interest from Capital:
- Returns from the ownership of capital are a significant source of
consumer income
- Ownership of capital, primarily occurs indirectly through superannuation
and other investment funds, or through the ownership of shares
- Many Australians now own shares in companies such as Telstra,
Woolworths and the Commonwealth Bank, which earn them dividends
each year
4. Profit from entrepreneurial skills:
- Many Australians are involved in operating businesses, especially small
businesses.
- If the business makes a profit, this income is considered a return for their
use of entrepreneurial skill
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5. Social Welfare
Social security or social welfare is collected through taxation, then transferred
from governments to consumers
Aim of these benefits is to provide a minimum income safety net, allowing
consumers to purchase the basic necessities of life
In times of economic downturn, governments raise transfer payments in order
to increase consumer demands, helping economic growth to pick up
More than a 1/3 of government revenue is used to make social welfare
payments such as; assistance to the aged, family payments, disability support
payments and unemployment benefits.
Business vs. industry:
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A business firm is an organisation involved in combining the factors of
production to produce goods or services using entrepreneurial skills
Industry consists of those firms involved in
making a similar range of items that usually
compete with each other
PRODUCTION DECISIONS:
What to produce?
• Skills and
experience
• Consumer
Demand
• Business
opportunities
• Capital
required
How much to
produce:
• Level of
consumer
demand – too
much or too
less, market
research
• Large vs. small
firms
• Introduction of
new products
How to produce:
• The use of
resources and
technology in the
production
process
• Entrepreneurs
attempt to
produce output at
minimum cost
How to organise and
manage production?
• Management
structure
• Pay for factors of
production
CONTRIBUTION:
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A business will:
Contribute to economic growth
Reduce unemployment
Regional Development
Increase productive capacity – outward shift in the production possibility
frontier
GOALS of the firm:
A firm is organised in such a way as to establish clear goals that guide business
behaviour.
The firm’s main goals are:
- Maximising profit
- Meeting shareholder expectations
- Increasing market share
- Maximising growth
- Satisficing behaviour
PRODUCTIVITY AND
EFFICIENCY:
Definition:
- The quantity of goods and
services the economy can
produce with a given amount of inputs per unit of time
- An increase in productivity = increase in output
- Productivity means resources are being used more efficiently
- This means that we are able to produce goods and services with our existing
resources
Benefits of productivity:
- Productivity improves our living standards, due to:
• Less wastage of our scarce resources
• Lower production costs and higher profits
• A lower inflation rate
• Higher incomes
• Improved international competitiveness of our industries
Impacts on a firm’s productivity:
Firms can increase productivity through:
- Specialisation
• Where the factors of production are used more intensely for a small
number of production process
- Improvements in the quality of resources through technology or improved
combination of resources
INTERNAL ECONOMIES OF SCALE:
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Firms can reduce their per-unit costs of production as their output increases.
Largely due to start-up costs
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Internal economies of scale are: reductions in the costs of production that
occur as a result of an increase in the scale of operation of a business (advantages of growing)
This suggests that, up to a point, increasing production will lead to lower unit
production costs.
I.e. long-run average costs will fall as the firm becomes larger and increases
production.
Average cost = per unit production costs
Made within a firm as a result of increasing the levels of production
As the firm expands and produces more goods, average costs start to decline
as the firm may be able to:
• Specialisation of labour
• Invest in more capital goods
• Buy raw materials in bulk
• Find a market for by-products (small firms will discard as waste)
• Research and development
• Raise finances for business expansion
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INTERNAL diseconomies OF SCALE:
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Internal diseconomies of scale are disadvantages associated with a firm
become too large
Firms increase production =
eventual rise in average costs
This can be caused by:
• Management can lose
touch with day-to-day
working
• Duplication and
paperwork
• Workplace relations
• Decrease in managerial and administrative efficiency
o E.g. decision making process becomes more complicated
LONG RUN AVERAGE COST CURVE:
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As firms increase the scale of its operations up to output level X, it’s per unit
production costs are declining, as revealed by the falling long-run average cost
curve of the firm.
If the firm increases its scale of operations past output level X, its per-unit
production costs start to rise, as revealed by the rising LRAC curve of the firm
Past this point, diseconomies of scale will now outweigh internal economies of
scale
Point X represents the most efficient level of production for the firm, known as
the technical optimum
Average costs of production at this level are the lowest
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This is the point where the firm has taken maximum advantage of internal
economies of scale, without having to suffer excessive internal diseconomies of
scale
Learning by doing:
- -Benefit of continuously repeating production processes is that a firm gets
more practice, becoming more efficient and completing the same tasks in the
production process over time
- This results in a downward shift of the firm’s long-run average cost curve,
meaning lower per unit production costs at each level of production
EXTERNAL economies OF SCALE:
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Benefits to a firm due to outside sources – cost-saving advantages the firm has
no control over
Can be due to:
• Growth of industry benefits firms within
• Government provision of services
• Large industry/firm may attract skilled labour
• Cheaper investment funds from a variety of sources
EXTERNAL DiSeconomies OF SCALE:
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Disadvantages faced by a firm because of the growth of the industry in
which the firm is operating
Results in additional costs to the firm
Can include:
• Increased pollution
• Transport bottlenecks = increased transport costs
• Cost of raw materials rise due to increase demand from industry
• Labour becomes scarce = decline in quality
• Government regulation of industry
• Rising rents
IMPACTS ON A FIRM:
Impacts of investment, technological change and ethical decision-making:
- Production methods
- Prices
- Employment
- Output
- Profits
- Types of products
- Globalisation
- Environmental sustainability
Demand:
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Reflects an inverse relationship between price and quantity demanded
As price decreases, demand will increase
Demand is the quantity of a good or
services that consumers are willing to buy
at a particular price, at a particular point
in time.
Demand CURVE:
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Graph reflecting the price consumers are
willing to pay and the quantity consumers
are willing to buy’
Changes in the demand curve:
1. M ovem ent along the dem and curve:
Change in the quantity demanded due to a change in the price of the
product only
- When only prices changes, there is a change in the quantity
dem anded
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There has not been a change in the intensity of demand, so the
demand curve has not shifted.
Movements along the demand curve as a result of prices changes are
known as expansions or contractions in demand.
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If the price of good increases, there will be a contraction in
demand, due to more consumers being excluded from the market.
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If the price of the good decreases, then there will be an
expansion in demand due to more consumers being included in the
market
2. Shifts of the dem and curve:
Increase:
- A shift to the right is known as an increase in dem and
- An increase in demand means that consumers now demand more of the
product at the same price
- It also means that consumers are willing to buy a given quantity at a
higher price than before
- Following the increase in demand, consumers are now prepared to
purchase the same quantity of
the product at a higher price.
Decrease:
- A shift to the left is known as a
decrease in demand
- This means that consumers now
demand less of the product at
the same price
- A decrease means that
consumers are only prepared to
pay a lower price, in order to
purchase the same quantity of
the product
Price elasticity of
demand:
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Defined as the degree to which the
quantity demanded responds to
changes in price
It is calculated by the percentage
change in quantity demanded divided
by the percentage change in price.
Importance of price elasticity of demand:
The knowledge of price elasticity of demand is important to:
Business:
- To decide on their optimal price strategy,
therefore maximising profit
Government:
- Pricing goods and services for the
community
- E.g. Public transport
- Imposing taxes
Types of elasticity:
Elastic demand:
- A strong response to a change in price
- Demand is said to be elastic when a change in price leads to a more than
proportional change in the quantity
demanded
- A 10% rise in price resulting in a 25% fall in
quantity demanded indicates an elastic
demand
Perfectly Elastic:
- When demand is perfectly elastic, the
demand curve is a straight, horizontal line
- Buyers will demand an amount at the given
price, but none at all a price slightly above
the given market
Perfectly Inelastic
- When demand is perfectly inelastic, the
demand curve is a vertical straight line
- It shows that consumers are willing to pay any
price in order to obtain a given quantity of a
good
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Example: A person with a life threatening
disease that can only be treated with a
particular drug would be willing to pay
almost any price to obtain it.
Inelastic demand:
- A weak response to a price change
- Demand is said to be inelastic when a price
change leads to a less than proportionate
change in the quantity demanded
-
A 10% price change rise resulting in a 5% fall in quantity demanded indicates
that demand is inelastic
Steeper Slope
Unit elastic demand:
- A proportional response to a price change (total amount spent by consumers
remains unchanged)
- Quantity demanded will change by the same proportion as the price change
Measuring Price Elasticity:
Total Outlay method:
- Calculates price elastic of demand by
looking at the effect of changes in price
on the revenue earned by the producer
- Total outlay is found by multiplying the
price by the quantity that would be
demanded at the price
- If price increases and total outlay
increases, it is inelastic
- If price increases and outlay decreases,
this is elastic demand
- If price changes have no impact on total outlay, this is unit elastic demand
Factors affecting elasticity of demand
1. Whether the good is a luxury or a necessity
- E.g. necessities for daily life, such as milk or bread have relatively
inelastic demand, even if there is an increase in price, the quantity
demanded will not fall.
- For luxury items, such
as fine dining, price elasticity would be expected to be higher
2. Whether the good has any close substitutes
- E.g. Different brands of cereal = higher elastic demand
- If the price of one brand of cereal increases, then demand is likely to
contract more than proportionately, since people would simply switch
to another brand, perceived to be equally good
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G + S with few or no services
would have an inelastic demand –
even as price increases, people
cannot switch to another product
e.g. Sydney Water
3. The expenditure on the product as a
proportional income
- G + S that take up a small portion
of ones income, e.g. chewing gum, will have a lower price elasticity of
demand, opposed to more expensive items which tend to be more
elastic
4. The length of time subsequent to a price change
- If the price of a G or S increases, consumers will take some time to
seek alternatives, identifying substitute products, which will make
demand more responsive.
- If the price of a G or S decreases, it will take time for consumers to
become aware that it is now relatively cheaper
5. Whether a good is habit-forming (addictive) or not
- Goods like ciggies and alcoholic beverages usually have inelastic
demand
- People who are addicted to these items, will continue regardless of
the cost
Supply:
•
•
•
•
•
•
•
Supply is the amount of goods and services producers are willing and able to
produce at a particular price and point in time
Law of Supply: Any increase in price will result in an increase in supply
Supply curve is upwards sloping; sUPply
Supply curve is a graph reflecting at
different quantities producers are willing
to sell to consumers at different prices
Supply has a direct relationship between
quantity supplied and the price of the
product
Increase in Price = Increase in quantity
supplied
Decrease in price = Decrease quantity
supplied
Movement in Supply:
- Movement up or down the supply curve is caused by a change in price only
- If the price of the good increases then there will be an expansion in supply
-
If the price of the good decreases, then there is a contraction in supply
Change in Supply:
- If a factor other than price changes, the supply curve shifts to the left or right
of its original position
A shift to the left is known as a
decrease in supply
A shift to the right is known as an increase
in supply
Non-Price: A factor affecting supply:
- Favourable changes in supply conditions cause an increase in supply and the
supply curve moves to the right
- Unfavourable changes in supply conditions cause a decrease in supply and
the supply curve moves to the left
Factors influence supply:
1. The price of the good or service itself
2. The price of other goods or services
3. The state of technology
4. Changes in the cost of factors of production
5. Changes in the costs of factors of
production
6. The quantity of the good available
7. Climatic and seasonal influence
Price elasticity of supply:
Perfectly elastic supply:
- At price OP, suppliers would supply an
infinite quantity of the good, whereas
below the price they would not be willing
to supply any.
- This is very unlikely
Perfectly inelastic supply:
- Quantity supplied is fixed at 0Q regardless of the price
- The supply of a unique piece of art may be perfectly inelastic – if only one
exists, then the supply is fixed at one regardless of the price.
Factors affecting the elasticity of supply:
1. Time lags after a price change
- In the short run, price elasticity of supply increases, despite its
unlikeliness
- In the long run, the producer would be able to increase any of the
inputs, including the size of the production plant or the amount of
machinery, thus, facilitating a greater increase in production in
response to a price change, making supply relatively price elastic.
2. The ability to hold and store stock
- Stock of goods, known as inventory, can be offered for sale when
prices rise again
- As a general rule, the easier it is to hold stock, the more elastic the
supply
- To a large degree, this will depend on the nature of the good itself
- E.g. Highly perishable items such as fresh fruit and vegetables would
be difficult to hold in stock, opposed to durable items such as
furniture which would make supply more elastic
3. Excess capacity
- Exists when a firm is not using its existing resources to their full
capacity
-
-
Supply will be elastic when firms have excess capacity, but they have
to respond quickly to any price increase by simply using their existing
resources more intensively
E.g. A firm operating its plant and machinery at only half capacity
could double its output very quickly in response to a price increase
Supply will tend to be inelastic when resources are already being
used at full capacity
MARKET EQUILIBRIUM:
•
•
•
•
•
•
A market is a situation where the buyers and sellers have the opportunity to
exchange goods and services for money.
In other words where there is a demand and supply for a product or service
for exchange.
When the demand from consumers for a product or service equals the
supply from producers, we have Market Equilibrium.
Market Equilibrium gives us the price and quantity that consumers are happy
to buy and the suppliers are also satisfied to produce.
D=S
This means, there is no excess demand or supply
Price Mechanism:
- The process by which the forces of supply and demand interact to determine
the market price at which goods and services are sold and the quantity
produced
- Attempts to solve economic problems in product market (interaction of
demand and supply of the outputs of production i.e. goods and services)
- Central role in the markets for the factors of production or factor markets.
- Demand and supply forces in factor markets determine the price paid for the
factors of production and thus the share of total output that is received
-
- Market demand
- Market supply
PRICE
MECHANISM
- Equilibrium price
- Equilibrium
quantity
DISEQUILIBRIUM:
•
•
•
•
•
•
•
If D = S this is referred to as disequilibrium
This means there is market pressure on both prices and quantity to change
towards the direction of equilibrium.
The pressure for change is referred to as the ‘invisible hand’.
When the quantity dem anded exceeds the quantity supplied there is
excess demand.
This is also referred to as a shortage.
In order to settle the shortage the price mechanism will allow suppliers to
increase prices to move towards equilibrium.
This involves an expansion in supply and a contraction in dem and
Excess Demand: (Shortage)
- When the quantity dem anded exceeds
the quantity supplied there is excess
demand.
- This is also referred to as a shortage.
- In order to settle the shortage the price
mechanism will allow suppliers to increase
prices to move towards equilibrium.
- This involves an expansion in supply
and a contraction in dem and
Excess Supply: (Surplus)
- The situation when the quantity available is
greater than the demand is referred to as
a surplus or excess supply
- Result: produces will reduce prices to
attract more buyers.
- The price m echanism drives prices down
to bring the quantity supplied to equal the
quantity demanded.
Changes in Equilibrium:
- Factors affecting supply and demand will
cause prices to change over time.
- For example: fashion, tastes, market
efficiency, new technology, alternative
products.
How can an increase in demand change
equilibrium?
• Increase in demand means that more of a
good will be demanded at any given
•
•
•
•
price
Demand curve shifts to the right (from D1D1 to D2D2) consumers demand
more at the old equilibrium (OPE). At this price, the quantity demanded
(0Qx) exceeds the quantity supplied (0QE1
Competition among buyers for the limited quantity of umbrellas will force
the price up, causing an expansion in supply (movement along the curve to
the right)
It will continue to occur until the market clears again at a new equilibrium
price (OPE2) and quantity (0QE2)
In simple words, an increase in demand raises both equilibrium price and
equilibrium quantity
GOVERNMENT INTERVENTION IN THE MARKETPLACE:
•
•
Equilibrium price and quantity in product and factor markets may be too
high or too low
This can result in market failure
•
Market failure occurs when the price mechanism takes account of private
benefits and costs of production to consumers and producers, but it fails to
take into account indirect costs such as damage to the environment
Price Intervention:
• Aims to ensure fair distribution of
income
Price Ceiling:
• Refers to the maximum price that can
be charged for a commodity e.g.
Train ticket
• Demand is greater than supply
• This results in disequilibrium,
• Aims to redistribute money from
sellers to buyers
Price Floor:
• Refers to the minimum price that can
be charged for a particular commodity
e.g. Wheat
• Supply is greater than demand
• This results in disequilibrium
• Aim is to redistribute money from
buyers to sellers
Quality intervention:
• Quantity of some goods and services
provided by the market may be too
high or too low such as Merit goods
• Merits goods are goods that are not
produced in sufficient quantity by the private sector because private
individuals do not place sufficient value on those goods, i.e. they involve
positive externalities that are not fully enjoyed by the individual consumer.
Merit goods include education and health care
• This is because social costs and benefits (externalities) are not considered
• Negative externalities such as pollution, environmental damage, etc.
• Gov. imposes taxes to restrict quantity produced
• Positive externalities such as public transport, public parks, etc.
• Gov. provides subsidies to encourage consumption
• Some G+S will not be provided by individual firms at all, because once
provided, producers will not be able to exclude those who are unwilling to
pay from using and obtaining the benefits of those public goods
• Public goods are goods that private firms are unwilling to supply as they are
not able to restrict usage and benefit those willing to pay for the good.
Because of this, governments should provide these goods.
Competition and market power:
•
•
•
•
Monopolistic competition: many small firms in the industry
Oligopoly: A small number of large firms dominate the industry
Pure competition: a theoretical model of perfect competition
Monopoly: only one producer in the industry
AGGREGATE DEMAND:
Total demand for goods and services in an economy. AD = C + I + G + (X-M)
HUMAN CAPITAL:
Total sum of knowledge, skills training and experience of workers that contributes to
the production process
LABOUR MARKET:
•
A market where individuals seeking employment interact with employers
who want to obtain the most appropriate labour skills for their production
process
The demand for labour:
•
•
Who demands labour?
FIRMS
Labour demand is a derived demand. That is, the demand for labour which is
derived from the demand of G&S in an economy
Factors influencing the demand for labour:
•
•
The labour demand curve is downward sloping
Therefore, as wages fall, firms will demand (employ) more labour
OUTPUT FACTOR
As the demand for labour is
a derived demand, the most
significant influence on a
firm’s demand will be output
factors
These influences can include:
• General economic conditions
(aggregate demand)
• Conditions of the firm’s
industry
• Demand for an individual
firm’s product
•
INPUT FACTORS:
The productivity of labour
• Firms consider the productivity of labour to help them make choices
between using labour or capital in their production process
•
•
Labour productivity depends on the quality of the workforce.
TOTAL OUTPUT
_______________
LABOUR INPUT
The cost of other inputs
• If the cost of labour is relatively high, firms will consider substituting it for
inputs, such as capital.
• A firm’s demand will be more elastic – respond more sharply to price
changes, when:
o It is easy to substitute between labour and capital
o Labour costs are a relatively high proportion of its total costs
o It is more difficult for the firm to pass on increased labour costs
in the form of higher prices to consumers
• The cost of capital is represented by a number of factors, including;
o Interest rates (represents the cost of borrowing funds to invest in
capital)
o Special tax allowances
• Foreign Labour
o If the cost of labour is too high, firms may also consider shifting
some of its operations overseas
SUPPLY OF LABOUR:
•
•
Individuals supply labour when they are able and willing to work
The supply curve is upward sloping upward sloping, since the higher the
wage, the more individuals will be able and willing to work
FACTORS CONTRIBUTING TO THE SUPPLY OF LABOUR:
•
•
•
•
Pay levels
Working conditions
Education, skills and experience requirements
The mobility of labour:
o Occupational mobility – ability to move between different
occupations in response to wage differentials and employment
opportunities
Geographical mobility – refers to the ability of labour to move
between different locations in response to improved wage
differentials and employment opportunities
Labour force participation rate
Other factors
o
•
•
Participation Rate:
• Percentage of the working population who are working or actively seeking
work
• The participation rate has reached record levels due to the feminisation of
the workforce, however with an ageing population it is expected to decline
in coming years
Labour
m arket area
Differences in
wage outcomes
for individuals in
different
occupational
groups
Research
-
-
-
-
A survey published in 2014 showed that while Australians think
CEOs should be paid eight times average wages, they actually
are already paid an average of 93 times the average pay of their
workers in Australia, or $4.2 million per year.
An ABS survey on average weekly income by occupation full
time employees in 2015 highlighted the income distribution
inequality across eight major occupation groups; managers,
profes
sional
s,
techni
cians
and
trade
worke
rs,
machi
nery
opera
tors
and
drivers, clerical and administrative workers, sale workers,
community and personal service workers and labourers.
Highest paid group were managers with a mean weekly income
of $1913 per week = higher level of education and training
required for occupations
Lowest paid group were labourers at 1119 per week, due to a
lower level of skills and training required for these + higher level
of occupational mobility
(ABS AUGUST 2013) >
Differences in
non-wage
outcomes for
individuals in
different
occupational
groups
-
Reasons for
gender
differences
Arguments for
and against a
more equitable
distribution of
income from
work
Employees receive additional benefits such as sick leave,
holiday leave, superannuation, etc
In some industries, workers earn far more than their regular
wage because of substantial non-wage allowances
Salary packing – e.g. company car, laptop, gym membership etc
Bonus cash payments on top of normal wage
Study leave, extra parental leave, leave to look after sick family
member, etc
Working flexibility
Superannuation – 9.5% of salary paid by employer, only used
upon retirement
- Since 1969, Australian employment laws have recognised
the principle of “equal pay for equal work” – this has failed
based of stereotypes that most women stay at home.
- Lead to new principle “equal pay for work of equal value”
- According to an ABS statistic on average weekly total
earnings between gender; in 2016, the average weekly
earnings of women were only one third of those of male
earnings. M = $1395 W = $925.
- Australian National University study completed in 2016
suggested that men on average earn 19 per cent more than
women working full time in the same occupation = labour
market discrimination
- Difference in earnings explained by variation of hours, type
of work done, etc.
- LFS Data shows that in 2014, 83% of male employees
worked full time, in comparison to 54% of female
employees.
- Female employees worked fewer hours per week, at around
40.8, than males at 44.6 hours.
- Part time women: 19.2 hours
- Part time men: 18.5
- According to the workplace gender equality agency;
• Women comprise 46.2% of all employees in Australia
• Workforce participation rate for women: 59.3% and for
men is 70.4%
- ABS statistic showing the share of income, shows the
proportion of total income received by each income quintile
over time, revealing that the top 20% of income account for
40.8% of total income = average weekly incomes over five
times higher than the average bottom quintile
- 40% of income recipients remained relatively constant –
highest income share expands. 3.7 increase from 19996 to
2016
- Since 1996-97, highest income earned gain larger share of
income
FOR:
-
-
Recent trends in
unemployment
in Australia
Remove income hierarchy/social class divisions (industrial
disputes = social and economic instability)
Socialist society- state controls incomes, jobs and
distribution of goods and services
Poverty
Bridge the gap in standard of living
Increase in wellbeing
Herald/Age-Lateral Economics (HALE) adjusts GDP to
measure the collective wellbeing of Australians, estimating
in recent years that the recent rise in inequality is reducing
wellbeing by around $2 billion per quarter
Increase utility
Increase annual economic growth rate (currently increased
2.4%, previously 2.5%))
Equality can increase consumption and investment
Decrease the cost of welfare support
AGAINST:
- Skills and talent – not everyone has the same mental and
physical attributes
- Hard work for same pay – increase casual and part time jobs
- Less labour mobility – higher incomes for less demanded
occupations
- Wealth through inheritance - stripped
- Education – time undergoing education wasted?
- Inequality encourages labour force to increase education
and skill
- Australia’s seasonally adjusted unemployment rate fell to
5.6% in April from 5.9% in March.
- Lowest jobless rate since January (5.7033) as the economy
added 37,400 jobs while the number of unemployed decline
19,100.
- Trend due to casualization of the workforce – large increase
- Structural changes in economy
- Unemployment Rate in Australia averaged 6.91 percent
from 1978 until 2017, reaching an all time high of 11.20
percent in December of 1992 and a record low of 3.98
percent in February of 2008.
Unemployment
levels in
different parts of
Australia
Impact of labour
market trends
on individuals
- Demand for labour varies in different areas
Since 1995, there has been around a 4% decline in the number of
people in full time work
Increase in part time & causal work from 24.5% in 1995 to 28.5% in
2005. – due to more flexible workplaces, increased opportunities,
extended trading hours and work and family considerations
Increase in work hours; average increased from 35 to 45 hours
Increase participation of women
Increasing role for technology – changing skill requirements
Structural changes lead to widespread unemployment
AUSTRALIAN WORKFORCE:
Unemployment – a situation where individuals want to work but are unable to find a
job, and as a result labour resources in an economy are not utilised.
Size and quantity of the workforce:
There are three key factors that influence the size and quantity of the Australian
workforce, including:
1. Population size – the larger the population, the greater the potential
workforce.
- Natural increase
- Net Migration
2. Age Distribution:
- c population
3. Education Patterns
DETERMINING EQUILIBRIUM:
•
•
•
•
•
•
•
•
Supply curve slopes upwards –
as wage rates increases, people
will be more willing to supply
their labour
As wage rates increase, the
opportunity cost of leisure rises
and working is more attractive –
people will substitute leisure for
work and work more
As wage rates become higher,
workers can also achieve the
same level of income by working
less
So at higher wage rates, labour
supply declines as the wage rate
increases
Demand curve slopes downwards
According to the law of
diminishing marginal returns, each
extra worker will contribute less to
total production than the previous
worker
A profit-maximising firm will only
employ the extra worker if they
pay him or her a wage rate that is
lower than marginal revenue
earned from production
Therefore, as wage rate is declines, the demand for workers by firms will
increase – which is why the labour demand curve is downward sloping
•
Equilibrium is achieved at the intersection of the supply and demand curves,
the equilibrium wage rate occurs where the quantity of labour supplied is
exactly equal to the quantity of labour demanded by firms
UNEMPLOYMENT:
•
•
To be classified as unemployed a person must:
o Be over the age of 15
o Without a job
o Be actively seeking work
To be classified as actively seeking work, a person without a job should:
o Regularly cheeking advertising
o Be willing to respond to job advertising
o Register with an employment agency
Cyclical Unemployment:
• Occurs in the downswing and recession phases of the business cycle
• Downswing = lower demand for G+S = firms will cut back on production =
less workers needed
• This is because demand for labour is a derived demand
Structural Unemployment:
• Occurs when there is a mismatch between the skills demanded by employers
and those possessed by unemployed people
• Can be assisted with technological advancements
• Closing down old industries and introducing new technological industries –
may lead to an increase in structural unemployment due to a mismatch of
skills
Frictional:
• Occurs when people move from one job to another
• Efficiency in in job placement services can reduce frictional unemployment
Long Term Unemployed:
• Applies to those who have been unemployed for 12 months or more
• May have started out as cyclical unemployment
• Issues with long term unemployment include:
- Individuals may lose job related skills
- Employers often reluctant to hire
Seasonal Unemployment:
• This occurs because of the seasonal nature of some jobs
• E.g. No need of Santa Clause in March
Hard-Core unemployment:
• Refers to those individuals who might be considered unemployable because
of personal characteristics
• E.g. Disability or Anti-social behaviour
Hidden Unemployment:
• Refers to those individuals who are not counted in the official unemployment
rate because they have given up actively seeking work or have gone back to
school
• A rise in hidden unemployment will be reflective in a fall in the labour market
participation rate rather than an increase in the unemployment rate
• Although officially not unemployed, they are still considered to be part of the
employment problem
Underemployment:
• Refers to individuals who have part time or casual jobs but would like to work
more hours
• Not considered unemployed
• Represent under-utilised resources
• Labour flexibility has come at a cost
Wage outcomes:
•
Wage and salaries are the major source of income for Australian households –
accounting for 55% of household incomes in Australia
Nominal Wage:
• Pay received by employees in dollar terms for their contribution to the
production process, not adjusted for inflation
Real Wage:
• Measure of the actual purchasing power of money wages (i.e. nominal wage
adjusted for inflation)
Enterprise Bargaining:
• Refers to negotiations between employers and employees about pay and
work conditions at the level of the individuals of the firm
Income distribution:
• Refers to the way in which an economy’s income is spread among the
members of different social and socio-economic groups
Non-wage outcomes:
• Benefits that many employees receive in addition to their ordinary pay and
overtime
• E.g. Sick leave, holiday leave, superannuation
• Superannuation is a form of saving that individuals cannot access until they
reach retirement age.
• Employers are required to pay 9.5% compulsory superannuation payments to
a nominated account.
• Salary Packaging:
- Means to supplement wages
- E.g. subsidised childcare, company car, laptop, gym membership, etc
• Bonus cash payments:
- Added to an employees nominal wage
- Often performance based (based on company profits or individual
performance)
• Flexibility in work patterns:
- E.g. Allowing time for study leave, extra parental leave, work from
home, etc.
The benefits of inequality:
1. Inequality encourages the labour force to increase education and skill level
2. Inequality encourages the labour force to work longer and harder
3. Inequality encouraged entrepreneurs to accept risks more readily
4. Inequality creates the potential for higher savings and capital formation
The costs of inequality
1. Inequality reduces overall utility
2. Inequality can reduce economic growth
3. Inequality reduces consumption and investment
4. Inequality creates conspicuous consumption
5. Inequality creates poverty and social problems
6. Inequality increases the cost of welfare support
Social cost of inequality:
1. Wellbeing
2. Social class divisions
3. Poverty
THE CHANGING AUSTRALIAN LABOUR MARKET:
•
•
Industrial relations refers to the relationship between employees and
employers.
The industrial relations system involves the laws, institutions and processes
established to resolve conflicts between employers and employees.
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.
• The main role of unions include:
o To represent their member’s interests by negotiating wage increases
o Presenting employees interests in issues such as training, safety in
workplace and organisational changes such as company restructures
o Australian Council of Trade Unions [ACTU] is the notional voice of the
trade union movement
Occupational
•Particular occupational skill or a range of skills
regardless of the industry or firm they work
•Eg Electrial Trades Union
Industry based
•Workers from a particular industry regardless of
the type of work they do
•Eg Australian Meat Industry
Enterprise based
General unions
•Members from one specific enterprise
•Very rare
•Members from a range of skills across various
industries
•Eg AWU
•
Unions influence wage outcomes by:
o Representing employee interests
o Exercising their bargaining power in negotiating with employers
o Restricting the supply of labour
Employer associations:
• Employer associations are organisations formed to represent the interests of
businesses. E.g. include ACCI, BCA,AIG
• They are not as well-coordinated and successful as unions
• Role of EA:
o Assisting in wage negotiations with employees
o Providing advice, training and direct assistance to employers
o Lobby govt for changes to govt policies
o Representing employers interests in any hearings in industrial
tribunals
• The actions of EA have been of benefit both to the employers and
employees.
• Through lobbying for protection from foreign competition, have been able to
secure a larger share of the domestic market for Australian producers
Fair work Act 2009:
Establishes 3 main streams in the labour market that determine the pay and
conditions of employees 1. Industrial Awards
2. Collective Agreements
3. Individual Employment Contracts
• Australia’s industrial relations framework has gradually evolved during the
past 3 decades from a highly centralised of wage determination towards one
that allows more room for wage levels and work arrangements to be
negotiated at the level of the individual firm.
• SO wages and working conditions now take into account the specific
characteristics of the workplace.
Fair work commission:
• The government agency that regulates industrial relations in Australia. It
combines the functions of an industrial tribunal, with a role of education and
promotion of enterprise bargaining.
• Oversees the Fair Work Act, setting minimum standards (minimum wage) and
helping resolve disputes
Australia’s current industrial relation framework:
1. Minimum employment standards
2. Industrial Awards
3. Enterprise Agreements
4. Common Law contracts
Minimum employment standards:
Australian employees have a minimum of 10 employment entitlements that are set
out in the Fair Work Act 2009 by a document called the National Employment
Standards. The 10 minimum entitlements of the NES are:
•
•
•
•
•
•
•
•
•
•
Maximum weekly hours of work
Requests for flexible working arrangements
Parental leave and related entitlements
Annual leave
Personal/carer’s leave and compassionate leave
Community service leave
Long service leave
Public holiday
Notice of termination and redundancy pay
Fair Work Information Statement
Industrial Awards:
•
•
•
•
•
•
Awards are set of pay and conditions that are specific to an employee’s work
or sector.
Awards provide a safety net of minimum wages and conditions.
Many employers pay above the award wage rates but awards set the absolute
minimum rates of pay and entitlements.
The Fair Work Commission sets these minimum award wage rates.
o Around 19% of workers have pay set directly through award rates.
o Around 40% of workers have “award based” pay arrangements
Awards extend the protections of the National Employment Standards, with
specific provisions tailored to the needs of the specific industry or
occupation.
These may include:
o Types of employment
o Arrangements for when work is performed
o Overtime and penalty rates
o Annualised wage or salary arrangements
o Allowances
o Leave related matters
o Representation and dispute settlements
o Superannuation and procedures for consultation (ways to eliminate or
minimise risks, resolving health and safety issues etc. )
Enterprise Agreements:
•
Most common method of wage determination In Australia is a workplace
agreement that is negotiated collectively through enterprise bargaining
between an employer and employees - represented by unions
•
•
The agreements need to comply with the National Employment Standards
They also must pass the “Better Off Overall Test” (BOOT)
o Employees be better off overall by an agreement compared to an
applicable award
o This test is administered by the Fair Work Commission
Enterprise Agreements cover around 41 per cent of employees
Common Law Contract:
•
•
•
•
Simple agreements, often only a few pages long, involving add-ons to
relevant awards
They offer pay rates and conditions above the rate that would be paid by the
equivalent award
BUT the exception to the rule is: when pay is above $138, 900, the award
requirements for not apply and common law contract can effectively replace
the award
Enforced through ordinary law courts (as opposed to industrial tribunals) BUT
cost more for both employers and employees
•
Short-term work contract (becoming more common with Labour Market
trends) - ie. contracting or sub-contracting
•
Important part of wage determination in Australia
Under the Fair Work Act, there is only ONE TYPE of individual contract in the
industrial relations system - a com m on law contract (aka unregistered
individual agreements)
o Not part of formal industrial relations system but complies with all of
the minimum standards
o Applies to 37% of workforce
•
Most individual contracts are common law contracts, and they are the most common
form of individual employment arrangements - especially in SMALL BUSINESSES
FINANCIAL MARKETS:
In Australia there are many different financial markets. Some of them involve the
transfer of money between lenders and borrowers
o
o
o
o
o
o
o
o
o
Share market- not secure, rate of return is dividends,
Bitcoin
Capital markets
Home loan market
Money market
Bond market
Property market
Foreign exchange market
Commodity market- the assets e.g gold, copper- fluctuates
Demand, the general economic conditions, level of risk- (high level of risk generally
means more money gained)
ROLE OF FINANCIAL MARKETS:
Financial markets play a critical role in the operation of modern market economies.
Important to have a strong financial system which ensures that economic growth
o Financial markets create products that provide a return for those who have
excess funds. E.g. if you gave excess saving you put in bank an they invest or
lend to other- all about interaction between the systems
o This making those excess funds available to those who need additional
money.
o That is, financial markets act as financial interm ediaries (m oney put in
back and you get interest and they lend this to others and charge
a higher interest rate to obtain profit) between savers and borrowers.
1. Example of financial intermediary is banks- ADAVNTAGES- individuals would not
be able to buy shares, get returns on their savings or borrow money in order to
purchase certain things- e.g. house
2. Banks want people to borrow because they make money and stimulate the
economy as consumption will increase which
sources of saving:
o
o
o
o
Household savings- The proportion of household incomes that is not spend
on consumer goods is saved.
Businesses save by not distributing all their profits to their owners. The funds
that are not distributed can be retained in financial markets until needed.
Government savings- surplus When the
Foreign savings- interest rate
Reasons for borrowing
o
o
o
o
Consumers borrow when their demand for goods and services exceeds their
current capacity to pay for them. E.g many consumers borrow to purchases
houses and expensive consumer durables such as cars.
Entrepreneurs and business managers borrow to fund the expansion of their
businesses or to start their business, in terms of purchasing new machinery
etc.
The government becomes a borrower of funds when it budgets for a deficit
(when its current expenditure is greater than its current revenue.
Australian financial institutions can lend money overseas to borrowers. (While
this does occur, in overall terms Australia borrows far more from overseas
countries than it lends)
PRIMARY AND Secondary markets:
Primary financial markets: facilitate the creation of financial assets, known as
securities that can be sold into the economy. Is when you first create some financial
assets, e.g. when a public company first sells its shares.
Secondary financial markets: involve transactions with financial assets that have
already been issued on a primary market some time in the past.
o
Investor B is not buying directly from the company and therefore the assets
have already been issued on a primary market and thus is a secondary market
transaction.
MAIN FINANCIAL MARKETS:
1. The share or equity market- where ownership shares in companies are issued
or exchanged. E.g. when company makes profit shareholders earn a share of
that profit in dividends
2. The debt market- where debt securities (such as bonds) are exchanged, or
cash is lent or borrowed. Everyone people borrow money they are involved in
the debt market, e.g in the form of interest payments. If yo don’t repay your
loan, you assets will be taken away from you or debt collectors will buy your
bad debt at a cheaper rate.
3. The derivatives market- where people buy and sell financial assets that are
based on the value of other financial assets. E.g.
4. The foreign exchange market- where financial assets defined in one country’s
currency (buying and selling currency)
W hat is the difference between debt and equity?
Debt is the money owned
Equity- assets and wealth are owned
Other financial markets
o Finance companies
o Investment banks
o Credit unions
o Permanent building societies- mortgages
o Mortgage originators- brands,
o Superannuation funds
FINANCIAL MARKETS PRODUCTS:
1. Consumer credit
o Allows consumers to purchase G+S now and pay later
o Credit cards are most common- have high interest
2.Hosuing loans
o Consumers who want to buy a home or other personal property
o Long term loans
o Using interest rate ½ % above RBA cash rate
o For example, if you deposit $70,000 into your home loan and the required
loan is $645,552 and you pay 4.00%p.a variable interest rate your weekly
repayments will be $709 over the course of 25 years.
3. Business loans
o
o
o
People who want to buy or expand a business
Interest rates usually charged at 1-2% higher than home loan rate- due to its
association with higher risk.
For example, Smith’s construction obtains a loan for $100,000 and must repay
the loan within 18 months. The weekday payment would be $333 and the
total repayment would be $130,000
4. Short term money market
o Brings together people and businesses with temporary shortages or surplus
of funds
o This then is distributed often by banks to those in the economy of needs of
funds
o Have a maturity date of less than 1 year- means must be paid back in one
year.
o Businesses usually use this, need to buy invoices and then pay back
Bonds
o Treasury notes and bonds, which are examples of governments shot-term
and long-term debt instruments, are sold and redeemed (paid out)
o Loan that governments take out and is a form of debt and rather than paying
interest they pay yield to whoever issued that bond until it reaches maturing,
which is the date it needs to be paid back.
o The government and RBA use bonds to influence the level of money available
in the economy. Buy and sell bonds to influence the amount of money
available.
o For example, a large company might issue a ten year corporate bond of one
million dollars with annual coupons of $50,000 which is sold for 1 million
dollars. This means that every year the bondholder receives a payment
(coupon) of $50,000 or 5 percent. At the end of 10 years (the maturity period),
the bondholder gets back the one million dollars (the face value)
Financial futures and options
o A futures contract is a financial contract giving the buyer an obligation to
purchase an asset (and the seller an obligation to sell an asset) at a set price
at a future point in time.
o The market for buying and selling of contracts at a later date for a certain
price
o Futures markets allow investors to protect themselves against adverse
movements in interest rates, currency fluctuations or share prices, by
agreeing on a price and currency at which to buy or sell.
o Some traders in this market speculate on price movements
o The market is derived from primary market financial instruments
o You have some type of asset and you make a contract with somebody to sell
or buy that asset at a certain point in the future and predict the price of that
asset. This is a locked in contract, where no changes occur despite its market
price.
o
o
Futures market is about speculation and about trying to purchase things
below market level
Normally rare things such as paintings and Ferrari are traded.
Foreign Exchanging market
o This is the market for buying and selling of foreign currencies.
o Businesses require foreign currencies when they do business overseas
o Operates 24 hours a day- trading all over the world
SUPERANNUATION IN AUSTRALIA
o
o
o
o
It is an important source of retirement income when people finish their
working lives.
The superannuation system allows more people to indirectly own shares and
participate in more sophisticated parts of the finance sector (with higher
returns) than simply depositing money in banks.
The growth of superannuation therefore reduces pressure on the government
to provide the age pension to people over the retirement age of 65.
The large pool of finance made available through superannuation also plays
an important role in prompting growth in the economy as superannuation
funds can loaned to financial institutions, loaned to households and may be
directly invested in new share issuances by businesses that are used to raise
money for new capital investment.
W hat were the impacts of the introduction of superannuation on the
econom y?
o Changes in superannuation can have significant impacts on the rest of the
economy.
o Because of the amount of superannuation invested in shares, changes the
share market are the main driver of superannuation balances.
o Therefore strong superannuation growth can encourage people to retire
before the legal retirement age of 65, while in contrast the sharp downturn in
shares and superannuation will result in workers having to stay longer in the
workforce in order to be able to save for retirement.
o Due to the strong impact superannuation has on the number of individuals in
the workforce, it thus has a strong impact on the economy. This is because if
a sharp decline in employees occurred due to the growth in superannuation
there would in turn be a decrease in economic growth as there would be less
individuals contributing to the labour market.
o In contrast, if there was a downturn in superannuation funds then more
individuals would be required to stay in the workforce and thus there would
be more individuals contributing to the labour market, stimulating the
economy.
The Share M arket
The share market is the financial market where investors buy and sell shares.
The role and function of the share market
Definitions
Share- is a type of financial asset that provides an individual with ownership over
part of a business or company.
Investm ent- is any current expenditure where the benefits will be obtained in the
future. Most typically, this injection will involve the purchase of capital goods or build
up of stock or inventory.
Public com pany- is an entity whose shares are traded freely on the share market,
and are not subject to any restrictions on being transferred to other parties. E.g.
Woolworths.
Private com pany- is one that restricts ownership of shares
Dividends- are the profit returns received by the shareholders (owners) of a business.
Capital gains- are the profits made by investors who sell their shares or asset at a
price above the level they originally paid for them.
Float- a float occurs when a company lists itself on the stock exchange and offers its
shares to the general public for the first time.
Only public companies can issue shares.
The seller does not buy it directly from the seller. Cannot go directly t a company
and ask to buy shares
This ensures that the seller is not ripping off the buyer and ensue that different
buyers are not getting differ prices, making the process more fair.
Outline the role of the share m arket for:
Individuals/ shareholders- to earn dividends and capital gains in the future
Businesses- to create wealth in their company to for the expansion of the businesses
as well as to participate in investment.
Management= CEO and people on boards
The effects of the share m arket on the econom y
1. Share markets can act as an indicator of a countries economic conditions.
Fluctuation in share market act as an indicator of how the whole economy is running.
The share market has huge fluctuations
2.Acts as a method of allocating resources to different production
3. However, the balance market can create issues due to speculation.
Graph- mining boom, end and GFC
3. Three organisations that are involved in the regulation of global
financial m arkets
1. Internal monetary fund
Ø Oversees the general stability of the international financial system, through
monitoring economies and markets and assisting countries having difficulty
meeting their international finical obligations.
Ø Has particular interest in foreign exchange markets.
2. Bank of international Settlements
Ø International organisation that helps central banks (e.g. Reserve Bank of
Australia) promote financial stability through appropriate market regulations.
3. Basel Committee
Ø Sets standards for banking regulations with the broad objective of promoting
effective and uniform financial regulatory systems around the world.
Australian Securities and Investm ents Com m ission
o
o
The Australian Securities and Investment Commission (ASIC) regulates
Australian companies and financial markets, with the aim of protecting
investors and consumers and improving the performance of the financial
system.
It has the power to:
- Monitor, investigate and act in situations where the integrity of the
financial system has been undermined by illegal acts of individuals or the
creation of unethical products.
- Protect consumers against misleading or deceptive and unconscionable
conduct affecting financial products and services.
ASIC typically has hundreds of investigations underway at any point in time. Each
year its legal actions can see individuals and companies paying fines, assets being
frozen, or people being jailed for major offences. In 2015, ASIC brought a case
against the high-profile property developer Jamie McIntyre, and the company 21st
Century, claiming that investment documents were misleading and deceptive. In
previous years, it has been involved in high-profile disputes with major companies
such as the Bank of Queensland and Storm Financial.
In the past few years, the scope of ASIC’s role has been expanded to cover a greater
amount of financial market activity. ASIC became the national regulator for consumer
credit (such as home loans, personal loans and credit cards) in 2009, taking over from
the states and territories. Since 2010, ASIC has increased responsibility for
supervising security markets such as the Australian Securities Exchange.
ASIC’s role is critical to lifting the standards of corporate behaviour and maintaining
confidence in financial markets.
Offences regulated by the ASIC include:
- “Insider trading”, where company directors use non-public information
about the company to buy and sell shares on the state market to make a
profit
- Company executives failing to inform the market of price-sensitive
information.
ASIC does not:
o Prevent investors from making losses.
o Try and stop people investing in high-risk ventures, which may end in
cooperate failure.
o Step in to ‘bail-out’ or prevent companies experiencing financial difficulties.
ASIC’s role reflects a view that financial markets will be more efficient and better for
investors in the long run if they operate with minimum government interferences.
MONEY MARKET:
-
The price of money in the money market is the rate of interest
However, the price of in the money market is not achieved through the
equilibrium of market forces alone- the RBA plays a key indirect role in
setting interest rates.
13.1- Borrowers: the demand for funds
Individuals, businesses and governments borrow money for different purposes.
Supply of funds/loans
⇒ Individuals- Saving up for future needs, money put in bank accounts and this
money receives interest and is at no risk of being lost. This is a way individuals
lend banks lend this money to other people and individuals gain interest.
⇒ Businesses- Savings if profits are strong and there is no immediate use of
funds
⇒ Governments- Savings
Dem and for funds/borrowers
Individuals borrow money in order to obtain a certain asset that they need or want,
even if they don’t have enough money to purchase it. Borrowing allows individuals to
purchase items rapidly and then they can pay the lender back at a later date.
⇒ Individuals- personal reasons
- Home loans (mortgage arrangement)- the bank has the home as security
on the loan, therefore if the borrower should default on making
repayments on the loan, the bank effectively owns the property and can
sell it to regain the debt, before giving any left-over money to the
borrower.
- Purchasing a car, international travel
- Personal loans
- Credit Cards (short-term borrowing)- these loans are mostly unsecured,
meaning there is no assets the financial institution can claim if the
borrower defaults on the loan. This explains why this loan has higher
interest rates in relation to mortgage interest rates.
⇒ Businesses
-
-
The business sector does the most borrowing of any other sector in the
economy.
Expand production, invest in research and development, start up a
business and expand a business.
This can be done directly through raising equity (value of shares) by
issuing shares or through raising the debt by issuing the bonds.
Alternatively, this can be done indirectly done by borrowing money from
a deposit-taking financial institution.
Managing cash flow- even if the business relies mainly on raising funds
through selling equity or bonds, they will often still need to borrow money
for brief periods through the course of the year in order to overcome
downturns in its cash flow.
For example, a business that relies on tourism will experience frequent
change in its level of activity, due to seasons and holiday patterns. Since
expenses are often constant, it may have to borrow additional money
when tourism is not at its highest during the year.
⇒ Governments
- Sometimes governments borrow deliberately, in an effort to raise
economic activity. If growth rate is low and funds are readily available on
financial markets, a government might borrow money in order to increase
spending or give tax cuts and stimulate the economy.
- Borrowing occurs when expenditure exceeds revenue
- Borrowing can also occur for funding major infrastructure projects for
example, if governments need to build a bridge or roads.
13.2- Factors affecting the dem ands for funds
o
o
Individuals with surplus funds must decide what form to keep them in i.e.
either as money (currency and bank deposits) or to purchase financial assets
(such as bonds or shares)
The benefit of holding money is liquidity. This allows for the easy use of funds
when necessary.
Liquidity is the ease with which a financial asset can be transformed into cash so it
can be used as a medium of exchange.
Return vs. Risk
o Liquid money (cash) does not earn return. In fact, the value of cash is eroded
by inflation over time.
o Financial assets can earn returns. For example, owners of shares in a company
can receive a proportion of the profits made by that company in the form of
dividend payments. (e.g. dividends from shares)
o However, financial assets carry risks as their value can change depending on
market conditions.
Therefore the main opportunity cost of holding liquid cash is the foregone
returns (or interest) that would have been earned by holding financial assets.
W hy do people prefer to hold liquid assets?
- There are a number of reasons why some prefer to hold liquid assets
(money) rather than invest in financial assets that offer a return.
o
Transaction m otive: people use liquid money for day-to-day transactions, e.g.
making regular payments for goods and services. Individuals cannot make everyday
purchase with their financial assets.
Precautionary M otive: Holding money for unpredictable circumstances and
emergencies e.g. Sickness, car breakdown.
Speculative M otive:
- Individuals try to predict market movements in order to ensure their
financial assets bring them capital gains.
- Therefore, they may hold their money till a time when it is preferable to
buy financial assets, such as shares.
- Likewise, they may sell their financial assets and convert them into money
if they expect the value of their financial assets to fall.
As long as the benefit of holding liquidity outweighs the costs, individuals will seek
to hold their money rather than purchase financial assets.
13.3- Lenders: the supply of funds
Individuals, businesses and government participate in financial markets as lenders
when they are seeking a return on their wealth.
Individuals may have excess savings and chose to lend their money to an institution
for the purpose of getting a return.
- Individuals who hold wealth but do not wish to spend it have a range of
options.
- Some may invest in assets (e.g. residential property), buy shares or place
money into an interest-bearing deposit in a financial institution (if they
wish to avoid risk)
Businesses may have a strong cash flow and good profits, but may not have
immediate plans to expand or buy a new business. In such circumstances, the
business may deposit its funds in a financial institution, where interest rates are likely
to be more lucrative than investing in expanding the business.
Governments generally participate in the financial market as borrowers, however
when they budget surplus with its revenue exceeding its expenditure this allows
governments to lend money in order to pay off outstanding debt from the past or
maintain positive financial balances (loan money through the financial sector)
International sector is an important source of funds for domestic borrowers.
Australia has historically had low savings rates and has relied on overseas lenders to
finance domestic consumption and investment. When Australians borrow money
from overseas, this is recorded as foreign liability and must be repaid in the future.
The importance of the international sector to lenders in Australia was highlighted
during the global financial crisis, when there was a shortage of credit internationally.
Banks and lenders in Australia were forced to raise their interest rates in excess of
official increases in the cash rate by the RBA, which attracted overseas lenders to
borrow in Australia as they were ensured a high return for this.
13.4- M oney and the m oney supply
Financial aggregates
Financial aggregates measured by the reserve bank of Australia
Money plays a crucial role in the functioning of an modern economy. This is because
the value of goods and services in product markets and all resources in factor
markets be expressed in terms of money.
M oney supply is the total amount of money in the economy that can be used as a
medium of exchange, a measure of value, a store value and a method of deferred
payment.
- Currency accounts for only 5% of money supply according to RBA.
M oney’s four characteristics
1. Medium of exchange- goods and services are exchanged for money.
2. A measure of value- money can be used to compare the relative value of goods,
service and resources.
3. A store value- money can be used to measure the value of resources over time.
Money can be held over time and used predictably for future exchanges of food,
services or resources.
4. A method of deferred payment- money allows a system of lending and borrowing.
The m oney supply can be m easured with 3 m ain indicators, called
financial or monetary aggregates:
1. Money base= currency (actual cash we have) + bank deposits with the RBA simple
way of measuring and not so accurate
2. M3= Money base +bank deposits (This is the RBA’s definition of the money
supply)
3. Broad Money- M3 +NBFI deposits – NBFI deposits in banks
(none banking financial institutions e.g. investment banks, mortgage banks(rams),
credit unions.
Interest rates and the RBA
- the Reserve Bank of Australia is Australia’s central bank.
- It uses interest rates to influence
- Responsible for financial stability in the economy
- The RBA is considered a government policy however the RBA operates
independently to the government, and the government has no control
over the RBA and financial sector. This is to make sure there is no political
influence over Australia’s financial sector.
- The economic governor is Phillip low and old one is Glen Stevens
13.5- Interest rates
Interest rate is the rate of return (yield) on financial assets or financial instruments,
such as shares and bonds. Therefore it is also the cost of borrowing money.
The rate of interest is one of the most important prices in the economy, as it is the
price that brings about equilibrium in a financial market, where the quantity of funds
supplied by lenders is equal to that demanded by borrowers.
o
o
In reality, interest rates are not determined by the interaction of supply and
demand forces.
The supply of funds (savings) tend to be unresponsive to change in the
interest rate (inelastic) as interest rates are indirectly set by the RBA.
The RBA has direct control over the supply of money and they can control how much
money banks have access to which influences interest rates.
If the RBA wants interest rates to go down they will make sure banks will have more
money and thus interest rates are lower.
Saving rates are always above cash rates.
Long term borrowings will have a higher interest rates.
Factors affecting interest rates
Any factor that affects the supply or demand of funds in the financial markets will also
lead to a change in equilibrium level of interest rates in the economy such as:
- Demand for capital goods (investment)- stronger investment demand will
usually lead to higher demand for borrowing, putting upward pressure on
-
-
-
interest rates. borrowing by firms seeking to finance their capital
expansion if lots of businesses invest in business it will increase the
demand for money and this will stimulate economic growth.
Level of savings in the economy- a higher level of savings means there is
an increased supply of loanable funds, which should put downward
pressure on interest rates.
Demand for liquid funds- if individuals in the economy have a stronger
preference for highly liquid funds, they may be willing to forego the yields
(returns) form buying securities and instead will choose to hold their funds
in bank deposits or in currency. This would mean the supply of funds
loanable funds is lower and would put upward pressure on interest rates.
Inflationary expectationsGovernment budget- surplus or deficits
International interest rates
Domestic market operations
Dom estic M arket O perations (DM O s) by the RBA
What is their role in determining the cash rate?
o Cash rate= RBA’s interest rate (
o The official cash rate in the Reserve Bank’s main instrument in
monetary policy. Macro-policy- impacting the whole economy
o Alterations in the cash rate trigger similar responses in other interest
rates in the economy.
o Banks want the RBA to increase interest rates so they can gain more
profit and are very quick to increase their interest rate, however the
opposite occurs when the RBA want to lower the cash rate as banks
won’t gain as much profit.
o Have the effect of lowering or raising the level of economic activity
and, as a result, the money supply.
o Cheaper to borrow when interest rates decrease and therefore there
is more consumption.
Cash rate- the rate of interest which the central bank charges on overnight loans to
commercial banks.
- banks and other financial institutions deposit any surplus funds or cash
they have in the market in order to earn interest. (Banks have account with
RBA and gain interest)
- Institutions requiring funds can also borrow in the cash market where The
rate of interest, called the cash rate, is determined by demand for and
supply of cash at a point in time.
Exchange Settlement Accounts (ESAs) (the account that all banks have together with
the RBA- like a married couple)
- Banks keep a certain proportion of their total funds with the Reserve Bank
in the form of exchange settlement accounts
-
-
-
These are used by banks to settle payments with other banks on a daily
basis.
For example, when a customer of the ANZ bank uses a cheque to buy a
good or service from a businesses that has a bank
The Reserve Bank requires other banks not to overdraw these accounts,
keeping reserve balances to meet unexpected circumstances.
The demand for cash is determined by the reserves of cash in the
exchange settlement accounts (ESAs) of the banks worth the Reserve
Bank.
The supply of cash in this market (short-term cash market) is determined
by the Reserve Banks, which has monopoly control over the supply of
cash.
When the Reserve Bank makes a payment to a commercial bank’s ESA or
vice versa, the supply of cash will change.
Market Operations by the RBA
o Market operations are also called domestic market operations (DM0s)
this is the process the RBA uses to influence the cash rate
o If the supply of funds in the short-term cash market increases (ES
accounts), the cash rate (the price for borrowing) falls. “Short term
overnight money market” because money is constantly changing and
is not fixed.
o Likewise, if the supply of the funds decreases, then the cash rate
increases.
o The RBA can directly control the supply of funds by selling or buying
theses securities within the cash market.
o The RBA sells government securities, as they cannot just take money
from the ES. They buy these securities from the ES accounts and thus
the money supply is lowered.
o The Banks purchase these, and draw on their exchange settlements
accounts
o The supply of settlement funds in the cash market declines from S1 to
S2
o This puts upward pressure on the cash rate and it rises from R1 to R2
o Increased cash rate has an important impact on all other interest rates.
Domestic Market Operations (DMOs)
o This is the RBA’s monetary policy
o It can be used to either lift the level of economic activity or to lower it.
o A tightening of monetary policy involves raising interest rates in order to
contract the economy. This increases interest rates in order for individuals to
save more money thus contracting economic activity
o A loosening of monetary policy involves lowering of interest rates to expand
the economy as this encourages more people to take out loans as it is
cheaper to borrow money and encourages spending. (Discouraging savings)
The im pact of m onetary policy on Interest Rates
Loosening- The RBA cannot just go and put Money into ES accounts and therefore
the RBA will have second hand government securities, the RBA buys the second
hand securities back, thus they give money in return and this increases the funds in
the ES accounts. Therefore interest rates are lowered. This stimulates economic
activity
We want more inflation because- official target band for inflation at about 2-3%.
Tightening- sell the second hand government securities (government assets/financial
instruments such as government money/loans) to the banks and therefore the banks
have to take out money from ES accounts to pay for these second hand securities.
and therefore this will lower the funds in the ES funds, causing upwards pressure on
cash rate and therefore investment and consumption will decrease as borrowing
money is more expensive, and thus economic activity will lower.
Stability is key in the economy and therefore economic activity doesn’t want to
skyrocket to high
Effects of changes in the cash rate on other interest rates
Instantaneously banks will rise cash rate because they want to maintain profit
margins. However, when the cash rate lowers, banks are slow to put interest rates
down as they will they will gain less profit.
LIMITS OF MARKETS:
14.1- W hy Governm ents intervene
-
The free operation of market forces does not always achieve desirable
economic and social outcomes.
Governments intervene and modify the operation of the price
mechanism, when market forces fail to achieve optimum allocation of
resources, equitable distribution of income and economic stability.
Market forces cannot make all economic decisions because markets consider private
economic interests, and not broader social interests.
-
Governments intervene not only to help the market function, but also to
sometimes change market outcomes when they are not satisfactory.
The challenge is for governments to find the right balance.
Too much government intervention can stifle innovation, efficiency and
growth.
Too little government intervention can lead to economic instability,
inequality and lack of basic community facilities.
The problem that economists call market failure occurs because the operation of
market forces creates unfavourable or inefficient outcomes. Market failure can arise
in the provision of goods and services, income distribution, externalities, the abuse
of market power and economic instability. Governments intervene in order to solve
the problems caused by market failure.
Market failure: provision of goods and services
W hat is m arket failure?
- When operation of market forces create unfavourable outcomes.
o
The market may fail to provide certain necessary goods and services or may
be that certain goods are better provided by public sector.
Public goods- are items that private firms are unwilling to supply, as once
provided, it is difficult to prevent anyone from using, regardless whether they pay for
its uses and therefore public goods are non-excludable and non-rival.
*Individuals do NOT pay for public goods
o Non-excludable:
- This means that public goods cannot exclude people from the benefit of
the good.
- It cannot be ensured that all users pay and therefore, there is no incentive
for the private sector to provide. As a result, a free market is likely to
undersupply a public good relative to demand for that good, or not
supply it at all. For this reason the governments generally provide public
goods.
- This attracts free riders- who are groups or individuals who benefit from a
good or service without contributing to the cost of supply the good or
service.
o
Non-rival
- One persons enjoyment of a public good does not diminish the potential
for others to also enjoy that good
- That is, benefits available to everyone
- For example, parks, public broadcasting, clean air
- If the government spends money on pollution control and environmental
policies to improve air quality, this benefit is available to everyone and
one person’s enjoyment does not diminish the the next person’s.
M erit good are goods that benefit the whole community that go beyond the
individual who just enjoys them directly.
o Market may fail to provide sufficient quantities of these goods e.g health
care, art.
o Merit goods are those goods and services that the government feels that
people will under-consume, and which ought to be subsidised or provided
free at the point of use so that consumption does not depend primarily on
the ability to pay for the good or service.
o They are rival as consumption reduces availability for others and it is
excludable.
o For example, a high quality health-care system and a place for [performing
arts such as the Sydney Opera House are both considered merit goods that
benefit society.
o Government intervene
- Directly e.g. through operating most hospitals
- Or indirectly e.g. art grants- providing financial support for art groups
Dem erit good
o Markets can also produce too much of a good- if the item brings harm to the
community.
o
o
Due to the negative effects associated with demerit goods, governments
intervene to restrict the production and sale of these goods and they
accomplish this by placing heavy taxes (tobacco and gambling), having
licenses to sell alcohol and even completely prohibiting the good (such as
dangerous illicit drugs)
For example, alcohol, tobacco, gambling, addictive drugs
Collective goods/services
o Provided by the government to benefit the whole community
o For example, government provides a defence force because it would not be
desirable to be provided by private enterprise.
o Other example, public education, health, roads, rail and national parks
o Not all collective goods are public goods, for example, a public transport
system is not a public good because people have to pay for it, making it
excludable.
Natural monopolises
Natural monopoly- is a market structure in which goods can only be efficiently
provided by one supplier, usually because enormous investment for infrastructure
inefficient for competition.
o A natural monopoly occurs where it would be inefficient for competition to
operate.
o Examples, railway network, water and electricity networks
o Governments may maintain ownership of these monopolies because of
concerns that private owners of such enterprises would have monopoly
power, leaving consumers with little choice but to pay whatever price the
monopolists set for their good or service.
o Government intervene to maintain control and try to set fair prices that
ensures that consumers cover the cost of providing the good or service but
are not exploited by excessive prices.
M arket failure in incom e distribution
o Income redistribution- one of the most important government functions.
o Distinguish between:
Absolute poverty- Not making enough money to meet necessary necessities
Relative poverty- refers to those whose standards of living are substantially lower
o
o
o
o
o
o
o
Inequality can easily become entrenched in a market economy
For example, poverty trap cycle: a child growing up in a low-income family
may not have access to the same education or job opportunities.
Governments intervene to redress inequalities in income distribution and to
break the cycle of poverty that can arise.
Governments intervene by implementing educational provisions- access to
free education, education assistance programs
Welfare programs
Growth of the “welfare state” during the 20th century (system of welfare
benefits ranging from aged pensions and unemployment benefits to
subsidies housing) was intended to create a more equal society.
Government criticised over the level of welfare payments individuals should
be entitled to if they make no contribution to the community- has led to
reduced welfare benefits and stricter obligations.
CURRENT BUDGET:
Q-Find one policy that will improve equality in the distribution of income, and one
policy that will deteriorate equality in the distribution of income.
Strengthening M edicare
In this budget, the government is planning to strengthen Medicare by implementing
a new policy that makes individuals have to pay a portion for their health services;
instead of these services being provided freely. This will deteriorate equality in the
distribution of income because less privileged individuals might not be able to afford
to pay these additional expenses in the health sector. The government argues that
this was the right decision as it will increase the money they have available and thus
they can use this additional revenue for very important health care services such as
funding public hospitals. The Government is investing record funding for our public
hospitals and will deliver an additional $2.8 billion in this Budget.
Affordable child care
The Government is implementing a new policy to provide more affordable and
accessible child care to working families through the recently legislated Jobs for
Families Child Care Package. The Government is investing $37.3 billion in child care
to help ease cost of living pressures for around one million Australian families. The
Jobs for Families Child Care Package will support workforce participation and place
downward pressure on fees while also providing high quality early learning
opportunities for children.
The Government is also implementing a Child Care Safety Net policy which will
deliver early childhood education and care services for children in rural and regional
areas and for those from disadvantaged backgrounds or with additional needs.
MARKET FAILURES IN EXTERNALITIES:
Externalities (or spill-overs) are external costs or benefits of private actions on the
community as a whole, which are not fully reflected in market prices.
Positive externalities- are external benefits not considered in the decision making
process that can be good for third parties. For example, improved labour
productivity rates due to increased university/apprenticeship completion rates.
Goods things that happened from consumption of goods and services
Negative externalities are harmful spill-over effects of production and other
economic activities on the economy (usually on the environment).
For example, private costs of purchasing and maintaining a car do not reflect social
costs of pollution and noise borne by the community. It is not covering this social
cost.
Problems with environmental goods, especially common property:
- arises from lack of well defined property rights
- Global issue
- For example, possibility of over explosion and eventual depletion of
marine resources in the world’s oceans due to unrestricted access to
common property.
- Land degradation from clearing for agriculture or mining, pollution from
industrial wastes
M arket failure in the abuse of m arket power
o Market power resulting from lack of perfect competition- can enable firms to
exploit customers.
o Governments
o Monopolisation- market power used to eliminate and TO PREVENT a firm
trying to take over an industry
o Price discrimination- firm sells same type of good in different markets at
different prices. For example, plane tickets constantly
o Exclusive dealing- firm sets supply conditions excluding retailors from dealing
with competitors. E.g. McDonald’s wanted a potato farm, and it the
conditions was that all the potatoes sold will
o Collusion and market sharing- firms agree on pricing and market sharing
arrangements to reduce competition between them and to inhibit entry of
potential competitors.
MARKET INSTABILITY – THE BUSINESS CYCLE:
Governments intervene in the economy to:
- achieve strong and stable (sustainable) economic growth (not rapid
growth, however growth that is able to be sustained for a long period of
time)
- Minimise effects of inflation
- Minimise effects of unemployment
Economic stabilisation policies (or macroeconomic policies) include:
- Fiscal policy
- Monetary police
- Prices and income policy
Aim of macroeconomic policy: provide counterbalance to the business cycle (i.e. smooth out
fluctuations)
- During periods of excessive growth- many people are purchasing and spending
(boom period)(risk of high inflation) the aim is to reduce economic activity by
reducing government spending, increase taxation, RBA can increase interest rates in
order to slow economy
Increased taxation- less money to spend due to
Recessionary periods- aim to stimulate growth through increased government
spending, decreases in taxation and decrease in interest rates.
The purpose of government interaction is to counter act
Microeconomic reform policies- designed
ROLE OF THE GOVERNMENT:
Structure of Governm ent
—
—
—
Australian Constitution
◦ Sets out lawmaking powers of Commonwealth and State
Governments.
◦ These laws must bid with the constitution
Com m onwealth
◦ Power over foreign affairs, defence and currency
◦ Shares some responsibility with states for economic matters
– e.g. business regulation, taxation, industrial relations, funding
health & education, hospitals
States – responsible for:
◦ public order and safety
◦ delivering services e.g. health care, hospitals
◦ education and roads
◦ as well as issues with regional focus, such as hosting international
sporting events. For example, when Commonwealth games were held
in Melbourne, the state government assisted with that.
◦ Commonwealth Government power gradually increasing.
◦ States constrained by limited access to revenue.
◦ GST (introduced 2000) – major single source of state revenue. Depend
on federal government for GST
—
Local governm ent
◦ Local planning and development decisions, some local services
– e.g. rubbish collection
◦ Road building and maintenance
◦ Community services
– e.g. parks & libraries
◦ Revenue – main source are rates paid on property. Other sources
include – fees, licenses, fines, Federal & State government grants.
Public sector:
Measuring the size of the public sector
o
o
o
Parts of the economy that are owned or controlled by the government.
Includes 3 levels of government and public enterprises.
- E.g. Sydney Water, State Rail, Australia Post.
Size of public sector relative to whole economy can be measured by:
- Public sector outlays (spending) as a percentage of GDP or
- Public sector em ploym ent as a percentage of total employment.
Public sector outlay (as a % of GDP)
o shows the proportion of total annual
expenditure by all levels of government
compared with the expenditure of the
economy as a whole.
o Figures show size of public sector steadily
increasing (peaking in 1980’s), Therefore the
government spending increased during this
period. Although relatively smaller than other
industrialised nations. Peaked again between
2007 and 2010 due to GFC.
o Public sector outlays generally increase
during times of economic downturn. During
economic downturns there are higher rates of
unemployment and therefore there is more
spending on welfare payments.
o Changes to governm ent spending
patterns
- less on infrastructure
- more on welfare support & community
services.
o Transfer paym ents (social welfare payments)
- major item of Commonwealth spending
Public Sector em ploym ent
— Public sector workers (as a % of total workforce)
— figures show similar trend to public sector outlay, however public sector
employment falling faster as governments can outsource more work and
contract out more activities to private sector.
Im portance of public sector:
Despite diminishing in size in recent years, public sector role remains more important
than in first half of last century, due to:
— Change in approach to econom ic m anagem ent since W W II
◦ industrialised governments more active role after WWII.
◦ Econimes got togther and put in pace certain rules and regualtions
that econimes needed to follow, with enocuegred governments t
gave a more active role in their economy. Therefore change in
government management and role
— Econom ic growth
◦ Voters high living standard expectations e.g. quality health care,
education, as well as responsibility to manage negative impacts of
economic growth e.g. pollution, depletion of natural resources.
◦ This is up to the government to be implemented.
— Growth of social security
◦ Providing welfare payments
◦ Although, in recent years the government has tightened access to
welfare benefits
◦ e.g. unemployment, especially due to our aged population- age
pensions.
REALLOCATION OF RESOURCS:
Aims of reallocating resources:
1. Direct resources towards production of desirable goods and services and
away from others less desirable e.g. directing labour to medicine by giving
grants rather than the tobacco industry.
2. Promote more efficient use of scarce resources.
How can governments affect the reallocation of resources?
o Government can affect allocation of resources by:
1. Influencing business & consumer behaviour in the market through
a. taxation or
b. spending measures
2. Producing goods & services itself
o Use of regulatory policies also influences resource allocation
- e.g. prohibiting sale of certain goods
TAXATION:
Taxation changes resource allocation directly by influencing prices, or indirectly
by influencing consumer demand.
o Direct taxes
- Paid by individual or firm on which they are levied, his means that you
cant pass this on to someone else you must pay it. Can’t make consumers
pay
- Can’t be passed on
- E.g. income tax, company tax, capital gains tax.
o
o
o
Indirect taxes
- Levied on individuals/ firms but can be passed on
- Attached to good/ service rather than individual/company
- e.g. sales tax – usually results in higher price.
Taxes are often used on items to shift resources away from their production.
◦ e.g. tobacco, leaded petrol
Higher prices should lead to fewer consumers and resultant benefits to
society
◦ e.g. ↓tobacco taxation will lead to better health within the community
and lower health care costs and leaded petrol will reduce pollution.
Spending M easures
o Spending measures aim to redress market failure to provide allocation of
resources to meet community needs/wants, either by directly allocating
resources or by influencing consumer/ business decisions.
Possible methods:
⇒ Funding
◦ E.g For the arts which is otherwise unprofitable
⇒ Grants for start-up business or new growth industries - no track record, little
access to finance
⇒ Subsidies for regional business – provide valuable local services, ensuring
that regional areas still have access to certain services- e.g. broadcasting
services.
⇒ Cash paym ents to private employment agencies that find jobs for
unemployed
Government’s provision of goods and services
o Government provision of goods & services aims to provide better
allocation of resources.
o Attitude shifts in late 20th century lead to reduced involvement in provision of
goods/services with many government businesses being privatised (sold to
private sector) to increase efficiency. E.g when they privatised Medibank
INCOME REDISTRIBUTION:
o
o
o
Aim is to create a more equitable distribution of income
Achieved through taxation and social welfare payments, the government uses
tax to redistribute income.
To determine type of tax system you must look at average rate of taxation
(ART) and marginal rate of taxation (MRT).
- ART = Tax Payable/ Taxable Income
- MRT = Δ in Tax Payable/ Δ in Taxable Income
Ta x ba se:
Ø The items that are taxed
Ø Income, wealth and consumption
Ave rage ra te of tax (ART):
Ø The proportion of total income earned that is paid in the form of tax
M argina l ra te of ta x (M RT):
Ø The proportion of any increase in income that must be paid as tax.
Ø Therefore, it represents how many cents in every extra dollar earned that
must be paid to the government.
Taxation m ethods
There are three different types of tax methods
1. Progressive tax
⇒ tax regime where ART & MRT rise as income rises: higher income earners pay
greater proportion of income as tax than lower income earners. E.g. Income
tax
2. Regressive tax
⇒ tax regime where ART & MRT fall as income rises: higher income earners pay
smaller proportion of income as tax than lower income earners. E.g. GST
⇒ Everyone pays 10% on a good or service, despite their income. E.g. tax on
groceries.
3. Proportional tax
⇒ tax regime where ART & MRT are equal as income rises: all income earners
pay same proportion of income as tax. E.g. company tax
*All about the proportion
Redistribution of incom e in Australia
o Australia has progressive personal income tax system – PAYG
o Tax free threshold
◦ income level below which no tax is payable- the current tax-free
threshold is $18,200.
o Social welfare paym ents
◦ redistribute taxation payments to lower income earners.
◦ Payments often m eans tested – income or assets considered when
deciding eligibility
◦ Aged pensions – comprise largest area of payments
Stabilisation and sustainable growth
o
o
Aim to reduce fluctuations in business cycle and raise longer-term rate of
economic growth.
Policies designed to smooth fluctuations in the business cycle are called
m acroeconom ic policie
Monetary Policy
o main stabilisation policy
o influence interest rates to
encourage/ discourage spending
or business investment
Fiscal Policy
o Role of directly influencing
economy through government
spending, taxing and borrowing.
monetary policy:
o
o
o
o
main stabilisation policy
influence interest rates to encourage/
discourage spending or business investment
M onetary policy is the main instrument of
domestic market operations with the RBA
buying & selling government securities
Tim e lag for impact of policy changes can be
12 – 18 months e.g. there is no immediate impact.
Public enterprises:
o
o
o
o
There has been increasing privatisation of many Government business
enterprises (GBE’s) or Public trading enterprises (PTE’s) in recent years
◦ shift towards minimal government role in production (aim: increased
efficiency)
◦ E.g. Commonwealth Bank, Qantas, Federal airports, Telstra (partial).
Many others Corporatised
◦ removal of government interference from operations and introduction
of accountability for management.
◦ E.g. Australia Post – public enterprises forced to operate as private
business enterprises – they are run to make profit.
Rem aining GBE’s:
◦ Australia Post
◦ State transport
◦ State electricity
◦ Water
◦ Research and development organisations (CSIRO)
◦ Educational institutions.
Reforms have lead to improvem ents in price and productivity due to
increased com petition
OTHER ROLES IN THE ECONOMY:
Competition Policy:
§ Promote workable competition in Australian economy – not monopolisation
of industry – price fixing (collusion), etc.
§ E.g. maximum level of competition comparable with the market structure
and specific industry conditions
§ Monitored by Australian Competition and Consumer Commission (ACCC)
Consumer protection:
§ Trade Practice Acts 1974 (replaced by Australian Consumer law 2011)
ensures fair business conduct
§ E.g. Prohibiting price fixing, misleading advertising, price discrimination and
mergers
§ ACCC inquires into pricing structures, recommends industry changes
§ Negative publicity when evidence of overcharging exists e.g. Petrol
Environmental Protection
§ Monitor the use of renewable and non-renewable resources and impose
controls to take into account externalities
§ E.g. Water restrictions during drought (before 6:30am, not washing car on
pavers, etc.)
Fiscal Policy Stance
Change to tax
Change to revenue
Change in Government
expenditure
Effect on circular flow
STM (leakage) = ITGX
(injections)
Monetary Policy Stance
Change to Interest rates
Cost of borrowing
Impact on Consumption
Impact on investment
Boom
Contractionary
Increase
Increase
Decrease
Recession
Expansionary
Decrease
Decrease
Increase
Decrease in G
Increase in G
Decrease in iMports
Decrease in C
Decrease in T
Loosening
Decrease
Decrease
Increase
Increase
Tightening
Increase
Increase
Decrease
Decrease
THE BUDGET:
-
Governments main instrument of Fiscal policy – implantation through
commonwealth
Presented each may
Details – Taxation and government spending plans
-
Instruments of Fiscal policy
Objectives:
- Economic stabilisation
- Low Inflation
- Low unemployment
- Policy goals are income distribution and place in the global economy
Fiscal Policy:
- A m acroeconom ic policy
- Aims to influence:
o Resource allocation
o Redistribution of income
o Reduce the fluctuations of the business cycle
- Instruments include:
o Government spending and taxation
o Budget outcomes
COMMONWEALTH GOVERNMENT REVENUE
-
Commonwealth Government budgeted for revenue of $444.bn in the 20172018 financial year
Nearly 94% of revenue comes from taxation sources
o Direct Taxes – whoever the tax is put on, must pay
§ Personal incomes and company tax
o Indirect Taxes – GST, etc.
§ Sales Taxes
Revenue Examples
Income Taxes
(direct)
Sales Tax (Indirect)
Excise Duty
Payable by
Individuals (PAYG) and
Companies (Company Tax)
Purchases of goods
Producers of certain goods
Customs duty
Importers
Main forms of expenditure:
1. Social Security and Welfare - $164.1bn
2. Health $75.3bn
3. Education $33.8bn
4. Defence $30.1bn
5. General Public Services $20.7bn
6. Other purposes $92.8bn
IMPACT OF BUDGET OUTCOMES
Projected revenue 2017/18
PAYG = $209.6bn
GST = $65.3bn
Fuel excise = $ 18.7 - non
renewable fuels
$14.7bn
Budget outcomes:
- The budget outcomes give an indication of the overall impact of fiscal policy
on the state of economy
- There are three possible budget outcomes
BALANCE:
Balanced
Planned government = Planned Government
BUDGET
revenue
expenditure
Budget
Planned revenue
> Planned expenditure
SURPLUS
Budget
Planned revenue
< Planned Expenditure
DEFICIT
=0
=+
=-
-
Governments aim is to achieve budget surpluses, on average, throughout
the course of the economic cycle
The government’s progress towards that goal is reflected in the four year
projects
Fiscal Policy Stance:
- Each year, the budget outcome changes, due to changes in revenue and
expenditure
- This reflects the impact of two key functions:
o Changing economic conditions
o Changes in government policy
- This change in the budget outcome can indicate a change in government
fiscal policy stance
Possible fiscal policy: - how the change in the budget outcomes can influence
economy
STANCE
HOW
ECONOMIC IMPACT
Expansionary - Less Taxes and/or Smaller surplus or
✓Stimulate economic
More G
bigger deficit
demand
✘ May increase inflation –
more economic activity ->
greater pressure on
inflation
Contractionary More Taxes
Bigger surplus or
✓Dampen economic
and/or Less G
smaller deficit
demand
✘ May increase
unemployment
Neutral
No change in budget outcome
Generally no overall effect
on aggregate demand
Identify the impact that each of the following changes on fiscal policy would have on
the level of economic growth.
a). A reduction in the budget deficit from $37 billion last year to $26 billion this year
b). An unchanged budget surplus of $12 billion last year and this year
c). A shift from a $4 billion deficit last year to a balanced budgets this year
Expansionary from 2007-08 to 2008-09
Fiscal balance decreased from 21.0 to -32.9
As a consequence of the Global Financial Crisis
http://www.budget.gov.au/2009-10/content/overview/html/overview_34.htm
AUTOMATIC STABILISERS
-
Policies to operate automatically to counterbalance economic growth &
stabilise the economy
- Cyclical
- Discretionary
Main automatic stabilisers:
- Progressive personal income tax – increase as people are working more –
major upswing
- Unemployment benefits – increase – greater demand – counter act recession
as there will be more government spending – providing people with income
In place to counteract fluctuations in the business cycle
Econom ic
Activity
Growing
economy
Recession
Results in:
Budget outcom e
Income level increases
Increase in Tax and
revenue
Unemployment falls
G falls (unemployment
benefits)
Income levels decrease
T falls
Unemployment rises
G Rises
Smaller deficit or
bigger surplus
Smaller surplus or
bigger deficit
->
In times of recession
governments should
implement
expansionary stance
Autom atic
stabilisers
Automatic
contraction in
aggregate demand
Automatic
stimulation in
aggregate demand
(unemployment
benefits)
-
Actual budget outcom es result from :
1. Cyclical budget component
- Also known as non-discretionary
- Changes in G&T resulting from changing level of economic activity
- This component reflects automatic stabilisers
2.
-
Structural budget component:
Also known as discretionary
Deliberate revenue and expenditure changes
New policies
INFLUENCES ON GOVERNMENT POLICIES
Parliament and Political Parties
- Lower House: The House of Representatives
- Upper House: The senate
- New Laws must be approved by both houses
- The government cannot pass legislation without some support from other
MPs or Senators
- Therefore, the government must often negotiate policy details in order to
get legislation passed.
-
Thinking economics handout
Complete questions 2, 4, 6, 8, 10 , 11, 12
1. Outline the pressures that were im pacting on the 2017-18
Com m onwealth budgets.
Managing the national debt – fiscal consolidation
2. Distinguish between a surplus and deficit budget.
A surplus in the government is when the budget has remaining funds,
otherwise known as excess funs, opposed to a deficit, which is when
expenditure exceeds revenue, meaning the government spends more than
what they have.
3. Outline the budget position for 2017-18, with reference to
revenue and expenditure figures
The budget demonstrates that the government is anticipating a net deficit
over 2017-2017 of $444.4bn-$464.3bn or -$19.9bn. This suggests that the
government will spend more than it earns over years, adding to the existing
debt. Despite this, the budget position is relatively contractionary on account
of the 2016-17 budgets.
Budget outcome was a deficit
4. Explain the im pact if the loss of the ending of the tem porary
budget repair levy
Less income/revenue for the government
5. Define the term ‘regressive’ with respect to taxes
Regressive tax refers to the tax regime where higher income earners pay
smaller proportion of income as tax than lower income earners.
6. Explain how an increase in the M edicare levy will be a regressive
tax
Regressive tax refers to higher income earners paying smaller proportion of
income than lower income earners. This relates to the Medicare levy, in
terms of individuals paying additional fees to see doctors, where higher
income earners will be more willing and inclined to pay these funds, as
seeking medical assistance is deemed as a necessity. Lower income earners
require the same services, however, the additional gap for the same
necessity is simply a step away from increased inequality, especially if the
Medicare levy increases. This will result in some earners being unable to pay
these additional fee to obtain medical assistance due to the higher regime
where ART and MRT fall as income rises, subsequently resulting in an
ineffective use of the resource of Medicare, however for some income
brackets, this may be unpreventable.
This regressive tax, allows for lower income earners to be more effected than
those of higher incomes.
Larger impact on lower income earners
7. a). W hat is the largest item of expenditure in the budget?
Social Security and Welfare - $164.1bn
b). W hat has the governm ent done to the am ount of m oney it is
spending on social welfare?
The government has funded several social welfare issues such as NDIS,
which has been solved through the implementation of an increased
Medicare levy.
Welfare targeting -> reducing welfare
Restrictions and regulations
Influences on governm ent policy:
Political Parties
• Economic reform must first be supported by the government in power,
meaning that it must be approved by the cabinet, the committee of senior
government ministers
• For a proposed law (a bill) to be passed through parliament, it must be
supported in both the lower house (the house of representatives) and the
upper house (the senate)
• While governments usually have majority support in the house of
representatives, it is rare to receive a majority in the senate
• As a result, they need the support of other senators; such as the opposition
and minor parties or independent senators
• 2010 election was an exception to this rule with no political party or coalition
winning a majority of seats in the house of representatives for the 1st time in
70 years
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
While all the state and territory parliaments in the past 2 decades
experienced minority government, it was unusual for a national government
and took several weeks after the election before the labour party was able to
formal government with the support of independent and green MPS
The result of having a minority government is that the details of many
policies need to be negotiated and debated in parliament for legislation to
be passed
While governments usually have majority support in the house of
representatives, it is rare to receive a majority in the senate
As a result, they need the support of other senators; such as the opposition
and minor parties or independent senators
2010 election was an exception to this rule, with no political party or
coalition winning a majority of seats in the House of Reps for the 1st time in
70 years.
While all the state and territory parliaments in the past 2 decades
experienced minority governments, it was unusual for a national
governments and took several weeks after the election before the labour
party was able to form a government with the support of independent and
green mps.
The result of having a minority governments is that the details of many
policies need to be negotiated and debated in parliament for legislation to
be passed.
The 2016 election also produced a close result – Turnbull government
achieved majority of just one seat.
The 2016 election resulted in the coalition government falling short of a
senate majority by nine seats.
The last time there was a majority vote in the senate was after the 2004
election when the Howard government received a majority in the senate by
one seat - allowing many laws previously rejected to pass, including the full
sale of Telstra and reducing controls on media ownership.
Most recent elections have resulted in governments not having a majority of
votes in the senate suggests that most australian voters support the role of
the Senate as a balance against the power of the government.
This slows down the process of developing legislation. Governments need to
retain popular support in order to be re-elected.
This requires them to work hard at explaining economic policies and
convincing the public that their strategies are the most effective ones
available, even if some elements of them may be unpopular.
Since political parties form governments, they play a key role in the process
of making economic policy
In Australia, federal and state governments are usually forced by a single
political party or a coalition of the 2 conservative parties
The M edia
•
•
•
•
•
•
Through the media, the public learn about new government policies and
how these policies will affect them and the economy.
The media plays a crucial role in determining which issues and polices will
receive coverage and how these policies will be presented to the public.
The media can have a direct influence on government policies as
government leaders try to anticipate how the media will portray certain
policies and use this information to assist them when implementing and
initiating policies and plans.
For example, in 2015 debate arose regarding Tony Abbott as a victim
‘consumed by the media,’ placing his focus on winning a media contest,
opposed to working on policies.
Hence, the media not only influencing individuals perspectives which can
lead to lobbying or change of policies, but also a political power being
consumed by attempting to portray themselves in the media in a certain
light.
The media is critical in shaping what voters think about issues and the use of
popular media personalities such as Cate Blanchett and Alan Jones will have
an immense impact on the voting decisions of individuals, with their
persuasive and influential place within society.
The Media is owned by private citizens who would have their own political beliefs,
which can lead to bias, likewise, the ABC goes to the opposite direction – balance.
Overseas Investors
• Since early 1980s, international financial markets (the foreign exchange
market) have emerged as a significant influence
• Governments wary of making policy decisions that would be unpopular
with international financial markets, BECAUSE if financial markets lose
confidence in the government’s economic management, they could face:
• A fall in their exchange rates
• Higher interest rates on government borrowing
• Negative media coverage
• Scrutiny resulted in lower budget deficits and stronger commitment to
microeconomic form eg. mining boom
• Increased FDI during boom: increased flow from EU, North
America and East Asia
• Post-mining boom FDI: 2013 - $51.2 billion, 2014 - $35.4
billion, 2015 - $15.3 billion
Trans Pacific Partnership (TPP):
• The TPP is a trade agreement, finalised October 2015
• Includes an Investor State Dispute Resolution mechanism
• Gives foreign companies the right to sue national governments (such as
Australia’s) if they change their policies in ways that harm their business and
breach the TPP agreement
•
•
Provisions such as this have made the TPP unpopular in many countries,
casting doubt over its future
The TPP constrains the power of the government to implement policies
affecting businesses
Business Groups
Business groups are important in the decision making process of government
policies. Businesses provide the limited public funding to political parties to conduct
election campaigns.
Businesses are involved in lobbying governments and dedicate significant resources
to policy making across a wide range of issue that may affect their activities.
Business can lobby through lobbying for company tax rates – recent drop in
company tax rates for small businesses 2.5%
W elfare Agencies
• Organisation that works to represent the most disadvantaged people in the
community
o Eg. Aged, people with disabilities, carers, unemployed people and
low income earners
o Australian Council of Social Services (ACOSS): peak welfare lobby
group in Australia
o Community Legal Centres
o Charities
• Participate in public policy by:
o Participation in government inquiries
o Media Influence
o Lobbying government ministers
Equal Pay Campaign: Australian Council of Social Services
•
With organisation and support of ACOSS, community organisations and
workers lobbied to achieve equal pay in the community sector
•
Lobbied for more pay to Social workers, carers and child protection workers
paid less than those in public service
•
•
Fair Work Australia’s decision on to award pay rises of 19-41%
ACOSS continues to campaign for adequate funding of community services
•
Pay equity can only become a reality if it is funded by those who support and
fund community services.
Increase Revenue for Essential Services:
•
•
•
•
ACOSS pressured fed govt. into adopting opposition’s stance for reform
trusts to increase transparency, fairness and much needed revenue for
essential services.
Against superannuation, neg. gearing and loopholes in capital gains tax that
allows high income earners to avoid taxation
Outcome: 2017-18 fed budget killed temporary budget repair levy,
increased Medicare levy- reduces taxes for high income earners
Therefore attempts to raise revenue by taxing high income earners more
failed
Lobby Groups: Interest Groups
• Organisations are often created when people with concerns, interest, or
expertise relating to specific issues work together towards common ends.
• Some interest groups have a strong local focus e.g. resisting a development
proposal or raising an issue of concern to a local community such as
hydraulic fracking of underground gas reserves, which has become an
increasingly controversial issue in many areas of rural Australia in recent
years.
• Some interest groups are formed around single issues e.g. the Australian
Republic Movement.
• Some represent a particular group in the community e.g. National Farmers’
Federation, National Union of Students, National Roads and Motorists’
Association.
• Some groups play a broader role in representing public interest concerns
e.g. Choice, GetUp! (an online political advocacy group).
• Some examples of interest groups include: National Roads and Motorists’
Association, NSW Aboriginal Land Council, National Union of Students
Lobby Groups: Environm ent Groups
• Australia has several interest groups that advocate for environmental
protection, including the Australian Conservation Foundation; Friends of
Earth; Greenpeace and so on…
• These organisations conduct research, provide educational information and
lobby governments and companies around a wide range of issues that have
implications on the local, national and global levels
• Environmental concerns are given especially high priority by the Australian
Green party, which in recent years has enjoyed significant influence with 9
out of total 76 seats in the current Senates
ACF in court challenging federal government’s ‘DRUG DEALER’S DEFENCE’ on
Adani coal
• The governm ent “Drug dealer’s defence”--- “if Australia doesn’t let Adani
dig up and burn coal, some other country will and the effect on the climate
will be the same.”
•
•
ACF: “The Great Barrier Reef is already under enormous stress. This drug
dealer’s defence is unethical and mocks the efforts of countries that are
working to reduce global climate pollution”
ACF is being represented in court by the Environm ental Defenders
Office Queensland. This lobby body has called on the State and Federal
Governments to change the law to restrict court challenges against mines.
Lobby Groups: Unions
• Largest organisation by membership in Australia
• However memberships have declined from 55 per cent of the workforce in
1970s to around 15 per cent now
• Unions mostly represent the interest of their members on many policy issues
• They participate in public debates and sometimes report on any matter that
affect the interests of their members
o They focus on industrial relations issues
• Australian Council of Trade Unions
o Coordinates campaigns and policy advocacy among unions nationally
• Unions have greater input of Labor governments and Coalition governments
o
Major source of donations for Labor Party
Sunday and Public Holiday Penalty Rates Cut
• The Fair Work Commision planned to cut sunday and public holiday penalty
rate in retail, pharmacy, fast food and hospitality industries of between 25
and 50 percentage point
• Ged Kearney who is the president of the Australian Council of Trade Unions
said the decision would reduce workers’ take-home pay by up to $6000 a
year
• The cuts took place on the 1st of July 2017 (this year)
• The cuts went through despite the lobbying and the backing of the coalition
and greens party