Module 1: Introduction to Economics Chapter 1: The nature of economics: Economics is about finding ways to answer the questions: what to produce, how much to produce, how to produce, and how to distribute production. hat is the economic problem? W Theeconomic problemis the problem of scarcity; thatis,there are an unlimited amount of consumer and community wants but limited resources to fulfil them.Hence, individuals, businesses and governments need to make choices and sacrifices. hy is there need for choice by individuals and society W Individuals:go on a holiday or save for a house Businesses:Investing with net profit or shareholders Government:How to spend taxpayer income. Whenever a choice to satisfy a want is made, we are giving up the opportunity to satisfy an alternative want. Opportunity Costrelates to the wants left unsatisfiedas others are fulfilled. hat is the opportunity cost? W Production possibility frontier (PPF):graphical representationofall the possible combinations of the productionoftwo goods or servicesthat the economy can produce at any given time.Can be used to demonstrate opportunitycosts. What are the assumptions of the PPF? Assumptions of the PPF: ● Only two goods can be produced ● At each point all resources are fully employed ● The level of technology is fixed ● Amount of resources is fixed but are transferable Technology With the application ofnew technology, we may developmore efficient methods of production. ● May allow us to produce a higher quantity of goods with the same resources. ● Represented by the outward shift of the PPF New resources PPF can be changed by anything thatincreases theinputsavailable for production ● Pushes PPF outward ○ Discovery of new resources ○ Expansion of population through immigration (more people available for work) Unemployment In terms ofproduction,unemploymentis whenresourcesare not fully employed. ● Does’t change the frontier itself, butchanges ourposition in relation to it. ● This situation indicates that we haveinefficientallocation of resources. ● Not achieving a maximum satisfaction of wants with the minimum opportunity cost. ● Unemployed resources→ output is less than what it could be onsumer goods and servicesare items produced fortheimmediate satisfactionof individual C and community needs and wants.Capital goodsare itemsthat have not been produced for immediate consumption but willbeused for the production ofother goods. ow can it be calculated? H Calculating Opportunity Cost using the PPF Point A → Point B = going from the production of 150 cars and 50 food to 100 cars and 100 food. Therefore, the opportunity cost of producing an additional 50 foods is 50 cars. /50 in order to get OC of one food OC of one food = 1 car. Countries should produce those goods which have the lowest opportunity cost. In the example PPF, production at point G would be impossible as there are insufficient resources. ● This doesn't mean this can't happen in the future. If technological advancements in both production methods occur, or more resources become available the PPF willshiftto the right. ● Iftechnological advancementsin onlyone areaoccurs,the PPF willpivot ● If there isdownturnin production, ie. tariffs introduce,the PPF willshift to the left ny production within the frontier means that resources are underemployed and not working at maximum A efficiency. hat are the economic factors underlying decision making? W Individual: Education(the higher the level of education;generally the higher the income; but you may have to forgo years of work in order to obtain this)Spendingvs. Saving, Work, Retirement, Voting Businesses:Pricing, production, recourse use andindustrial relations Governments:Allocation of resources, redistributionof wealth and tax, policies, regulation of economic behaviour, influencing the decisions of consumers and businesses. Chapter 2: The Operation of an Economy: n economic system is the way in which society is organised to solve the problem of scarcity. A There are3 typesof economic systems:Market Economy,Planned Economy and Mixed Economy. How are goods and services produced? I n amarket economy,themarketdetermines what isproduced. This is determined by the wants of individual consumers. In aplanned economy,the government determineswhatis produced. Factors of production ● Natural Resources: Rent ● Labour: Wages ● Capital:Income ● Enterprise: Profit How are goods and services distributed & exchanged? Market Economy Planned Economy Distribution: Distribution: I ndividuals arepaid in moneyin exchange for their resources. The individual will then use these funds to purchase goods and services.UNEQUAL overnment allocatedgoods and servicestoward its G people, ie. rations.EQUAL Exchange: Money is used as a medium for exchange. Exchange: arter [non cash exchange of goods]. ie. trading B something. What are some disadvantages for these systems? arket Economy → M ADV:easier to determine value of goods and services. DIS:unequal distribution of income means goods aredistributed unequally. Planned Economy → ADV:Equal distribution of goods and services. DIS:Hard to determine exchange rates of goods, particularlyif only one party is interested in the good or service. hat income provisions are there? W Income received is dependent on the value of input. ie. a highly skilled worker will be paid more as they possess more skill. TAXATIONis the redistribution of wealth. Individualspay taxation on income, goods and services,capital gains, etc. This is used bygovernmentsto spend on communitywants[ie. social welfare payments] hat is the business cycle? W The Business Cycle:The fluctuations in economic activityover time What are the impacts of the business cycle? ECESSION:Upturnin economic activity, business R productionincreases,higheremployment rates, consumers spending increasedue tohigher pay,betterqualityof life. OWNTURN:Consumption levelsfall, production levelsfall, D higherlevels of unemployment,fallingincome,lowerquality of life. hat is the circular flow of income? W Individuals:demand goods and services, supply labourand resources Businesses:demand labour and resources, supply goodsand service Financial institutions:Collect money as savings,spend money as investments into businesses Governments:Collects taxation, supplies collectivegoods. International:Buys imported goods, sells exportedgoods. ffects of the circular flow on the economy E S,T and MrepresentLeakages.[money not being spentwithin the economy] I, G and Xrepresentinjections.[money going intothe economy] quilibrium is the state whereS+T+M=I+G+X. However,economies are rarely in equilibrium. E WhenS+T+M>I+G+Xthe economy is in a state ofdownturn.Overtime, consumers will have less to save, spend on imports or have collected as taxes to equilibrium will be restored at a lower level. WhenS+T+M<I+G+Xthe economy is in a state ofupturn.Overtime consumers will have more to save, be collected as taxes and spend on imports so equilibrium will be restored at a higher level of economic output. Thefive sectors in the circular flow of income modelare: Private sectorincludes: •individuals •Individuals • businesses •Businesses • financial institutions •Financial institutions. • governments • international trade and financial flows. hegovernment sectorrepresents thepublic sectorin our economy, T Government + private sector = domestic sector Module 2: Consumers and Businesses Chapter 3: The role of consumers in an economy Consumer Sovereignty onsumers ultimatelydetermine which goods and servicesare producedbyexercising freedom to choose whatthey buy. C By doing so they: ● enforce technical efficiency [produce goods at the least cost to maximise profit] ● enforce allocative efficiency [allocate resources in a way to satisfy consumer preferences] ● enforce dynamic efficiency [responding to changing consumer preferences and technological improvements over time] Production is geared toward what people want and their wants satisfied. Factors that diminish consumer sovereignty: arketing:Advertisements exert a powerful influenceover the spending patterns of consumers. M Misleading or deceptive information:False or misleadingclaims about a product, leading them to pay for items that they do not really want to buy. Planned obsolescence:Sometimes firms produce goodsthat are designed to wear out quickly in order to keep consumers buying their products, allowing them to manipulate consumer behaviour Monopoly behaviour:Firms that operate in a marketwhere there are limited suppliers diminish consumer sovereignty, as the ability to choose is diminished Patterns influencing decisions to spend or save Y = C + S Y= disposable income (after tax),C= consumption,S= savings he equation indicates that an increase in consumption will lead to a decrease in savings, vise versa T The proportion of an individual’s total income that is spent on consumption is called theaverage propensityto consume, 𝐶 calculated using the equation 𝑌 = 𝐴 𝑃𝐶. The proportion of an individual’s total income that is saved is known as theaverage 𝑆 propensity to save, 𝑌 = 𝐴 𝑃𝑆. Minor factors influencing decisions: ● Cultural factors ● Personality factors ● Consumer confidence and future expectations When consumers are worried about the economic outlook, they are likely to save more, ○ ○ If a consumer is confident about wage growth/economic outlook, they may consume more ● Future spending plans ● Tax Policies ○ Taxes can make it more attractive to save rather than spend (ie. lower taxes on superannuation savings) or vise versa (abolishment/lowering of GST) ● Availability of credit. INCOME: ● A s income rises, people tend to save more of their income, therefore APS rise and APC falls. ● Consumers on lower incomes spend proportionately more of their disposable income [APC>APS] ∆𝑆 = 𝑀𝑃𝑆 ∆𝑌 ∆𝐶 = 𝑀𝑃𝐶 ● Marginal Propensity to Consume:the proportion of each extra dollar of income that is consumed. ∆𝑌 ● Marginal Propensity to Save:the proportion of each extra dollar of income that goes to savings. ● Since every extra dollar must be either spent or saved,𝑀𝑃𝑆 + 𝑀𝑃𝐶 = 1 AGE: ● Life cycle theory of consumption Factors influencing individual consumer choice Income ● The higher the level of income of a person, the more they can purchase, and higher quality Price of Complements ● If the price of a complement rises, consumers will be less likely to purchase the original goods. Price ● Necessities:people will purchase regardless of price change ● Consumers are likely to reduce their demand for other goods such as luxury goods as price increases Preferences/Tastes ● Consumers will generally buy the good that gives them the highest level of personal satisfaction. Price Of Substitutes ● If the price of a substitute rises, consumers will be more willing to purchase the original goods. Advertising ● Can generate demand, convince consumers they need/want the good. Social Welfare: I ncome collected through taxation and reallocated from government to consumers. Social welfare is aimed to provide a minimum “safety net” which allows consumers to buy the necessities for life. A candidate for social welfare many be someone who is: ● Disabled ● Old age [pension] ● Family benefits ● Unemployed Chapter 4: The role of businesses in the economy Definition of a firm and an industry business firmis an organisation involved in usingentrepreneurial skills to combine the factors of production in order to A produce a good or service and create a profit. Anindustryis a collection of business firms thatare involved in making the same product and generally compete with each other. Production decisions usinesses must determine what to produce, how to produce and how much to produce. In a free market economy, these are B generally determined by the market, and consumer demand. What to produce: ● Determined by: ○ The skills and experience of the business operator ○ Consumer demand ○ Specific business opportunities ➢ ie. a region where there is less competition/niche market ○ Amount of capital required How much to produce: ● Determined by the level of consumer demand for the product / service. A business may commission market research How to produce: ● How to combine inputs in order to create outputs. ● Depends on the relative efficiency of the 4 factors of production ● The entrepreneur must create an operation plan Business as a source of economic growth and increased productive capacity Goals of the firm: Profit Maximisation: ● Defined as making the biggest profit or smallest loss. ● The main goal of the firm ● Profit is the total difference between the firm's total revenue and cost of production. ● This goal can also lead to: economic growth, employment, regional development, infrastructure development and productive capacity. Other goals may include: ● Meeting Shareholder Expectations ○ Company directors make decisions to serve the interests and meet the expectations of all owners of the business ● Maximising Growth ○ Accumulating assets in order to growth the business and dominate the market more over time ● Increasing Market Share ○ More emphasis on increasing sales which could mean sacrificing profits in the short term ● Satisficing ○ Pursuing a satisfactory level in all goals rather than maximising a single goal Efficiency and the production processes roductivity:the quantity of goods and services theeconomy can produce P with a given amount of inputs. (OUTPUT PER UNIT OF INPUT PER UNIT OF TIME) Production:total amount of goods and services produced. Increased productivity allows a firm to satisfy a greater number of wants using the same resources. In order to increase productivity, we need to increase production proportionately more than the increase in inputs of resources. This stimulates an increase in outputs per unit of inputs. Higher productivity → ● Higher standard of living ● Less wastage of resources ● Lower production costs and higher profits ● Lower inflation rate ● Higher income ● Improved international competitiveness Specialisation: ne of the most common ways to increase productivity is through specialisation - using the factors of production O more intensively for a smaller number of the production processes. ● Divisionoflabour:Apersonis trained to do onespecific job ● Location ofindustry:A number of business producingsimilar goods and services congregate in the same area to reduceproductioncosts by sharing common infrastructure ● Large scale production:When a businessgrows so largethey can use highly specialised capital In most cases a firm is able to decrease their cost of production as output increases. The concept that a firm needs to achieve a large scale of production in order to minimise cost is known asinternal economies of scale. I nternal economies of scaleare the cost saving advantagesthat are a result of a firm expanding its scale of operations. Economies of scale are achieved when average costs per unit of production falls as output increases. BELOW TECHNICAL OPTIMUM Where AC = total cost / total outlay, TC = total cost and Q = quantity. I nternal diseconomies of scaleare the cost disadvantagesfaced by a firm as a result of a firm expanding its scale of operations beyond a certain point. Generally related to management problems. As the size of the business grows, management may become inefficient in organising all areas of production.ABOVE TECHNICAL OPTIMUM. echnical Optimum:the point at which per unit costsof production are T minimum. xternal economies and diseconomies of scale are the E advantages/disadvantages that accrue to a firm because of external factors. ● Growth of an industry in which the firm is operating in, not changes their own operations Impact of investment, technological change and ethical decision-making on a firm through: I nvestment:the purchase of new capital to increaseproduction in the future. Technology:“new” information/knowledge Ethical decision making:considering the impacts productionhas on society (rather than just considering profit maximisation) Module 3: Markets Chapter 5: Role of the Market Determining solutions to the economic problem I n A Mixed Market economy or Free Market economy, markets are the main allocative mechanism of resources. This occurs through the interaction between buyers and sellers in order to determine equilibrium in which both parties are satisfied. Allocating resources by the economic system. Types of Markets: ● Mixed Market (gov. intervention + laissez-faire) ● Free Market (no government intervention) ● Planned Market (fully operated by the government) he importance of relative price in reflecting opportunity costs in the goods and services and factor T markets Relative price:the cost of one alternative to another Thehighertherelative price= thelowertheopportunitycost. Chapter 6: Demand he Law of Demand T Individual Demand:The demand of an individual consumerfor a good or service. Market Demand:The sum of total individual demandsfor a particular service. The Law of Demand states the quantity demanded of a good or service varies inversely with its price.As price decreases, demandincreases, and vice versa. – This happens as more people are willing and able to pay for the good or service. The Demand Curve Where: ● Price ($) is on the y-axis ● Quantity Demanded in on the x-axis ● D is a negative gradient Factors affecting demand + Shift/Movements along the curve. Price: ● A s the price of a good decreases, demand for that good is more likely to increase, similarly, as the price of the good increases, demand is likely to decrease. ● This is per the law of demand, that states the quantity of a good demand varies inversely with price. A change in price causes either an expansion or contraction on the demand curve. Anexpansionis caused by a decrease in price andsubsequent increase in demand. Acontractionis causedby an increase in price and therefore a decrease in demand. Income: ● A s income rises, consumers have more disposable income which they can spend on additional goods and services, therefore demand is likely to increase. ● A s income decreases [ie. as a result of recession] there is decrease in consumption and subsequent decrease in demand. This is represented by either a shift to the left or right of the demand curve. When income rises, this increase in demand is represented by a shift to the right, and as income decreases, a shift to the left. Population: ● An expansion in population caused by immigration or natural causes will result in an increase in demand, as there are more people requesting more goods and services. ● A decrease in population as cause by emigration or famine/other causes will result in a decrease in demand, as there are less people in need of goods and services ● A s the demographics of the populations changes, ie. population ages, there will be increased demand toward those goods that group is in need of or wants [ie. ageing population = increase in demand in walking sticks] This is represented on the demand curve by either a shift to the left or the right. The expansion of population and impact on demand will result in a shift to the right, similar to an ageing population. A decrease in population would cause a shift to the left. Tastes: ● A s consumer taste and preferences change, as do their demands. ● If something is “trendy” it is likely that that product/service will experience an increase in demand ● Similarly, if something is deemed “out of fashioned” or “aged” then the demand for that product is likely to decrease. This is represented by a shift to the left/right. Price of substitutes and complements: ● If the price of a substitute good rises, the demand for the original good will rise as the demand for the substitute good decreases as less people are willing and able to pay, vise versa. ● If the price of a complementary good rises, the demand for the original product will decrease, as less people are willing and able to pay, and vice versa. Represented by a shift to the left/right of the demand curve. Increase in substitute good = shift to the right, increase in complement = shift to the left. Expected future prices ● If the price of a good is expected to rise in the future, the demand for the good will increase in the short term. ● If the price of a good is expected to fall in the future, the demand for the good will fall short term as more people wait it out for the price to drop. Represented by a shift on the demand curve. Expected future price is higher = shift to the right. Expected future prices lower = shift to the left. [PIPPET] These things occur Ceteris Paribus, or all other things/factors remaining equal. rice Elasticity of Demand P Significance of Price Elasticity of Demand Price elasticity measures the responsiveness of consumer demand of a particular product to a change in price. ● Awareness of price elasticity allows for businesses to determine a price in which they can make maximum profit. Best pricing strategy and if they can afford a change in price. ○ ○ Price changes will generally happen if a good has inelastic elasticity of demand, this can be determined by market research ie. surveys ● Allows for the government to determine which goods/services it can tax and how much it can tax them by. Price Elasticity ● Relatively Elasticdemand refers to a strong responseto a change in price. Decrease in quantity demanded is proportionally greater than the rise in price. ● Relatively Inelasticdemand refers to a weak responseto a change in price. Decrease in quantity demanded is proportionally less than the rise in price. ● Unit Elasticdemand refers to a proportionate changein quantity demanded which is the same as the proportionate change in price. We calculate elasticity using the total outlay method. This is calculated using the equation:𝑝𝑟𝑖𝑐𝑒 × 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑. Perfectly elastic/inelastic demand. erfectly elastic P demand refers to a point in which consumers demand an infinite quantity of a good or service at a particular price, but at no other price point. erfectlyinelasticdemand P refers to a point in which the quantity of a product is fixed, and consumers are willing to pay at any price point for this product (ie. limited edition artwork). Factors affecting the elasticity of demand Necessities and Luxuries: ● Necessities have a relatively inelastic demand. An increase in price will not cause a change in the quantity demands, ie. food ● Luxuries have a relatively elastic demand. A change in price will cause a significant decrease in the quantity demanded. Proportion of income spent on the good ● Goods and services that take up a small proportion of income have an inelastic elasticity of demand (ie. chocolate) ● Goods and services that take up a large proportion of the income tend to have an elastic demand (ie. cars, houses) Existence of close substitutes ● Products without close alternatives tend to have relatively inelastic demand as there are no other alternatives to these products. ● Products that have close substitutes tend to have highly elastic demand, as there are many alternatives. The length of a time since price change ● After an initial price change, durable goods tend to be more elastic than non durable goods. With time however, the elasticity would decline. Whether a good is addictive ● If a good is habit forming [ie. gambling, smoking, alcohol] then it tends to be relatively inelastic Chapter 7: Supply he Law of Supply T Individual Supply:The quantity of a good or servicea particular firm is willing to provide at various price points arket Supply:the quantity of a good or service whichproducers are willing and able to produce at a given price. M The Law of Supply states that the quantity supplied is a positive function of a price,as the price ofa good increases, supply increases. [vise versa] The Supply Curve Where: ● Price ($) is on the y-axis ● Quantity Supplied in on the x-axis ● S is a positive gradient actors affecting supply + moments/shifts along the curve F Price: ● The higher the price of the good, the greater the incentive for firms to produce this good = increase in supply. ● The lower the price of the good, the less incentive for firms to produce this good = decrease in supply. This is represented by a moment along the supply curve. As the price of goods increases, there will be an expansion along the supply curve. As the price of the goods decreases, there will be a contraction on the supply c urve. Increase in Price = Expansion Decrease in Price = Contraction Cost of production: ❏ Lower production costs will enable producers to increase supply at a range of prices. ❏ Higher production costs means producers will decrease supply at a decreased range of prices. This is represented by a shift to the left/right on the supply curve. Lower Production Costs = Shift to the Right Higher Production Costs = Shift to the Left Price of substitutes: ❏ If the prices of alternative goods or services are relatively higher, producers may switch to supplying the alternate goods or services in order to make more profit. ❏ This decreases the supply of original products. Represented by a shift to the left on the supply curve. Expected future prices: ❏ If a supplier believes the price of a good or service will increase in the future, supply will increase in the hope of more profit ❏ If a supplier believes the price of a good or service will decrease in the future, they will begin to supply less so as to not lose money. Represented by a shift to the left/right on the supply curve. Technology: ❏ Technology advances may lead to lower production costs which allows the supplier to supply more at various price points. ❏ This leads to an increase in supply Represented by a shift to the right Seasonal/Climatic Factors: ❏ Supply of some agricultural products decrease as they are not in season or during a drought ❏ Supply of agricultural products increase as they are in season/good yield Represented by a shift to the left/right on the supply curve. [ChrisPaulEx pectsTe chnologySeason] rice Elasticity of Supply P Price elasticity of supplyrefers to the responsivenessof a market supply to a change in price - Elastic Supply:If the rise in the quantity suppliedis proportionately greater than the increase in price, indicating the product is responsive to a price change - Inelastic Supply:If the rise in the quantity suppliedis proportionately less than the increase in price this means the supply is not very responsive to a price change - Unit Elastic:when the quantity supplied rises bythe same proportion as the price increase Perfectly Inelastic/Elastic Supply: - Perfectly elastic supplyrefers to when firms arewilling to supply an unlimited amount of a good at one certain price. [Under ACCC legislation this cannot happen] Price is fixed! - Perfectly inelastic supplyrefers to when a firm willsupply a fixed quantity of a good at any price point. Supply is fixed! actors Affecting the Elasticity of Supply: F Time Lags after a price change ❖ Short term, relatively inelastic as it takes a long time to be able to increase production capacity ❖ Long term, relatively elastic as the producer could begin to change the inputs and increase production c apacity Excess Capacity ❖ Supply will be more elastic if firms have excess capacity, because they can respond to any increase in rice by using their existing resources more intensively p Ability to hold/store stock ❖ The easier it is to hold stock, a firm can be more responsive to price changes - ie. if holding stock and a price change happens, they can release all stock = more elastic. Chapter 8: Market Price arket Equilibrium M Two Assumptions when calculating Market Equilibrium: - Pure Competition: no consumer or supplier has the power to influence market outcomes - No government intervention Themarketwilldetermine price and outputthroughinteraction ofdemand and supply. Market Equilibrium:When a quantity demanded of agood or service is equal to the quantity supplied, market e quilibrium price and quantity are established. Market Equilibrium occurs when: - Quantity demanded equals quantity supplied - The market clears - There is no tendency to change Market Equilibrium occurs when the supply curve and the demand curve intersect - the point wherequantity demanded is equal to the quantitysupplied. arketShortage:Occurs when demand exceeds supply M MarketSurplus:Occurs when supply exceeds demand. hanges to Market Equilibrium C Changes to market equilibrium may occur when there are shifts on either the supply curve or demand curve. - These are caused by the factors affecting either supply or demand Increase in Demand Decrease in Demand Increase in Supply Decrease in Supply Increase in equilibrium price, Decrease in equilibrium price, Decrease in equilibrium price, Increase in equilibrium price, increase in equilibrium quantity decrease in equilibrium quantity increase in equilibrium demand decrease in equilibrium demand overnment intervention G Ceiling Prices and Floor Prices: Ceiling Prices: [Blue] - Government sets a maximum price at which a good can be sold at (ie. Public Transport) - Used in order to support buyers - Results in Market Shortage/Underproduction Floor Prices: [Blue] - Government set a minimum price at which a product must be sold above - Implemented in order to support sellers arket Failure M Market failure:when the price mechanism takes intoaccount the private benefits and cost of production to consumers and producers, but fails to take in indirect costs [also known as the social cost] - Supply side government interventionsare designedto shift the supply curve to the left in order to take into account externalities - They recognise the costs of production,increasingprice and decreasing quantity - These are usually in the form of taxes Similarly, when production is producing positive externalities, a government might put in subsidies to lower the cost of production, therefore increasing supply and increasing quantity. Government also supplies some public goods: - Ie. Education, Healthcare, Defence MODULE 4 → Labour Markets Chapter 9: The Demand and Supply for Labour Labour is a derived demand - meaning it derives from the demand for goods and services. When consumer demand is high, firms require more labour in order to satisfy that demand, and vice versa. ( when one goes upthe other goes up) The demand for labour by individual firms Firms demand labour by offeringwages. Factors affecting demand: Output of the Firm ● If a firm is experiencing significantly higher scales, they will increase their demand for labour as their output increases. ○ This is influenced by general economic conditions - higher rates of economic growth = higher consumption = higher demand = falling levels of unemployment. ○ ● ● Therefore, changes in the demand for labour will occur as a result of fluctuations in an economy ○ But there are “time lags” which are a consequence of firms operating at excess capacity. Conditions in the firm's industry ○ A change in consumer tastes and preferences results in a change in the allocation of labour between industries ■ i.e. higher demand in the tertiary sector would see the shift in labour from the primary and secondary sector, or mining boom The demand for an individual firm’s products ○ A firm’s output is ultimately determined by its effectiveness in selling goods and services. This is determined by factors such as: quality, reputation, customer service and marketing. The Productivity of Labour ● A firm must decide where or use labour more intensively in production or relying more on capital ● The productivity of labour will determine the extent to which a business uses labour in its production. ○ ● ● 𝑇𝑜𝑡𝑎𝑙𝑂 𝑢𝑡𝑝𝑢𝑡 Productivity of Labour = 𝐿𝑎𝑏𝑜𝑢𝑟𝐼𝑛𝑝𝑢𝑡 Labour productivity depends on the quality of the workforce: including ○ Education, ○ Skill, ○ Health ○ Motivation ○ How effectively it can be combined w/ capital. Impact of labour productivity in the demand for labour: ○ Aggregate demand rises and labour productivity increases → higher demand for labour ○ Aggregate demand remains constant + increase in labour productivity → demand for labour decreases ○ Aggregate demand falls, labour productivity increases → demand for labour decreases. The cost of other inputs ● A firm will decide which [labour or capital] is the most cost effective method for production. The two are regarded as substitutes of each other as changes in price have a similar effect on demand. ● ● A firm’s demand will be more elastic when: ○ Labour costs are relatively higher in proportion ○ If it is easy to substitute between labour and capital ○ It is more difficult for the firm to pass on increased labour costs in the form of higher prices to consumers Cost of labour: wage rates plus labour-on costs ie. superannuation, fringe benefits ○ A firm may shift operations overseas if these can be avoided [ie. lower labour regulations], or if it is cheaper ● Cost of capital: interest rate DEMAND CURVE FOR LABOUR: COP = Cost, Output, Productivity actors affecting the the supply of Labour F Pay/Remuneration ● Perhaps the most influential factor in affecting the supply of labour is the wage and non wage benefits ○ More peoplewilling to work as pay gets higher Working Conditions ● Attractive working conditions encourage a greater supply of labour to a workplace ○ This can be:physicalenvironment,socialenvironment,team bondingexperiences Human Capital, Skills, Experience, Education and Training ● Human Capital:the total sum of the knowledge, skills,training and experience of workers that contribute to the process of production ● Essentially this means the“quality of labour”→ thisis the main influence on productivity growth. ○ Job requirements mean the supply of labour may vary between industries and occupations ○ Lower supply in industries that require a high amount of skill, education + experience. Occupational and Geographical Mobility ● Occupational:The ability for labour to move betweenoccupations , transferable skills. ● Geographical:the movement of labour between differentlocations - limited by cost of reallocating and personal upheaval The Participation Rate ● The percentage of the working age population who are in the labour force ● 𝐿𝑎𝑏𝑜𝑢𝑟𝐹 𝑜𝑟𝑐𝑒 𝑊𝑜𝑟𝑘𝑖𝑛𝑔𝐴𝑔𝑒𝑃 𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 ● High participation rate = higher supply of labour. WhenPe tepo pped (some)methHa rrycried. he Australian Workforce T Definition of the Workforce: ● Workforce: a section of the population 15 years of age and above ● Employed: a person is defined as being employed if they have one or more hours of work per week ● Unemployed: available for work, actively seeking work and unable to find it General Characteristics of the Australian Workforce ● Population Size ○ Population sets the limit to which the workforce can grow. ○ Population growth is influenced by natural increase and net migration. ■ Australia’s population is increasing due to increase in migration - 40% of total population growth since WWII ● Age Distribution ○ 15-65 year olds comprise if the workforce ■ Australia is experiencing an ageing population, as the Baby Boomers from WWII are retiring ● Education Patterns ○ Level of education increases Chapter 10: Labour Markets Outcomes age outcomes for all persons by income groups, occupational groups, age, gender and cultural W background Average Weekly Earningsmeasures the average weeklygross rate of pay (pay before tax) of all employees, both full time and part time. Nominal Wages is the pay received by employees inthe dollar term, and not adjusted for inflation. ● It does not tell us if people are better off as it fails to take into account changes in price levels that might be occurring at the same time. Real Wageis a measure of the actual purchasing powerof money wages (nominal wages adjusted for the effects of inflation) Employers can afford higherrealwages if there isalso a strong increase in productivity. ● If the growth in wages is higher than productivity, real labour costs rise this will eat into the employer’s profit ● When wage growth is below the sum of inflation and productivity growth, real labor costs will fall and profits expand Differences in Wage Outcomes: ● BETWEEN DIFFERENT OCCUPATIONS ○ Level of skill and education (increased level of skill and occupation = increased pay) ○ Appeal of working conditions (ie. high stress, competitive environment like CEO or mining positions) ○ Occupational mobility (the ease with which labour can move from one occupation to another) ● IN THE SAME OCCUPATION ○ Higher qualifications = higher pay ○ More experience ○ Geographic mobility (the ease with which labour can move from one area to another) ○ Productivity of labour ○ The capacity of the firm to pay Age ● Income varies throughout life, see chapter 2 notes ● Generally a person makes less in their youth, and as they approach their 40-50s will make the most Gender ● Discrimination against female ● The pay gap, “glass ceiling” ○ Discrimination, interruptions in working life, working in lower paid industries ● Women paid less than men Migrant Status and Cultural Background ● Overall, Australian workers with a migrant background earn slightly less than the average taxpayer ● However, those who came asskilledmigrants earn abovenational average (higher level of skill) ○ Yet receive lower rewards for their education than Australian born workers ● In the highest paying professions, workers with a migrant background earn more than average taxpayers ○ Recruit of highly qualified workers from overseas ● Recently migrants tend to have lower income levels than those who have been in Australia longer, but incomes tend to rise relatively quickly toward average levels. ● Those who come from English speaking backgrounds are more likely to earn above average income than t hose from non-English speaking backgrounds. ● Indigenous Australians Trends in the distribution of income from work uring the past 3 decades, the Australian labour market has undergone dramatic changes that have altered the D way in which people receive their wages increases, ● 1980’s implementation ofaward wage systemensuredthat differences in wage outcomes weresmaller ● Shift towardenterprise bargainingsince the early1990s (employees negotiate wages increases at the workplace level) has resulted in great difference in wage outcomes ○ Resulted in the creation of considerable difference inincome distributionbetween sections of the community. ■ There is considerable inequality in the distribution of income in Australia, which hasgrown slightly over the past decade ■ The highest income earners have gained a larger share of income while the share of every other group has shrunk. Income stratification, rich getting richer, poor getting poorer Non-wage outcomes for different occupations on wage outcomes are the benefits that many employees receive in addition to their ordinary and overtime N work. These include: sick leave, holiday leave, superannuation and other fringe benefits (company car, laptop, gym subsidies) - Non-wage outcomes can vary substantially from one workplace to another. In some industries, workers often earn far more than their regular wage because of substantial non-wage allowance. Bonus cash payments on top of an employee’s normal wage is another non-wage outcome. (performance bonus, Christmas bonus) Flexible work patterns ie. work-life balance - study leave, parental leave , work from home etc. Arguments for and against a more equitable distribution of income Economic Argument For - I nequality encourages the labour force to increase education and skill levels Inequality encourages the labour force to work longer and harder Makes the labour force more mobile Encourages entrepreneurs to accept risks more readily creates the potential for higher savings and capital formation - - - - Against - - - - educes overall utility (satisfaction) R Reduce economic growth Reduces consumption and investment Creates conspicuous consumption / the consumption of expensive goods and services for the purpose of displaying wealth creates poverty and social problems increases the cost of welfare - - Social Argument For - - heoretically, inequality should have a social benefit if an T individual's income genuinely reflected their relative productivity. Yet, the economic system does not give everyone the same level of opportunity to acquire knowledge and skills Against - - - overty P Lower levels of wellbeing Social class division Inequality of Opportunity Exists because: --Existing inequality in the distribution of incomeand wealth tends to perpetuate inequality of income --Not everyone has the same mental and physical attributesand the same potential with regard to the acquisition of income and wealth --People who acquire wealth through inheritance havea much greater opportunity to build up their wealth through investments --People may not have the access to the same networksthat may lead to new opportunities Unemployment ne of the highest priorities of all policies affecting the labour market is to reduce unemployment. O Unemployment:available for work, currently withoutwork, actively seeking work (ie. be registered with an employment placement provider) **𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡𝑅𝑎𝑡𝑒(%) = 𝑁𝑢𝑚𝑏𝑒𝑟𝑜𝑓𝑝 𝑒𝑟𝑠𝑜𝑛𝑠𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 × 100 𝑇𝑜𝑡𝑎𝑙𝑙 𝑎𝑏𝑜𝑢𝑟𝑓 𝑜𝑟𝑐𝑒 Unemployment / Underemployment ● Cyclical Unemploymentis unemployment caused by adownturn in the business cycle. ○ Demand for labour is a derived demand, thus when there is a downturn the demand for G+S’s go down , therefore les labour needed ● Structural Unemploymentoccurs because of a mismatchof skills demanded by employers and those possessed by unemployed people ○ Restructuring of the economy, ie. changes in industries ● Long-term Unemploymentthe unemployed person has beenout of work for 12 months or more. ○ The longer you are out of work, the more hard it is to get a job ● Seasonal Unemploymentoccurs because of the seasonalnature of some jobs (ie. fruit picking) ● Frictional Unemploymentoccurs as people change jobs,moving from one job to another. ● Hard-Core Unemploymentrefers to those individualswho might be considered unsuitable for work due to personal reasons ie. mental illness, disability, addiction ● ● idden Unemploymentrefers to those individuals who are not counted in the official unemployment figures H because they have given up on actively seeking work or gone back to school Underemployment individuals who have part-time orcasual jobs but would like to work more hours a week. Underemploymentis a measure of the total number ofpeople in an economy who are unwillingly working in low-skill and low-paying jobs or only part-time because they cannot get full-time jobs that use their skills. ○ Represent under-utilised labour resources he movement away from full-time work relate to job security T Part-time work ● Part time work is defined as those employees regularly working less than 35 hours per week. ○ Proportion of employees working part time has increased dramatically over recent decades ○ 25.7% compared to OECD average 16.5% ○ Some employees prefer part time work, as it allows a greater work-life balance, and has been made easier by industries ○ However, for others, it is the choice of their employer and not their own. Employers have greater flexibility in their staffing arrangements if a substantial proportion of their employers are less than full time workers ■ Can increase hours and not face extra overtime costs or hiring additional staff ■ Don’t have to provide holiday leave, sick leave or redundancy pay Casualisation of the workforce ● The growth of casual employment (and the relative decline of full-time permanent jobs) as a proportion of the total workforce ● Casual employment occurs when employees have occasional working hours but do not follow any set pattern ○ The most insecure because there is no job security Outsourcing ● Occurs when an organisation pays another business to perform a function that it does not regard as a core part of its business focus Contractors ● Firms engage contractors to pay them to provide a specific service for the business ie. specialised consulting advice ● Governed by commercial law rather than employment law ○ Ie. cleaning company in school CASUALISATION OF WORK ADVANTAGES - F lexibility for employers to increase or reduce staff as business demands change - Employer may avoid paying some non-wage costs - Flexibility for employees with family or other commitments DISADVANTAGES - L ess jobs security - More difficult for employees to plan for the future. ie. obtain loans - Less staff loyalty and less development of workforce skills MODULE 6 → Labour Markets. Chapter 14: The Limits of Markets Market Failure in the provision of goods and services: Under a completely free market, some community needs and/or wants are left unsatisfied. This is known asmarket failure. arket failure can arise in: M Provision of goods and services ● The market may fail to produce certain goods or services, particularlypublic goods[ie. ABC] ○ Public goods are goods that are nonexcludable and nonrival, meaning no one can be prevented from using it [even if they pay for it or not], ie street lights, People do not pay No incentive to produce these goods = firms do not produce these ● ● The market may also produce an inadequate quantity of a good or service, particularlymerit goods. ○ Merit goodshave benefits to the community that gobeyond the individual who enjoys them directly. ○ Ie. Healthcare/Education The market may also produce too much of a good, known as ademerit good. ○ These are goods which are harmful to a society, ie. alcohol, cigarettes, ○ Because these goods have negative effects, the government may restrict the sale [ie. 18+ age limits, heavy taxation or prohibitions] ● A government may also operate a monopoly of a good or service because it would be insensible to have competing firms. Examples of these include defence. These are calledNATURAL MONOPOLIES. ○ A market structure in which goods can only be efficiently produced by one supplier, generally because of infrastructure requirements. ○ Inefficient to have competition ○ Ie, rail networks Market failure in the distribution of income: Free markets will generally discriminate and produce considerable inequality in the distribution of income. ● Leads to poverty. ● Disadvantaged groups include those with low education levels, migrants, disabled, indigenous peoples, etc. ● The most common form of poverty in Australia isrelativepoverty ○ Those whose standard of living is substantially lower than the average of an economy as a whole. ○ Welcomed the establishment of awelfare statewhichdesigned welfare benefits. Market failure in externalities Markets take into account the economic and social concerns of individual buyers and sellers, but do not take into account any side effects that are directly reflected in the price mechanisms of supply and demand. ● Externalities are the external costs and benefits that private agents in a market do not consider in their decision making process. ○ ie. pollution (air/water/light/noise) ● Positive Externalities: positive side effects produced all members of the public can benefit from ● Negative Externalities ○ ○ ie. a tourism company cleaning the waterways Harmful effects on the economy and society, adverse spillover effects production has on the environment ■ CO2 emissions, ■ Deforestation, soil erosion, water pollution Market failure in the abuse of power Because of the costs of producing, advertising, and distributing goods in a market, only a small number of firms will survive. This creates imperfect market competition = smaller number of goods at a higher price ● Monopolisation: a firm uses its dominant market position to eliminate existing competition, or prevent new firms from entering the market. ● Price discrimination: when a firm sells the same type of good or service in different markets at different prices. ○ Businesses try to charge different prices to different consumers based on their willingness and ability to pay ○ Higher price to consumers more willing to pay, vise versa ● Exclusive dealing: when a firm sets conditions for supply that exclude retailers from dealing with other competitors. ○ Prohibited by the Competition and Consumer Act 2010 ● Collusion and market sharing: when firms get together and agree on a price and a market-sharing arrangement that reduces effective competition Market instability: the business cycle Without government intervention, an economy is likely to be subject to severe fluctuations in the business cycle and level of economic activity. ● Government’s role of sustaining economic growth ● Market boom can lead to inflation, which brings economic problems. ○ High inflation = reduce consumer’s purchasing power, force an increase in interest rates → recession ● Government intervenes through economic stabilisation policy ○ Fiscal ○ Monetary ● In a period of boom, a government may counteract this by spending less/injecting less into the economy, and vise versa Chapter 15: The Role of Government in Australia Functions of the three levels of government Government Hierarchy:Local < State < Federal ● the constitution set out the powers of the federal government and its responsibility and the states get the leftovers - Federal State Local Defence, Economy, Foreign Health, Education, roads, transport, Rubbish collection, community Affairs, immigration, welfare police points and areas, the largest type of revenue is the Goods and Services Tax Reallocation of Resources Government can affect the allocation of resources in two main ways: ● By influencing the way business and consumers behave in the market through taxation or spending measures ● By producing goods and service itself (ie public goods) Taxation: one of the main purposes of taxation isto raise revenue for the government, but they can also be used to influence the price of goods and services and therefore consumer demand. ● Direct Taxes ○ Those taxes that can be paid by individuals or business firms on which they are levied - connote be passed on to someone else ● ■ Ie. personal income tax ■ Company tax, capital gains tax Indirect taxes ○ Indirect taxes are those taxes which can be passed onto someone else, attached to a good or service as opposed to an individual or company ■ GST ■ “Sin” tax Spending:Government spending can also directly reallocate resources to a particular sector of the economy, or influence the decisions of consumers and businesses. ● Funding: ie for the arts which might be unprofitable ● Grants for start up businesses or new financial growth industries that might not have access to finance ● Subsidies to provide goods to areas that otherwise would not be profitable ● Cash payments ie. jobseeker / JobKeeper Provision of goods and services: ● Governments sometimes involve themselves directly in the production process to achieve a better allocation of resources. ● Provide basic infrastructure ie. schools, health centres, railways, NBN ● Recent trend of privatisation (sells public trading enterprises to the private sector) as opposed to nationalisation Redistribution of Income Governments intervene in the market economy to reduce the level of social inequality in the distribution of income. One of the mechanisms it uses to do this is throughsocial welfare. Taxation: ● Tax base: the items that are taxed. 3 main bases: income, wealth and consumption ● Average rate of tax: the proportion total income earned that is paid in the form of tax ● Marginal rate of tax: the proportion of any increase in income that must be paid as tax. How many cents of every extra dollar earned must be paid to the government Types of Taxation Systems: ● Progressive Tax: high income earners pay a greater proportion of their income as tax than low income earners. ie. Income tax (ART rises as income rises) ○ PAYG tax (income) ○ 18, 200 tax threshold ● Regressive tax: high income earners pay a smaller proportion of their income as tax than low income earners (ART falls as income rises) ie GST ○ Charged as a percentage of the price of the good or service sold, irrespective of the income ○ If calculate as a percentage of an individual’s income, the percentage of tax paid will fall as income rises ● Proportional tax: all income earners pay the same proportion of their income as tax (flat base rate of the income, ie. company tax) ART is constant as an individual’s income increases. ocial Welfare: S The government redistributes its taxation to lower income earners via social welfare payment, and accounts for ⅓ of a government’s spending. - Payments are often means tested, which means that people with high income are ineligible for such payments - Ie, Age pension Stabilisation of Economic Activity Monetary policy tends to operate as the main stabilisation policy. - Monetary policy involves action by the RBA in order to influence the level ofinterestratesand thesupply of money. - Use of DMOs which involve the buying and selling of CGSs by the RBA in order to affect the cash rate in the short-term money market and influence the level of interest rates in the economy ightening monetary policy:government wishes to slowdown the level of economic activity → increase cash rate T → upward pressure on interest rates → consumers save more → lower level of activity - Loosening monetary policy:increase the level of economicactivity → decrease cash rate → downward pressure on interest rate → increased level of consumption → increased economic activity Fiscal policy: is a macroeconomic policy that can influence resource allocation, redistribute income and reduce fluctuations of the business cycle. Its instruments include government spending and taxation and the budget outcome. - Government Business Enterprises GBE’s are businesses owned and managed by the government at either a Commonwealth or State Level. ● They function to provide goods and services ot to community Many have been privatised/corporatised in recent years under the ethos it will make them more efficient. (e.g. Commbank, Qantas, Telstra). Remaining GBEs include: ● Auspost ● Transport NSW ● Sydney Water ● NBN Competition and environmental policies Competition Policy: ● One of the aims is to maintain a level of healthy competition. ● ACCC is the consumer protection authority ○ Competition leads to a more efficient use of resources = lower production costs = lower prices for consumers ○ Monitors prices and conducts inquiries into pricing structures ○ Recommends changes to industries ○ Negative publicity when overcharging Environmental Protection: Externalities tax ie carbon tax, setting Renewable energy targets, Paris Agreement etc ● Chapter 16: Government in Action The Budget he Budgetis the tool of the government for the implementationsof fiscal policy. It shows the government’s planned T expenditure and revenue for the next financial year. ● Large majority of the Commonwealth Government Revenue is derived from taxation (direct and indirect) Key Areas of Government expenditure: ● Social Security and welfare ● Education ● Health ● Provision of infrastructure or social overhead capitals (roads, rails, ports) ● Protecting the environment and promoting ecologically sustainable development. ● Defence The change in the budget outcome from one year to another can indicate a change in government fiscal policy stance. The three stances possible are: ● An expansionary fiscal policy stance ○ The government may reduce taxation or increase government expenditure, creating asmaller surplusorlarger ● ● eficitthan previously. d ○ Aims to increase the level of economic activity by stimulating aggregate demand. A contractionary fiscal policy stance ○ Increase taxation or decrease government expenditure, creating alarger surplusorsmaller deficitthanpreviously. ○ Aims to decrease the level of economic activity by dampening aggregate demand A neutral fiscal policy stance ○ Does not change the budget outcome from the previous year, Therefore the budget should have no effect on the level of aggregate demand or/and economic activity. Automatic Stabilizers:instruments inherent in thegovernment’s budget that counterbalance economic activity. In a boom period, they decrease economic activity. In a rescission, they increase economic activity. Examples include: transfer payments (unemployment benefits) and progressive tax system ● Increase in the level of economic activity: ○ Income levels rise, leading to a rise in taxations (as people’s incomes jump tax brackets), and leads to a rise in taxation revenue for the government. ○ ● ■ Unemployment falls, decreasing the level of expenditure on unemployment benefits. ■ = smaller deficit or bigger surplus. Automatic stabilisers would lead to an automatic contraction in aggregate demand A decrease in the level of economic activity ○ ○ Income levels fall = fall in taxation revenue (income bracket decreases) ■ Unemployment rises, increasing the level of expenditure of unemployment benefits. ■ =smaller surplus or bigger deficit, Automatically stimulating aggregate demand. ypes of Tax T Income Tax (Direct Tax): - Personal income tax accounts for almost 46% of the Budget revenue, PAYG tax. - Company Tax: flat rate of 30% of the net profit. GST (indirect tax) - 10% of most items sold in Australia Excise and Customs Tax: - Inelastic demand, therefore the government can impose an excise. Apply to petrol, tobacco, alcohol. Influences on government policy in Australia ● Political parties: political parties with differentpolicy stances influence the budget outcome (think, liberal = jobs and growth, back in the black vs labour = increased unemployment benefits, increased government spending) ● Business:businesses dedicate significant resourcesto the lobbying of governments in order to pursue their own budget agenda. ● Unions:represent the interests of their workforce,participate in public debates and focus on industrial relations issues. ● Environmental groups:These organisations conductresearch, provide educational information and lobby government and companies about environmental issues. ● Welfare agency:represent the most disadvantaged peoplein the community, lobby the government for increased welfare benefits. ● The media:The media hold influence on the publicopinions, from determining which issues will receive coverages to how issues will be reported to the public ○ Political parties try to anticipate media response to their policies, they want positive media coverage (even if the policy is of limited benefit) ● Interest groups:Lobby ● International:free trade policies have made the internationalmarket a significant influence of the Australian domestic market. ○ Also tend to follow overseas policy trends, such as the OECD.
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