Rowville Secondary College
Economics
Mr Desler (Careers Room- next to Room 27)
desler.marcus.a@edumail.vic.gov.au
Do Now Activity – List 10+ eco. terms
Learning intention:
 Review the work covered in Head Start last
year
 Success Criteria
 You have answered or can now answer all the
questions from Chapter 1 with confidence
Success in VCE Economics
= achieving your best
1.
Keep notes and handouts organised (a workbook for any class
notes and exercises done and a folder with plastic sleeves for
handouts and tabs/dividers to separate work into topics)
2.
Keep notes neat with headings and subheadings, bullet points
(some students retype the powerpoint slides from class)
Prepare summary notes from the textbook ??
WORK ON A CONSISTENT BASIS (a bit most days – 35+ minutes not a lot one day and nothing for 6 days)
DO THE MAJORITY OF THE TASKS GIVEN TO YOU
Make effective use of class time
Review the day’s lesson in the evening (look at the class slides /
read the textbook(s)
Have some interest in current events / affairs affecting Australia
Do the review questions given to you before an assessment (SAC)
3.
4.
5.
6.
7.
8.
9.
Housekeeping
les apply i this classroom, in particular:
• Punctuality
• Prepared (bring all stationery)
• Respect for others (listen when
someone is speaking)
• Effort all the time in the classroom !
• No phones or iPods etc. except when I
say
• Water bottles only (no other drinks or
food – eat before you arrive)
Unit 3
Area of study 1
What is economics ?
 Economics looks at how limited resources are
used to produce goods and services which
are then distributed to people to satisfy their
unlimited needs and wants
 How can we as a society organise
ourselves and use the resources
available to maximise people’s
standard of living
Microeconomics
Examines a particular part or section of an
economy
 A particular market (car, housing, fruit &
vegetable)
 A particular industry (agriculture, manufacturing,
tourism, retail etc)
 A particular sector of the economy (household
sector, business sector or government sector)
Macroeconomics
Takes a look at the economy as a whole and how
it is progressing (the ‘health’ of the economy)
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Overall changes in prices (inflation)
Jobs growth
The level of unemployment
Level of trade with other countries (imports and
exports of goods and services)
 Interest rate movements by the RBA (Reserve Bank)
 Changes in ‘national production’ – Gross domestic
product (GDP)
Standard of living
Material
Non-material
Material standard of living
 An individual’s access to and consumption of
goods and services (as a country this can be
improved by increasing gross domestic product
(GDP) – the total value of final goods and services
produced in an economy over a certain period of
time)
Non-material living standards
 Quality of life (level of happiness / health /
friendships / family connections / amount of
leisure time available / freedom / crime /
pollution / equality of opportunity / crowding
and congestion / stress etc)
LIVING STANDARDS
Material
vs
Non-material
Material and non-material living standards can
be in conflict with one another – often to
pursue one means to reduce the other
Resources (factors of production)
Resources – inputs used by business to
produce goods and services
Types of resources:
 Human resources
The physical and mental efforts of people in the
production of goods and services
 Entrepreneurial / Enterprise resources
The risk taking and management skills and
organisation of individuals who set up and operate
a business
Factors of production (resources)
 Capital resources
Plant, machinery and equipment used in the
production of final goods and services for
consumers
 Natural resources
The gifts of nature which a country possesses eg:
solar / minerals underground / soil / forests / oceans
/ rivers / climate
Classifying goods and services
Collective goods and services
 Goods and services produced or provided mainly by
Government for the use / benefit of all in society
Producer goods and services
 Goods and services required by businesses to create
final goods and services for consumers
Consumer goods and services
 Final goods and services that are purchased by
individual households
Why needs and wants are unlimited
NEEDS AND WANTS FROM
HOUSEHOLDS (individuals)
BUSINESSES
GOVERNMENT
OVERSEAS COUNTRIES
Caused by an increasing population, materialistic
attitudes of society, intense advertising by businesses,
planned obscelecense of products, re-occurring needs
(food)
Relative scarcity (the basic economic
problem)
 The imbalance between our unlimited wants
and the limited resources that are available
 Our society cannot produce everything it needs
and wants
 Can only produce a certain level of output (GDP)
 The economy can only expand at a certain rate
 Need to make choices as to what should be
produced and what needs to be forgone or not
produced
The basic economic problem
Unlimited
needs and
wants by
people
SCARCITY
Limited
resources
available to
produce goods
and services
•Most goods and services have a price because they are
scarce (the scarcer the item, the higher the price)
•Scarcity restricts living standards of a nation because we
can’t have everything we want
•Countries with access to more resources or use them
more efficiently can have higher standards of living
compared to other countries
Scarcity leads to making choices
 Choices need to be made about what goods and
services will be produced with our limited
resources
 Choice on the best use of our limited resources
leads to the notion of ‘opportunity cost’
 Opportunity cost is the benefit forgone by not
using resources for there next best alternative
use (cost can include $ lost, time lost etc)
Time to smell the roses
Show the connections between the terms & concepts below in a
mind map – you have 25 minutes
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Choices
Opportunity cost
Limited resources
Unlimited needs and wants
Collective goods and services
Consumer goods and services
Producer goods and services
Scarcity
Labour resources
Natural resources
Capital resources
Households
Businesses
Overseas countries
Government
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Living standards
Material living standards
Non-material living standards
People’s behaviour
Models & calculations/equations
The BASIC ECONOMIC PROBLEM
Social Science
Microeconomics
Macroeconomics
Individual markets, sectors,
industries
 The economy as a whole
Production possibility diagram
 A ‘PPD’ shows the possible combinations of
goods & services & the concept of
opportunity cost faced by a nation in deciding
what choice of goods and services will be
produced.
C
Goods
A
B
Services
Points on the PPF
 C: a combination of goods and services which is
not attainable by the economy at present
 A: the various combinations of goods and
services which are possible if the economy is
operating at full capacity (using all it’s resources)
 B: a combination of goods and services which is
not using all the resources available in the
economy (under-utlilisation of resources)
How can a nation increase it’s production
possibility frontier ?
 Increasing skilled migration (labour resource




increases)
Improvements in productivity levels of
employees
Improvements in technology to increase
efficiency and productivity
Increases in foreign investment (more capital
resources)
Discoveries of more natural resources
Types of efficiency
Allocative Efficiency
 An efficient allocation of resources is the best
combination of goods and services produced so
that living standards are maximised which is a
particular point on the ‘PPF’.
Technical Efficiency
 A technically efficient allocation of resources
refers to an economy operating at maximum
productivity & output (operating at the lowest
possible costs) which is any point along the ‘PPF’.
Types of efficiency
Inter-temporal Efficiency
 Having the right combination of resources used
for production of consumer items and resources
being used for production of capital goods &
infrastructure to improve future production and
assist future generations
Dynamic Efficiency
A country is dynamically efficient if it is able to
change production to take advantage of new
technology to benefit it’s society (change from
using labour to machine based production or from
fossil fuels to renewable energy sources
Factors that influence the decision-making of
households, businesses and government
Households
 Income levels
 interest rates
 fashions & fads
 advertising in the media
 traditions & customs (culture)
 state of the economy – boom or recession influences
household confidence and thus spending choices
 pressure groups in society (Greenpeace, Consumer
action groups like ‘Choice’, political parties) can
influence household spending choices
Factors that influence the decision-making of
households, businesses and government
Businesses
 Government policies and laws
 interest rates
 state of the economy affects business

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
confidence and whether they invest and expand
Number of competitors locally and overseas
resources available and their price
people’s fashions and tastes influence what
businesses produce
technology available for use
Pressure from trade unions (organisations that
represent employees on pay and conditions)
Changing demographics (an ageing population)
Factors that influence the decision-making of
households, businesses and government
Government
 State of the economy affects government spending
(in a ‘downturn’ governments will spend more to
stimulate the economy)
 amount of tax revenue available for use
 pressure groups in society influence governments
 Employer associations (represent employers)
pressure governments for business-friendly policies
 society attitudes to issues and where tax revenues
should be spent
 opposition political parties
 Changing demographics
(an ageing population)
An economy:
 a system that exists to organise the
production of goods & services, the
distribution of incomes as well as the
distribution of goods & services based on
consumer expenditure.
Production
Incomes
Expenditure (Spending)
(Distribution of goods & services)
Economic system
Three questions an economic system needs to answer
1 What and how much to produce ?
 (how are resources to be allocated or used) – left
mainly to the market mechanism or price system in
Australia – interaction of buyers and sellers
2 How to produce ?
 The lowest cost method will be adopted as firms
wish to maximise profits – how much labour vs
capital resources should we use ?
3 For whom to produce for ?
 Who will receive goods and services and incomesdistribute evenly (or unevenly via the market ?)
Australia = a ‘contemporary market
capitalist economy’
 Approximately 80% of resources privately owned
& 20% are Government owned
 On the whole consumers influence business
decisions & production by their behaviour (what
they buy and do not buy) – 80% of resources
allocated through the ‘market’ – consumers
sending ‘signals’ to businesses
 Government also interferes somewhat in the
economy to influence what and how much is
produced (20% of resources are allocated by
Government) because of MARKET FAILURE
Economic systems
Contemporary Market Capitalism
80% of resources non-government owned,
20% government owned. Decision making
mostly by consumers & businesses but
some government interference
Pure Market Capitalism
Planned Socialism
Individuals own resources and
consumers decide what and how
much is produced. NO
GOVERNMENT INTERVENTION
Government control of
resources and decision
making on what and how
much is produced
How does the market mechanism / price system allocate resources in
the economy
 In a market economy, businesses receive signals from consumers.
Businesses will only produce goods and services which are most profitable
for them and will choose the method of production which minimises their
cost of production.
 When the final prices of goods and services increase due to higher
consumer demand, this indicates to businesses that there is a shortage or
underproduction of that product and thus an under-allocation of
resources. Businesses and owners of resources will want to re-allocate
scarce resources & start producing this product or increase production of
the product as there is more profit to be made from this product than
other alternative uses for the scarce resources.
 If demand and the final prices of goods and services decrease , this
indicates to producers and owners of resources that there is an oversupply
or overproduction of the product and thus too many resources have been
allocated in this area. Profit margins on the product will be reduced and so
businesses and owners of resources will no longer be prepared to allocate
resources to production of this product and will look to allocate scarce
resources elsewhere where greater profits can be obtained.
The operation of the market mechanism
(demand and supply)
The law of demand
 As the price of a good or service increases,
there will be a decrease in demand for that
item as less consumers can afford the item.
 As the price of a good or service decreases,
there will be an increase in demand for the
item because it becomes more affordable
for more consumers
 There is an inverse relationship between the
price and the quantity demanded
The law of Demand (packet of Dorritos)
The demand line shows the quantity
demanded of a particular item by
consumers at different prices for
the item
Price
Price ($)
Quantity
demanded
1
2
8000
6000
3
4
4000
2000
5
1000
D
0
Quantity
Movements along the demand line
(contractions and expansions)
P
r
i
c
e
There is a
movement along
the demand line
when there is a
change in price
Contraction in demand
Expansion in demand
Quantity
Shifts in the demand line (increase in demand due to
factors OTHER THAN PRICE CHANGES)
 Buyers may change their demand for an item over a
range of prices. This will cause a shift in the demand line
An increase in demand (D to D1) – buyers want more of
the product at a given price than before over a range
of prices
Price
$4
$3
D1
D
0
1000
2000
4000
5000
Quantity
A shift of the demand line to the right (an
increase in demand for an item over a range of
prices)
An increase in demand over a range of prices is
caused by:
 An increase in disposable income (wage rises,
decrease in personal tax rates, working longer
hours)
 Increase in the price of SUBSTITUTE products
 Decreases in the prices of COMPLEMENTARY
products
 Increase in the population or increase in the
population target market for that item
A shift of the demand line to the right (an increase
in demand for an item over a range of prices)
 An increase in demand over a range of prices is
caused by:
 Increase in consumer confidence
 The item becomes more fashionable
(preferences & tastes change)
 Decreases in interest rates on loans leaves more
income to purchase goods & services
 (Advertising campaigns to promote the product
have been more successful or there has been
less advertising on substitute products)
Shifts in the demand line (decrease in demand)
 An decrease in demand (D to D2) – buyers want
less of the product at a given price than before over
a range of prices
Price
$4
$3
D
D2
0
1000
2000
4000
5000
Quantity
A shift in the demand line to the left (a decrease in
demand over a range of prices)
A shift of the demand line to the left is caused by:
 A decrease in disposable income (less hours
worked, increase in personal tax rates, lower
wage rates)
 Decreases in the population or the population of
the target market
 Decreases in consumer confidence (sentiment)
 The prices of SUBSTITUTE products decreases
A shift in the demand line to the left (a decrease in
demand over a range of prices)
 A shift of the demand line to the left is caused




by:
The price of COMPLEMENTARY products
increases
Increases in the interest rate on borrowed
funds – less discretionary income for
purchases
The product is becoming less fashionable
(preferences & tastes change)
(More advertising is occurring on substitute
products or less advertising on this product)
Do Now Activity
Fill in the blanks
Australia has a 1_______ _______ ________ economy. 2___% of resources are
3______ owned and 4____% of decision making is done by 5_____ & ______. So
the 6 m _____ m _______ allocates 7____% of resources in our economy.
The 8 m____ m____ allocates resources through 9_____ sending ______ to
businesses. Businesses will only allocate their scare resources to 10
p_______activities and use the 11______ cost possible in 12_____. When
consumers want more of an item this indicates to businesses that there could
be 13__________ of that product. Business will 14_______ _______ ________to
that product because 15_______ are there to be made. When consumers reject
or stop purchasing an item, this indicates to businesses that there is an
16_________ of resources to the production of the item. Businesses will take
17______ _______away from production of the item as there are 18____ _____
to be made now from the product.
The law of demand says that when 19______ _____, demand 20 ______ and
when 21_____ _____, demand will 22______. Movements along the demand
line are caused by changes in the 23_______ of the product. The demand line
may shift or move (an increase or decrease of demand over a range of prices)
because of 24____________, 25_____________, 26 __________________,
27____________.
The behaviour of sellers (suppliers) in
the market
The Law of supply
 As prices rise, producers will supply more of the
product to the market (due to greater profits
being made per item)
 As prices fall, producers will supply less of the
product to the market as profits will be lower
per item
The Law of Supply (packet of Dorritos)
 The supply line shows the quantity sellers are
willing to supply the market at certain prices of the
good or service
Price
Price ($)
Quantity
supplied
1
1000
2
2500
3
4000
4
6000
5
8000
0
S
Quantity
Movements along the supply line
(expansions and contractions) – caused by
changes in the price of the good or
service
Price
Expansion
in supply
Contraction in
supply
0
Quantity
There will be
a movement
along the
supply line if
there is a
change in
price
Increases in supply of a product over a range of
prices (shifts in the supply line to the right)
 Sellers may decide to increase their
production or supply of a product over a
range of prices (shift of the supply line to the
right from S to S1)
S
Price
S1
$4
$2
0
1000
3000
3700
5000
Quantity
An increase in supply at a particular price
Factors which could cause this are:
 Decreases in the costs of production (raw
materials, energy prices, interest rate decreases)
 Introduce better technology, so can produce at a
cheaper cost or produce more with the same
level of resources
 Using the existing resources more productively
so can produce more at the same cost as before
 (More Government subsidies (financial
assistance handouts) for the industry)
 Changes in climate (favourable climatic
conditions) for agricultural products
A shift in the supply line to the left (a
decrease in supply at a particular price over a
range of prices)
 Sellers may decide to decrease their
production or supply of a product over a
range of prices (shift of the supply line to the
S2
left from S to S2)
Price
S
$4
$2
0
1000
3000
3700
5000
Quantity
A decrease in supply over a range of prices
may be caused by:
 Increase in production costs of the product (wage




rises, energy cost increases, interest rate rises,
raw material price increases)
Change in the climate (unfavourable climatic
conditions)
(Reduction of or scrapping of subsidies to
businesses in the industry)
Less use of efficient technology means lower
production and higher costs of producing a
product
Lower productivity levels of labour and capital
resources
Equilibrium or market price
Price
S
The quantity
supplied equals
the quantity
demanded at a
particular price
D
Quantity
The market or equilibrium price
 Buyers want to buy at the lowest possible price
while sellers want to sell at the highest possible
price so:
 In a competitive market, there will be a price
where both buyers and sellers agree to and
an exchange of goods and services will occur.
This is the equilibrium market price. At the
equilibrium price, there is no shortage or
excess of a product because quantity
demanded is equal to the quantity supplied
and thus the goods are cleared. Both buyers
and sellers are satisfied.
A price in the market which is lower than
the equilibrium price
S
Price
$4
$2
D
200
300
450
Quantity
As sellers raise the price
to ‘clear’ the market
Expansion in supply
Contraction in demand
When there is a low price for a product (below
the equilibrium price)
At a low price for the product there will be a shortage
of the product because the quantity demanded at
that price will far exceed the quantity available
(supplied) in the market as profits for suppliers will
be low.
This will cause buyers to be unhappy and allow
suppliers the opportunity to increase prices and thus
produce more profit. Production of the item would
increase as profitability of the item improves, thus
there would be an expansion in supply and a
contraction in demand as prices rise until the
equilibrium price is reached which is the natural
market position where there is no excess or shortage
of the product.
When the current market price is above the
equilibrium price
S
Price
$6
$4
D
200
300
450
Quantity
As sellers lower the price
to stimulate demand
Expansion in demand
Contraction in supply
When there is a high price for a product
which is above the equilibrium price
 When the current market price is higher than the
equilibrium price, there will be an excess of the
product in the market as the quantity supplied at
the high price will be much greater than the
quantity demanded by buyers. Sellers would be
very dissatisfied and would need to clear the
excess stock in the market. They would reduce
their prices causing a contraction in supply as
profitability on the item decreases and an
expansion in demand due to the price decrease
until a situation where demand and supply of the
item in the marketplace is equal (the equilibrium
price).
Changes to the equilibrium price and quantity when
there is an INCREASE IN DEMAND (factors other than
price)
Price
S
D
Quantity
D1
As demand increases there will be an initial shortage of the
product, causing the price to increase with a corresponding
expansion in supply until a new equilibrium is reached
Changes to the equilibrium price and quantity when
there is an DECREASE IN DEMAND (factors other than
price)
Price
S
D
D2
Quantity
As demand decreases there will be an initial surplus of the
product, causing the price to decrease with a corresponding
contraction in supply until a new equilibrium is reached
Changes to the equilibrium price and quantity when
there is an INCREASE IN SUPPLY (factors other than
price)
Price
S
S1
D
Quantity
As supply increases there will be an initial surplus of the
product, causing the price to decrease with a corresponding
expansion in demand until a new equilibrium is reached
Changes to the equilibrium price and quantity
when there is a DECREASE IN SUPPLY (factors
other than price)
Price
S2
S
D
Quantity
 As supply decreases there will be an initial shortage of the
product, causing the price to increase with a corresponding
contraction in demand until a new equilibrium is reached
The role of relative prices in allocating
resources in Australia’s economy
Relative prices:
 The price of one item compared to the price of
another. Changes in relative prices will influence
the behaviour of consumers and businesses.
What would happen to resource allocation in the
economy in the situations below:
 The government gives households a $1000 rebate
to install solar panels
 The government places a 20% tax on ‘alcopops’
 The government introduced a carbon tax of $23
per tonne on Australia’s 500 top carbon emitting
businesses on 1st July 2012
The government places a 20% tax on
‘alcopops’
 The relative prices of other alternative alcoholic
drinks will become cheaper in comparison to
‘alcopops’. This would cause consumers to reduce
their demand for alcopops and increase their
demand for wine as it is now relatively cheaper. As
the demand for wine increases, it’s price will start
to rise also. The increase in demand and price for
wine sends signals to businesses to redirect their
scarce resources away from the production of
alcopops to instead the production of wine as now
greater profits can be made from wine.
The government gives households a $1000 rebate
if they install solar panels
The price of solar panels …………………………………………..
The price elasticity of demand (PED)
 How the quantity demanded by buyers
changes when there is a change in the price
of a product
PED=
% change in quantity demanded
------------------------------------% change in price
Price elasticity of demand
When demand is relatively elastic (PED > 1)
 The quantity of a product demanded by consumers changes
MORE THAN proportionally with a change in the price. The
actual total revenue (sales) for the business will increase
when there is a price decrease but total revenue will
decrease when there is a price increase
 A 7% decrease in price causes a 15% increase in demand for
the product or visa versa
P
7%
D
15%
Q
Types of goods and services that would display a
HIGH price elasticity of demand (PED > 1) – VERY
ELASTIC DEMAND
 Non-essential (discretionary items) in the household
budget tend to be fairly elastic
 More expensive items (a high proportion of income
spent) tend to display a higher elasticity of demand
(holidays / dining out / housing / luxury cars)
 Products which have CLOSE SUBSTITUTES tend to
display a high price elasticity of demand
 (If the product has no complementary products but is
a stand alone item, then it may display more price
elasticity (fresh flowers ? , take away food ?, petrol ?))
The price elasticity of demand
Demand is of ‘unit elasticity’
 The quantity demand by consumers changes in the
same proportion as the change in the price (a 5% drop
in price will cause a 5% increase in the quantity
demanded and visa versa)
P
8%
D
8%
Q
The price elasticity of demand
Demand is relatively inelastic PED < 1)
 The quantity demanded changes less than
proportionally than the change in the price
 (eg: a 15% drop in the price causes an 8% increase in
the quantity demanded by consumers and visa versa)
P
12%
D
5%
Q
Goods and services that may display
inelastic demand (PED < 1)
 Items which are essential (non-discretionary)
 Cheap items in the household budget (small
proportion of income spent)
(milk, bread, cereal, rent, school costs, etc)
 Items which do not have substitutes tend to display
inelastic demand
 (Products which complement other items may
display fairly inelastic behaviour)
 (Addictive products such as cigarettes, alcohol and
poker machine gambling)
 (Products which have significant ‘branding’ in the
marketplace – a strong brand name and presence)
Price elasticity of supply
(PES)
 Refers to how the quantity supplied changes
when there is a change in the price of that
product
PES =
% change in the quantity supplied
---------------------------------------% change in price
A high PES – a large price elasticity of
supply – supply is VERY ELASTIC
 There is a larger proportional change in the
quantity supplied then there is a change in
the price (PES > 1)
P
S
5%
15%
Q
A low PES – supply is inelastic (small
price elasticity of supply)
 Refers to a smaller proportional change in the
quantity supplied compared to the change in
price (PES < 1)
S
P
10%
4%
Q
Factors that determine the ‘PES’
for certain products
 Products that can be more easily stored /stockpiled
(durable items) for longer time periods tend to have a
more elastic supply (stock can be placed on the
market quickly if prices rise)
 Businesses that have spare capacity or where
resources can be moved easily into or out of the
industry in response to price increases or decreases
show a greater PES
 Products that can be produced quickly tend to have
more elastic supply (production period is short)
Price elasticity of supply
Elastic supply
 Products which are
stockpiled (durable)
 Industries operating
below full capacity
 Industries where
resources are easily
moved into or out of
production when
prices change
 Can be quickly
produced
Inelastic supply
 Products not able to
stockpiled or stored
over a period of time
 Industries operating
at full capacity
 Industries where
resources are not
easily moved into
production to
respond to price rises
 Take a long time
period to produce
Market structures
The structure of a market or industry is determined by
the following criteria:
 Number of sellers and their market share
 The degree of similarity of the products sold (are
they identical or very different in their
characteristics)
 Ease of entry and exit into & out of the industry for
sellers
Their are four basic types of market structures
 Perfect competition
 Monopolistic competition
 Oligopoly
 Pure monopoly (no competition)
Perfect competition
 Lots of buyers and sellers in the market.
 Prices are determined purely by the market forces
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of supply and demand – businesses are ‘price
takers’ (consumer sovereignty exists)
All products are the same – quality and features
(no product differentiation)
There are no barriers for sellers to enter or exit the
market
Buyers and sellers have all information available to
them and make rational decisions
Resources are easily mobile and can be moved to
where they can be used most profitably
Buyers and sellers try to maximise their own well
being
Monopolistic competition
 Many buyers and sellers (like perfect competition)
 Buyers and sellers are well informed about
products and resources available respectively
 There are very little or no barriers to enter or exit
the market
 Products are similar in nature but sellers will try
to differentiate their product from other sellers
Products may be differentiated based on:
• Physical characteristics (size, taste, texture,
quality)
• Location (close to consumers)
• Services (offer extra benefits beyond the product
itself – longer warranties or after sales service)
• Image (link the product to a concept / idea)
Oligopoly
 A few only large sellers with a large market
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share and maybe a few (if any) other firms with
low market share
Moderate competition or perhaps even low
levels of competition if only 2 or 3 firms exist
Products could be the same or differentiated
Price collusion or price fixing can occur if their
are only a small number of big firms
Often difficult for businesses to enter the
market (high costs of setting up and of
production and / or barriers created by existing
businesses)
Monopoly
 Only one seller of the product
 No competition so seller is a PRICE-MAKER (sets
the price)
 Product differentiation is not important
 Very high barriers to enter the market (firm often
owns the resources or Government gives firm
the right to be sole producer or costs of
production are too high for other potential
businesses to try and enter the market)
 Eg Postal services, South East Water, Melbourne
Ports Authority, Metro (Melbourne train service)
High levels of competition
Benefits
 Keeps prices and thus inflation low
 Makes firms produce products efficiently otherwise they will not
survive (resources are used efficiently and to their maximum
potential)
 Firms must provide a quality product to the consumer to be
competitive
 Goods and services are produced that consumers desire -consumer
sovereignty (thus maximising their satisfaction and standard of
living
Problems
 Price wars can force many smaller businesses to fail
 Businesses often cut costs to try and survive leading to issues with
safety for workers and / or customers
 Money is often spent on advertising distorting consumer knowledge
and not allowing them to maximise their welfare
Problems with having little or no competition
 Prices of goods and services can be higher than
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what they should be
Lower product quality
Lower customer service
Businesses are more inefficient (leads to lower
production than is possible, inefficient use of
resources – lower GDP – and thus lower living
standards)
Firms may restrict supply in the market leading
to shortages in order to keep prices higher
Market Failure
 Occurs when a free market is
unable to allocate resources
efficiently or when resources
are allocated in a way that
does not maximise society’s
satisfaction or welfare (living
standards).
There is market failure when socially desirable goods
and services are under-produced (public goods)
 If left to a free market, many desirable and essential
goods and services would not be produced or very little
would be produced and / or the prices for these products
would be very high. This because many socially desirable
products are PUBLIC GOODS. Public goods are nonexcludable and non-rival (one person’s use does not lessen
another person enjoying the product). You cannot
exclude non-payers from using the product.
Exs: education, health, roads, street lighting, recreational
areas (parks & pools), transport services, defence services
law and order
 Businesses don’t want to produce these goods and
services because of the ‘free-rider’ problem of people
accessing the product without paying for it. Therefore
businesses make less or lower profits than what they
should. There is a disincentive to produce the product.
Socially desirable products
How can governments promote these products
 Spending through the budget (money collected
from tax revenues)
 Payment of government subsidies to producers
and rebates to consumers (rebates for water
tanks, LPG conversions for vehicles, private
health insurance, subsidies to private schools
and hospitals and some agricultural industries)
 Govt laws to force people to consume a product
(minimum school leaving age)
There is market failure because of
‘externalities’
Occurs when a person or business is engaged in an
economic activity (production or consumption) that
affects the well being of a 3rd party who is not
involved in the activity
Externalities can be either:
 Positive – the 3rd party receives a benefit
 Negative – the 3rd party incurs a problem or cost
Negative externalities
 Causes market failure because firms do not pay for
the social costs that they inflict on other
businesses or people through their actions.
Therefore they continue to create these social costs
as they are not added into business production
costs. Peoples’ standard of living decreases and so
resources have not been used efficiently.
Governments reduce negative externalities by:
 Laws to reduce or stop pollution (noise/air/outflows
into waterways)
 Subsidies or rewards for pollution reduction
 Proposed carbon tax to be introduced (1st July 2012)
There is market failure because of
market power (weak competition)
If competition is weak
 Prices are higher, firms don’t produce and thus use resources
efficiently and often restrict their output
Government can promote competition by:
 Deregulating markets (removal of government restrictions for
competition)
 Financial markets (early 1980s), Labour markets (early
1990s), aviation market (1990s), certain agricultural products
(1990s onwards), etc
 Reducing tariffs on imports (more competition from overseas
forcing our businesses to be efficient in their resource use to
keep production costs down to compete)
 Government bodies to promote competition and investigate
a lack of competiton or breaches in competition laws
(Competition & Consumer Act) and ACCC (Australian
Competition & Consumer Commission)
Markets & the lack of competition
Types of ‘anti-competitive’ behaviour which is illegal as per
the Competition & Consumer Act (2010) and monitored
by the ‘ACCC’)
 Price fixing by 2 or more businesses
 Predatory pricing – where a business deliberately undercuts
a smaller business to drive the small business out of the
market
 Market zones – where businesses agree with each other to
have only certain areas where they sell
 Exclusive dealing – where businesses only buy their products
from a certain firm and sell their products to a certain
business
There is market failure because of
asymmetric information
 When buyers or sellers have more information than the
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other party (usually sellers) or when one party does not
have access to all the information they require to make
a rational decision about resource use
Insider trading on the share market
The used car market
The property market
The food market (artificial ingredients)
Education (parents do not have full information about
the performance of all schools ? – My Schools website
?)
The liquor and tobacco market
Government action to stop asymmetric
information
 Pass laws requiring full disclosure (labelling
on food products, Product Disclosure
Statements (PDS) for financial investment
products, RWC for used cars)
 Govt ad campaigns to inform consumers
 Making certain activities illegal (insider
trading on shares, winding back car
odometers)
There is market failure when undesirable
goods and services are produced
 Examples of undesirable or dangerous products
are alcohol, cigarettes, vehicles, pornography,
prostitution, gambling, drugs, firearms etc
Government reduce these problems by:
 Putting production and / or consumer taxes on
certain products
 Outlawing or restricting the product
 Government inspectors to ensure businesses are
abiding by the law in relation to a product
 Age restrictions on certain goods and services
There is market failure when income
is distributed very unevenly
In purely free markets, income is distributed very unevenly. Those who
own resources earn much more incomes than those that do not own
resources.
Income inequality also exists because of:
 Inheritance of wealth
 Occupational skills
 Educational opportunities
 Geographic location
 Sickness / disability
Government can reduce income inequality by:
 Having progressive tax rates
 Welfare benefits to poorer households (income &/or means tested)
 Access to cheap or free govt services (health card, education subsidies
etc)
 Setting a minimum wage (Fair Work Australia)
 Superannuation co-contribution scheme for lower income workers
Government failure
When government intervention does NOT lead to a
more efficient allocation of resources
 Eg: Tax laws – negative gearing on property
investments (wealthy people buy property to
reduce tax often pushing up house prices)
 Pork barrelling in marginal electorates (promising
big spending in certain electorates if re-elected)
 The obsession with spending on roads rather than
public transport – should be a balance ??
 Over-regulation of the labour market (too many
laws for employers to follow when employing
people ? – is a disincentive for businesses to employ
people ????)
Government intervention to stabilise
economic activity
 Try to avoid massive ‘booms’ (lots of spending by
households and business) and recessions (very
little spending by business and households)
 Aim for strong but sustainable economic growth
 Influence / regulate economic activity through
MONETARY POLICY (RBA) and BUDGETARY
POLICY
Can you answer this question
 Why is climate change considered
to be a failure of markets ????
 Hint: ‘Externalities’
Market failure occurs when the market does not use resources as efficiently as it
could and so household’s standard of living is not maximised. Climate change refers
to a rise in average global temperatures which could lead to more severe weather
events (floods, cyclones, droughts) which could in turn affect the economy of
Australia significantly. The predicted rise in temperature has been caused by manmade activity, notably carbon emissions into the atmosphere. These carbon
emissions are a negative externality as it has and will impact on Australia’s
population in an adverse way through rises air pollution and temperatures. These
carbon emitters (both business and households) have not had to pay in the past for
the social costs that they are creating through their activities and so they continue
to emit carbon through their activities. However, this has changed somewhat with
the introduction of a carbon tax on 1st July 2012 with the top five hundred largest
carbon emitting businesses now paying to some extent for the negative
externalities they create ($23 per tonne of carbon emitted rising by 2.5% in real
terms in 2013/14) which may motivate some businesses to reallocate their scarce
resources to devising ‘cleaner’ methods of production.