iii. supply 3.2 shifts of the supply curve

Topic 3 – Markets

iii. Supply Supply may be defined as the quantity of a particular good which producers (or firms) are willing to offer for sale at a particular price, during some specified period of time.

- The law of supply states that as price rises, supply rises. Conversely, as prices fall, supply falls. 3.1 Movements Along The Supply Curve Movements along the supply curve generally come about from about as a result of two main factors:

1. An expansion in supply – comes about as a result of a rise in price of the good itself. 2. A contraction in supply – comes about as a result of a fall in the price of the good itself.

Expansions or contractions in supply involve a movement along the existing supply curve i.e. the supply curve does not move. 3.2 Shifts of the Supply Curve The supply curve can shift in two basic ways: An Increase in Supply An increase in supply means that producers are willing to sell more of the good at each possible price than before. It also means that producers are willing to sell any given quantity at a lower price than previously.

1. Fall in price of other goods – making production of other good less profitable 2. Improvement in technology 3. Fall in costs of FOP 4. Increase in quantity of resources 5. Climatic and seasonal changes which are favourable to production process

A Decrease in Supply A decrease in supply is shown by a movement of the supply curve to the left. A decrease in supply means that producers are only willing to sell less of the good at each possible price than before.

1. Rise in price of other goods 2. Certain technology no longer available 3. Rise in the costs of FOP 4. Decrease in quantity of resources 5. Regulations put in place which restrict the sales of certain goods (i.e. risky) 6. Climatic and seasonal changes which are less favourable to the production process

Topic 3 – Markets vii. Price Elasticity of Supply

7.1 Elastic Supply, Inelastic Supply Refers to how responsive supply is to a change in price:

1) Perfectly elastic supply: suppliers would supply an infinite quantity of the good at a certain price, whereas below that price they are not willing to supply any (unlikely situation)

2) Perfectly inelastic supply: quantity supplied is fixed regardless of price (i.e. unique piece of art) 7.2 Factor Affecting Price Elasticity of Supply

1. Time lags after a price change: greater amount of time that producers have to respond to a price change, the more elastic the supply for the product ; short run unable to increase inputs but in long run able to increase inputs

2. Ability to hold and store stock: inventory is the total amount of G&S held by a firm; the easier to hold stock, the more elastic the supply is for durable goods; inelastic for perishable items

3. Excess capacity: when firm is not using its resources to its full capacity; supply will be inelastic when resources are being used at full capacity

iv. Market Price

4.1 Market Equilibrium Market equilibrium is determined through the interaction of supply and demand forces.

- At any price below the equilibrium, the quantity demanded exceeds the quantity supplied and therefore there is excess demand (a shortage). - At any price above equilibrium, quantity supplied exceeds quantity demanded and therefore there is excess supply (a surplus).

v. Alternatives to Market Solutions – The Role of Government 5.1 & 5.2 Government Intervention In Markets Market failure is the reason the governments have to intervene in the market place. Market failure refers to the occurrence of the market forces creating unfavourable outcomes. The aim of government intervention is to achieve desirable outcomes; some ways that they intervene include:

• Price control schemes • Price support schemes • Externalities

1. Price Control Schemes - Government fixes prices above or below the equilibrium if they believe that it is what the public wants.

Price Ceiling - This occurs when a maximum price for a good or service is set below the equilibrium.

Topic 3 – Markets

2. Price Support Schemes - Price Floor - This occurs where the government sets a minimum price for a good or service above the equilibrium

3. Externalities - Externalities are impacts or consequences of resource decisions that are not reflected in the price of the good or service being produced such as pollution. - Governments can impose taxes on businesses, which increase the costs of production and reduce production levels.

- Merit Goods: goods or services that the government believes are beneficial to society but they may not be produced in adequate quantities because the

market is too small and there is little or no incentive for private production e.g. education.

- Public Goods: goods that private firms are unwilling to supply as they’re not available to restrict usage and benefits to those willing to pay for the good. In other words, they can’t exclude people from using the good and thus the government provides this good e.g. national defence.

Problem Government Action Problem

Market price too high Price ceiling Reduces price, quantity shortages [Disequilibrium]

Market price too low Price floor Increases price, quantity excess [Disequilibrium]

Market quantity too high [negative externalities] Taxes Increases equilibrium price, reduces equilibrium quantity

Market quantity too low [positive externalities] Subsidies Reduces equilibrium price, increases equilibrium quantity

Market does not provide good or service Government provides good or service Government must collect taxation revenue to finance its supply of public goods

Topic 3 – Markets Market Structure Number and Relative Size of Firms Type of Product Entry Conditions Examples Perfect competition Very large number, relatively small

size Homogenous (similar) Very easy – no entry

barriers Fish markets, Fruit markets

Monopoly One firm only, often very large Unique – no close substitute Blocked Australia Post Sydney Water

Monopolistic Competition Large number, relatively small size Differentiated Relatively easy Cafes Motels

Oligopoly Few, relatively large Differentiated or Homogenous

Significant obstacles preset Supermarket, airlines

Topic 4 – Labour Markets

i. Demand for labour - The services of labour are demanded only because they are needed for the firm to produce goods and services and make a profit. - The demand for labour is a downward sloping curve. This indicates that as the price of labour (wages) fall, an individual firm will employ more labour. - Derived demand is the derived from the demand of G & S within the economy

1.1 Factors Affecting Demand The output of the firm The most significant influence on a firm’s demand for labour is its level of output. If a firm is experiencing higher sales, it will increase production and therefore increase demand for labour. General economic conditions • Aggregate (total) Demand– refers to the total demand for goods and services within the economy.

• Higher rates of economic growth > falling unemployment levels and vice versa. • Changes in the demand for labour will occur as a result of fluctuation in the business cycle • Time lag between firms observing a pick-up in the level of demand and raising their demand for labour. • Firms tend to operate with excess capacity. They do not always utilise their resources and tend to accumulate

labour so as not to have to train new staff when production picks up. • When production does increase, firms can satisfy the higher demand, at least in the short run, by using their

existing resources more efficiently and intensively. • During a fall in aggregate demand it takes time for firms to notice that their sales are falling, cut back

production and retrench some of their workers Conditions in the firm’s industry • A change in the consumer tastes and preferences for different goods and services will see a change in the

allocation of labour between different industries • Increase in demand for an industry’s products > increase in demand for labour

Demand for a firm’s products • Firm’s output is determined by its effectiveness in selling goods and services • This is determined by the quality of its products, its customer service and its marketing efforts.


1.2 Productivity of labour - The productivity of labour can be defined as the output per unit of labour per unit of time: - The cost and productivity of labour will determine the extent to which a firm uses labour in its production.

- Generally, labour productivity depends on the quality of the workforce (including overall education, skill, health and desire to perform) and how efficiently labour can be combined with other factors of production in the production process.

- An increase in labour productivity can have either a positive or negative impact on the demand for labour, depending on whether aggregate demand increases or not.

• If AD is rising, there is a higher demand for G & S – is AD is rising at a faster rate than the increase in productivity, higher demand will be greater than the higher production generated by the existing workers.

• If AD is unchanged, but labour productivity is rising then the existing workers will be producing more G & S, but there will not be any higher demand in the economy

• If AD is falling but labour productivity is rising, the demand for labour will fall even more

- In summary: more labour will be employed when labour productivity increases, but only when there is a sufficient increase in aggregate demand to warrant it.

- If firms substitute capital for labour > reduce demand for labour > output levels remain the same or increase. 1.3 Cost of Other Inputs

- Firms must consider the cost of all inputs when choosing how much labour to employ as compared to capital. - If the cost of labour is relatively high, firms will use more capital inputs in the production process, and less labour and vice versa.

- A firm’s demand will respond more sharply to price changes when: • It is easy to substitute between labour and capital • Labour costs are a relatively high proportion of its total costs • It is difficult for the firm to pass on increased labour costs in the form of higher prices to consumers.

- When comparing the cost of labour against the capital, firms must include both wages and labour on-costs/benefits such as sick leave.

1.4 Other factors

- A firm’s demand for labour may also be affected by discrimination or prejudice on the part of some employers, or due to mistaken belief that members of certain groups in society are less productive workers.

- Firms must satisfy certain legal requirements when employing workers, such as giving them holiday leave and ensuring minimum occupational health and safety standards at the workplace.

Labour Productivity = Total Output/Labour Input


ii. The supply of labour

Factors affecting supply 2.1 Pay levels

• The higher wage offered, the more people are willing to work. • Other non-wage and salary incentives would also influence one’s willingness to work.

2.2 Working Conditions

• Attractive working conditions encourage a higher supply of labour to a workplace and vice versa. • Firms may offer incentives such as generous holiday leaves which would increase people’s willingness to work.

2.3 Education, Skills and Experience Requirements (Human Capital) • The education, skill and experience requirements for some type of sales can limit the supply of labour. • Human capital refers to the knowledge, skills and training of workers which contribute to the process of production ; reflects the quality of the labour force

and it’s productivity strength • A country with relatively high levels of human capital is more likely to achieve low unemployment. • Government spending on education and training will also influence the skill levels in the workforce.

2.4 The Mobility of Labour The supply of labour will be affected by its responsiveness to changes in the demand for labour in different areas and industries Two types of labour mobility: Occupational Mobility – refers to the ability of labour to move between different occupations in response to improved wage differentials and employment opportunities. Geographical Mobility – refers to the ability of labour to move between different locations in response to improved wage differentials and employment opportunities. Factors that limit geographical mobility include:

• The costs of relocating, including travel, transportation and real estate costs. • The personal upheaval associated with moving, such as breaking ties with family and friends.

2.5 The Labour Force Participation Rate

• People may decide not to participate in the workforce because they want to undertake further study or take care of family; or • They think they are unlikely to find a job or would rather rely on other forms of income. • Labour force: total employed and unemployed person in the country at a given time (workforce)

Labour Force Participation Rate (%) = Labour Force X 100 Working Age Population (15+) 1


2.6 Other Factors • Supply of labour may be restricted as a result of government policy decisions or the collective action of those providing labour within an industry. • Higher participation rate > increased living standards • Government can limit the supply of labour to particular occupations by imposing certain qualification and license restrictions e.g. builders.

iii. The Australian Workforce 3.1 Definition of the Workforce The Australian workforce can be defined as that section of the population who are 15+ years who are working or actively seeking work.

Included In the Workforce Not Included in the Workforce • Persons aged 15 • Employed for at least one hour a week • On paid leave, strike or on workers compensation • Unemployed – actively seeking and available for work

• Children under 15 years. • Full time, non working students above 15 years • Retirees • People performing full time domestic duties • Without a job but not available or actively seeking work

The Australian workforce can be divided into 2 categories:

1. The employed – a person is defined as being employed if they have more than one hour of work per week. 2. The unemployed – a person is defined as unemployed if they are currently available for work and are actively seeking work.

3.2 General Characteristics of the Australian Workforce The size and quality of the workforce is affected by 3 main factors:

a) Population size b) The age distribution c) The labour force participation rate

a. Population Size • Sets the limit to which the workforce can grow • The larger the total population, the greater the potential workforce • Population growth influenced by 2 factors – natural increase and net migration. • Natural increase refers to the excess of births over deaths in the population over a period of a year. • Net migration refers to the excess of permanent new arrivals to our country over permanent departures over a period of a year.

b. Age Distribution • The greater the proportion of the population in the 15-65 age group, the greater the potential for a larger workforce. - Full time workers are employed people who usually work 35 hours a week or more. - Part time workers are employed people who work more than 1 hour but less than 35 hours a week.


iv. Labour Market Outcomes Labour market outcomes refer to the performances of the labour market in terms of wage and employment levels. Wage outcomes refer to the following:

• The rate of wages growth • The distribution of wages and salaries • The forms of labour income e.g. fringe benefits • The relative differences between these wage levels, according to income groups, occupational groups, age, gender and cultural background.

4.1 Wage Outcomes Average Total Earnings - measures the average weekly gross rate of pay to all employees Nominal Wage - is the pay received by employees in dollar for their contribution to the production process not adjusted for inflation Real Wage - measures the actual purchasing power of money wages Inflation - the sustained increase in the general level of prices over a period of time, usually one year

- this is commonly measured by the percentage change in the consumer Price Index (CPI) 4.2 Differences in Wage Outcomes Wage differentials between different occupations

• People are generally rewarded for working in occupations that require a higher level of skill and a longer period of training. • They will not spend their time and money acquiring education unless they are confident that they will receive higher wages when employed or some other

substantial benefit. • If occupational mobility is high, supply of labour will be high, less need for employers to raise wages to attract labour and vice versa.

- Wage differentials in the same occupations

• Wages also differ for workers in the same occupation, reflecting the various degrees of experience. • Employers find it difficult to attract labour to isolated locations, and generally have to pay higher wages to do so (geographical mobility). • The productivity of labour will influence wage rates paid. • Enterprise bargaining employees often gain higher wages at the individual enterprise level in exchange for taking steps to increase their productivity. • The capacity of the firm to pay also influences wage outcomes. More profitable firms have a greater capacity to pay for higher wages.

- Age

• Income levels are low in the earlier years of working life. • Highest when people are 25-64. • Income levels decline as people get older and need to rely on aged pensions.


- Gender • Discrimination by employers against certain groups in our society means that people in some groups have fewer job opportunities and less access to higher

paid jobs, leading to lower earnings. - Ethnic and Cultural Background

• Those born overseas tend to receive higher weekly income levels than those born in Australia. • Migrants from non-English speaking countries have lower income levels than those born in Australia. • Lack of understanding of the language leaves the non-English speaking migrants unable to obtain better paid jobs even if they have the equivalent skills and

experience of their Australian-born counterparts. 4.2 Non-Wage Outcomes Many employers receive additional benefits such as sick leave, holiday leave and other fringe benefits. These are known as non-wage outcomes. Different types of non-wage outcomes include:

• Salary packaging. Employees receive a company car, laptop etc. • Bonus cash payments. These come about as a performance bonus, either based on the company’s profit performance or the employee’s individual work

performance. • Flexibility for employees in work patterns. Employees may be given time to study, extra paternal leave etc.

4.3 Trends in the Distribution of Income from Work

• In the 1980s, the prevalence of the award wages system ensured that differences in wage outcomes both between and within occupations were smaller. • Negotiations between employers and employees have created a much greater difference in wage outcomes for both different industries and individuals. • Emerging industries that require skilled labour are likely to pay higher wages than declining industries that are experiencing falling demand for their goods

and services. 4.4 Income Distribution Within Occupations

• Recent years have seen an increase in the dispersion of earnings within occupations and among employees with the same skill levels or educational qualifications.

• Another contributing factor is the declining level of union membership in Australia. • High rates of union membership create more similar wage outcomes in an occupation, but as union influence has declined there has been greater variation

in wage levels.


4.5 The costs and benefits of an inequitable distribution of income Economic benefits of inequality - The labour force is encouraged to increase education and skill levels

• If those with higher qualifications and skills receive higher income rewards, new entrants and participants in the labour force will be encouraged to improve their education and skill levels.

• Income inequality > increase in the quality of the labour force. - The labour force is encouraged to work longer and harder

• The potential to earn higher income produces an incentive for workers to work longer hours or to work overtime. • Workers will only be willing to give up leisure time in order to work longer hours when they feel the extra income is more valuable than their leisure time. • Increased output is rewarded through higher pay > improved labour productivity.

- The labour force becomes mobile

• A more mobile labour force > more efficient allocation of resources > higher rate of economic growth - Entrepreneurs are encouraged to more readily accept risks

• Income rewards for entrepreneurs is necessary to encourage them to take risks associated with business. • If they did not receive extra rewards for risk taking then > fewer entrepreneurs and businesses > lower rate of economic growth > fewer jobs > reduced

productive capacity in the economy. - Potential for higher savings and capital formation

• Higher income earned, the greater the proportion of income that will be saved and vice versa. • Greater income inequality should encourage increased savings in the economy because of the greater number of higher income earners.

Economic costs of inequality - Overall utility is reduced

• Generally felt that inequality in the distribution of income reduces the total utility or satisfaction in society. • Based on the assumption that people on higher incomes gain less satisfaction from an increase in income that people on lower incomes. • Reasoning is that as more of a good is consumed it will prove progressively less utility to the consumer.

- Consumption and investment is reduced

• Poorer people spend a higher proportion of their income than richer people. • Thus less income will go towards consumption. • This leads to lower economic activity, employment, investment and living standards.


- Expenditure on conspicuous consumption • Inequality in income distribution creates a class of higher income earners who spend a large proportion of their income on ‘conspicuous consumption’,

which is a consumption of expensive goods and services purely for the purpose of displaying wealth e.g. expensive cars/clothes. • Lower income earners might try to emulate conspicuous consumption to lift their status, rather than spending their money on more necessary goods or

services. - Less work and work efficiency

• Inequality in income distribution causes relative poverty. • Reduces educational opportunities and lowers self esteem. • May result in people not working to their full capacity or not working at all.

- Welfare support

• Places demands on government spending as a large number of people on low incomes may require government assistance. Social costs of inequality - Problems associated with social class divisions

• Class divisions can result in tensions between people and between different regions. • Wage disputes between workers and capitalists, in which workers try to improve their income level, are a common cause of dispute. • These divisions can lead to social and economic upheaval

- Poverty

• There are many Australians who live in relative poverty. • This leads to misery for those in poverty and tends to trap families into a vicious cycle of low incomes and few economic opportunities. • High poverty levels also tend to be associated with high levels of crime, suicide, disease and reduced life expectancy.


v. Labour Market Trends 5.1 Unemployment

Types of Unemployment Cyclical unemployment Results from the ups and down of the business cycle. During a downturn, firms respond by cutting back production levels

and laying off workers. Structural unemployment Occurs because of a mismatch between the skills demanded by employers and those possessed by unemployed people. Seasonal unemployment Occurs because of the seasonal nature of some jobs (such as tourist-related jobs) and during periods of the year when new

school leavers enter the job market Frictional unemployment Occurs as people change jobs – it usually takes some time to move from one job to another Hard Core unemployment Refers to those individuals who might be considered unemployable because of some personal characteristic such as mental

or physical disability Hidden unemployment Refers to those individuals who are not counted in the official unemployment figures ( they have given up actively seeking

work or have gone back to school) Long term unemployment Refers to those individuals that have been out of work for a period of 12 months or more.

Underemployment Refers to those individuals who have part-time jobs but would like to work more hours per week. 5.2 The Move Away From Full Time Work

- The labour market has been undergoing changes over recent years. The main change in work practices is the shift away from full time work towards more work structures which give businesses flexibility e.g. part time work, casual jobs, outsourcing, individual contracts and sub-contracting.

5.3 Part time employment

- Part time workers are employed people who work more than 1 hour but less than 35 hours a week. - Casual employment is when employees have occasional work hours that don’t follow a set pattern. - The 90s saw a shift towards part time and casual employment. Several factors help to explain this shift, these include: • Some employees prefer part time work to satisfy non work commitment e.g. family, study • Part time work my be a preferred lifestyle choice • Improvements in communication technology make it possible for people to work in more flexible arrangements

Unemployment Rate = (Number of unemployed/labour labour) x 100/1


5.4 Casualisation of Work The advantages of casualization are: - Flexibility for employers to increase or decrease as per the business’ change in demand - Employers can avoid paying some non-wage costs such as penalty rates or redundancy entitlements - Flexibility for employee who want to engage more in non-work commitments (i.e. family, study) The disadvantages of casualization are: - Less job security - More difficult for employees to plan financially for the future (i.e. home loans securing) - Less staff loyalty and development of workforce skills 5.5 – 5.7 Outsourcing, Contractors and Sub-Contracting - Outsourcing and subcontracting is when the firm pays a private sector company or an individual to perform non-core functions. These jobs are predominately

contract based (limited time period). vi. Labour Market Institutions - The relationship between employers and employees is known as industrial relations. - The Industrial Relations System involved the laws, institutions and processes established to resolve conflict between employers and employees. 6.1 Trade Unions The Role of Trade Unions

• A trade union is an association of workers, which aims to advance the interests of its members by improving their wages and working conditions. • Trade unions bargain collectively on behalf of their members, thereby increasing bargaining power of individual workers in wage negotiations. • They use industrial actions such as strikes to support their claims for higher wages or working conditions.

Occupational Unions Draw their members from people of the same occupation e.g. Electrical Trades Union

Industrial Unions Cover workers in a particular industry regardless of the type of work they do e.g. Transport Workers’ Union General Unions Cover a whole range of workers with many different skills across various industries e.g. The Australian Workers Union.

Most unions are joined with the Australian Council of Trade Unions (ACTU). The ACTU has several roles today:

• It provides a national union movement voice when proving input into Safety Net Review Wage Case. • Play a key role in major industrial relations disputes. • Is the voice of the union movement on key industrial relations issues e.g. enterprise bargaining.


Unionisation levels have declined because of: • Increasing casualisation of the workforce in the services sector where union presence is low. • The decline in manufacturing employment, a traditional stronghold of unionism • The decentralisation of wage determination • A general fall in confidence in the union movement’s ability to deal with industrial issues.

Trade unions can influence labour market outcomes in 2 ways:

• By restricting the supply of labour to only unionised worker, this will cause a shift in the supply curve to the left, forcing up wage rate. Reduces the quantity of labour employed to only union members.

• By attempting to raise wage levels above market equilibrium. If the award wage for an occupation is raised, the supply curve of labour may change, creating a wage floor. However at the wage rate, supply of labour exceeds demand and thus leading to unemployment.

6.2 Employment Contracts - These are agreements made between an employer and employee on an individual basis. They generally favour the employer. Contracts offer employer a number of benefits:

• They provide the greatest flexibility for changing pay and working conditions to the individual circumstances of the firm and employee. • At the end of the program, the employer has no obligation to provide work or redundancy payment.

Outsourcing is another form of employment replacing full time work. Outsourcing (or sub-contracting) occurs when an organisation pay businesses to perform a function, which it doesn’t regard as a core part of its business focus, For example, governments leaving their information technology operations in the hands of private companies. Advantages of outsourcing:

• It aims to improve efficiency because it allows the organisation to focus on its area of specialisation • It tends to create shorter term employment arrangements because workers only work until they complete the job.

Sub contracting is a method of labour contracting which is more common in certain industries such as building. Sub contractors are private companies that work for large contractors, but charge their own wage rates and provide for all the costs of employment e.g. taxation, superannuation etc. Role of Employer Associations Employer Associations represent employers in similar industries. Employer Associations seek to have a collective voice on industrial relations to protect the interest of their member in negotiation with trade unions. Employer Associations:

• Make employer submissions at the annual Safety Net Review Case • Make employer submissions over industrial relations issues such as unfair dismissal laws.


6.3 Current Employment / Industrial Framework • The federal government has the constitutional power and responsibility to resolve nation industrial disputes. • State and Federal industrial tribunals set minimum wages and working conditions for a range of occupational awards at both state and federal level as a

means of providing a safety net for workers on minimum wages. • Tribunals hold hearing and may be called upon to conciliation or arbitration services. • Introduction of Workplace Relations Amendment Act 2006 > AIRC’s power to adjust the federal minimum wage and working conditions was handed over

to the Australian Fair Pay Commission (AFPC) • The Federal Government creates legislations to establish procedures for wage negotiations and working conditions.

The Role of Industrial Tribunals - The main role that these tribunals play is to resolve disputes between employers and employees. - The key role of the Australian Industrial Relations Commission (AIRC) has been to resolve industrial disputes through conciliation and arbitration. - Conciliation – is the process in which the tribunal provides a mediator who tries to help the disputing parties to reach an agreement - Arbitration – occurs when an industrial tribunal or court makes a rule that is legally binding on all parties. - The Court’s role is to interpret and to enforce AIRC decisions. - The Court’s role is important because the AIRC is not a court, and therefore its decisions and determinations are not automatically enforceable in the same way

as the courts would be. - The Workplace Ombudsman enforces the legal obligations of employers, unions and employees. The role of the Ombudsman is to ensure that agreements are

implemented, and that employees receive their minimum pay entitlements. - The Workplace Authority promotes individual contracts and reviews contracts.

Topic 5 – Financial Markets

i. Financial Markets in Australia 1.1 Financial Markets

• The financial markets play key role in the economy as the market allows both savings and investment, which are the basic elements necessary for economic growth.

• Price is determined by the interaction of demand and supply • Financial markets affect how we act and interact in the economy.

1.2 The Financial Sector

• The financial sector comprises all those institutions involved in the borrowing and lending of money and in the provision of related services • Institutions such as banks, building societies and credit unions are called financial intermediaries • The process is bringing together the funds from a large number of lenders who have a surplus of money and make them available to borrowers who have a

deficit of money is called intermediation • The flow of funds from savers to borrowers can be described as indirect or intermediate financial flows. They are indirect because the savers have no direct

contact with the borrowers.

- The role of financial intermediaries • When financial intermediaries borrow funds from the surplus sector (lenders), they pay this sector a certain agreed rate of interest. • When they lend these funds to the deficit sector (borrowers), they charge interest. • Interest Differential – the difference between the rate of interest paid to savers and the rate of interest charged to borrowers. This is used for running

expenses of the financial intermediary as well as providing profit. 1.3 The Structure of Financial Markets

• They play an important role by providing a return for those in the economy who have savings or excess funds and by making funds available to those who need additional money.

• Consumers tend to be the net savers in a market economy, and the businesses the net borrowers. Sources of savings:

• The proportion of household incomes that are not spent on consumer goods is saved. • Businesses can save by not distributing part of their profits to their owners. • When the government budgets for a surplus it means that it is accumulating savings. • Australians can borrow funds from overseas. In this way they get access to foreign savings.

Reasons for borrowing:

• Consumers borrow when their demand for goods and services exceed their current funds. • Entrepreneurs borrow to fund the expansion of their businesses. • The government becomes a borrower of funds when it budgets for a deficit.


• Australian financial institutions can lend money to overseas borrowers.

1.4 Primary and Secondary Markets Primary Financial Markets • Facilitate the creation of financial assets, known as securities, which can be sold into the economy.

• If a business wants to raise funds it can borrow money by issuing debt securities or sell new shares. • The money received from investors goes directly to the company

Secondary Financial Markets • Involve transactions with financial assets that have already been issued on a primary market some time in the past • Companies whose securities are traded on the secondary market do not receive any money from these

transactions. Securities – any form of financial instrument, including shares and bonds, which represent negotiable financial value. 1.5 Financial Market Products Consumer Credit • Allows consumers to purchase consumer goods and services in advance of actual payment

• Most common type of consumer credit is the credit card • Other major forms of consumer credit are personal loans offered by banks and credit unions.

Housing Loans • Offered by banks, as well as mortgage originators such as Aussie Home Loans. • Long term loans to purchase property • Requires periodic repayments with interest

Business loans • Form of debt, which allow business to begin or expand production of goods and services. • Small businesses typically borrow funds from finance companies and banks. • Larger companies tend to borrow from merchant banks as well

Bond Markets • Bonds are a written record of debt • The borrower sells a bond in return for a loan • The holder of a bond receives interest payments and the final payment • Bonds can be sold in the secondary market. • Markets for longer term securities where lenders receive regular fixed payments from the issuing institution, and finally

receive the coupon payment (face value of the bond) at maturity. • Bonds usually issued by a small number of companies and banks

Short Term Money Market • Brings together people and businesses with temporary shortages or surpluses of funds Debt securities have a maturity date of less than one year

• Surplus can be invested for a short period of time hoping it’ll create profit that can be loaned to people who need it Share Markets • Provide an avenue for the trade of shares and other financial products. Financial Futures • Contracts to trade in other financial instruments, such as bank bills, at a later date for a certain price.

• Allow investors to avoid against adverse movements in interest rates or share prices Foreign exchange/FOREX market

• Market for buying and selling of foreign currencies.


ii. Regulation of Financial Markets – the role and functions of current institutions Before the early-mid 1980s, the Reserve Bank of Australia (RBA), acting on behalf of the government, had very powerful direct controls over the banks. The RBA could tell the banks:

• How much they could lend • To whom they could lend • What rate of interest they could charge

- These controls had banks being inflexible when it came to offering a service to customers. - As a result, many people began to turn away from the banking sector to the non-bank financial institutions (NBFI’s) such as finance companies. - The Campbell Report and the Martin Report came to the conclusion that it was time to abolish direct controls over the banking system.

Consequences of financial deregulation:

• Less distortion in the allocation of resources in the economy, as market forces of supply and demand now determine who gets the borrowed funds. • Increased competition > encouragement for innovation and efficiency in the financial sector • Reckless lending during the 1980s which had large corporations bankrupt.

Three major regulators under the new regulatory structure:

• The Reserve Bank of Australia (RBA) • The Australian Prudential Regulation Authority (APRA) • The Australian Securities and Investments Commission (ASIC)

The Reserve Bank of Australia • Responsible for monetary policy, payment systems, regulation and stability of financial system Australian Prudential Regulation Authority (APRA)

• Responsible for prudential supervision and regulation of all deposit-taking institutions, life and general insurance and superannuation funds

Australian Securities and Investments Commission (ASIC)

• Responsible for corporate regulation, consumer protection and oversight of financial service products

Australian Treasury • Main advisor of government on financial stability issues, legislative and regulatory framework for the financial system

Council of Financial Regulators • Coordinating body for financial regulation that provides for cooperation and collaboration among its for members – RBA, APRA, ASIC and Treasury


iii. Borrowers: The Demand for Funds

- Main borrowers: 1. Individuals 2. Businesses 3. Governments

3.1 Individuals

• Borrow money for personal purposes • Most commonly for family home • Also borrow for short term purposes such as a car, holiday etc.

3.2 Businesses

• Borrow to expand production, invest in research and development. • Can be done by issuing shares or by borrowing from a financial institution

3.3 Governments

• Borrow to raise the level of economic activity • Also to increase its spending or give tax cuts • May also borrow if they are engaged in major infrastructure projects e.g. 2000 Olympic games

iv. Factors Affecting the Demand for Funds • Benefit of holding money is liquidity • Benefit of purchasing assets is that you can earn a return on them

Transactions motive • People have day to day transactions in which they need money including regular payment for goods or services

• Shares or bonds are not an acceptable form of payment Precautionary motive • There are numerous unpredictable circumstances and emergencies for which people need to have liquid funds Speculative motive • Buying financial assets carries the probability of capital gains or losses

• If the price of shares or bonds goes up, the individual will make capital gains, otherwise they make capital losses. • If individuals expect the value of financial assets to fall they will try to sell their financial assets and convert them into money.

- Financial innovation can alter people’s demand for liquidity. In recent decades, many alternative forms of accessing funds or making payments have

emerged, such as ATMs. This means that people do not need to hold high volumes of liquid funds for day-to-day transactions. - Liquidity – the ability to access money


v. Lenders: the Supply of Funds

- Main lenders: 1. Individuals 2. Businesses 3. Governments

5.1 Individuals

• Place deposits in institutions, in effect, loaning money to that institution to get a return of it. 5.2 Businesses

• A successful business may be achieving a very strong cash flow and good profits, and may not have immediate plans for expansion or buying out another. 5.3 Governments

• Can pay off outstanding debts from the past or maintain positive financial balances.

vi. Financial Aggregates measured by the Reserve Bank 6.1 – 6.3 Currency, Broad Money and Credit

- Money acts as: • A medium of exchange – where goods, services and resources are exchanged for money • A measure of value – used to compare the relative value of items • A store of value – used to measure the value of goods, services and resources over time • A method of deferred payments – allows the system of lending and borrowing

Money Supply – is the amount of quantity of money which exists in the economy at any given point in time. M1 - Defined as currency + current deposits held with all banks M3 - Defined as M1 + all other deposits held with banks Broad Money - Defined as M3 + (NBFI deposits – NBFI deposits in banks) Money Base - Defined as Currency + Bank deposits with RBA Credit - Includes loans and advances by financial intermediaries + total bank bills outstanding


vii. Interest Rates

7.1 Interest Rates • Interest is the price paid for borrowed funds. • Rate of interest is determined by the demand and supply of loan funds

Demand for Loan Funds

• The demand for loan funds comes from borrowers. • Interest rates rise > cost of borrowing increases > demands for loans contract and vice versa.

Supply of Loan Funds • The supply of loan funds comes from savers. • Interest rates rise > more willingness for households to save because they receive a greater rate of return and vice versa.

- The Influence of Interest Rates on Economic Activity

• Increase in interest rates > reduction in economic activity • Interest rates rise > reward for savings increase > households stop spending and start saving and vice versa. • Savings is a leakage from the circular flow.

Interest Spread or Margin = Lending Rate – Borrowing Rate

- Lending rates – is the rate of interest that banks or financial institutions charge borrowers. - Borrowing rates – the rate of interest that banks or financial institutions are prepared to offer savers. The demand for capital goods(investment)

- Stronger investment demand > higher demand for borrowing by firms seeking to finance their capital expansion > upward pressure on the level of interest

- Either an increase in the real wage rate, making capital relatively cheaper compared to labour, or an increase in the level of economic activity, whereby firms need to expand capacity to satisfy stronger demand > stronger demand for capital goods by firms.

Level of savings in the economy - Higher level of savings means that there is an increased supply of loanable funds, which should put downward pressure on interest rates.

The demand for money - If individuals have a stronger preference for highly-liquid funds, they might forgo buying securities, and instead choose to hold their funds in bank deposits or in the form of currency

- This would mean that the supply of loanable funds is lower and have an upward pressure on the rate of interest Inflationary expectations - Inflation reduces the value of money and financial assets

- If inflation is expected in the economy, lenders would require a higher interest rate to be paid to compensate for the risk of a loss.

- Higher expected inflation > higher nominal interest rates International Interest Rates - The level of world interest rates has a significant impact on domestic interest rates.


- If the domestic rate of interest was lower relative to overseas, domestic lenders would seek to invest their funds overseas, reducing the supply of loanable funds, putting upward pressure on interest rates.

The Role of the Share Market in the Economy Shareholders

• Main reason for investors to purchase shares is to gain a stake of any company profits and to make capital gains from increases in share prices. • Owning shares also gives investors the right to vote for a company’s board of directors and ultimately decide how the company will act to maximise the

wealth of shareholders. • Proportion of profits received by company will be returned to shareholders. These payments are known as dividends. • As the company grows, the value of the company increases and share prices rise. • For shareholders, the possible gains from holding shares are almost limitless. If the value of their shares continues to increase, the shareholder may sell at

any time to make a gain. • The risks of being a shareholder are limit. If a company loses money or closes due to business failure, shareholders only lost the amount they invested in

shares. Companies

• When a company decides to list itself on the stock exchange it must set about offering its shares to the public for the first time. This process is called a float. • It is often beneficial for a company to float itself to access funds for investment without having to earn these funds as profits or having to borrow them from

a financial institution. • A company can access further equity funds at any time by issuing an approved prospectus for the release of new shares. • Issuing new shares reduces the control existing shareholders have over the company, as they will own a smaller proportion of the company. • A company’s share price is set by the market forces of supply and demand and reflects factors such as confidence in management, previous earnings,

expected earnings and general economic conditions. • A low share price can expose the company to a possibility of a takeover.

The economy as a whole

• Share market values are often an indicator of a country’s economic conditions. • Rising share prices generally suggest that the economy is enjoying good conditions and vice versa. • When individual shareholders expect economic prospects to improve they will invest more in order to maximise profits. • The share market is often described as the “barometer” of an economy, as it is a useful guide to both the confidence and strength of the economy as a

whole. • A downturn or upturn in the share market can be measured by the All Ordinaries Index, which measures changes in the overall value of companies listed on

the Australian Stock Exchange (ASX). • By comparing the changes in the ASX with changes in a country’s economic growth rate, we can see that the market generally rises and falls in line with a

country’s economic prospect.


• Share market also acts as a method of allocating resources to different types of production. The share price will be higher for firms in industries that shareholders expect will experience high growth

The Impact of Share Market Activities - Investment

• Share market encourages more efficient investment in the economy. • The problem with people saving their money in the bank is that they are left with limited, low benefits. • A healthy share market will encourage individuals to purchase shares with their additional income, as these offer the potential for higher returns. • A healthy share market also ensures that shares have a much higher liquidity, which makes them more desirable.

- Debt

• Companies can pay off debt in one of two ways – debt financing or equity financing. Debt financing involves borrowing money with the obligation to repay that money. Equity financing involves selling ownership in the company in order to raise funds.

• Companies choose to float as the funds they gain do not need to be repaid. • This is unlike debt, which must be repaid regardless of a company’s success or failure and which requires regular interest payments. • A company that decides to float on the share market will avoid debt, and as a result, the overall level of debt in the economy is likely to be lower.

- Asset Prices

• Because investors have limited funds, they will choose to invest in assets that have a greater return. When an asset is doing well, demand for the asset is likely to increase, raising its price.

• Speculators buy lots of share to drive up the price of the asset; more speculators y the same shares (believing that the price will go up further); the extra demand forces the price up further, and so on. This creates a speculative bubble, in which share prices are driven by speculation rather than real financial performance.

- The Business Cycle

• Downturns in the share market are often associated with falling growth rates in the economy. • Economic conditions influence share prices, but share prices also influence economic conditions. • Market experiences downturn > shareholders feel less confident about their economic expectations > may encourage shareholders to save instead of

consume > economy slows down. • Downturn in economic conditions > discourage investors from buying shares > fall in share prices.

Topic 6 – Government and the Economy

i. Government Intervention in the Economy 1.1 Limitations of the operation of the free market

- The free operation of market forces does not always achieve the most desirable economic and social outcomes - Consequently, the government intervenes and modifies the operation of the price mechanism in order to achieve:

• A better allocation of resources • A more equitable distribution of income • Greater economic stability

- The general fault of markets is that unfortunately they only consider private economic interests and not the broader social interests - The challenge is to find the right balance. - Too much government intervention may stifle innovation, efficiency and growth - Too little intervention may cause instability, inequity and a lack of basic community facilities - Hence, market failure occurs when the operations of the market result in inefficient and unfavourable outcome

The main reasons therefore why governments intervene in the operation of markets is because of market failure. More specifically:

1. Market failure in the provision of goods and services 2. Market failure in income distribution 3. Market failure in externalities 4. Market failure in the abuse of market power 5. Market instability

1. Market Failure in the

Provision of Goods and Services

- Public good is a type of market failure because you can’t stop people from using it even if they don’t pay for it - Public goods are items which the private sector are unwilling to supply as they are not available to restrict the usage and

benefits to those willing to pay for the good - Public goods will always attract free-riders who benefit without contributing towards their costs - Free riders are groups or individuals who benefit from a G or S without contributing to the cost of supplying the G or S

(G or S is likely to then be under-supplied in relation to the total demand) - Public good are non-excludable (thus attracting free-riders) and non-rival (one person’s enjoyment of the public good will

not diminish the potential for others to enjoy the good) - Markets may sometimes produce an inadequate quantity of an item, such as health care or art; these items are known as

merit goods - Merit good are goods which are not produced in sufficient quantity by the private sector because private individuals do

not place sufficient value on these items (e.g. health care, performing arts) - Demerit goods – items which are harmful such as alcohol, tobacco - These items have negative effects; their production and sale may be restricted or heavily taxed - Governments provide a range of collective goods and services which benefit the whole community. - Governments may maintain ownership of monopolies such as railways because of concerns that private owners would


have monopoly power and consumers would little choice but to pay whatever price the monopolist set for their good or service

- Natural monopoly refers to a market structure in which goods can only be efficiently provided by one supplier, due to the large investment in infrastructure and other facilities which are required

2. Market Failure in Income Distribution

- Free markets tend to produce substantial inequality in the distribution of income - Often this inequality will worsen over time, because one people become wealthy, their wealth tends to multiply - Relative poverty refers to those who standards of living are substantially lower than the average for the economy (level of

income below 30% of average earnings) - Absolute poverty refers to a situation in which individuals only have a minimum income OR just enough income to

enable them to survive - Relative poverty refers to the living standards of the poor in comparison to the entire population - Governments act to reduce this inequality by providing greater opportunities for low income earners by providing:

- Education assistance programs/scholarships - Living allowances for students - Subsidised health care/transport /housing - Pensions/unemployment benefits - Imposing minimum wages (award wages)

3. Market Failure in Externalities

- An exchange in the market economy will often affect people other than those involved in the transaction. These are known as externalities.

- Externalities are external costs and benefits which are not considered during the decision-making process by the private agents in the market

- Positive externalities are externalities that are very good for third parties - Negative externalities are externalities that cause harmful effects. These are an example of market failure. - Negative externalities are of great concern in relation to the environment, because generally environment spill over

effects are negative e.g. pollution. - Examples of negative externalities in Australia include:

- The transformation of land which occurs because of land clearing - Land degradation through increased soil salinity and soil erosion - Water pollution from detergents and industrial output - Atmospheric pollution.

4. Market Failure in the Abuse of Market Power

- The costs involved in producing, distributing and marketing goods and services will only allow a small number of firms to survive

- This may create a market structure where there is imperfect competition - In this market situation, the market will produce an inefficient quantity of goods at a higher price - A monopolist will often restrict their production in order to charge a higher price and maximise their profits - Oligopolists may find that engaging is risky, so instead of reducing prices, they will compete with advertising, brand

packaging and trying to make their product look different – activities which hold little real benefits for consumers. - Some of the ways in which firms may abuse their market power include:


- Monopolisation – occurs when a firm uses its dominant market position to eliminate existing competition, or prevent new firms from entering the market

- Price Discrimination – occurs when a firm sells the same type of good or service in different markets at different prices

- Exclusive dealing – occurs when a firm sets conditions for supply which excludes retailer from dealing with other competitors

- Collusion – occurs when firms get together and agree on a pricing and market sharing arrangement that reduces effective competition between them, and tends to inhibit the entry of new competition into the market

5. Market Instability - A free market system is likely to experience severe fluctuations in the level of economic activity - This makes it very hard for the government to achieve its goal of sustained economic growth - Free market forces can bring on boom periods where excess demands for goods and services causes inflation and this can

bring about severe economic problems. - High inflation and excessive imports can force interest rates to rise which can then cause a downturn in economic activity

and potentially recession. - Recessions increase unemployment and cause a wide range of economic and social problems. - Governments use 2 stabilisation policies – macro economic and micro economic policies - Macro economic policies – help to smooth out major fluctuations in the economy cycle in order to help the economy

achieve a sustainable rate of economic growth. The main macro-economic policies include fiscal policy and monetary policy.

- Micro economic policies – focus on certain areas of the economy and are intended to help improve productivity levels in individual firms and industries, efficiency levels etc.

ii. Role of the Government

2.1 Function of the three levels of government

• Governments intervene in the economy to improve on the outcomes of the free market • Under the Australian Constitution, the central Commonwealth government and the state governments are independent of each other, although they often

work together • Though their role is not mentioned in the Constitution, the state governments further delegate their powers to local governments

Commonwealth/ Federal Government - Overall responsibility for the economy

- Most influence on the economic performance State Government - Important roles in developing:

o Infrastructure o Delivering government services (i.e. health and education) o Fostering regional development (i.e. Hunter Valley Region)

Local Government - Relatively minor role, mainly relating to:


o Local community facilities o Roads

2.2 Constitutional Powers

• The Australian Constitution is a legally binding document that provides the framework for Australia’s system of democratic government and the relationship between the Commonwealth and state governments

• The Commonwealth Government is only able to act under one of what are described as constitutional ‘heads of power’ – e.g. the power to make laws relating to foreign affairs and defence

• The state government holds all other powers which are not stated in the Constitution as belonging to the Commonwealth • However, the Commonwealth share responsibilities with the states for most economic matters, namely business regulations, taxation, health and education

• The power of the Commonwealth Government has increased over the years since Federation • This has reflected the evolution of Australian into a single national economy with a national approach to economic issues • States also play an vital role – when the Commonwealth Government wants to implement major economic changes, its often needs the support of the states

(i.e. IR, Occupational Health and Safety Laws, Public Hospital Funding)

• State governments have more limited roles than the Commonwealth – states’ roles have declined over the years • They are important as they understand the specific needs of their cities and regions – i.e. health system (Medicare System), school education and

infrastructure • State governments have to rely on a patchwork of taxes such as:

o Payroll Tax o Stamp Duty o Licenses o Taxes on gambling and land ownership o Direct grants from Commonwealth Government – e.g. GST revenue

• Responsible for local planning and development decisions, providing local services such as rubbish collection, road building and maintenance and

community facilities • Rates levied on local property owners are the main source of revenue for local governments – some money is also raised by fees, licences and fines which

are imposed by councils (e.g. buildings fees, parking fines) 2.3 Size of the Public Sector

• The public sector refers to the parts of the economy which are owned and controlled by the government – includes all tiers of the government as well as GBEs (e.g. Sydney Water, City Rail)

• Total public outlay – shows the proportion of total annual expenditure by all levels of government compared with the expenditure for the economy as a whole


• Public sector employment – proportion of Australian employees who work in the public sector; as percentage of total employment • Employment levels in the public sector has declined due to the contracting of many activities to the private sector • As the economy has grown, there has been an increase in expectation of the government – improved standards of health care, education and other services • Social security – establishment of personal superannuation funds has allowed individuals to funds more of their needs in retirement as Australia will

struggle to fund rising costs of aged care services and age pensions as the population continue to grow older 2.4 Economic functions of the Australian Government

1. Reallocation of Resources - When the government reallocate resources – it is change the patterns of production in the economy - It directs resources towards the production of some G & S which it considers desirable and moves away from others

which it considers less desirable - Government can influence the price of G & S and thus influence consumer demand through taxes - Often, the influence of a tax system on resource allocation is indirect - By changing prices, tax policies may change the pattern of consumer demand and this will indirectly change resource

allocation • Direct Tax: paid by the individuals or businesses on which they are levied (cannot pass onto someone else) – i.e.

personal income tax, company tax, capital gains tax • Indirect Tax: levied on individuals and businesses, but they can be passed onto someone else; this tax is attached to a

G or S , rather to an individual or company – i.e. GST - Government also uses indirect taxes and charges on items such a tobacco to divert resources away from the production of

such goods (i.e. higher prices of cigarettes deter people from smoking reflects higher health costs) - Government spending can also be used to directly reallocate resources to a particular sector of the economy - Government spending may influence individuals to buy certain G & S by reducing an industry’s costs and therefore

reducing the prices charged to consumers • Funding: for the arts, which may otherwise be unprofitable • Grants: start-up businesses or new growth industries, which may lack access to finance • Subsidies: telecommunication companies such as Telstra, who are able to provide broadband services in regional

areas where those services would not be profitable • Cash payments: private employment search businesses, which find jobs for unemployed people

- Through direct involvement in the market, governments were considered better able to provide certain G & S - However, as attitudes shifted, it was widely felt that the government was inefficient and that this inefficiency increased

the costs to consumers – because government enterprises do not have strong incentives to make a profit - As a result, governments have largely sold their businesses to the private sector (privatisation) – reducing their

involvement in the provision of G & S 2. Redistribution of Income - The main way in which the government redistributes income is through the taxation system and social welfare payments


- By taxing the wealthiest groups more heavily, the government is able to redistribute that share through the form of social welfare payments to lower socio-economic groups

- Tax Base: items that are taxed; three main bases for the imposition of taxes – income, wealth and consumption - Average Rate of Tax (ART): proportion of total income earned that is paid in the form of tax - Marginal Rate of Tax (MRT): proportion of any increase in income which must be paid as tax; represents how many

cents in every extra dollar earned that must be paid to the government - Progressive Tax: higher income earners will pay a greater proportion of their income as tax than lower income earners

(ART rises as an individual’s income increases) – i.e. personal income tax - Regressive Tax: higher income earners would pay a smaller proportion of their income as tax than lower income earners

(i.e. ART falls as an individual’s income increases) – i.e. GST - Proportional Tax: all income earners pay the same proportion of their income as tax (ART remains constant as an

individual’s income increases) – i.e. company tax - Australia’s progressive personal taxation system – PAYG: tax payment regularly deducted from employee’s wages and

included tax paid in advance for self-employed persons and individuals who derive a significant proportion of their income from investment

- Regressive taxation – GST: charged as a percentage of the price of the G or S as a flat rate of 10 per cent; if calculated as a percentage of income paid in tax will fall as income rises

- Redistribution to lower socio-economic groups is performed through social welfare payments - Largest single area of social welfare payments is age pension – will put significant pressure on the budget in coming

years due to the Australian population growing older 3. Stabilisation of Economic

Activity - Policies designed to smooth economic fluctuations – macroeconomic policies

• Monetary Policy: influencing the level of interest rates and the supply of money • Fiscal Policy: influencing economic growth and unemployment

4. Government Business Enterprises

- GBEs – businesses which are owned and managed by a government at either the Commonwealth or state level - Some of the major GBEs have been privatised (i.e. Qantas, Telstra) – felt that they would run more efficiently as private - Corporatisation – occurs when the government encourages public trading enterprises to operate independently from the

government as if they are private businesses in order to improve efficiency and profitability – i.e. Australia Post, Medibank Private, Rail Track Corporation

5. Other - Governments also have other, smaller functions in the economy that aim to make markets produce better outcomes in the long term.

- These include ensuring a maximum level of competition in the economy, protecting consumers from unfair business conduct, and protecting the natural environment.


- Competition Policy: • A major aim of government policy relating to business firms is to ensure that markets operate efficiently. • Governments aim to promote workable competition in Australian industry. • Government policies assume that competition will produce a more efficient use of resources, lower production costs,

lead to product innovation, and lower prices for consumers. • Sometimes it is necessary to reduce the number of firms in an industry • The remaining firms can then produce on a larger scale and achieve the lowest possible long run average costs of

production. • Entry barriers to industries should be kept to a minimum by eliminating practices that restrict potential competition. • The Australian Competition and Consumer Commission (ACCC) monitor competition policy and uphold consumer

protection legislation. - Consumer Protection:

• Consumer interests are protected through the Trade Practices Act and the ACCC. • The aim of trade practices legislation is to ensure fair business conduct by prohibiting practices that restrict

competition and imposing penalties on firms that breach these guidelines. • In some cases, such as financial services, consumers are given stronger protections because of the significant risks of

consumers losing large amounts of money if their finances aren’t protected. - Environmental Protection:

• Environmentalists argue that at the current rate of energy consumption, resources will be depleted within a matter of generations.

• The government can contribute towards sustainable energy use by supporting alternative energy sources and giving incentives to reduce the use of fossil fuels.

• Externalities are another major concern regarding environmental issues. These involve atmospheric and water pollution.

• Climate change is now regarded as the greatest environmental threat in the world, with devastating consequences for future generations.

2.5 Federal Budget - The budget is the tool of the government for the implementation of fiscal policy - It shows the government’s planned expenditure and revenue for the next financial year - The Commonwealth Budget is an official document which outlines the government’s planned revenue and expenditure for the coming year


- The sources of taxation revenue are divided into direct taxes and indirect taxes

Income Tax - Makes up 70% of total government revenue - Imposed on individuals and companies

1. Personal Income Tax - 40% of Commonwealth Government tax revenue - PAYG system – tax payment regularly deducted - Personal income tax is progressive in nature – higher income earners will be taxed proportionately more

than lower income earners

2. Company Tax - 20% of government revenue - Flat rate of 30% on the net profit of both private and public corporations - Businesses also pay fringe benefits tax for the non-cash benefits that they provide – i.e. company cars - Resource rent taxes – 2% of government revenue - Small proportion is collected through the tax on superannuation contributions

Goods and Services Tax (GST) - Main indirect tax – applies at 10% to most G sold in Australia, although basic food is an exemption - Equal to 13% of total tax collection - Revenues are automatically distributed to state and territory governments

Excise Duty - Imposed on the producers of certain G - Based on a quantity of a product - 7% of government revenue, mainly from petrol, tobacco and alcohol

Carbon Pricing Mechanism - 2% of total revenue - Is being used to compensate households and businesses for higher prices and production costs - Also encourages renewable energy technology

Customs Duty - Imposed on importers of G - 2% of government revenue

Other Tax Revenue - 1% of government revenue - Covers miscellaneous taxes, charges, fees and fines imposed by the government – i.e. fees for Australian

passport Non-tax Revenue - 6% of total revenue

- Includes profits from GBEs, interest, dividends and royalties paid to government


- Major expenditure items include:

Social Security - Largest outlay - Transfer payment – payments aimed at redistributing income from taxpayers to welfare recipients,

such as elderly people Education - Provides funding to schools, universities, vocational education and training providers Health - Health is primarily the responsibility of state and territory government

- Commonwealth Government funds Medicare, Pharmaceutical Benefits Scheme and public hospitals

Infrastructure and Social Overhead Capital - Roads, rail, ports and communication networks Environmental Protection and Ecological Sustainability - Investment in clean energy and environmentally efficient production methods (i.e. low carbon

emission) - There are 3 budget outcomes:

• Balanced budget: occurs when T = G • Surplus budget: occurs when T > G • Deficit Budget: occurs when G > T

Contractionary Fiscal Policy - Occurs when government spending is reduced either through higher taxes or reduced government spending or a combination of the two e.g. a budget deficit is reduced, or a surplus increased

- The effect is to reduce the total level of economic activity and would be used to reduce spending, growth and inflationary expectations

Expansionary Fiscal Policy - Involves an increase in government spending either through lower taxes or increased government spending or a combination of the two e.g. existing budget deficit would be increased or a budget surplus reduced

Neutral Stance of Fiscal Policy - Implies a balanced budget. G = T - Government spending would be fully funded by tax revenue

- Even without deliberate decisions by government to change its policies, the level of revenue and expenditure change in response to changing economic

conditions. - Automatic stabilisers – policies that operate automatically to counterbalance the trend in the level of economic growth and to stabilise the economy. - Two automatic stabilisers – progressional income tax system and unemployment benefits. - Their operations can be illustrated by the following situations:

o An increase in the level of economic activity: when the economy is growing, income levels increase, leading to arise in taxation revenue for the government > unemployment falls, reducing government expenditure on unemployment benefits > contraction in aggregate demand.

o A decrease in the level of economic activity: in times of recession, income levels fall > fall in taxation revenue > unemployment rises, increasing government expenditure on unemployment benefits > aggregate demand expands.


2.6 Influences on Government Policies in Australia Political Parties - There are major political parties at the federal level in Aus which traditionally had support from different groups of

the community. They are: • The Liberal Party(LP) • The National Party (NP) • The Democrats • The Greens • The One Nation Party

- Each party has a platform of policies on a range of political, economical and social issues - Extent of each party’s political power is determined by their parliamentary representation and potential to influence

voting on legislation - Each party has ideological factions but is united on key issues

Business - Business also undertake rent-seeking activities • Major business lobby groups include: • The Biz Council of Australia (BCA) • The Australia Chamber of Commerce and Industry (ACCI) • The Confederation of Australia Industry

- They try to influence the government on a range of issues such as: • Industrial relations • Taxation returns • Conduct of economic policy in seeking more favourable policies towards business activity, including lower

production costs & more opportunities for investment, exports, profitability Unions - The Australian Council of Trade Unions (ACTU) as the peak union body attempts to influence government on

industrial relations policy through: • Info campaigns • Debate of industrial relations issues such as - controls over union power, demands for higher wages and better

working conditions - The ACTU is involved in direct negotiation with the Federal government over the annual Safety Net Wage Case - Other public service unions negotiate with government employers over the renewal of enterprise agreements and the

resolution of industrial disputes Environmental Groups/Organisations - Environmental groups lobby governments on a variety of environmental issues such as:

• Logging • National parks • Land degradation • Uranium mining & export • Biodiversity


• Toxic waste • Greenhouse gases & climate change • Ozone depletion

- They attempt to influence government environmental policies & legislation either through: • Direct political action • Representation in the upper houses of state & federal parliaments

Welfare Agencies - Welfare agencies lobby the government on matters of social policy, including • The alleviation of poverty and the effective design of redistributive policies to assist disadvantaged groups

including the employed, sick, the elderly, and families. - Some groups include :

• The Australian Council of Social Services (ACOSS) • The Brotherhood of St Laurence • The Salvation Army

The Media - Media organisations report news and encourage public debate on government policies - Play a major role in influencing public opinion (part. during election campaigns) through debate & editorials - Aim to influence government policy regarding the cross media ownership laws & regulation of the media industry. - The media includes:

• News Corporation • Consolidated Press • Television • Radio stations • Newspaper groups

Other Interest Groups - Many interest groups spend large amounts of resources in lobbying governments - Aims is to try and get governments to adopt policies which are favourable to them - The activity of trying to obtain favourable outcomes is called “rent-seeking” - Some interest groups include:

• National Farmers Federation (NFF) • Aboriginal groups • Women’s Electoral Lobby (WEL) • The Australian Conservation Foundation

International - International influences on government include foreign policies of allied govs (US, UK) & treaty obligations of Australia through the UN

- Federal government’s economic policy is influenced by • Changes in the global biz cycle including • Technology • Trade • Investment flows


• Policies of trading partners towards free trade & protection - These major trade agreements impact on government policies:

• CER • APEC • The Cairns Group • The WTO

iii. supply 3.2 shifts of the supply curve

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