year 11 final notes

7/21/2019 Year 11 Final Notes

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Economics Review

CHAPTER 1 – WHAT IS ECONOMICS ABOUT?

Production possibility Frontier: Is a graphical representation of all the possible

combinations of the production of two goods or services that the economy can

produce at any given time. It can be used to demonstrate how opportunity costs

arise when individuals or the community make choices

ut the production possibility frontier does not always remain the same! because

with the application of new technology being made or produced we may be able

to develop more e"cient methods of production.

#onsumer goods and services are items produced for the immediate satisfaction

of individual and community needs and wants.

#apital goods are items that have been produced for immediate consumption but

will be used for the production of other goods.

Economics is the basis of choices! all participants in the economy must weigh up

a range of factors relating to their short and long term ob$ectives.

Individuals make choices such as whatever level their income they must make a

choice of how much of that income they will spend and how much they will save!

these choices will be in%uenced by how much income they receive.

usiness make many choices! such choices can be when pricing its products! itcould choose to increase the price hoping it will ma&imise their pro'ts! also

targeting speci'c consumers will be a big choice on the business. usiness will

always seek to minimise their costs and ma&imise their pro'ts. (lso another

choice for business includes if they choose to employ employees on industry set

wages or they negotiate it themselves with the sta).

(nother sector that face choices include *overnment! but the government

in%uences individual and business choices. +ome such choices includes ta&ing

items such as cigarettes more heavily so they stop the public from getting

cancer and discouraging business to sell them. ut also some positive choicesinclude the amount of ,edicare bene'ts the public will receive will in%uence

individuals and businesses such as dentists! doctors! physio-..

verall in choosing between satisfying present or future wants:

• Individuals must make choices between spending and saving. +pending

satis'es present wants and savings raises future living standards.

• Businesses must make choices about price! how much to produce! what

resources to use and how to manage their employees.

• Government can in%uence the choices of individuals and usinesses by

a)ecting the cost of choices and other factors underlying their decisionmaking process.



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CHAPTER 2 - HOW ECONOMIES OPERATE

Factors of production are any resources that can be used in the production of

goods and services. he four main types are natural resources 2or land3! #apital!

4abour and Enterprise.

Rewards: natural resources 5 rent! labour 5 6ages! #apital 5 Interest! Enterprise

5 Pro't

7atural Resources include all resources provided by nature that are used in

production process! such as soil! water! forests! mineral deposits! 'shing areas.

4abour is human e)ort! both mental and physical. he si8e of the population will

be important in determining how much labour is available.

#apital is the 9produced means of production. his means that capital goods are

not produced for immediate consumption! but to be used in the production of

other goods and services. E&amples of capital include machinery! tools! factories

and computers. hese types of capital goods are generally owned by individuals

or 'rms.

Enterprise involves organising the other factors of production for the purpose of

producing goods and services. It is the vital ingredient that brings the production

process together.

he total amount of goods and services produced in an economy in a given year

is known as the Gross Domestic Product, OR GDP. *;P is the total market

value of all 'nal goods and services produced in an economy over a period of

time.

,arket economies distribute goods and services based on the individuals

contribution to the production process. he larger the contribution the greater

the amount of output received.

,arket economies are sub$ect to recurring %uctuations in the level of economic

activity known as the business cycle! which a)ects income levels! employment

opportunities and <uality of life in an economy. ;espite this cycle! the overall

trend over time in an economy is generally towards increased output.

he business cycle refers to the %uctuations in the level of economic growth due

to either domestic or international factors.

Recession is the stage of the business cycle where there is decreasing economic

activity! de'ned as two consecutive <uarters of negative economic growth. I.e. a

fall in *;P.

( boom in economic growth is associated with increased investment and

production.



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IMPACTS OF THE BSI!ESS C"C#ERECESSIO! BOOM

Falling Production of goods and

services

Increasing production of goods and

servicesFalling levels of consumption and

investment

rising levels of consumption and

investmentRising =nemployment Falling =nemploymentFalling income levels Rising income levelsFalling <uality of life Rising <uality of life

he circular %ow of income is a model that describes how economic activity

occurs between di)erent groups in an economy. +aving! a&ation and spending

on imports represent leakages from the circular %ow! i.e. they decrease the level

of economic activity. Investment! *overnment spending and e&port revenue

represent in$ections into the circular %ow! i.e. they increase the level of economic

activity.

E<uilibrium occurs in the circular %ow of income when the sum of all the

leakages is e<ual to the sum of all the in$ections in the economy. I.e. +>>, 5

I>*>?! 4E(@(*E+ 5 I7AE#I7+

6herever there is dise<uilibrium there will be a change in the level of economic

activity. It will increase when in$ections e&ceed leakages and decrease when

leakages e&ceed in$ections. herefore the *overnment has a large amount of

in%uence over the level of economic activity.



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CHAPTER 3 – HOW ECONOMIES DIFFER

Product market is the interaction of demand for and supply of the outputs of

production! i.e. goods and services.

( market is a network of buyers and sellers! seeking to e&change a particular

product at a certain price! the buyers are the consumers! and they constitute the

demand for products. he sellers are the businesses! and their output decisions

make up the supply of products.

Price ,echanism is the process by which the forces of supply and demand

interact to determine the market price at which goods and services are sold! and

the <uantity produced.

#onsumer sovereignty refers to the manner in which consumers! collectively

through market demand! determine what is produced and the <uantity of

production

#ompetition is the force that allows the price mechanism to work e)ectively!

competition means that there are large numbers of buyers and sellers. his

ensures that no one buyer or seller is big enough on their own to in%uence the

market price.

#ompetition is the pressure on the business 'rms in a market economy to lower

prices or improve the <uality of output to increase their sales of goods and

services to consumers.

( mi&ed economy is an economic system where the decisions concerning

production and distribution are made by a combination of market forces and

government decisions.

(ustralia is a good e&ample of a mi&ed economy to see why the government

chooses to intervene in the free operation of market forces. ne reason why the

government intervenes in the economy is because the free market does not

always provide the most e"cient allocation of resources for the economy as a

whole. +ome goods and services may not be provided under a pure market

system. E.g. (ustralia has historically had a government owned and operatedrailway system. *overnment intervention was necessary because no private



(ustraliaBs,i&ed

Economy

Mar$et Forces%

Private Property

Free Enterprise

#onsumer+overeignity

#ompetition

Government

Intervention%

Public .wnership

Regulation

+ocial 6elfarePayments

Progessive 1a&ation

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enterprise was willing to provide the huge capital outlay or undertake the risk of

providing such a facility.

+econdly the government intervenes in the distribution of income because the

free market will not provide a socially desirable or fair distribution.

&H" GO'ER!ME!TS I!TER'E!E I! THE MAR(ET ECO!OM" Resource

Allocation

• Provide important things that would not otherwise

be provided

• Restrict production of harmful things

Income

Distri)ution

• #reate a fairer society and look after people

Economic Sta)ilit* • +mooth out sharp %uctuations in the economic

cycle

• Ensure stability in the economy and the 'nancial

system

In a mi&ed

economy! the

answers to the four important <uestions are primarily determined by the

operation of markets.

he four <uestions are: 6hat to produce! how much to Produce! Cow to Produce!

Cow to distribute Production.

Economic *rowth is measured by changes in *ross ;omestic Product. *;P per

capita measures the total value of goods and services produced by a nation!

divided by its population. (ustralia has a Cigh standard of living compared with

most economies in (sia.



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he Duality of life in an economy is commonly measured by the Cuman

;evelopment Inde&! which measures income! life e&pectancy! adult literacy and

educational levels. (ustralia ranks second in the world by this inde&! Aapan 5

1th! 7ew ealand 5 /th! #hina 5 G/nd.

he distribution of income in (ustralia is relatively une<ual compared with otherindustrialised (sian economies such as Aapan and @orea! ut more e<ual than

many developing economies in (sia

CHAPTER 4 – CONSUMERS IN THE MARKET ECONOMY

ne of the main assumptions in a market economy is that consumers determine

what is produced. #onsumers will ultimately decide what goods and services will

be produced by e&ercising their freedom to choose what they buy and which

wants they will satisfy. usiness 'rms will produce whatever goods and services

are in demand! this concept is known as consumer sovereignty! because

consumers will determine the answer to the <uestions what to produce and how

much should be produced.

ut consumer sovereignty is not always going to choose their wants or needs. In

todays market some aspects of business can reduce the sovereignty of

consumers:

• ,arketing: marketing and advertising create a signi'cant in%uence over

the wants and needs of consumers. hese are used to manipulate the

spending patterns of consumers over the recent years. he

marketersHusinesses conduct research into the wants and desires of the

consumers and use this to start their advertising campaign. ,arketing is

used in popular media! or in email.



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• ,isleading #onduct: #onsumers can be deceived to buy a good or service

that are false claims that the good or service can do. +uch as weightloss

programs! investments! Cair regrowth treatments.

• (nti competitive behaviour: these can be like banks! because there is not

really much more competition they know consumers have to go to them

to bank their savings or wages! but the banks in return can o)er poor

customer service.

In overall terms after consumers have received their income and paid their ta&es!

they make a choice to either spend it or save it. his e&pressed in the e<uation:

J5 #>+

J ;isposable 2after ta&3 income

# #onsumption e&penditure

+ K +avings

his means that for a speci'c level of income! any increase in consumption will

cause an e<ual reduction in the level of saving! and similarly! a rise in saving will

bring an e<ual reduction in consumption. (lso the level of income will a)ect the

level of consumption and saving.

+ome factors in%uencing the decision on whether to spend or save! including:

• #ultural Factors

• Personality factors

• E&pectations of the future

• (ny speci'c future spending

• a& Policies

• (vailability of credit

CHAPTER 5 – BUSINESS IN THE MARKET ECONOMY

( usiness 'rm is an organisation that uses entrepreneurial skills to combine thefactors of production to produce goods and services. (n industry consists of

those 'rms involved in making a similar range of items that usually compete with

each other. ther sub $obs in a business 'rm include:

Entrepreneurs K the owners of the business 'rms.

+ole raders K consist of one owner who usually carries all the responsibilities for

management and the risktaking 2enterprise3. he main risk faced is that pro'ts

are not guaranteed.

Partnerships K / to / owners and are unincorporated enterprises. hey alsocarry the risk of business losses for which they are legally responsible.



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Incorporated 'rms 2companies3 K registered with the government to gain legal

recognition of this type of business as a legal LpersonM separate from the owners.

;i)erent types of companies e&ist with the main types being:

Private #ompanies: / to N people. =sually small to medium si8ed businesses

and have a limit to the number of shareholders and restrictions on to who sharesmay be sold.

Public #ompanies: allow anyone to become a shareholder usually through buyingshares on the +tock E&change. hey are usually large businesses.

he 'rm! like an economy! has to answer the following <uestions

6hat to produce

Cow much to produce

(nd how to produce

In a market economy! the <uestions of what to produce and how much to

produce are determined by the level of consumer demand in the economy for

each individual product 2#onsumer +overeignty3. he problem of how to produce

is normally determined by a comparison between the cost and e"ciency of the

factors of production in producing that good or service.

*oals of the 'rm include:

•

Pro't ,a&imi8ation: his means ma&imi8ing revenue and minimi8ingcosts.

• Increasing ,arket +hare: may mean less or no pro't now to gain pro'tin future

• alance pro'ts against leisure: Pro't increasing activities might be

turned down because entrepreneurs have goals in their personal lifethey rate more highly

• alance pro'ts against future pro'ts: Entrepreneurs may reduce pro'ts

now so as to ensure that future pro'ts are good

• alance current pro'ts against growth: Entrepreneurs may borrow

heavily in order to e&pand their 'rm. Cowever high interest costs will

reduce their immediate pro'ts.• ,eeting +hareholder E&pectations: ,anagers of public companies seek

to avoid a shareholder revolt rather than seeking ma&imum pro'ts.

• +atisfying: (bsolute ma&imi8ing pro'ts are not the main priority! but

others such as a minimum pro't may be the main pro't.

o achieve ma&imum pro't! the 'rm must combine resources at the lowest cost.

Increasing productivity and e"ciency will further reduce costs. ne of the ma$or

ways business 'rms can increase their productivity is specialisation! where the

factors of production K labour! natural resources and capital K are used more

intensely for a smaller number of production processes



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Productivity refers to the <uantity of goods and services the economy can

produce with a given amount of inputs such as capital and labour.

Economies of scale is the cost reductions gained from increasing si8e.

4ong Run K de'ned as involving su"cient time for the entrepreneur to change

the <uantity of all the resources used in production. he advantage of increasing

the si8e of operations is related to achieving e"ciency in the long run. his

concept is involves analysis of average cost.

(verage #ost 5 otal #ostHotal utput

Economics of scale can be achieved both internally and e&ternally.

Internal Economies of +cale K occur when the increasing si8e of a 'rm leads to

lower average costs.

(s a 'rm grows! it has the ability to:

- speciali8e its labour force- speciali8e its capital- buying resources in bulk 2discount for large <uantity3- *reater ability to obtain cheaper 'nance! to recycle or sell waste! to

undertake research and development.- *reater product recognition

Internal ;iseconomies of +cale K occur when average cost increases as the 'rms

scale is increased. his occurs because:

- the 'rm has become too large for its e&isting place and management- break downs! bottlenecks! disputes! con%ict will impact on output

o avoid these 'rms will need to:

- e&pand their operations- =ndertake research and development to predict! plan and avoid this

situation.



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4ong Run (verage #ost #urve 24R(#3

he longrun average cost curve depicts the per unit cost of producing a good or

service in the long run when all inputs are variable. In the long run! when all

factors of production can be changed! productive e"ciency occurs at the

optimum scale of output.

#hanges in the si8e of the industry can also change average costs upwards and

downwards producing e&ternal economies of scale 2reductions in average costs3

and e&ternal diseconomies of scale 2increases in average costs3

E&ternal Economies of scale can develop from the:

4ocali8ation of industries: result in provision of infrastructure from government. Itwill also attract labour and suppliers and customers to locate in the area K furthercost saving is now possible.

E&ternal ;iseconomies of +cale K the cost disadvantages resulting from the

growth of industry. E.g. pollution.

echnical ptimum K 6hen the 'rm is at the lowest long run average cost.



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CHAPTER 6 – DEMAND

;emand can be de'ned as the <uantity of a particular good or service that

consumers are willing and able to purchase at various price levels at a given

point in time. ,arket demand is the demand by all consumers for a particular

good or service. he market demand is obtained by summing the <uantities

demanded by all individual consumers at the various price levels.

Factors a)ecting the market demand include:

• he price of the good itself

• he price of other goods and services

• E&pected future prices

• #hanges in consumer tastes and preferences

•

he level of income 2 income distribution refers to the way in which aeconomys income is spread among the members of di)erent social and

socioeconomic groups3

• he si8e of the population and its age distribution.

In the real world! several of the above factors often in%uence demand

simultaneously! but it would be di"cult task if we had to analyse all of them at

once. o avoid this! we focus on one factor at a time 2for e.g. price of good3 and

analyse the response level of demand to a change in price! while we assume that

all the other factors that could a)ect demand remain constant. 6e call this

procedure the ceteris Paribus assumption.

#eteris paribus is an assumption used in economics to isolate the relationship

between two economic variables. It is a 4atin phrase that means 9other things

being e<ual! or assuming that nothing else changes.

,aking the assumption that all other factors that could in%uence demand remain

constant! we construct a demand schedule. ( demand schedule demonstrates

the typical relationship between price and <uantity demanded! sometimes

referred to as the law of demand.

he law of demand states that the higher the price of a certain product! the less

the consumer is willing to purchase it and vice versa. ut there are sometimes

occasional e&ceptions to this rule! such as eating at a N star restaurant! may

e&perience a rise in the <uantity demanded as their prices rise! this is because

they become more sought after status symbol. ut again this is very rare.

6e can plot this data onto a demand curve.



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( movement in the demand curve to the right is called an increase in demand!

and a movement to the left of the demand curve is called a decrease in demand.

Price Elasticity of ;emand: a measurement of how a change in price of a productwill a)ect the <uantity demanded! and as a result the 'rms pro't

otal utlay ,ethod is the measurement of elasticity 2multiplying price by<uantity3O if total outlay increases when the price rises the demand is inelasticO iftotal outlay is constant the elasticity of demand is unitaryO if total outlaydecreases the demand is elastic

E#ASTICIT" A!D TOTA# OT#A"SPRICE RE'E!E 5 InelasticPRICE RE'E!E 5 ElasticPRICE RE'E!E 5 =nit Elastic

+ome factors a)ecting elasticity of demand include:

• 6hether the good is a lu&ury or necessity

• 6hether the good has any close substitutes

• he E&penditure on the product as a proportion of income

•

he length of time subse<uent to a price change• 6hether a good is habit forming 2addictive3 or not.



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CHAPTER – MARKET E!UILIBRIUM

,arket e<uilibrium is the situation where! at a certain price level! the <uantity

supplies and the <uantity demanded of a particular commodity are e<ual.

Price mechanism is the process by which the forces of supply and demand

interact to determine the market price at which goods and services are sold and

<uantity produced.

he market e<uilibrium occurs where the demand and supply curve intersect.

he point where the <uantity of demand is e&actly e<ual to the <uantity of

supply.

E<uilibrium is achieved in an individual market when any consumer who is willing

to pay the market price for a good or service is satis'ed! and any producer who

o)ers their goods or services at the market price is able to sell their produce. It

occurs when <uantity demanded is e<ual to <uantity supplied! i.e. when the

market clears.

he e<uilibrium price and <uantity can be changed by any circumstances that

lead to a shift in either or both the supply and demand curves. +hifts in the

supply and demand curves are caused by changes in the conditions behind

supply and demand.

In a market economy! the price mechanism plays the most important role in

determining the solutions to the economic problem. he Price mechanism

attempts to solve the economic problem in product markets fort goods and

services.

Product ,arket is the interaction of demand for and supply of the outputs of

production.

,arket failure occurs when the price mechanism makes take account of private

bene'ts and costs of production to consumers and producers! but it fails to take



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into account indirect costs such as damage to the environment. 6hen this

happens *overnment normally intervenes.

Price ceiling is a ma&imum price set by the government for which a good! service

or factor or production can be sold! usually resulting in a market dise<uilibrium

as ,arket demand will be higher than market supply

Price %oor is a minimum price set by the government for which a good! service or

factor of production can be sold! usually resulting in a market dise<uilibrium as

market supply will greater than market demand

Pure competition K ( theoretical model of a perfect competition.

,onopolistic #ompetition K ,any small 'rms in the industry

ligopoly K a small number of large 'rms dominate the industry

,onopoly K nly one producer in the industry.

Firms in pure competition are face with the following market conditions:

• here are many small buyers and none of them are su"ciently large to be

able to a)ect the market price.

• he products sold by all 'rms are homogeneous. uyers and sellers all

know the product is the same and they also know the prices at which the

products are being o)ered for sale through the market.

• uyers do not incur any cost from moving from one supplier to another• here are no barriers to new 'rms entering or e&isting 'rms leaving the

market.

• +ellers can sell as much of their product they like! at the market price.

=nder these conditions the 'rms are price takers! they must $ust simply accept

the market price determined by the forces of supply and demand.

( ,onopoly can be regarded as the opposite of pure competition. It is

characterised by the following conditions:

• here is only one 'rm selling the product! and there is no marketcompetition at all.

• he product sold has no close substitutes

• here are signi'cant barriers to entry and this e)ectively prevents any

potential competitors from entering the market.

=nlike the pure competitor! the monopolist is a price setter and can set the price

of the product in order to ma&imise pro't. ne e&ample of a monopoly would be

the (ustralian water supply.



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Product di)erentiation is when 'rms try to make their good or service look

di)erent from competitors to increase brand loyalty and give the 'rm some

degree of price setting power.

CHAPTER " – LABOUR DEMAND AND SUPPLY

he labour market is a crucial part of a market economy. It is where individuals

seeking employment interact with employers who want to obtain the most

appropriate labour skills for their production process. 4abour is critical for

business to operate! and for individuals to 'nd work and a stable income. Inreality an economy does not $ust have a single labour market. Instead there are

many di)erent labour markets for each individual 'rm or industry.

he demand for labour di)ers from consumer demand for goods and services

because the demand for labour is a derived demand. he demand for labour is

derived from the demand for goods and services within the economy. 6hen the

demand for goods and services increase the 'rms are forced to increase their

level of output to meet the demand.

Factors a)ecting the output of the 'rm include:

• *eneral Economic #onditions 2(ggregate ;emand3. (ggregate demand

refers to the total demand for goods and services within the economy.

Economic conditions refers to when the demand for a good and service in

the economy is more buoyant and high! a 'rm is more likely to en$oy

higher sales and therefore will need to employ more employees. ut the

'rm does not always en$oy immediate changes in the employment

because there is always going to be a time lag between 'rms observing a

pick up in the level of demand and raising their labour.

• (lso another factor a)ecting the level of output of a 'rm is the conditions

in a 'rms industry. #onditions in a 'rms industry is when a change inconsumer demand will a)ect the demand for labour. It states that when

there is a change in consumer tastes and preferences for di)erent goods

or services will see a change in the allocation of labour between

industries.

• he last factor a)ecting the level of output is the demand for an

individuals 'rms products. his is where a 'rms output is determined by

its e)ectiveness in selling its goods and services in the market place. his

includes <uality of products! customer service and its marketing e)orts.

his factor can still in%uence demand even when the demand for the 'rms

good or service is in decline.



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(part from the output of the 'rm the input of the 'rm is also a high looking point

for a 'rm and industry. his is where it will determine how it will organise its

production.

Factors a)ecting input of labour include:

• he productivity of labour. his can be de'ned as the out per unit of labour

per unit of time. In normal terms! the higher the <uality of the workforce

the more output is going to be achieved in a shorter period of time. (lso

the productivity of labour can include newer technology 2capital3! this can

be achieved by investing in new technology and there will be no need for

improvement in the skills or work patterns of employees.

• he cost of other inputs. his is where a 'rm will take into account the cost

of labour in comparison with other input costs. If the cost of labour is

relatively high! Firms will use more capital inputs in the production

process! and less labour and vice versa. he labour to capital ratio is the

particular mi& of machines employed relative to workers in a 'rm or

economy.

FACTORS I!F#E!CI!G #ABOR DEMA!DOut+ut Factors In+ut Factors

• *eneral economic conditions • Productivity of labour

• #onditions in the 'rms industry • #ost of labour vs. other inputs

• ;emand for an individual 'rms

product

• #ost of labour vs. foreign

labour

Individuals supply labour when they are ready and willing to work in the labour

market.

he wage or salary paid to employees is important determinant of the supply of

labour. In general the higher the wage o)ers! the more people will be prepared to

sacri'ce their hobbies or leisure time to supply their labour.

he working conditions in%uence the supply of labour. I.e. if a workplace was

dirty and unattractive people would discourage other from working there!

whereas if the working conditions was high and en$oyable more individuals would

supply their labour to that certain 'rm. ther working conditions include thingssuch as %e&ible working hours! or training and e&perience opportunities.

he education! skill and e&perience re<uirements for some types of $obs can limit

the supply of labour. hese are all elements of human capital.

ccupational ,obility refers to the ability of labour to move between di)erent

occupations in response to wage di)erentials and employment opportunities. he

degree for occupational mobility depends on the individuals education and skills

re<uired for a particular occupation. For e.g. it would be di"cult for a mechanic

to become a 7euro +urgeon! but it would be easy to become a bar attendant.



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*eographical ,obility refers to the ability of labour to move between di)erent

locations in response to improved wage di)erentials and employment

opportunities. For e.g. a 7+6 coal miner could travel to 6.( where miners are

scare and the move would result in the o)er of higher wages.

CHAPTER 1# – LABOUR MARKET OUTCOMES

6ages and salaries are a ma$or source of income for most (ustralian households.

7ominal wages is the pay received by employees in dollar terms for theircontribution to the production process! not ad$usted for in%ation.

Real wage is a measure of the actual purchasing power of money wages 2i.e. the

ad$usting of nominal wages for in%ation3

In%ation is the sustained increase in the general level of prices over a period of

time! usually one year. his is commonly measured by the percentage change in

the consumer price inde& 2#PI3.

Enterprise bargaining refers to negotiations between employers and employees

about pay and work conditions at the level of the individual 'rm.

For individuals in addition to their ordinary and overtime payments! many

employees receive additional bene'ts such as sickleave! holiday leave!

superannuation and other fringe bene'ts. hese are known as nonwage

outcomes.

7onwage outcomes are the bene'ts that many employees receive in addition to

their ordinary and overtime payments! such as sick leave! superannuation! a

company car! study leave! or arrangements for employees to work from home for

part of the week.



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6age outcomes di)er according to occupational groups! age! gender and cultural

background.

=nemployment is de'ned as all those over 1N years of age! without a $ob! or

stood down form a $ob without pay! but actively seeking work. here are many

types of unemployment! including cyclical! structural! long term! seasonal!frictional! hard core! and hidden and underemployment.

CHAPTER 11 – THE CHAN$IN$ AUSTRALIAN LABOUR MARKET

he relationship between employees and employers is known as industrial

relations.

he industrial relations system involves the laws! institutions and processes

established to manage the relationship between employers and employees. he

structure of the industrial relations system determines the process of wage

determination and con%ict resolution in the (ustralian labour market.

( trade union is an association of workers that aims to advance the interests ofits members by improving their wages and working conditions. =nions are

usually based on particular occupations! industries! 'rms or a mi&ture of these:

• ccupational unions these unions draw their members from persons who

posses a particular occupational skill! or a range of skills regardless of the

industry or 'rm they work in. 2 e.g. medical scientists association or the

electrical trades union3

• Industry based unions hese unions cover workers in a particular

industry! regardless of the type of work that they do. 2 e.g. the (ustralian

meat industry employees union and the 'nance sector union3



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• Enterprise based unions hese unions represent only the workings of one

speci'c enterprise. his kind of union is very rare although government

policies have tried to encourage the creation of enterprisebased unions.

2e.g. Dantas =nion3

• *eneral =nions K general unions cover a whole range of workers with

many di)erent skills across various industries 2 e.g. the (ustralian workers

union! the construction! forestry! mining and energy union3

,embership of trade unions has declined in recent decades. Factors in%uencing

this decline in union membership include:

• #hanges to wage determination the movement away from centralised

wage determination to enterprise bargaining has tended to reduce the

overall in%uence of unions in wage outcomes.

• #hanges within industries the industries that have e&perienced the

greatest growth in recent years do not have a history of high levels ofunion membership.

• #hanges in the nature of employment the fastest employment growth has

occurred in casual and parttime and temporary employment! and among

contractors! all of which have lower levels of trade union membership than

that for permanent or fulltime employees.

=nions can in%uence the labour market in two main ways K by restricting the

supply of labour and by e&ercsing their bargaining power in wage negotiations.

oth situations will lead to an increase in wage rates.

Employer associations are organisations that are formed to represent theinterests of business! especially in industrial relations and in lobbying the

government.

THE MAI! RO#ES THAT EMP#O"ER ORGA!ISATIO!S !O& P#A" I! THE

#ABOR MAR(ET

• (ssisting members in negotiating wage agreements with employees

•

In some instances! negotiating wage agreements that might cover a largenumber of their members.

• Providing advice! training and direct assistance to employers.

• 4obbying the government for changes to government policies! especially

relating to industrial relations and skills training.

• Representing employers interests in any hearings in industrial tribunals

Fair work (ustralia is the government agency that regulates industrial relations in

(ustralia. It combines the functions of an industrial tribunal with a role of

education and promotion of enterprise bargaining.

,inimum employment standards K national employment standards:



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• ,a&imum weekly hours of work: full time employees must not e&ceed Q

hours per week.

• Right to re<uest %e&ible working arrangements: parents or cares may

re<uest a change in working arrangements to assist them for caring a

child. Employers can only refuse on 9 reasonable business grounds! and

must $ustify their actions in writing

• 4eave: employees have the right to annual paid leave! public holidays! and

carers and compassionate leave. hey further have the right to unpaid

parental leave and long service leave.

• 7otice of termination and redundancy pay: Employers are re<uired to give

between one and four weeks of notice of a $ob termination! determined by

how long a person has been employed. Further in most circumstances

entitled to redundancy pay! determined by their employment length as

well.

(lso a national minimum wage provides a safety net for any employee notcovered by an award. Fair work (ustralia is responsible for setting the national

minimum wage annually.

(wards are a set of pay and conditions that are speci'c to an employees work or

industry sector. (wards provide a safety net of minimum wages and conditions.

he most common method of wage determination in (ustralia is a workplace

agreement that is negotiated collectively through enterprise bargaining between

an employer and employees! represented by unions. hese agreements are

known as enterprise agreements. his agreement must also pass the LEER

FF ER(44 E+M 23! re<uiring that employees be made better o) overallby an agreement than to an award. his test is submitted and administered by

Fair 6ork (ustralia.

(nother common method for setting wages is through a common law agreement!

an individual contract which adds to an award. #ommon 4aw contracts are often

informal agreements and they are widespread in small businesses.

he industrial relations +ystem has changed from a highly centralised system to

a decentralised system! with most wage outcomes now determined through

enterprise bargaining.

CHAPTER 12 – TYPES OF FINANCIAL MARKETS

Financial intermediaries are 'rms that receive the accumulated funds of

individuals or 'rms! and then make loans to other 'rms or individuals who can

make use of them

here are two main types of 'nancial markets these are:

•

Primary 'nancial markets Primary 'nancial markets facilitate the creationof 'nancial assets! known as securities! that can be sold into the economy.



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If a business wants to raise funds it can either borrow money by issuing

debt securities or e&pand ownership of company by selling new shares. In

a primary market! the money received from investors goes directly to the

company. he sale of a new issue 6estpac +hares to the public is an

e&ample of a primary market transaction.

• +econdary Financial ,arkets involve transactions with 'nancial assets thathave already been issued on a primary market sometime in the past. ,ost

'nancial market transactions are on secondary markets. #ompanies whose

securities are traded on the secondary markets do not receive any money

from these transactions.

he largest Primary nd secondary 'nancial amrket in (ustralia is he

9(ustralian +ecurities E&change 2(+?3. he (+? is the ma$or share market in

(ustralia! where the purcahse and sale of most shares in the public

companies occures. he share market brings together people wishing to buy

and sell shares to allow transactions to occur.

Financial markets:

• he +hare or E<uity ,arket

• he ;ebt ,arket

• he derivatives ,arket

• he Foreign E&change ,arket

raditionally the 'nancial system has been divided into anks and 7onbank

'nancial intermediaries 27FIs3.

here are various 'nancial market products in the economy to meet the needs of

lenders and borrowers. hey vary in risk! return and li<uidity.

• #onsumer credit allows consumers to purchase consumer goods and

services in advance of actual payment. he most common type of

consumer credit is the credit card. his allows consumers to purchase

goods and repay their borrowings with interest at a later date.

• Cousing loans are o)ered by anks as well as mortgage originators. hese

are long term loans to purchase property! re<uiring periodic repayments

with interest.

• usiness loans are a form of debt that allows businesses to begin ore&pand production of goods and services.

• he short term money market brings together people and businesses with

temporary shortages or surpluses of funds. hose with surplus such as

banks issue debt securities to those in need of funds.

• onds are longerterm securities for which lenders receive regular '&ed

payments from the issuing institution! and receive principle value of the

debt at the end of the bond period.

nce a company has %oated on the share market! it pays regular dividends to

share holders. +hareholders who sell their shares for more than their purchaseprice make a pro't known as capital gain.



1

he share market plays an important role in the economy by providing an income

for investors and a source of 'nance for businesses to invest and grow. he share

market is also an indicator of economic #onditions! demonstrating the level of

con'dence of individuals and businesses in the economy.

(ustralias domestic 'nancial markets are increasingly integrated with global'nancial markets! with foreign investors being a signi'cant source of lending for

(ustralian individuals and businesses. he (ustralian dollar is now the worlds

'fth most traded currency on the foreign e&change markets.

he R( is responsible for the overall stability of the 'nancial system. he

(ustralian Prudential Regulation (uthority provides prudential supervision and

regulation of all deposit in institutions! life and general insurance companies and

superannuation funds. he (ustralian +ecurities and Investment #ommission

2(+I#3 have responsibility for corporate regulation! consumer protection and

oversight of 'nancial services.

reasury plays a role in the 'nancial markets because it is responsible for

advising the government on 'nancial stability issues and for the legislative and

regulatory framework for the 'nancial system.

CHAPTER 13 – THE MONEY MARKET



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orrowers represent the demand for funds in the 'nancial markets and include

individuals borrowing for housing or consumption! businesses borrowing for

investment or e&pansion! and governments borrowing to 'nance budget de'cits

or infrastructure pro$ects.

4enders represent the supply of funds and consist of individuals that may haveup spent income! businesses that may have unused pro'ts! governments that

may run budget surpluses and international lenders with surplus funds.

Individuals demand money because it is an easy form of payment for day to day

transactions! i.e. it is li<uid! and does not carry the risk of capital losses.

Individuals demand 'nancial assets because they can earn a return 2interest3

and may possibly be making gains.

here are a number of reasons why individuals prefer to hold money rather than

invest surplus funds in 'nancial assets that o)er a return:

• ransactions motive: people have day to day transactions such as

purchases for which they need to use money. his includes making regular

payments of goods and services.

• Precautionary motive: Duite apart from regular and predictable

transactions! there are numerous unpredictable circumstances and

emergencies 2e.g. sicknesses3 for which people need to have li<uid funds.

• +peculative motive: uying 'nancial assets carries the possibility of

making a capital loss.

, is the R(s de'nition of money supply. It includes all currency and all bank

deposits.

road money includes all currency and all deposits in anks and nonbank

'nancial intermediaries! minus all 7FI holdings of bank deposits.

;omestic ,arket perations are actions by the R( in the short term money

market to buy and sell securities either outright or through repurchase

agreements in order to in%uence the cash rate and the general level of interest

rates.

Reserve ank purchases of securities increase the supply of funds in the short

term money market and reduce the cash rate of interest. Reserve ank sales of

securities decrease the supply of funds in the short term money market and

increase the cash rate of interest.

( change in the cash rate a)ects the cost of short term borrowing for 'nancial

institutions. his will %ow through to market interest rates for consumers and

businesses! in%uencing their consumption and investment decisions and

therefore in%uencing the level of economic activity.



1



4..+E7I7* .F ,.7E1(RJP.4I#J

R( buys securities

E&cess of borrowable funds

#ash rate decreases

1o maintain margins! banksdecrease interest rates

#onsumers and businesseshave to pay less on e&isitngdebtsO new borrowers 'nd it

easier to borrow funds

consumption and investmentspending increases

economic activity increases

1I*C1E7I7* .F,.7E1(RJ P.4I#J

R( sells securities

+hortage of borrowablefunds

#ash Rate increases

1o maintain margins!banks increase interest

rate

#onsumers andbusinesses have to paymore on e&isiting debtsO

new borrows 'nd itharder to borrow funds

#onsumption andinvestment spending

decreases

Economic (ctivitrydecreases

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1

CE I,P(# F ,7E(RJ P4I#J

CHAPTER 14 – THE LIMITS OF MARKETS

he free market forces do not always achieve the most desirable economic and

social outcomes. =nder a completely free market system! some important

community wants may not be satis'ed. +ome individuals may be unable to earn

enough money to live! ine<ualities between people and regions may worsen and

at times the market may cause economic instability. ecause of these! this is

why the government has to intervene the free market to create a mi&ed

economy.

7o matter what markets are never perfect.

,arket failure occurs when markets operating without government intervention

produce outcomes that are ine"cient! unfair or create instability. he

government intervenes in that market to deals with the problems of marketfailure.

( ma$or way in which governments deal with market failure is to provide public

goods. hese are goods that are desired by the community but will not be

provided by business 'rms because consumers do not have to pay for these

goods to receive their bene'ts.

*overnments may encourage the production of merit goods! which are goods

that will not be produced in su"cient <uantity because of market imperfections.

,erit goods include education and health care.

(lso apart from making too little of the goods! the market can also make too

much of the good. hese goods are called demerit goods. hese items are

normally harmful to individuals such as tobacco! alcohol! addictive drugs and

activities such as gambling. ecause these goods have a negative e)ect on the

economy! the government intervenes and puts a restriction on these demerit

goods. For e&ample you must be 1Q to drink alcohol and if you are under the age

you can be 'ned severely. (lso heavily ta&ed alcohol and tobacco retailers.

( natural monopoly may e&ist where it is only feasible for there to be one

producer in certain markets. he government often operates or controls these

monopolies! in order to reduce the e&ploitation of market power. *overnments

that operate natural monopolies generally try to set a fair price that ensures that

consumers cover the costs of providing the good or service but are not being

e&ploited by e&cessive prices.

( ma$or reasons for government intervention is to redistribute income to lower

income earns to ensure that they en$oy a reasonable standard of living

Relative poverty refers to those whose standards of living is substantially lower

than the average for the economy as a whole! and is often de'ned as a level of

income below S of average earnings.



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(bsolute poverty refers to a situation where individuals have only $ust enough

income to enable them to survive.

E&ternalies are costs and bene'ts of production that are not re%ected in the

demand and supply forces of the market.

6ithout government intervention! 'rms can behave in a way that is harmful to

the interest of consumers! such as colluding to raise prices! charging e&cessive

monopoly prices! e&clusive dealing and price discrimination.

he government may reduce the abuse of market power through regulatory

bodies such as the (ustralian #ompetition and #onsumer #ommission 2(###3.

he business cycle refers to the pattern of economic growth! which over time

tends to %uctuate between periods of strong economic growth and recession.

he government can intervene in the business cycle by implementing

stabilisation policies. hese are called ,acroeconomic policies.

he aim of macroeconomic policy is to provide some counterbalance to the

business cycle. ;uring periods of e&cessive growth! where there is a risk of high

in%ation! the government tries to reduce economic activity by spending less!

increasing ta&ation or raising interest rates. y slowing down a fast growth rate

the government aims to keep the economy growing for longer.

GO'ER!ME!T

MACROECO!OMIC

PO#ICIES

GO'ER!ME!T

MICROECO!OMIC

PO#ICIESI!F#E!CE Entire economy Individual 'rms and

industries

EAMP#ES Fiscal policy #ompetition policy and

trade policy



1

CHAPTER 15 – THE ROLE OF $O%ERNMENT IN AUSTRALIA

he (ustralian constitution sets out the lawmaking powers of the

commonwealth and state governments.

here are three tiers of government in (ustralia

• #ommonwealth 2Federal3

• +tate *overnment

• 4ocal *overnment

hroughout most of the twentieth century! the public sectors role in the economy

increased as it met growing demand for government intervention in the economy

he public sector has been playing a less signi'cant role in the economy! as

shown by decreasing contribution to production 2*;P3! although there was a

substantial e&pansion of government spending to support growth after the global

'nancial crisis in /Q.

Public sector refers to the parts of the economy that are owned or controlled by

the government. It includes all tiers of government as well as governmentbusiness enterprises.

Privatisation occurs when the government sells public trading enterprises to the

private sector.

he government reallocates resources through its mi& of ta&ation and spending

policies! which can be targeted to achieve speci'c goals.

he *overnment redistributes income through a range of ta&ation measures and

social welfare payments to people without ade<uate incomes.

( ta& can either be progressive! proportional or regressive! depending on how

the average rate of ta& changes as an individual income increases.

he *overnment may reduce the %uctuations of the business cycle through the

use of economic stabilisation policies! namely 'scal and monetary policies.

*overnment business enterprises are government owned businesses that

provide goods and services for the community.

he government also pursues other economic and social ob$ectives! including

consumer and environmental protection. he main consumer protection

organisation is the (ustralian #ompetition and #onsumer #ommission. 2(###3.



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CHAPTER 16 – $O%ERNMENT IN ACTION

Fiscal policy is presented annually in the commonwealth budget. It sets out the

governments plans for spending and collecting revenue for the year ahead.

( balanced budget is where the e&pected revenue and planned e&penditure are

e<ual. ( surplus budget is where the e&pected revenue is greater than the

planned e&penditure. ( de'cit budget is where planned e&penditure e&ceedse&pected revenue.

he largest component of revenue for the government is income ta&! which is

levied on individuals and companies.

he largest component of government spending is social security and welfare

payments! such as assistance to the elderly! family bene'ts! and income support

for people with disabilities and people who are unemployed.

he government can implement:

• (n e&pansionary 'scal policy to boost the level of economic activity

• ( contractionary 'scal policy to reduce the level of economic activity

• ( neutral 'scal policy to maintain current level of economic activity

(utomatic stabilisers! which include unemployment bene'ts and a progressive

income ta& system! are a countercyclical components of 'scal policy that reduce

the severity of %uctuations in the business cycle.

Policy making is in%uenced by interest groups including businesses! unions!

environmental groups and welfare agencies! which all attempt to in%uence the

government to achieve their goals. he media is also an important in%uence onthe process of making government policy.

he constitution sets out the limits of the powers of the commonwealth and state

governments! and in some areas restricts how the commonwealth government

can manage the economy.

International treaties and membership of international organisations can impose

constraints on economic policy makingO for e&ample! as a result of our

membership in the 6orld rade rganisation! (ustralias policy options to assist

local industries are limited

year 11 final notes

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