Topic 1: The nature of economics · Web viewTopic 1: The nature of economics Economics is the study...
Transcript of Topic 1: The nature of economics · Web viewTopic 1: The nature of economics Economics is the study...
Topic 1: The nature of economics Economics is the study of factors affecting production, consumption and distribution of goods & services involving individuals, businesses and government.
The economic problem – wants,
resources, scarcity
Economic Problem: Scarcity - Efficient allocation of limited resources to satisfy unlimited and
competing wants
Resources: Factors of Production (FOP)Used to produce goods and services to satisfy our needs and wants. The quality and quantity of these resources will determine the standard of living of a community
- Land (rent), labour (wages), capital (interest), enterprise (profit)
Needs - Individual (each person), collective (community), basic
(essential), luxury, recurring (continually satisfied), substitute (interchangeable/substitutional), complementary
The need for choice by
individuals and society
- Our wants are unlimited but resources are scarce – not adequate to satisfy all our wants; we must choose which wants to satisfy in order of preference
Opportunity cost and its
application through
production possibility
frontiers
Opportunity cost - Cost of the alternative foregone by choosing the current
consumption/production decision - Opportunity cost = what is foregone/what is gained
PPF (Production Possibility Frontiers) - Maximum production potential of the economy given finite amount
of resources
Assumptions 1/ Only two goods are produced 2/ All resources are fully employed
3/ Level of technology is fixed
4/ Resources are fixed; can be used to produce both goods
- Outward shift of the PPF represents economic growth; maximum potential of production has increased as curve moves outwards
Future implications of
current choices by individuals,
businesses and governments
Aim: Maximise returns from existing resources Allocative efficiency: maximising use of limited resources to produce maximum output
Consumer goods: Items produced for the immediate consumption of the individual and community
Capital goods: Items not produced for immediate consumption but are used for the production of other goods and services
Consumer goods satisfy our wants now; capital goods will help satisfy our wants into the future
Current Choice Current Implications Future Implications Individuals Spend money/use resources higher living standards lower living standards Save money/resources lower living standards higher living standards
Business Invest in capital reduced cash flow, less increased production, profit to owner, high risk potential profit/growth
Government Increase gov. spending higher debt improved quality of life +
economic growth
Economic factors
underlying decision-
making by: Individuals,
business, government
Individuals Business Government - Spend vs save - Work vs study - Retire vs work
Voting: What party will manage unemployment, inflation and interest rates
Depends on: - Pricing of
products - Levels of
production - Resource use
(FOP) - Industrial
relations (pay/conditions of workers)
Influence individuals/businesses:
- Taxes/subsidies influence purchasing and production
The operation of an economy
Production of goods and
services from resources –
natural, labour,
capital and entrepreneurial resources
4 key economic issues: 1. What to produce: Resources are finite, must choose what to produce 2. How much to produce: Allocate resources efficiently to maximise
production 3. How to produce: Method of production; in any economy most efficient
will be used 4. How to distribute production: Who will have access to the goods
Factor Factor Income/Return
Description Limitations
Land Rent Natural resources/physical ground used for production
The amount of natural resources available for production
Labour Wages Human skills utilized to produce goods and services
The supply of labour: production size, labour market skill and people’s willingness to work
Capital Interest Equipment used to produce other goods and services
The supplies of capital: willingness of government and the private sector to invest, level of domestic saving available for investment
Enterprise
Profit Risk in utilizing the other factors of production for business ventures
The supply of entrepreneurial skills: size of the population and the ability and willingness of individuals to innovate and take risks
Distribution and
exchange of goods
and services
GDP (Gross domestic product): Total value of goods and services produced by an economy within a given period
- Money is a medium of exchange; it creates efficiencies in transactions
Market Economy Mixed-market Economy
Commander Economy
Private incomes of individuals
Private Incomes + government welfare
Governments choose who get what
Provision of income
and employm
ent
- Market economies tend to have uneven distriution of income: individuals accumulate wealth/income; ability to earn income depends on education, training, sklls, experience
- Government provide minimum income to financialy unstable; pensions, allowances, etc, funded through progressive taxation
Primary Involved in raw material extraction: agriculture, mining, forestry
Secondary Process raw materials/input into finished goods: food processor
Teritary The provision of a service: teaching, nursing Business
cycle
- Trend line is less volatile and more stable with effective government spending
- Recession: 3 consecutive quarters of negative GDP growth - Depression: A serious and continuing recession
Impact during expansion Impact during contraction Individuals Consumer confidence rises
Increased output Consumer confidence falls Decrease output
Increased wage growth Lower unemployment Higher inflation Increased quality of life
Lower wage growth Higher unemployment Lower inflation Decreased quality of life
Business Increased production Increased investment in new equipment/expansion Increased profits
Decreased production Decreased investment in new equipment/expansion Decreased profits
Government
Increased collection of company and personal taxes Reduced spending on social welfare payments (unemployment)
Decreased collection of company and personal taxes Decreased spending on social welfare payments (unemployment)
The circular flow of income
Equilibrium (S + T + M = I + G + X) The state with no tendency to change
Disequilibrium: injections/ leakages imbalanced Leakages > Injections
- Shrinkage of income/employment/GDP
- Falling economic growth Injections > Leakages
- Increase in income/employment/ GDP
- Rising economic growth
International Trade/Financial Flows: Transactions with the rest of the world (imports/exports)
Equilibrium: Injections = leakages
Topic 2: Consumers and Business The Role of Consumers in the economy
Patterns of consumer
spending and saving/dissav
ing
Consumer sovereignty: Consumer demand for products determines production and resource allocation.
Consumers can either spend or save: - Y = C + S; Income=Consumption+ Savings- Dissaving; Consumption > Income
Average Propensity to consume and save
APC: Proportion of total income that is spent APS: Proportion of total income that is saved APC = Consumption/income APS = Saving/income
- As income rises, average propensity to consume decreases, as a smaller proportion of income is spent on autonomous consumption in order to satisfy basic needs
- Low income households have a higher APC, as a larger proportion of income is spent on autonomous consumption
Marginal Propensity to consume and save How much of an extra dollar of income would individuals consume or save
MPC: Proportion of every extra $ earnt that is spent MPC = consumption/ income (where means change in amount) MPS: Proportion of every extra $ earnt that is saved MPC = saving/income
MPC + MPS = 1
- Individuals and economies with higher incomes have a higher APS and MPS and lower APC and MPC, vice versa is true
Relationship between consumption and disposable income Consumption Function Consumption = autonomous consumption + (MPC x disposable income) C = Co + cY
Lifecycle theory of income consumption and spending
Individuals fund consumption by borrowing when their income is low (young years) and saving when income is high (working years) in order to afford retirement during non-working years
Factors influencing
individual consumer
choice
Consumer Incomes
As incomes increase, so does total consumption
Price of product/service
If a produces price increases demand decreases
Consumer taste and preference
As trends in society change, so does patterns of consumer spending
Advertising Increased advertising increases consumer consumption
Price of substitutes
If price increases, consumers will buy cheaper alternatives
Price of complements
As prices of goods increase, demand for that product and its complementary products decrease
Source of income Income The return for resources
Wages Income from labour supplied
Rent
Income from land supplied
Interest Income from capital supplied
Profit Income from enterprise (return from investments)
Social Welfare Income supplied by government for those in need of assistance including elderly, disabled and unemployed.
The Role of Businesses in the economy Definition of a
firm and an industr
y
Firm: Any business which uses resources to produce goods/services to satisfy consumers, usually in return for profit. Industry: A group of firms producing a similar range of products - Quaternary: Provide knowledge and information. - Quinary: Firms and individuals who provide personal services.
A firms production
decisions
1. What to produce: Must be profitable. Based on products with high consumer demand.
2. How much to produce: Aiming for maximum profit with little to no shortages/surpluses, based on market research, demand and access to capital. o Break-even point (BEP): The point in which revenue meets total costs.
It shows the minimum number of sales required to cover costs.
3. How to produce: Resources and technology required to efficiently produce output at a minimum cost.
Businesses as a source
of economic
growth and increased
production capacity
- When the private sector is healthy, higher economic growth occurs and government receives stronger taxation revenue to fund expenditure
Main goals of the firm Profit Maximisation
Maximising revenue & minimising expenses. The greatest positive difference between total revenue and total cost- Increase revenue by rising prices and/or increasing
amount sold - Minimise expenses through efficient allocation of
resources
Growth Maximisation
Maximising market share at the expense of some profit- Increasing investment into the business - Merging two businesses or vertical/horizontal
expansion - Changing legal structure
Increasing Market share
Being the dominant firm in an industry - Expanding product range through
diversification/differentiation - Introducing more effective marketing - Developing better relationship with customer base to
satisfy needs
Meeting shareholder expectations
- Ensuring business success in order to provide dividends
Satisficing behaviour
Balancing and satisfying all goals simultaneously.- Attaining minimal expectations in order to reduce
maximum exertion that is unnecessary to achieve acceptable outcomes
- Suffice expectations rather than exceed them (bare minimum)
Efficiency and the
production process
Efficiency: Minimise costs whilst maximising output Technical Producing goods at the lowest costAllocative Allocating resources to maximise satisfactionDynamic Responding to changing consumer preferences
Productivity: How much is produced with a given quantity of resources per unit of time. Productivity = output/input
1. Less wastage of scarce resources 2. Lower production costs and higher profits for firms 3. Higher incomes due to more productive labour 4. Improve international competiveness due to increased productivity
Technical Optimum - Point where a business is able to produce the maximum output at the lowest
cost per unit - Increases in production beyond the technical optimum will lead to rising
average costs- Advantage of large scale production: lower average cost per unit
Law of Diminishing Returns - At a certain point, employing an additional factor of production will increase
output in the short run, but decline in the long run
Economies of Scale Reduction in cost per unit of output as output increases Economies Business increasing in size, reducing cost per unit Diseconomi Business increasing in size, increasing cost per unit
es Internal economies/diseconomies of scale
Externalveconomies/diseconomies of scale
Impact of technological change, investment and ethical decision making on a firm
Production Methods
- Labour intensive capital intensive - Increased efficiency leading to lower costs
Prices - Lower production costs passed onto consumers through lower prices
- Generic and non-generic brands increase range of consumer choice
Employment - Specialist labour skills and increased need for retraining - Structural unemployment due to capital based production
methods Output - New investment and technology may result in increased
output and opportunity for improved range/quality of products
Profits - Better investment and production process may lead to increased profit
Types of Products
- Technological change creates new products and industries
- Horizontal/vertical integration or diversification of product base
Globalisation - The process by which businesses or other organizations develop international influence or start operating on an
international scale.- May increase profits for business
Environmental sustainability
- Firms must ensure production methods limit environmental destruction
- Ethical production process may increase customer base due to social attitudes
Topic 3: Markets Market Where buyers and sellers exchange goods and/or services at a
particular priceProduct markets
Where produced goods and services are bought and sold
Factor markets
Where factors of production are bought and sold. (land, labour, capital)
The role of the market
Determining
solution to the
economic problem
Solutions to the economic problem- Allocative Efficiency- Allocation of resources to satisfy maximum number of consumer wants. - Goods/services are allocated to consumers who value them most - Only the lowest cost producers supply goods
Importance of relative
price (reflecting
opportunity costs)
Factor markets determine opportunity costs of productive resources - Relative price reflects the opportunity cost of selecting one alternative
relative to another alternative.- Relative price can be used to help determine the best way to allocate
scarce resources
Demand and Supply
Demand: Law of demand,
Law of Demand: As price increases, the quantity of demand decreases
Law of Supply
As price increases the quantity supplied increases
Law of Demand
As price increases the quantity demanded decreases
individual and
market demand,
the demand
curve
Factors affecting demand
Price Price rises demand contracts (A to B)Prise falls demand expands (A to C)
Increased Income Increased demand for luxury goods (right shift)
Increased Population
Increased demand for goods (right shift)
Increased Taste/preference
Increased demand (right shift)
Increase of substitute goods
Increased demand (right shift)
Expected future price increase
Increases demand for goods today (right shift)
Increase complement goods
Decrease demand for good (left shift)
Movements along the demand
curve/shifts of the
demand curve
Increase/decrease NON-PRICE factors - Contraction/expansion PRICE factors Increase in demand: entire demand curve shifts horizontally to the right Decrease in demand: entire demand curve shifts horizontally to the left
Expansion of demand: larger quantity demanded as price falls (A C) Contraction of demand: smaller quantity demanded as price rises (A B)
Supply:Law of
supply, individual
and market supply, the
supply curve
Law of Supply: As price increases the quantity supplied increases
Demand A consumers willingness and ability to pay a particular price for a certain product or service
Individual Demand
Demand for a product by an individual consumer
Market Demand Combined demand of all consumers
Supply Quantity that producers are ready, willing and able to supply for purchase at a given price at a given time.
Individual Supply Supply of an individual business Market Supply Combined supply of all producers
Factors affecting
supply
Price Price rises supply expands (A to C) Price falls supply contracts (A to B)
Number of suppliers Increased supply as market supply increases (right shift)
Cost of FOP Decrease in supply of goods (left shift) Changes in technology
Increased productivity reduces cost of production Increase in supply (right shift)
Expected future price
Decreases supply producers may sell the good later at a higher future price (left shift)
Price of other goods Decreases supply of first good as producers may switch to producing other good’s who’s price have increased (left shift)
Movements along the
supply curve/shifts
of the supply curve
Increase in supply: entire supply curve shifts horizontally to the right Decrease in supply: entire supply curve shifts horizontally to the left
Contraction of supply: reduced quantity supplied as price falls (A B) Expansion of supply: larger quantity supplied as price rises (A C)
Market Price:
Market equilibrium
Market equilibrium: Quantity supplied and quantity demanded of a particular commodity are equal- Market clears (no excess demand or supply) - Demand = supply
Price Mechanism: Forces of supply and demand, which determine the prices of products.
Movement to equilibrium
Excess demand - Price is too low - Sellers increase prices to
contract demand - Increased prices = sellers supply
more
Excess supply - Price is too high - Sellers reduce price to encourage
expansion in demand - Lower prices = sellers supply less
Effects of change in
supply/demand on
equilibrium price and quantity
(diagrams)
Increase Demand - Increases equilibrium
price/quantity (right shift)
Decrease Demand - Decreases equilibrium
price/quantity (left shift)
f
Increase in supply - Decreases equilibrium
price/quantity
Decrease in supply - Increases equilibrium
price/quantity
Changing levels of
competition and market
power
Greater competition among sellers results in a lower product market price- Market price mechanism equalises changes in forces of demand or supply
through allocative efficiency - equilibrium price/ quantity adjust to remove surplus or shortage in the market’
Market power: Ability of a firm to influence, raise and maintain prices within its industry - Leads to reduced output
Ceiling prices and ceiling
floors
Ceiling Price
Maximum price set by government that can be charged for a product - When price is considered too high - Results in excess demand below equilibrium price
E.g: Medicine Ceiling Floor
Minimum price set by government that can be charge for a product - When price is considered too low - Results in excess supply above equilibrium price
E.g: labour market minimum pay
Market failure
The inability of businesses to act appropriately in all circumstances, leading to government intervention.
Market Failure
Summary
Problem Government Action OutcomeMarket price too high
Price ceiling Reduces price- Quantity Shortage
Market price to low
Price floor Increases Price- Quantity Excess
Negative externalities
Taxes Increases Equilibrium Price, Reduces Equilibrium Quantity
Positive externalities
Subsidies Reduces Equilibrium Price, Increases Equilibrium Quantity
Public goods Government provided g/s: nonrival/excludable
Government collects taxation revenue to fund supply.
Price elasticity of supply/dem
and:Significance
of price elasticity of
demand – market
research
- Allows producers to accurately predict how changes in price will impact total revenue and profitabilityE.g: slightly increasing cost of bread/milk will not decrease demand as it is essential
- Governments can effectively predict the outcomes of indirect taxes on prices, market demand, resource allocation and taxation revenueE.g: higher taxes imposed on addictive goods will not significantly impact demand
Elastic, inelastic, unit
elastic supply/
demand
Elastic demand/supply
Strong response to change in price - Price increases, demand/supply contracts, revenue
decreases Perfectly elastic
Consumers will demand an infinite quantity at a certain price but nothing at all at a price above this.Producers will supply an infinite quantity of the good at a certain price but nothing if the price increased
Inelastic demand/supply
Weak response to change in price - Price increases, demand/supply remains, revenue
increases Perfectly inelastic
Consumers are willing to pay any price in order to obtain a given quantity of a good or service. These are considered necessities.Producers are willing to supply the exact same quantity of the good regardless of price
Unit elastic No response to change in price - Price increases, revenue remains the same
Calculation of elasticity
Total outlay method: Total outlay = price x quantity demanded
Factors affecting
elasticity of demand
Luxury or necessity good
Price elastic demand (sensitive to price change)
Existence of close substitutes
Absence of close substitutes: price inelastic demand Lots of close substitutes: price elastic demand
Whether the good is habit forming
Addictive goods: price elastic demand
Time since price increase
Long time since price increase: price elastic demand as new cheaper products are brought it
Proportion of income spent on the good
Smaller proportion: price inelastic Larger proportion: price elastic
Factors affecting
elasticity of supply
Time since price increase
Longer time: price elastic supply Might take a long time for producers to responds (changing schedules/equipment) – supply more responsive after a longer period
Ability to store stock
If inventory can be stored, supply tends to be more price elastic- Stock can be taken from storage to supply market
quickly Excess production capacity
Excess capacity: price elastic - Production can be increased to respond to more
demand
Variations in Competition Market
structures Market Structure
Number and size of firms
Product characteristics
Barriers to entry
Pure Competition
Many small firms Homogenous product
No barriers to entry
Monopolistic Competition
Many relatively small firms
Differentiated products
Relatively easy
Oligopoly Few , relatively large firms
Differentiated products
Extremely high
Monopoly One large firm No close substitutes
Extremely high
Inflation
- Healthy between 2-3% - Inflation represents rise in demand firm’s increase production
Topic 4: Labour Markets The Demand for labour by individual firms
Labour – a derived demand
- Derived from the consumer demand for goods and services - Increased in demand for products = increase in demand for labour for
production - Demand for labour varies inversely with the price for labour
Factors affecting demand
Price Price increases: contraction of demand Price decreases: expansion of demand
Microeconomic factors (non-price) 1. Economi
c Activity
Rise in aggregate demand causes higher levels of economic activity increased demand for labour - AD = C + I + G +(X-M).- Downturns/recessions: decrease - Upturns/booms: increase
2. Nature and size of industry
- Labour intensive: lots of employees (construction) - Capital intensive: fewer employees (mining)- The manufacturing industry has become significantly
more capital intensive 3. Producti
vity of labour
Labour productivity = Output/Labour UnitsIncreased total productivity: raises demand for productive workers extra units of labour hired produces increased output at a lower cost
Decreased total productivity: decreases demand for workers. Extra potential output is more costly with every additional labour unit hired
- Employers will demand labour until the Law of Diminishing Returns sets in
4. General wage rates
- Labour cheaper than capital: increased demand for workers
- Capital cheaper than labour: decreased demand for labour. (capital deepening)
5. Structural change and expectations
- Tariff cuts decreased workforce - E.g. : less competitive reduced their workforce - Shift towards demand for employees in the services-
based sector
- Expected rise in demand more people employed
6. Industrial relations
- Rising ‘on-costs’ (leave entitlements, superannuation, etc.) results in lower demand for labour
climate - Restrictive regulation results in lower demand
The Supply of labour Factors affecting
the supply of labour
1.Wage rate - Substitution effect: As wage increases, workers are
more willing to sacrifice leisure time for work increased supply
- Income effect: When income is sufficient, workers are less willing to sacrifice as much leisure time decreased supply
2. Working conditions
- Working conditions improve more likely to offer labour (flexible working hours, fringe benefits, superannuation, leave entitlements)
- Government policies like paid parental leave and benefits increase labour supply
3. Education and training
Higher skill: lower supply of labour (limited pool of suitable applicants) Lower skill: larger labour supply
4. Mobility Geographic
Ability of workers to move from one job location to another- Mining workers willing to relocate cause
of attractive remuneration
Occupational
Ease with which workers are able to move from one job or occupation to another- Transfer skills across different
occupations - Higher rates of labour mobility will increase the
elasticity of supply of labour
5. Size of population
- Increase in population increases labour supply
6. Age distribution
- Countries with populations in the working age group of 15-65 will tend to have a larger workforce
7. Participation rate
- Measure of the proportion of the working age population who are either employed or looking for work.
Participation Rate=Employed+UnemployedWorking Age Population
- Determined by school leaving age, wage levels, retirement, women in the workforce
8. Labour market institutions
- Influence labour supply E.g: advocating for higher wage rates encourages increased supply of labour
The Australian workforce Definitions Employed Work for more than 1 hour a week
Unemployed
Working less than 1 hour a week but actively seeking and available to work
General characteristics
- Around 11.9 million people employed - > 65% work full-time - 46% are female- 39% are aged > 45 - 16% aged 15-24 years
Labour market outcomes - Differences in reward that different types of workers receive in exchange for
their labour Wage outcomes 1. Income
groups - Wages/salaries, major source of income (56%
2019) - Dividends - Gov. transfers (welfare) - Property incomes (rent)
2. Skills Higher skilled job = higher income - Skills are less-common, in higher demand, harder
to attain (uni, more study, etc) Lower skilled job = lower income
- Skills are more common, in less demand, easy to attain
- Unattractive working conditions = higher rate of
pay3. Age - Younger males and females earn less income than
older adult male and female workers (less experience, etc)
- Income for males and females is maximum in the 35-54 age group
4. Migrants - Migrants from English speaking countries earn more
- Migrants from non-English speaking countries have difficulty finding jobs lower incomes
- Employment/income levels relate to length of residency in Australia
- Participation rate of migrants is significantly higher (96-98%) compared to 65.7% for the rest of the population.
5. Indigenous Australian’s
- Amongst the lowest income earners in the Australian community
- Heavy reliance on government welfare payments for income
6. Gender Gender pay gap: difference between men’s and women’s average weekly full-time equivalent earnings expressed as a percentage of men’s earnings.
- The full-time pay gap for women is 13.9% less than men
Reasons for differences in outcome for women: - Glass Ceiling (barrier preventing women from being promoted to
higher roles)- Discrimination and bias in hiring and pay decisions- Female-dominated industries and jobs attract lower wages- Women’s disproportionate share of unpaid caring and domestic
work- Lack of workplace flexibility to accommodate caring and other
responsibilities, especially in senior roles- Women’s greater time out of the workforce impacting career
progression and opportunities.
Non-wage outcomes
Non-monetary benefits that employees receive - Superannuation, company car, holiday leave, other fringe benefits
Trends in distribution of
income from work overtime
- Much greater since the early 1990’s when enterprise bargaining became more popular. - -
- Family benefits have offset/balanced increase wage differentials. - Declining union memberships lead to more inequality amongst
occupations.
Arguments for/against more
equitable distribu
For:- More consumer satisfaction among the poor - Reduces social class divisions
tion of income - Less corruption and illegal activities for financial gain- Prevent higher tax burden on taxpayers and reduce government
welfare spending Against:
- Potential reduction in allocative efficiency - Lack of incentive effect on workers and producers to work for higher
wage
Labour market trends Unemployment - Cyclical: rising to peaks of > 10% in 1980/90s recessions
- MB1: significant decrease in unemployment due to investment - MB2 (post GFC): rising commodity prices high levels of
investment, decreasing unemployment - 2012: commodity prices decline, slowed economic growth and
rising unemployment - 2017: decreasing unemployment due to rise in women working full-
time in NSW
Types of Unemployment Frictional People moving between jobs Seasonal Caused by season change Structural Mismatch of labour skills due to changing
industry/technology Cyclical Contraction in labour demand, workers who are let go
due to lowered g/s demandLong-term Unemployment for over 12 months
- May experience problems finding work due to loss of skills
Hard-core People deemed unemployable/experience regular periods of unemployment
- Severe mental/physical disability, substance abuse, criminal record
Hidden Have difficulty or are discouraged from actively finding work
- Not looking, therefore considered unemployed Underemployment
People who want and are available to work more hours - Due to the rise in part-time employment
compared to full-time work - Underemployment rising steadily (more people
working but want longer hours) - 27% of part-time workers consider themselves
underemployed Underutilization Underutilisation rate = unemployment rate + underemployment
rate - More resources available in the economy to use (potential economic
growth)
- Underutilisation greater for women than men (more casual employment)
- Steadily rising: 1.8 million workers unemployed/underemployed = under-utilised
Casualization - More part-time jobs created than full-time jobs - Wages rates are usually higher to compensate for lack of other
entitlements (paid, leave, etc) - 35% of jobs in the economy are part-time (teenagers higher
represented) Outsourcing - Outsourcing non-core business functions to external organisations
(school outsourcing cleaning) - Helps reduce costs and improve focus on core business functions
Off-shoring: Work is done overseas Outsourcing: Someone else does work for you
Contractors/ Subcontracting
Contractors Run their own business and sell their services to others (employ subcontractors)
Subcontractors
Carries out work for a company as part of a larger project
Labour market institutions Unions, employer
associations, current
employment/industrial framework
Unions Represent workers on a collective basis. - Aim to increase rights, entitlements and working
conditions- Australian Council of Trade Unions (ACTU) peak
union body
Trade Union memberships steadily declining 46% in 1986, 20% 2012
- Increased corporisation, decline of manufacturing industries, decentralization of wage determination, general fall in confidence of union ability
Note: Critics of union action to raise minimum wage argue that it creates unemployment among low skilled/paid workers
Employer associations
Represent business groups in similar industries/aims in industrial relations matters
- Seek to protect the rights of members in negotiations with trade unions.
- E.g: Australian Industry Group (AIG), Business Council of Australia
Influence - Seek wage moderation to maintain profitability
and competitiveness of businesses. - Enterprise bargaining with employers provided
higher wages for more productive employees
demand for productive labour has risen along with wages.
Fair Work Aus. Institutions
(Aim to settle disputed between employees and employers)
Fair Work Australia - Vary awards, make minimum wage orders,
approve agreements, determine unfair dismissal claims, order good faith bargaining and industrial action
Fair Work Ombudsman - Enforce the laws through the court system if
needed - Inspectors investigate breaches
Current employment
/industrial framework
Ten National Employment Standards (Fair Work Act 2009)
Minimum employment entitlements that have to be provided to all employees
- Max. weekly hours, request flexible arrangements, leave, etc
National minimum wage
Currently $19.84
Employment contracts Modern awards
Provide minimum wages and working conditions for employees specific to their industry
Enterprise Agreements
Workplace agreement negotiated collectively through enterprise bargaining between employers and employees.
Common law Contracts
Simple agreement between an employer and employee, enforced through court of law
- Must satisfy BOOT test
Topic 5: Financial Markets Types of financial markets Markets,
Domestic/global markets
Primary Money from an investor goes directly to the borrower. - E.g. When shares are first floated and bonds and
debt securities are purchased directly from the issuerSecondary Securities already issued in the primary market are
traded between investors. Companies who issued securities do not receive any money. - E.g. Trading on the ASX
A Financial Market consists of agents, brokers, institutions, and intermediaries, facilitating the sale and purchase of financial products.
Domestic Supply/demand of goods and services within a single country
Global Supply/demand of goods and services in the entire world
Consumer credit
Allow an individual to buy now and pay back the original amount with interest at a later date - Aus. credit card debt $42.6 billion (ASCI,Jan 2020)
Housing loans/mortgage
Offered by financial institutions to purchase property.
Business loans
Loan allowing business’ to invest in operations- Support start up, expansion and cash flow
management Short term money market
Enables individuals, business’, financial institutions or government agencies to borrow or lend money for short periods of time- Usually under 6 months but almost always under 1
year
Bond market /Commonwealth Government Securities (CGS)
Instrument of debt issued to raising funds through borrowing.
Face value Size of the loan; written on the bond document.
Coupon rate
Fixed income that the bond holder receives. Similar to an interest rate.
Yield Yield=Coupon Rate x FaceValuePrice of the Bond
- Interest rates falls, yield falls bond traded for less
Generally issued by government/large businesses to raise money - Bond auctions; bid on interest rate/how much to
invest - Australian office of Financial Management allocates
bond to bidders with the lowest interest rates
Financial futures/derivatives
Futures Contract
Contract to buy/sell a specific asset at a predetermined price for a fixed quantity at some future date. - Buyer and seller are obligated to
fulfil the terms of the contract at the future date
Options Contract
Option to buy or sell asset on or before the option’s expiration time at the pre agreed price
- Not an obligation, so typically more expensive
‘Hedge’: minimising potential losses in the futureForeign exchange
Value of a currency in terms of another currency- International transactions currency must be
converted - Traded for purpose of travel, trade, investment,
speculation - Fluctuate with changes in demand/supply of currency
Depreciation: downward movement of one currency against another - Lowers value of AUS $ compared to foreign
currencies - Each foreign unit buys more AUS, One AUS $ buys
less foreign $Winners Losers
• Exporters of goods/services more profitability
• Tourists visiting AUS • Aus. tourism industry
• Importers of goods/services
• Aus. tourists travelling overseas
• Australian consumers
Appreciation: Upward movement of one currency against another - Rises value of AUS $ compared to foreign currencies - Each foreign unit buys less AUS $, One AUS $ buys
more foreign $Winners Losers
• Importers of goods/services
• Aus. tourists travelling• Australian consumers
• Exporters of goods/services less profitability
• Tourists visiting Australia
The Share Market Market in which securities are bought and sold; a stock exchange.
Role Shareholders
- Primary reason for investment: capital gains - Right to vote for board of directors/receive dividends
from profit- Management fiduciary duty: run company to benefit
shareholders - Share price rise anticipation of future capital gains
Business - Publicly listed companies trade on stock exchange - Float: selling shares for first time on ASX - Business can raise funds through equity finance, not
debt finance- Issuing new shares dilutes control of existing
shareholders - High share price confidence in management etc- Low share price expose company to a take over bid
Economy - Share-market performance indicator of country’s economic performance
- Indicator of ‘confidence/sentiment’ in the economy - ‘bullish’ share market results in greater investment by
shareholders increase investment, higher growth rates - Share markets are efficient allocators of scarce resources
companies with growth potential usually raise more funds in ASX
Function Facilitates: - The sale of new shares or equities (primary market) - called a float- Buying and selling of pre-existing shares (secondary market)- Trading of other securities, eg. Options, futures and bonds- Allows businesses to raise funds for establishment and growth
Share price set by market forces of demand and supply Higher share price indicates a business is doing well Low share price forces management to improve performance
Impact 1. Efficient investment and market capitalisation
- Healthy share markets result in higher share liquidity (buy and sell shares easily invest more)
- Preferable to avoid debt - Easier access to investment funds higher investment
spending increased production, GDP, economic growth- Impact how companies manage investment
(equity/finance)- Efficient share market: more Equity instead of Debt
Financing2. Investors Rising share prices measured by the share market index
(ASX 200). – - Rising index indicates rising business confidence and
investmentFalling share prices can result in the wealth effect (investors feel less wealthy due to a fall in their share values).- May lead to lower spending, higher leakages downturn
3. Share market and investment assets
- Share market rising: investors demand more shares, pushing up prices in comparison to other investment assets
- Share market falling: investors move funds to other investments
- In a bullish (rise) share market, investors might choose to speculate in shares in anticipation of quick profits speculative bubble
Regulation of financial markets Reserve
Bank Australia
RBA - Conducting Monetary Policy- Systemic Stability- Control of Notes Issue/currency - Regulation of the Payments System- Banker to the bankers- Responsible for holding Australia’s reserves of Gold and
Foreign - Banker and source of economic advice to the
governmentAPRA Regulates and enforces guidelines set by the RBA for all
deposit taking financial institutions. E.g: Banks, Insurance, Superannuation Funds, Credit Unions, Building Societies
- Issuing or withdrawing bank licenses- Setting standards regarding debt, risk and liquidity- Approving changes to structures and operations- Reviews of systems and management- Enforcement of regulations if needed
APRA’s main responsibility is to ensure that all institutions are capable of repaying the people who hold deposits and funds with them.
ASIC Responsible for monitoring the functioning of companies operating in Australia. - Works to protect consumers and investors and maintain
integrity in company processesCompanies Securities Industry and Markets - Formation - ASX - Registration - Bonds markets - Reporting - Futures
markets Australian Treasury
Anticipate and analyse policy issues, understand government/stakeholder circumstances and respond rapidly to changing events - E.g: Manage Australian GovernmentFunction - Provide policy advice regarding budget, taxation, financial
sector, foreign investment, etc- Manage federal financial relations - Work with state governments on key policy areas
Council of Financial Regulators
Crisis management – promote stability of the Australian financial system and efficient regulation by Australian regulatory agencies - Regulate all four other regulators (RBA, ASIC, APRA,
treasury) Function - Identify important issues/trends in financial systems which
impact financial stability - Ensuring appropriate coordination among agencies to respon
to financial instability - Engage with work of international institutions, forums and
regulators which relate to financial system stability BorrowersBorrowers Individual
s Personal purposes (purchase products) mortgages, loans, credit
Business Expansion, R & D investment, overcome cash flow downturns Government
Running budget deficits (more spending than taxes) infrastructure, tax cuts
Factors affecting the demand for funds Transactions
and speculative
motives
Transactions motive
Funds are held for day to day transactions + regular payments
Precautionary motive
Funds are kept aside to provide for future emergencies
Speculative motive Funds are kept aside to be invested in expectation of a higher return.
Financial innovations
Changes in payment options reduce demand for cash money for transactions (apple pay)
Lenders Individuals Lend to financial institutions for return shares, bonds, interest-bearing deposit
Business Deposit if interest rates are more lucrative than internal investment
Government
Whilst in surplus- a government may invest money (e.g international loans) to maintain positive balances
International
Known as foreign liability (must be repaid) - to finance domestic consumption & investment
Financial Intermediari
es
Holds funds from lenders in order to make loans to borrowers - Bank, building society, insurance company, superannuation funds
Financial aggregates measured by the Reserve Bank of Australia Meausring
money supply
Money Base All currency (notes and coins) in circulation + bank deposits with the RBA
M3 Money Base + Bank Deposits Broad money
M3 + NBFI deposits – NBFI deposits in banks
Interest rates Types of
rates in the short/long
term
Lending rates
Interest rate which banks charge for loans to their customers. This is higher than the borrowing rate.
Borrowing rates
Interest rate which banks pay their deposit holders for their funds. This is lower than the lending rate.
Note: Profit is made by having a higher lending rate than borrowing rate. The difference between the borrowing and lending rate is called the interest rate differential/margin
Short term Generally lower than long term rates due to low risk
Long term Generally higher than short term rates due to higher risk
Role of the RBA in
determining the cash rate
Cash rate: interest that every bank has to pay on the money it borrowsLiquidity: Amount of funds available in the cash market
Summary: determine cash rate by altering supply of money Influence of
the cash rate on interest
rates
Interest rates usually mirror changes in the cash rate to some extent
• Cash rate rises banks raise interest rates less consumption/investment decreases economic activity inflation decreases
• Cash rate falls banks reduce interest rates more consumption/investment increases economic activity rising inflation
Topic 6: Government and the Economy Government intervention in the economy Free market: Operates without government intervention; prices determined by unrestricted competition between individuals and businesses.
Provision of goods and
services
Goods and services
- Underproduction: not at the socially optimal position because they are not valued sufficiently by consumers
- Overproduction: cause negative externalities because costs associated with the production/consumption are not included in the price mechanism
Public goods
Goods not provided by private sector as they annot make profit selling them- Nonexcludable/non rival (electricity) - Government collects taxation revenue to fund these
services
Merit goods Positive unintended consequences of consumption/production of the good
Distribution of income
Disadvantaged groups
Free market result in wider difference in income and higher income equality. - The aged (no pensions or medicare) - Disabilities (no NDIS)- Young (no youth wage, minimum wage) - Hard re-entry into labour market (no paid parental leave) - Structural unemployment (no ov. Training)
Increasing cash rate
RBA sells government securities/bonds decreases liquidity/ supply of funds in banks Exchange Settlement Accounts (ESA) cash rate increases
Decreasing cash rate
RBA buys government securities/bonds increases liquidity/ supply of funds in banks Exchange Settlement Accounts (ESA) cash rate decreases
- No unemployment benefits - Indigenous worse off (no funding on welfare, training,
healthcare) - Lower income/jobs for migrants (no gov. support)
Relative poverty
Lives on less than 30% of the average income within the economy
Free market: Households do not pay taxes and do not receive welfare payments. - No laws in relation to minimum wage and conditions- Advantages people with high income jobs Gov intervention improves: - Equality: taxes higher income earners more which reduces difference - Redistribution: tax used to fund welfare for low earners, reduces
difference in income
Monopoly Power
Formation 1. Natural: may be due to limited infrastructure (Sydney water gov. owned)
- Not feasible/cost worthy to establish competition 2. Owernship of scarce resource: owner has exclusive
control over a physical resource (only supplier of raw metal)
- Exclusive control of intellectual property 3. Acquistion/merger: after acquisition there is only one
supplier. - If Coles and Woolworths merged
Risk of high pricing, no incentive for productivity improvmenets and less innovation. Achieve higher profits through the absence of competition
Privitisation The transfer of a business, industry, or service from the Government sector to private ownership and control.
Corporisation
Change a government owned organisation into a privately owned company. - Shares owned by Government - Commerical funding arrangements (interest paid on
loans/expectation of return from dividends)
Competition
If there are no laws that prevent anti-competitive behaviour firms may pursue profit maximisation to increase price and profit - Buyout/takeover: Possible if company has large market
share. Establishes monopolist supplier with no competition can increase prices and profit
- Collude with competiton: Collectively agree on higher prices to be charged by all suppliers. Reduces competition, increases prices, negatively impacts customers
Fluctuations in economic
activity
Booms (econoimc growth)
Increases inflationary pressures Reduces international compeitiveness reduces exports, increases imports Eroders real wages/value of savings Increased wages must be greater than inflation to maintain living standards
Recession (reduced growth)
Decreases inflationary pressures Lower levels of demand lower demand for labourUnemployment rises quickly in recession and reduces slowly in expansion No social/unemployment welfare lower living standard for unemployed
Without government intervention, there can be no moderations in economic activity.
The Role of GovernmentLevels of Government
Local State Federal
Constitutional powers
Size of the public sector
Rellocation of resoruces Direct Tax Taxes where impact and incidence are the same.
- Income tax, corporate tax Indirect Tax Tax which is imposed on one entity but is passed on to
another entity. Incidence and impact are different. - Goods and services tax
Expenses
Redistribution of income Progressive Tax rate increases as the taxable amount (income) increasesRegressive Tax rates higher for low-income earners than high-income
earners Proportional
Same rate of tax from each taxpayer, irrespective of income
Gov. welfare
Government funded services (education,healthy) and provision of minimum income (Newstart Allowance, Pensions)
Stabilisation of econoimc activity
Government business enterprises
Other Competition Environ. Policy
Influences on government policies in Australia Political parties Business Unions Environmental groups Welfare agencies Media Other interest
Monetary policy
- Open market operations (buying/selling of CGS) - Transmission mehchanism
Fiscal policy
- Adjustment of government spending and taxation through the Federal Budget
- Aims to ensure internal and external stability of the economy
Budget Stance Expansionary
Net increase in government expenditure- May be due to lower tax or increased gov.
spendingContractionary
Net decrease in government expenditure- May be due to higher tax or lower gov.
spending Neutral Government Expenditure = Taxation
Revenue
Budget Outcomes - Surplus - T > G- Balanced – T = G - Deficit - T < Gs
Automatic Stabilisers
Features of budgets that moderate the economy without direct intervention by policymakers.- Taxation and Welfare
Discretionary spending
Deliberate changes in government spending or taxation in response to domestic or global economic events - NDIS funding
groups International