Module 1: Introduction to Economics

Chapter 1: The nature of economics:

Economics is about finding ways to answer the questions: what to produce, how much to produce, how to
produce, and how to distribute production.

What is the economic problem?

The economic problem is the problem of scarcity; that is, there are an unlimited amount of consumer and
community wants but limited resources to fulfil them. Hence, individuals, businesses and governments need
to make choices and sacrifices.

Why is there need for choice by individuals and society

Individuals: go on a holiday or save for a house
Businesses: Investing with net profit or shareholders
Government: How to spend taxpayer income.
Whenever a choice to satisfy a want is made, we are giving up the opportunity to satisfy an alternative want.
Opportunity Cost relates to the wants left unsatisfied as others are fulfilled.

What is the opportunity cost?

Production possibility frontier (PPF): graphical representation of all the possible
combinations of the production of two goods or services that the economy can produce
at any given time. Can be used to demonstrate opportunity costs.

What are the assumptions of the PPF?

Assumptions of the PPF:
● Only two goods can be produced

● At each point all resources are fully employed

● The level of technology is fixed

● Amount of resources is fixed but are transferable

Technology
With the application of new technology, we may develop more efficient methods of production.
● May allow us to produce a higher quantity of goods with the same resources.
● Represented by the outward shift of the PPF

New resources
PPF can be changed by anything that increases the inputs available for production
● Pushes PPF outward
○ Discovery of new resources

○ Expansion of population through immigration (more people available for work)

Unemployment
In terms of production, unemployment is when resources are not fully employed.
● Does’t change the frontier itself, but changes our position in relation to it.
● This situation indicates that we have inefficient allocation of resources.
● Not achieving a maximum satisfaction of wants with the minimum opportunity cost.
● Unemployed resources→ output is less than what it could be

Consumer goods and services are items produced for the immediate satisfaction of individual
and community needs and wants. Capital goods are items that have not been produced for immediate
consumption but will be used for the production of other goods.
How can it be calculated?
Calculating Opportunity Cost using the PPF
Point A → Point B = going from the production of 150 cars and 50 food to 100 cars and 100 food.
Therefore, the opportunity cost of producing an additional 50 foods is 50 cars.
/50 in order to get OC of one food
OC of one food = 1 car.
Countries should produce those goods which have the lowest opportunity cost.
In the example PPF, production at point G would be impossible as there are insufficient resources.
● This doesn't mean this can't happen in the future. If technological advancements in both production methods occur, or
more resources become available the PPF will shift to the right.
● If technological advancements in only one area occurs, the PPF will pivot
● If there is downturn in production, ie. tariffs introduce, the PPF will shift to the left
Any production within the frontier means that resources are underemployed and not working at maximum
efficiency.

What are the economic factors underlying decision making?

Individual: Education (the higher the level of education; generally the higher the income; but you may have to
forgo years of work in order to obtain this) Spending vs. Saving, Work, Retirement, Voting
Businesses: Pricing, production, recourse use and industrial relations
Governments: Allocation of resources, redistribution of wealth and tax, policies, regulation of economic
behaviour, influencing the decisions of consumers and businesses.

Chapter 2: The Operation of an Economy:

An economic system is the way in which society is organised to solve the problem of scarcity.
There are 3 types of economic systems: Market Economy, Planned Economy and Mixed Economy.
How are goods and services produced?
In a market economy, the market determines what is produced. Factors of production
This is determined by the wants of individual consumers. ● Natural Resources: Rent
In a planned economy, the government determines what is ● Labour: Wages
produced. ● Capital: Income
● Enterprise: Profit

How are goods and services distributed & exchanged?

Market Economy Planned Economy

Distribution: Distribution:
Individuals are paid in money in exchange for their Government allocated goods and services toward its
resources. The individual will then use these funds to people, ie. rations. EQUAL
purchase goods and services. UNEQUAL
Exchange:
Exchange:
Barter [non cash exchange of goods]. ie. trading
Money is used as a medium for exchange. something.

What are some disadvantages for these systems?

Market Economy →
ADV: easier to determine value of goods and services.
DIS: unequal distribution of income means goods are distributed unequally.
Planned Economy →
ADV: Equal distribution of goods and services.
DIS: Hard to determine exchange rates of goods, particularly if only one party is interested in the good or service.
What income provisions are there?
Income received is dependent on the value of input.
ie. a highly skilled worker will be paid more as they possess more skill.
TAXATION is the redistribution of wealth.
Individuals pay taxation on income, goods and services, capital gains, etc.
This is used by governments to spend on community wants [ie. social welfare payments]

What is the business cycle?

The Business Cycle: The fluctuations in economic activity over time

What are the impacts of the business cycle?

RECESSION: Upturn in economic activity, business

production increases, higher employment rates, consumers
spending increase due to higher pay, better quality of life.
DOWNTURN: Consumption levels fall, production levels fall,
higher levels of unemployment, falling income, lower quality
of life.

What is the circular flow of income?

Individuals: demand goods and services, supply labour and resources
Businesses: demand labour and resources, supply goods and service
Financial institutions: Collect money as savings, spend money as
investments into businesses
Governments: Collects taxation, supplies collective goods.
International: Buys imported goods, sells exported goods.

Effects of the circular flow on the economy

S,T and M represent Leakages. [money not being spent within the economy]
I, G and X represent injections. [money going into the economy]

Equilibrium is the state where S+T+M = I+G+X. However, economies are rarely in equilibrium.
When S+T+M > I+G+X the economy is in a state of downturn. Overtime, consumers will have less to save, spend
on imports or have collected as taxes to equilibrium will be restored at a lower level.
When S+T+M < I+G+X the economy is in a state of upturn. Overtime consumers will have more to save, be
collected as taxes and spend on imports so equilibrium will be restored at a higher level of economic output.

The five sectors in the circular flow of income model are: Private sector includes:
• individuals • Individuals
• businesses • Businesses
• financial institutions • Financial institutions.
• governments
• international trade and financial flows.

The government sector represents the public sector in our economy,

Government + private sector = domestic sector
 Module 2: Consumers and Businesses
Chapter 3: The role of consumers in an economy
Consumer Sovereignty
Consumers ultimately determine which goods and services are produced by exercising freedom to choose what they buy.
By doing so they:
● enforce technical efficiency [produce goods at the least cost to maximise profit]
● enforce allocative efficiency [allocate resources in a way to satisfy consumer preferences]
● enforce dynamic efficiency [responding to changing consumer preferences and technological improvements over time]
Production is geared toward what people want and their wants satisfied.
Factors that diminish consumer sovereignty:
Marketing: Advertisements exert a powerful influence over the spending patterns of consumers.
Misleading or deceptive information: False or misleading claims about a product, leading them to pay for items that they do
not really want to buy.
Planned obsolescence: Sometimes firms produce goods that are designed to wear out quickly in order to keep consumers
buying their products, allowing them to manipulate consumer behaviour
Monopoly behaviour: Firms that operate in a market where there are limited suppliers diminish consumer sovereignty, as the
ability to choose is diminished

Patterns influencing decisions to spend or save

Y=C+S

Y = disposable income (after tax), C = consumption, S = savings

The equation indicates that an increase in consumption will lead to a decrease in savings, vise versa
The proportion of an individual’s total income that is spent on consumption is called the average propensity to consume,
𝐶
calculated using the equation 𝑌 = 𝐴𝑃𝐶. The proportion of an individual’s total income that is saved is known as the average
𝑆
propensity to save, 𝑌
= 𝐴𝑃𝑆.

Minor factors influencing decisions:

● Cultural factors
● Personality factors
● Consumer confidence and future expectations
○ When consumers are worried about the economic outlook, they are likely to save more,
○ If a consumer is confident about wage growth/economic outlook, they may consume more
● Future spending plans
● Tax Policies
○ Taxes can make it more attractive to save rather than spend (ie. lower taxes on superannuation savings) or vise versa
(abolishment/lowering of GST)
● Availability of credit.

INCOME:
● As income rises, people tend to save more of their income, therefore APS rise and APC falls.
● Consumers on lower incomes spend proportionately more of their disposable income [APC>APS]
∆𝑆
● Marginal Propensity to Save: the proportion of each extra dollar of income that goes to savings. ∆𝑌
= 𝑀𝑃𝑆
∆𝐶
● Marginal Propensity to Consume: the proportion of each extra dollar of income that is consumed. ∆𝑌
= 𝑀𝑃𝐶
● Since every extra dollar must be either spent or saved, 𝑀𝑃𝑆 + 𝑀𝑃𝐶 = 1

AGE:
● Life cycle theory of consumption
Factors influencing individual consumer choice
Income Price of Complements
● The higher the level of income of a person, the more ● If the price of a complement rises, consumers will be
they can purchase, and higher quality less likely to purchase the original goods.
Price Preferences/Tastes
● Necessities: people will purchase regardless of price ● Consumers will generally buy the good that gives them
change the highest level of personal satisfaction.
● Consumers are likely to reduce their demand for other
Advertising
goods such as luxury goods as price increases
● Can generate demand, convince consumers they
Price Of Substitutes need/want the good.
● If the price of a substitute rises, consumers will be more
willing to purchase the original goods.

Social Welfare:
Income collected through taxation and reallocated from government to consumers. Social welfare is aimed to provide a
minimum “safety net” which allows consumers to buy the necessities for life. A candidate for social welfare many be someone
who is:
● Disabled
● Old age [pension]
● Family benefits
● Unemployed

Chapter 4: The role of businesses in the economy

Definition of a firm and an industry
A business firm is an organisation involved in using entrepreneurial skills to combine the factors of production in order to
produce a good or service and create a profit.
An industry is a collection of business firms that are involved in making the same product and generally compete with each
other.

Production decisions
Businesses must determine what to produce, how to produce and how much to produce. In a free market economy, these are
generally determined by the market, and consumer demand.
What to produce:
● Determined by:
○ The skills and experience of the business operator
○ Consumer demand
○ Specific business opportunities
➢ ie. a region where there is less competition/niche market
○ Amount of capital required
How much to produce:
● Determined by the level of consumer demand for the product / service. A business may commission market research
How to produce:
● How to combine inputs in order to create outputs.
● Depends on the relative efficiency of the 4 factors of production
● The entrepreneur must create an operation plan

Business as a source of economic growth and increased productive capacity

Goals of the firm:
Profit Maximisation:
● Defined as making the biggest profit or smallest loss.
● The main goal of the firm
● Profit is the total difference between the firm's total revenue and cost of production.
● This goal can also lead to: economic growth, employment, regional development, infrastructure development and
productive capacity.
Other goals may include:
● Meeting Shareholder Expectations
○ Company directors make decisions to serve the interests and meet the expectations of all owners of the business
● Maximising Growth
○ Accumulating assets in order to growth the business and dominate the market more over time
● Increasing Market Share
○ More emphasis on increasing sales which could mean sacrificing profits in the short term
● Satisficing
○ Pursuing a satisfactory level in all goals rather than maximising a single goal

Efficiency and the production processes

Productivity: the quantity of goods and services the economy can produce Higher productivity →
with a given amount of inputs. ● Higher standard of living
(OUTPUT PER UNIT OF INPUT PER UNIT OF TIME) ● Less wastage of resources
Production: total amount of goods and services produced. ● Lower production costs and higher profits
Increased productivity allows a firm to satisfy a greater number of wants ● Lower inflation rate
● Higher income
using the same resources.
● Improved international competitiveness
In order to increase productivity, we need to increase production
proportionately more than the increase in inputs of resources. This
stimulates an increase in outputs per unit of inputs.

Specialisation:
One of the most common ways to increase productivity is through specialisation - using the factors of production
more intensively for a smaller number of the production processes.
● Division of labour: A person is trained to do one specific job
● Location of industry: A number of business producing similar goods and services congregate in the same area
to reduce production costs by sharing common infrastructure
● Large scale production: When a business grows so large they can use highly specialised capital
In most cases a firm is able to decrease their cost of production as output increases. The concept that a firm needs
to achieve a large scale of production in order to minimise cost is known as internal economies of scale.
Internal economies of scale are the cost saving advantages that are a result of a firm expanding its scale of
operations. Economies of scale are achieved when average costs per unit of production falls as output increases.
BELOW TECHNICAL OPTIMUM

Where AC = total cost / total outlay, TC = total cost and Q = quantity.

Internal diseconomies of scale are the cost disadvantages faced by a firm as a result of a firm expanding its scale
of operations beyond a certain point. Generally related to management problems. As the size of the business
grows, management may become inefficient in organising all areas of production. ABOVE TECHNICAL OPTIMUM.

Technical Optimum: the point at which per unit costs of production are
minimum.

External economies and diseconomies of scale are the

advantages/disadvantages that accrue to a firm because of external
factors.
● Growth of an industry in which the firm is operating in, not changes
their own operations
Impact of investment, technological change and ethical decision-making on a firm through:
Investment: the purchase of new capital to increase production in the future.
Technology: “new” information/knowledge
Ethical decision making: considering the impacts production has on society (rather than just considering profit
maximisation)
 Module 3: Markets

Chapter 5: Role of the Market

Determining solutions to the economic problem

In A Mixed Market economy or Free Market economy, markets are Allocating resources by the economic system.
the main allocative mechanism of resources. This occurs through Types of Markets:
the interaction between buyers and sellers in order to determine ● Mixed Market (gov. intervention + laissez-faire)

equilibrium in which both parties are satisfied. ● Free Market (no government intervention)
● Planned Market (fully operated by the government)

The importance of relative price in reflecting opportunity costs in the goods and services and factor
markets
Relative price: the cost of one alternative to another
The higher the relative price = the lower the opportunity cost.

Chapter 6: Demand
The Law of Demand
Individual Demand: The demand of an individual consumer for a good or service.
Market Demand: The sum of total individual demands for a particular service.
The Law of Demand states the quantity demanded of a good or service varies inversely with its price. As
price decreases, demand increases, and vice versa.
– This happens as more people are willing and able to pay for the good or service.

The Demand Curve

Where:
● Price ($) is on the y-axis
● Quantity Demanded in on the x-axis
● D is a negative gradient

Factors affecting demand + Shift/Movements along the curve.

Price:
● As the price of a good decreases, demand for that good is more likely to increase, similarly, as the price of the
good increases, demand is likely to decrease.
● This is per the law of demand, that states the quantity of a good demand varies inversely with price.
A change in price causes either an expansion or contraction on the demand curve.
An expansion is caused by a decrease in price and subsequent increase in demand. A contraction is caused by an
increase in price and therefore a decrease in demand.
Income:
● As income rises, consumers have more disposable income which they can spend on additional goods and
services, therefore demand is likely to increase.
● As income decreases [ie. as a result of recession] there is decrease in consumption and subsequent decrease
in demand.
This is represented by either a shift to the left or right of the demand curve. When income rises, this increase in
demand is represented by a shift to the right, and as income decreases, a shift to the left.
Population:
● An expansion in population caused by immigration or natural causes will result in an increase in demand, as
there are more people requesting more goods and services.
● A decrease in population as cause by emigration or famine/other causes will result in a decrease in demand, as
there are less people in need of goods and services
● As the demographics of the populations changes, ie. population ages, there will be increased demand toward
those goods that group is in need of or wants [ie. ageing population = increase in demand in walking sticks]
This is represented on the demand curve by either a shift to the left or the right. The expansion of population and
impact on demand will result in a shift to the right, similar to an ageing population. A decrease in population
would cause a shift to the left.
Tastes:
● As consumer taste and preferences change, as do their demands.
● If something is “trendy” it is likely that that product/service will experience an increase in demand
● Similarly, if something is deemed “out of fashioned” or “aged” then the demand for that product is likely to
decrease.
This is represented by a shift to the left/right.

Price of substitutes and complements:

● If the price of a substitute good rises, the demand for the original good will rise as the demand for the
substitute good decreases as less people are willing and able to pay, vise versa.
● If the price of a complementary good rises, the demand for the original product will decrease, as less people
are willing and able to pay, and vice versa.
Represented by a shift to the left/right of the demand curve. Increase in substitute good = shift to the right,
increase in complement = shift to the left.
Expected future prices
● If the price of a good is expected to rise in the future, the demand for the good will increase in the short term.
● If the price of a good is expected to fall in the future, the demand for the good will fall short term as more
people wait it out for the price to drop.
Represented by a shift on the demand curve. Expected future price is higher = shift to the right. Expected future
prices lower = shift to the left.
[PIPPET] These things occur Ceteris Paribus, or all other things/factors remaining equal.

Price Elasticity of Demand

Significance of Price Elasticity of Demand
Price elasticity measures the responsiveness of consumer demand of a particular product to a change in price.
● Awareness of price elasticity allows for businesses to determine a price in which they can make maximum
profit.
○ Best pricing strategy and if they can afford a change in price.
○ Price changes will generally happen if a good has inelastic elasticity of demand, this can be determined by market
research ie. surveys
● Allows for the government to determine which goods/services it can tax and how much it can tax them by.

Price Elasticity
● Relatively Elastic demand refers to a strong response to a change in price. Decrease in quantity demanded is
proportionally greater than the rise in price.
● Relatively Inelastic demand refers to a weak response to a change in price. Decrease in quantity demanded is
proportionally less than the rise in price.
● Unit Elastic demand refers to a proportionate change in quantity demanded which is the same as the
proportionate change in price.
We calculate elasticity using the total outlay method. This is calculated using the equation: 𝑝𝑟𝑖𝑐𝑒 × 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑.
Perfectly elastic/inelastic demand.

Perfectly elastic Perfectly inelastic demand

demand refers to a refers to a point in which the
point in which quantity of a product is
consumers demand an fixed, and consumers are
infinite quantity of a willing to pay at any price
good or service at a point for this product (ie.
particular price, but at limited edition artwork).
no other price point.

Factors affecting the elasticity of demand

Necessities and Luxuries: Proportion of income spent on the good

● Necessities have a relatively inelastic demand. ● Goods and services that take up a small
An increase in price will not cause a change in proportion of income have an inelastic elasticity
the quantity demands, ie. food of demand (ie. chocolate)
● Luxuries have a relatively elastic demand. A ● Goods and services that take up a large
change in price will cause a significant decrease proportion of the income tend to have an elastic
in the quantity demanded. demand (ie. cars, houses)

Existence of close substitutes The length of a time since price change

● Products without close alternatives tend to have ● After an initial price change, durable goods tend
relatively inelastic demand as there are no other to be more elastic than non durable goods. With
alternatives to these products. time however, the elasticity would decline.
● Products that have close substitutes tend to
have highly elastic demand, as there are many Whether a good is addictive
alternatives. ● If a good is habit forming [ie. gambling, smoking,
alcohol] then it tends to be relatively inelastic

Chapter 7: Supply
The Law of Supply
Individual Supply: The quantity of a good or service a particular firm is willing to provide at various price points
Market Supply: the quantity of a good or service which producers are willing and able to produce at a given price.
The Law of Supply states that the quantity supplied is a positive function of a price, as the price of a good
increases, supply increases. [vise versa]

The Supply Curve

Where:
● Price ($) is on the y-axis
● Quantity Supplied in on the x-axis
● S is a positive gradient

Factors affecting supply + moments/shifts along the curve

Price:
● The higher the price of the good, the greater the incentive for firms to produce this good = increase in supply.
● The lower the price of the good, the less incentive for firms to produce this good = decrease in supply.
This is represented by a moment along the supply curve. As the price of goods increases, there will be an
expansion along the supply curve. As the price of the goods decreases, there will be a contraction on the supply
curve.
Increase in Price = Expansion
Decrease in Price = Contraction

Cost of production:
❏ Lower production costs will enable producers to increase supply at a range of prices.
❏ Higher production costs means producers will decrease supply at a decreased range of prices.
This is represented by a shift to the left/right on the supply curve.
Lower Production Costs = Shift to the Right
Higher Production Costs = Shift to the Left

Price of substitutes:
❏ If the prices of alternative goods or services are relatively higher, producers may switch to supplying the
alternate goods or services in order to make more profit.
❏ This decreases the supply of original products.
Represented by a shift to the left on the supply curve.

Expected future prices:

❏ If a supplier believes the price of a good or service will increase in the future, supply will increase in the
hope of more profit
❏ If a supplier believes the price of a good or service will decrease in the future, they will begin to supply
less so as to not lose money.
Represented by a shift to the left/right on the supply curve.

Technology:
❏ Technology advances may lead to lower production costs which allows the supplier to supply more at
various price points.
❏ This leads to an increase in supply
Represented by a shift to the right

Seasonal/Climatic Factors:
❏ Supply of some agricultural products decrease as they are not in season or during a drought
❏ Supply of agricultural products increase as they are in season/good yield
Represented by a shift to the left/right on the supply curve.

[Chris Paul Expects Technology Season]

Price Elasticity of Supply
Price elasticity of supply refers to the responsiveness of a market supply to a change in price
- Elastic Supply: If the rise in the quantity supplied is proportionately greater than the increase in price,
indicating the product is responsive to a price change
- Inelastic Supply: If the rise in the quantity supplied is proportionately less than the increase in price this
means the supply is not very responsive to a price change
- Unit Elastic: when the quantity supplied rises by the same proportion as the price increase

Perfectly Inelastic/Elastic Supply:

- Perfectly elastic supply refers to when firms are willing to supply an unlimited amount of a good at one
certain price. [Under ACCC legislation this cannot happen] Price is fixed!
- Perfectly inelastic supply refers to when a firm will supply a fixed quantity of a good at any price point.
Supply is fixed!

Factors Affecting the Elasticity of Supply:

Time Lags after a price change
❖ Short term, relatively inelastic as it takes a long time to be able to increase production capacity
❖ Long term, relatively elastic as the producer could begin to change the inputs and increase production
capacity
Excess Capacity
❖ Supply will be more elastic if firms have excess capacity, because they can respond to any increase in
price by using their existing resources more intensively
Ability to hold/store stock
❖ The easier it is to hold stock, a firm can be more responsive to price changes - ie. if holding stock and a
price change happens, they can release all stock = more elastic.

Chapter 8: Market Price

Market Equilibrium
Two Assumptions when calculating Market Equilibrium:
- Pure Competition: no consumer or supplier has the power to influence market outcomes
- No government intervention
The market will determine price and output through interaction of demand and supply.

Market Equilibrium: When a quantity demanded of a good or service is equal to the quantity supplied, market
equilibrium price and quantity are established.
Market Equilibrium occurs when:
- Quantity demanded equals quantity supplied
- The market clears
- There is no tendency to change
Market Equilibrium occurs when the supply curve and the demand curve intersect - the
point where quantity demanded is equal to the quantity supplied.
Market Shortage: Occurs when demand exceeds supply
Market Surplus: Occurs when supply exceeds demand.
Changes to Market Equilibrium
Changes to market equilibrium may occur when there are shifts on either the supply curve or demand curve.
- These are caused by the factors affecting either supply or demand

Increase in Demand Decrease in Demand Increase in Supply Decrease in Supply

Increase in equilibrium price, Decrease in equilibrium price, Decrease in equilibrium price, Increase in equilibrium price,
increase in equilibrium quantity decrease in equilibrium quantity increase in equilibrium demand decrease in equilibrium demand

Government intervention
Ceiling Prices and Floor Prices:

Ceiling Prices: [Blue]

- Government sets a maximum price at which a good can be sold at (ie. Public
Transport)
- Used in order to support buyers
- Results in Market Shortage/Underproduction

Floor Prices: [Blue]

- Government set a minimum price at which a product must be sold above
- Implemented in order to support sellers

Market Failure
Market failure: when the price mechanism takes into account the private benefits and cost of production to
consumers and producers, but fails to take in indirect costs [also known as the social cost]
- Supply side government interventions are designed to shift the supply curve to the left in order to take
into account externalities
- They recognise the costs of production, increasing price and decreasing quantity
- These are usually in the form of taxes
Similarly, when production is producing positive externalities, a government might put in subsidies to lower the
cost of production, therefore increasing supply and increasing quantity.
Government also supplies some public goods:
- Ie. Education, Healthcare, Defence
 MODULE 4 →
Labour Markets
Chapter 9: The Demand and Supply for Labour
Labour is a derived demand - meaning it derives from the demand for goods and services. When consumer demand is
high, firms require more labour in order to satisfy that demand, and vice versa. ( when one goes up the other goes up)

The demand for labour by individual firms

Firms demand labour by offering wages.

Factors affecting demand:

Output of the Firm
● If a firm is experiencing significantly higher scales, they will increase their demand for labour as their output increases.
○ This is influenced by general economic conditions - higher rates of economic growth = higher consumption =
higher demand = falling levels of unemployment.
○ Therefore, changes in the demand for labour will occur as a result of fluctuations in an economy
○ But there are “time lags” which are a consequence of firms operating at excess capacity.
● Conditions in the firm's industry
○ A change in consumer tastes and preferences results in a change in the allocation of labour between
industries
■ i.e. higher demand in the tertiary sector would see the shift in labour from the primary and
secondary sector, or mining boom
● The demand for an individual firm’s products
○ A firm’s output is ultimately determined by its effectiveness in selling goods and services. This is determined
by factors such as: quality, reputation, customer service and marketing.

The Productivity of Labour

● A firm must decide where or use labour more intensively in production or relying more on capital
● The productivity of labour will determine the extent to which a business uses labour in its production.
𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡
○ Productivity of Labour = 𝐿𝑎𝑏𝑜𝑢𝑟 𝐼𝑛𝑝𝑢𝑡
● Labour productivity depends on the quality of the workforce: including
○ Education,
○ Skill,
○ Health
○ Motivation
○ How effectively it can be combined w/ capital.

● Impact of labour productivity in the demand for labour:

○ Aggregate demand rises and labour productivity increases → higher demand for labour
○ Aggregate demand remains constant + increase in labour productivity → demand for labour decreases
○ Aggregate demand falls, labour productivity increases → demand for labour decreases.

The cost of other inputs

● A firm will decide which [labour or capital] is the most cost effective method for production. The two are regarded as
substitutes of each other as changes in price have a similar effect on demand.
● A firm’s demand will be more elastic when:
○ Labour costs are relatively higher in proportion
○ If it is easy to substitute between labour and capital
○ It is more difficult for the firm to pass on increased labour costs in the form of higher prices to consumers
● Cost of labour: wage rates plus labour-on costs ie. superannuation, fringe benefits
○ A firm may shift operations overseas if these can be avoided [ie. lower labour regulations], or if it is cheaper
● Cost of capital: interest rate
DEMAND CURVE FOR LABOUR:

COP = Cost, Output, Productivity

Factors affecting the the supply of Labour

Pay/Remuneration
● Perhaps the most influential factor in affecting the supply of labour is the wage
and non wage benefits
○ More people willing to work as pay gets higher

Working Conditions
● Attractive working conditions encourage a greater supply of labour to a
workplace
○ This can be: physical environment, social environment, team bonding experiences

Human Capital, Skills, Experience, Education and Training

● Human Capital: the total sum of the knowledge, skills, training and experience of workers that
contribute to the process of production
● Essentially this means the “quality of labour” → this is the main influence on productivity growth.
○ Job requirements mean the supply of labour may vary between industries and occupations
○ Lower supply in industries that require a high amount of skill, education + experience.

Occupational and Geographical Mobility

● Occupational: The ability for labour to move between occupations , transferable skills.
● Geographical: the movement of labour between different locations - limited by cost of reallocating and
personal upheaval

The Participation Rate

● The percentage of the working age population who are in the labour force
𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒
● 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐴𝑔𝑒 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
● High participation rate = higher supply of labour.

When Pete popped (some) meth Harry cried.

The Australian Workforce

Definition of the Workforce:
● Workforce: a section of the population 15 years of age and above
● Employed: a person is defined as being employed if they have one or more hours of work per week
● Unemployed: available for work, actively seeking work and unable to find it
General Characteristics of the Australian Workforce
● Population Size
○ Population sets the limit to which the workforce can grow.
○ Population growth is influenced by natural increase and net migration.
■ Australia’s population is increasing due to increase in migration - 40% of total
population growth since WWII
● Age Distribution
○ 15-65 year olds comprise if the workforce
■ Australia is experiencing an ageing population, as the Baby Boomers from WWII are
retiring
● Education Patterns
○ Level of education increases

Chapter 10: Labour Markets Outcomes

Wage outcomes for all persons by income groups, occupational groups, age, gender and cultural
background

Average Weekly Earnings measures the average weekly gross rate of pay (pay before tax) of all employees, both
full time and part time.
Nominal Wages is the pay received by employees in the dollar term, and not adjusted for inflation.
● It does not tell us if people are better off as it fails to take into account changes in price levels that might
be occurring at the same time.
Real Wage is a measure of the actual purchasing power of money wages (nominal wages adjusted for the effects
of inflation)
Employers can afford higher real wages if there is also a strong increase in productivity.
● If the growth in wages is higher than productivity, real labour costs rise this will eat into the employer’s
profit
● When wage growth is below the sum of inflation and productivity growth, real labor costs will fall and
profits expand

Differences in Wage Outcomes:

● BETWEEN DIFFERENT OCCUPATIONS
○ Level of skill and education (increased level of skill and occupation = increased pay)
○ Appeal of working conditions (ie. high stress, competitive environment like CEO or mining
positions)
○ Occupational mobility (the ease with which labour can move from one occupation to another)
● IN THE SAME OCCUPATION
○ Higher qualifications = higher pay
○ More experience
○ Geographic mobility (the ease with which labour can move from one area to another)
○ Productivity of labour
○ The capacity of the firm to pay

Age
● Income varies throughout life, see chapter 2 notes
● Generally a person makes less in their youth, and as they approach their 40-50s will make the most
Gender
● Discrimination against female
● The pay gap, “glass ceiling”
○ Discrimination, interruptions in working life, working in lower paid industries
● Women paid less than men

Migrant Status and Cultural Background

● Overall, Australian workers with a migrant background earn slightly less than the average taxpayer
● However, those who came as skilled migrants earn above national average (higher level of skill)
○ Yet receive lower rewards for their education than Australian born workers
● In the highest paying professions, workers with a migrant background earn more than average taxpayers
○ Recruit of highly qualified workers from overseas
● Recently migrants tend to have lower income levels than those who have been in Australia longer, but
incomes tend to rise relatively quickly toward average levels.
● Those who come from English speaking backgrounds are more likely to earn above average income than
those from non-English speaking backgrounds.
● Indigenous Australians

Trends in the distribution of income from work

During the past 3 decades, the Australian labour market has undergone dramatic changes that have altered the
way in which people receive their wages increases,

● 1980’s implementation of award wage system ensured that differences in wage outcomes were smaller
● Shift toward enterprise bargaining since the early 1990s (employees negotiate wages increases at the
workplace level) has resulted in great difference in wage outcomes
○ Resulted in the creation of considerable difference in income distribution between sections of the
community.
■ There is considerable inequality in the distribution of income in Australia, which has grown
slightly over the past decade
■ The highest income earners have gained a larger share of income while the share of every
other group has shrunk. Income stratification, rich getting richer, poor getting poorer

Non-wage outcomes for different occupations

Non wage outcomes are the benefits that many employees receive in addition to their ordinary and overtime
work. These include: sick leave, holiday leave, superannuation and other fringe benefits (company car, laptop,
gym subsidies)
- Non-wage outcomes can vary substantially from one workplace to another. In some industries, workers
often earn far more than their regular wage because of substantial non-wage allowance.
Bonus cash payments on top of an employee’s normal wage is another non-wage outcome. (performance bonus,
Christmas bonus)
Flexible work patterns ie. work-life balance - study leave, parental leave , work from home etc.
 Arguments for and against a more equitable distribution of income

Economic Argument

For Against

- Inequality encourages the labour force to increase education - Reduces overall utility (satisfaction)
and skill levels - Reduce economic growth
- Inequality encourages the labour force to work longer and - Reduces consumption and investment
harder - Creates conspicuous consumption / the
- Makes the labour force more mobile consumption of expensive goods and services for
- Encourages entrepreneurs to accept risks more readily the purpose of displaying wealth
- creates the potential for higher savings and capital formation - creates poverty and social problems
- increases the cost of welfare

Social Argument

For Against

- Theoretically, inequality should have a social benefit if an - Poverty

individual's income genuinely reflected their relative - Lower levels of wellbeing
productivity. - Social class division
- Yet, the economic system does not give everyone the same level
of opportunity to acquire knowledge and skills

Inequality of Opportunity Exists because:

-- Existing inequality in the distribution of income and wealth tends to perpetuate inequality of income
-- Not everyone has the same mental and physical attributes and the same potential with regard to the
acquisition of income and wealth
-- People who acquire wealth through inheritance have a much greater opportunity to build up their wealth
through investments
-- People may not have the access to the same networks that may lead to new opportunities

Unemployment
One of the highest priorities of all policies affecting the labour market is to reduce unemployment.
Unemployment: available for work, currently without work, actively seeking work (ie. be registered with an employment
placement provider)
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑠𝑜𝑛𝑠 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
**𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 (%) = 𝑇𝑜𝑡𝑎𝑙 𝑙𝑎𝑏𝑜𝑢𝑟 𝑓𝑜𝑟𝑐𝑒
× 100
Unemployment / Underemployment
● Cyclical Unemployment is unemployment caused by a downturn in the business cycle.
○ Demand for labour is a derived demand, thus when there is a downturn the demand for G+S’s go down ,
therefore les labour needed
● Structural Unemployment occurs because of a mismatch of skills demanded by employers and those possessed by
unemployed people
○ Restructuring of the economy, ie. changes in industries
● Long-term Unemployment the unemployed person has been out of work for 12 months or more.
○ The longer you are out of work, the more hard it is to get a job
● Seasonal Unemployment occurs because of the seasonal nature of some jobs (ie. fruit picking)
● Frictional Unemployment occurs as people change jobs, moving from one job to another.
● Hard-Core Unemployment refers to those individuals who might be considered unsuitable for work due to personal
reasons ie. mental illness, disability, addiction
 ● Hidden Unemployment refers to those individuals who are not counted in the official unemployment figures
because they have given up on actively seeking work or gone back to school
● Underemployment individuals who have part-time or casual jobs but would like to work more hours a week.
Underemployment is a measure of the total number of people in an economy who are unwillingly working in
low-skill and low-paying jobs or only part-time because they cannot get full-time jobs that use their skills.
○ Represent under-utilised labour resources

The movement away from full-time work

Part-time work
● Part time work is defined as those employees regularly working less than 35 hours per week.
○ Proportion of employees working part time has increased dramatically over recent decades
○ 25.7% compared to OECD average 16.5%
○ Some employees prefer part time work, as it allows a greater work-life balance, and has been made easier
by industries
○ However, for others, it is the choice of their employer and not their own. Employers have greater flexibility
in their staffing arrangements if a substantial proportion of their employers are less than full time workers
■ Can increase hours and not face extra overtime costs or hiring additional staff
■ Don’t have to provide holiday leave, sick leave or redundancy pay
Casualisation of the workforce
● The growth of casual employment (and the relative decline of full-time permanent jobs) as a proportion of the total
workforce
● Casual employment occurs when employees have occasional working hours but do not follow any set pattern
○ The most insecure because there is no job security
Outsourcing
● Occurs when an organisation pays another business to perform a function that it does not regard as a core part of its
business focus
Contractors
● Firms engage contractors to pay them to provide a specific service for the business ie. specialised consulting advice
● Governed by commercial law rather than employment law
○ Ie. cleaning company in school

CASUALISATION OF WORK

ADVANTAGES DISADVANTAGES

- Flexibility for employers to increase or - Less jobs security

reduce staff as business demands change - More difficult for employees to plan for the
- Employer may avoid paying some future. ie. obtain loans
non-wage costs - Less staff loyalty and less development of
- Flexibility for employees with family or workforce skills
other commitments
 MODULE 6 →
Labour Markets .

Chapter 14: The Limits of Markets

Market Failure in the provision of goods and services:

Under a completely free market, some community needs and/or wants are left unsatisfied. This is known as market failure.
Market failure can arise in:
Provision of goods and services
● The market may fail to produce certain goods or services, particularly public goods [ie. ABC]
○ Public goods are goods that are nonexcludable and nonrival, meaning no one can be prevented from using it
[even if they pay for it or not], ie street lights, People do not pay No incentive to produce these goods = firms do
not produce these
● The market may also produce an inadequate quantity of a good or service, particularly merit goods.
○ Merit goods have benefits to the community that go beyond the individual who enjoys them directly.
○ Ie. Healthcare/Education
● The market may also produce too much of a good, known as a demerit good.
○ These are goods which are harmful to a society, ie. alcohol, cigarettes,
○ Because these goods have negative effects, the government may restrict the sale [ie. 18+ age limits, heavy
taxation or prohibitions]
● A government may also operate a monopoly of a good or service because it would be insensible to have competing
firms. Examples of these include defence. These are called NATURAL MONOPOLIES.
○ A market structure in which goods can only be efficiently produced by one supplier, generally because of
infrastructure requirements.
○ Inefficient to have competition
○ Ie, rail networks

Market failure in the distribution of income:

Free markets will generally discriminate and produce considerable inequality in the distribution of income.
● Leads to poverty.
● Disadvantaged groups include those with low education levels, migrants, disabled, indigenous peoples, etc.
● The most common form of poverty in Australia is relative poverty
○ Those whose standard of living is substantially lower than the average of an economy as a whole.
○ Welcomed the establishment of a welfare state which designed welfare benefits.

Market failure in externalities

Markets take into account the economic and social concerns of individual buyers and sellers, but do not take into account any
side effects that are directly reflected in the price mechanisms of supply and demand.
● Externalities are the external costs and benefits that private agents in a market do not consider in their decision
making process.
○ ie. pollution (air/water/light/noise)
● Positive Externalities: positive side effects produced all members of the public can benefit from
○ ie. a tourism company cleaning the waterways
● Negative Externalities
○ Harmful effects on the economy and society, adverse spillover effects production has on the environment
■ CO2 emissions,
■ Deforestation, soil erosion, water pollution
Market failure in the abuse of power
Because of the costs of producing, advertising, and distributing goods in a market, only a small number of firms will survive.
This creates imperfect market competition = smaller number of goods at a higher price
● Monopolisation: a firm uses its dominant market position to eliminate existing competition, or prevent new firms from
entering the market.
● Price discrimination: when a firm sells the same type of good or service in different markets at different prices.
○ Businesses try to charge different prices to different consumers based on their willingness and ability to pay
○ Higher price to consumers more willing to pay, vise versa
● Exclusive dealing: when a firm sets conditions for supply that exclude retailers from dealing with other competitors.
○ Prohibited by the Competition and Consumer Act 2010
● Collusion and market sharing: when firms get together and agree on a price and a market-sharing arrangement that
reduces effective competition

Market instability: the business cycle

Without government intervention, an economy is likely to be subject to severe fluctuations in the business cycle and level of
economic activity.
● Government’s role of sustaining economic growth
● Market boom can lead to inflation, which brings economic problems.
○ High inflation = reduce consumer’s purchasing power, force an increase in interest rates → recession
● Government intervenes through economic stabilisation policy
○ Fiscal
○ Monetary
● In a period of boom, a government may counteract this by spending less/injecting less into the economy, and vise versa

Chapter 15: The Role of Government in Australia

Functions of the three levels of government
Government Hierarchy: Local < State < Federal
● the constitution set out the powers of the federal government and its responsibility and the states get the leftovers

Federal State Local

Defence, Economy, Foreign Health, Education, roads, transport, Rubbish collection, community
Affairs, immigration, welfare police points and areas,

- the largest type of revenue is the Goods and Services Tax

Reallocation of Resources
Government can affect the allocation of resources in two main ways:
● By influencing the way business and consumers behave in the market through taxation or spending measures
● By producing goods and service itself (ie public goods)

Taxation: one of the main purposes of taxation is to raise revenue for the government, but they can also be used to influence
the price of goods and services and therefore consumer demand.
● Direct Taxes
○ Those taxes that can be paid by individuals or business firms on which they are levied - connote be passed on to
someone else
■ Ie. personal income tax
■ Company tax, capital gains tax
● Indirect taxes
○ Indirect taxes are those taxes which can be passed onto someone else, attached to a good or service as opposed
to an individual or company
■ GST
■ “Sin” tax
Spending: Government spending can also directly reallocate resources to a particular sector of the economy, or influence the
decisions of consumers and businesses.
● Funding: ie for the arts which might be unprofitable
● Grants for start up businesses or new financial growth industries that might not have access to finance
● Subsidies to provide goods to areas that otherwise would not be profitable
● Cash payments ie. jobseeker / JobKeeper

Provision of goods and services:

● Governments sometimes involve themselves directly in the production process to achieve a better allocation of
resources.
● Provide basic infrastructure ie. schools, health centres, railways, NBN
● Recent trend of privatisation (sells public trading enterprises to the private sector) as opposed to nationalisation

Redistribution of Income
Governments intervene in the market economy to reduce the level of social inequality in the distribution of income. One of the
mechanisms it uses to do this is through social welfare.

Taxation:
● Tax base: the items that are taxed. 3 main bases: income, wealth and consumption
● Average rate of tax: the proportion total income earned that is paid in the form of tax
● Marginal rate of tax: the proportion of any increase in income that must be paid as tax. How many cents of every
extra dollar earned must be paid to the government

Types of Taxation Systems:

● Progressive Tax: high income earners pay a greater proportion of their income as tax than low income earners. ie.
Income tax (ART rises as income rises)
○ PAYG tax (income)
○ 18, 200 tax threshold
● Regressive tax: high income earners pay a smaller proportion of their income as tax than low income earners (ART
falls as income rises) ie GST
○ Charged as a percentage of the price of the good or service sold, irrespective of the income
○ If calculate as a percentage of an individual’s income, the percentage of tax paid will fall as income rises
● Proportional tax: all income earners pay the same proportion of their income as tax (flat base rate of the income, ie.
company tax) ART is constant as an individual’s income increases.

Social Welfare:
The government redistributes its taxation to lower income earners via social welfare payment, and accounts for ⅓ of a
government’s spending.
- Payments are often means tested, which means that people with high income are ineligible for such payments
- Ie, Age pension

Stabilisation of Economic Activity

Monetary policy tends to operate as the main stabilisation policy.
- Monetary policy involves action by the RBA in order to influence the level of interest rates and the supply of money.
- Use of DMOs which involve the buying and selling of CGSs by the RBA in order to affect the cash rate in the
short-term money market and influence the level of interest rates in the economy
- Tightening monetary policy: government wishes to slow down the level of economic activity → increase cash rate
→ upward pressure on interest rates → consumers save more → lower level of activity
- Loosening monetary policy: increase the level of economic activity → decrease cash rate → downward pressure on
interest rate → increased level of consumption → increased economic activity
Fiscal policy: is a macroeconomic policy that can influence resource allocation, redistribute income and reduce fluctuations of
the business cycle. Its instruments include government spending and taxation and the budget outcome.
Government Business Enterprises
GBE’s are businesses owned and managed by the government at either a Commonwealth or State Level.
● They function to provide goods and services ot to community
Many have been privatised/corporatised in recent years under the ethos it will make them more efficient. (e.g. Commbank,
Qantas, Telstra). Remaining GBEs include:
● Auspost
● Transport NSW
● Sydney Water
● NBN

Competition and environmental policies

Competition Policy:
● One of the aims is to maintain a level of healthy competition.
○ Competition leads to a more efficient use of resources = lower production costs = lower prices for consumers
● ACCC is the consumer protection authority
○ Monitors prices and conducts inquiries into pricing structures
○ Recommends changes to industries
○ Negative publicity when overcharging
Environmental Protection:
● Externalities tax ie carbon tax, setting Renewable energy targets, Paris Agreement etc

Chapter 16: Government in Action

The Budget
The Budget is the tool of the government for the implementations of fiscal policy. It shows the government’s planned
expenditure and revenue for the next financial year.
● Large majority of the Commonwealth Government Revenue is derived from taxation (direct and indirect)
Key Areas of Government expenditure:
● Social Security and welfare
● Education
● Health
● Provision of infrastructure or social overhead capitals (roads, rails, ports)
● Protecting the environment and promoting ecologically sustainable development.
● Defence

The change in the budget outcome from one year to another can indicate a change in government fiscal policy stance. The
three stances possible are:
● An expansionary fiscal policy stance
○ The government may reduce taxation or increase government expenditure, creating a smaller surplus or larger
deficit than previously.
○ Aims to increase the level of economic activity by stimulating aggregate demand.

● A contractionary fiscal policy stance

○ Increase taxation or decrease government expenditure, creating a larger surplus or smaller deficit than previously.

○ Aims to decrease the level of economic activity by dampening aggregate demand

● A neutral fiscal policy stance

○ Does not change the budget outcome from the previous year, Therefore the budget should have no effect on the

level of aggregate demand or/and economic activity.

Automatic Stabilizers: instruments inherent in the government’s budget that counterbalance economic activity. In a boom
period, they decrease economic activity. In a rescission, they increase economic activity. Examples include: transfer payments
(unemployment benefits) and progressive tax system
● Increase in the level of economic activity:
○ Income levels rise, leading to a rise in taxations (as people’s incomes jump tax brackets), and leads to a rise
in taxation revenue for the government.
 ■ Unemployment falls, decreasing the level of expenditure on unemployment benefits.
■ = smaller deficit or bigger surplus.
○ Automatic stabilisers would lead to an automatic contraction in aggregate demand
● A decrease in the level of economic activity
○ Income levels fall = fall in taxation revenue (income bracket decreases)
■ Unemployment rises, increasing the level of expenditure of unemployment benefits.
■ =smaller surplus or bigger deficit,
○ Automatically stimulating aggregate demand.

Types of Tax
Income Tax (Direct Tax):
- Personal income tax accounts for almost 46% of the Budget revenue, PAYG tax.
- Company Tax: flat rate of 30% of the net profit.
GST (indirect tax)
- 10% of most items sold in Australia
Excise and Customs Tax:
- Inelastic demand, therefore the government can impose an excise. Apply to petrol, tobacco, alcohol.

Influences on government policy in Australia

● Political parties: political parties with different policy stances influence the budget outcome (think,
liberal = jobs and growth, back in the black vs labour = increased unemployment benefits, increased
government spending)
● Business: businesses dedicate significant resources to the lobbying of governments in order to pursue
their own budget agenda.
● Unions: represent the interests of their workforce, participate in public debates and focus on industrial
relations issues.
● Environmental groups: These organisations conduct research, provide educational information and
lobby government and companies about environmental issues.
● Welfare agency: represent the most disadvantaged people in the community, lobby the government for
increased welfare benefits.
● The media: The media hold influence on the public opinions, from determining which issues will receive
coverages to how issues will be reported to the public
○ Political parties try to anticipate media response to their policies, they want positive media
coverage (even if the policy is of limited benefit)
● Interest groups: Lobby
● International: free trade policies have made the international market a significant influence of the
Australian domestic market.
○ Also tend to follow overseas policy trends, such as the OECD.