WHAT IS ECONOMICS ABOUT

THE ECONOMIC PROBLEM WANTS RESOURCES, SCARCITY Exists because societies have limited resources in which they need to satisfy unlimited wants and needs Applies to individuals, groups, communities and countries Is an on-going problem wants will never be satisfied by resources Relative scarcity is used to describe the problem of to many wants and insufficient resources to satisfy them a good is said to be relatively scarce in relation to the demand for it economic goods is used to describe goods that are scarce relative to wants EXAMPLE: tickets sold out, diamonds

WANTS Materials desired by individuals or the community. Human want are usually considered to be unlimited or insatiable, but the means to satisfy them are limited. They are usually are for pleasure or satisfaction Individual wants: the desire of each person. Depends on personal preferences Collective wants: are wants of the whole community. Depends of the preferences of the community as a whole, not the individuals inside it.

THE KEY ECONOMIC ISSUES 1. What to produce? Because of limited resources, no economy can satisfy all individual and collective wants. It must decide which wants it will satisfy first, and which it will leave unsatisfied. Therefore it must decide what goods and services to produce. How much to produce? To allocate limited resources efficiently and maximise the satisfaction of wants, an economy must make decisions about how much of each good or service it will produce. By producing too much of good, resources will be wasted. And by producing too little, the wants of some individuals will be left unsatisfied How to produce? Having decided what and how much to produce, an economy must decide how to allocate its resources in the production process. It must look for the most effective method of production that uses the least amount of an economys resources so that the greatest number of wants are satisfied at any one point in time How to distribute production Having produced a certain range and quantity of goods and services, an economy must decide on their distribution among the population. In modern economies, each persons share of total production depends on their level of income. People on higher incomes can afford to buy more goods and services than people on lower incomes and therefore receive a bigger share of total production. Each economy must decide whether it wants a more equitable (even) distribution of production or a more inequitable (uneven) distribution. This is a difficult question because there is often a conflict between equity and efficiency more efficient systems may produce less equitable outcomes.

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OPPORTUNITY COST AND ITS APPLICATION THROUGH PRODUCING POSSIBILITY FRONTIERS **Production of one good means foregoing the production of another good** Consuming one good or service reduces our purchasing power and prevents us from consuming another good or service. Opportunity cost is the term used to represent the true cost of an economic decision and can be defined as the value of the next best alternative forgone. The concept of opportunity cost can be illustrated using a model called the production possibility frontier. The model is a graph which shows us all the combinations of goods and services that can be produced by an economy at any given time, with the available resources and technology. For this model it is assumed that That an economys resources are fixed in both quantity and quality Technology is fixed The economy can only produce 2 types of goods The slope of the curve reflects the law of increasing opportunity cost, indicating that all resources are not equally suited to different types of production. New technology and/or resources that have been discovered increase the total production; therefore economic growth has taken place. Any point on the frontier curve = resources fully employed Points outside the curve = unattainable Any point inside the curve = resources are under employed

FUTURE IMPLICATIONS OF CURRENT CHOICES We can choose between immediately satisfying our want (consumer goods) and goods that will increase our productive capacity in the future (capital goods) Consumer goods: are items produced for immediate satisfaction of the community and individuals Capital goods: items that have not been produced for immediate consumption but will be used for the production of other goods. Individuals: May choose to forgo an overseas holiday and instead take out a mortgage and buy a house Saving up and making deposits will be a significant sacrifice for many individuals In long term, improves their financial security Businesses Must focus on one area of business activity over the other Must focus on the products as there is limited labour, capital and entrepreneurial skill Involves a difficult assessment, evaluating which activity will be more successful for the business in the long term Most likely to be effective if they can identify where the next wave of business growth is likely to come from. (investment in technology 10 yrs ago will now achieve financial success Governments Have very important long term implications, for the government and entire economy May choose to give highest spending to satisfy immediate needs As a result provide less funding for other areas of expenditure This in the long term will result in lower economic growth, because of lower skills base, less innovation and weaker infrastructure Short term may be politically popular to satisfy immediate needs but fatal in long term Gov.

ECONOMIC FACTORS UNDERLYING DECISION MAKING BY Individuals Choices by individuals are shaped by a variety of factors e.g. age, income, spending, family Personality factors all play a part due to some people liking to take risks They need to make a choice on how much of their income they will spend and save o Influenced by their level of income and other factors such as age and expectations Education, work, family and retirement also effect economic decision making o To further their education an individual may forgo their income for a couple of yrs. also contribute to economic decision making through voting for a government Businesses businesses choose their pricing of their products, the higher the price the business decides, they are hoping to maximise profit and to only have a small impact on number of sales businesses will seek to minimise their costs in relation to production and resources used businesses will usually choose the cheapest available resource, but if a cheaper resource is not assured, they may pay slightly more to have a more reliable supply they face complex choices in how they manage industrial relation issues they can choose to have set wages by industrial awards or they can negotiate wage agreements with the whole workforce, or individual contract negotiation also face choices about whether they will encourage union representation Governments this may include making it less or more expensive to make some choices governments may seek to influence economic behaviour through prohibiting certain activities and imposing heavy implications for those who break the law governments may wish to encourage certain economic activity and may provide incentives for example government provided a 30% tax rebate for private health cover the governments influence on the economy is a result of both influencing the decisions of individuals and businesses and providing goods and services directly

How economies operate

PRODUCTION OF GOODS AND SERVICES Factors of production: can be defined as any resource that can be RESOURCE: used in the production of goods and services. A factor is another Natural resources (land) name for a resource. Quantity and quality of these factors can Labour determine how wealthy or poor a nation will be Capital ( money) Producers face opportunity cost when they are deciding how to Enterprise (skill) use resources in the production process. These can be affected over time by their availability. Each of the following four resources are limited in their supply reflecting the problem of scarcity.

REWARD: Rent Wages Interest Profit

Natural: Included all the income rewards derived from the productive use of natural resources Includes all resources provided by nature that are used in the process Examples include soil, water, forests, mineral deposits Labour: Includes executive salaries, commissions, fees, regular payments for standard working each week

Human effort, both physical and mental used to produce goods and services Supply of labour depends on factors which change overtime e.g. population size = birth rate Capital: Interest = price of capital. Is the produced means of production (capital goods = not immediate consumption) for example infrastructure is a good owned by the community Although not owned by individual, vital for operations Does not include financial assets such as money + allows us to satisfy more wants than usual Amount of capital available can have significant affect on future earnings Enterprise Income received over and above other awards happens from risk others would not dare Involves organising other factors of production for producing goods and services Vital to whole process and makes decisions regarding who business one wrong decision = failure DISTRIBUTION OF GOODS AND SERVICES Gross domestic product: is the total market value of all final goods and services produced in the economy over a period of time (GDP) Main function of economic system is to determine how to distribute G+S that are produced Involves people receiving certain income - can exchange income to obtain G+S Market economies do not attempt to distribute among economic equally instead providing individuals with rewards for their contribution more income depending on level of input Individuals do not all receive same income depends on skills, work and education Proves to be incentive for individuals to get more qualifications results in better income Problem: can be unfair particularly towards minority and disabled groups Government may intervene and influence distribution + help disadvantaged taxation Use money for an exchange of G+S, - allows for people to determine how much they contribute to production process (non-cash exchange is called a barter agreement ) BUSINESS CYCLE Amount of goods and services produced in never consistent, therefore market economies are subjected to a cycle of ups and downs known as the business cycle. Economies usually experience an overall trend in their output and economies are subjected into a continuous pattern of decline after a strong growth. The business cycle in broad terms the cyclical pattern of growth that recurs in market economies The cycle can present problems causes distributions to individuals and businesses Downturns are known as recessions stage of business cycle where there is decreasing economic activity defined as two consecutive quarters (3months) of negative growth Increased unemployment has a negative effect relying on welfare less injections into economy Underemployment=reduced consumption, people will fall below poverty line Affect living standards and increase health problems, education opportunities=lower quality of life Boom is associated with increased levels on investment and production ^ lower unemployment rate and an increase in demand for labour improve quality of life = incomes Main aim of government is to smooth cycle out to not have such an impact on the economy. They aim for sustainable growth over a long period of time

CIRCULAR FLOW OF INCOME What is it all about? The circular flow of income model is a basic illustration of the working of a basic, fee economy An economists, we use models to help describe features of economic activity This model illustrates the operation of a free economy and the linkages between the five main sectors of an economy. Key terms Y = income C = consumption expenditure S = savings I = investment

T = taxation G = government expenditure M = imports X = exports

Sector 5 model All households within the economy: Earn income Spend income on goods and services Supply factors of production They are rewarded for labour/enterprise with income, rent, interest and profit Either spend, save, or pay tax with their reward Firms -

All firms are engaged in the production of goods and services within the economy Does not include firms who provide financial service Firms o Purchases factors of production and utilises them to produce goods and services o Rely on individuals to supply resources, as well as to consume goods and services Injections Government expenditure Investment Exports

Leakages: Taxation Saving Imports 1.

What is greater leakages or injections, explain S + T + M = $356 million I + X + G = $380 million Consumption expenditure increases Output increases Unemployment decreases The size of the circular flow of income has increased as there is more injections that leakages.

How economies differ

MARKET ECONOMY: Private ownership of property (property rights) Freedom of enterprise (establish, own businesses, choice in spending and employment decisions) Profit motive (motivation of individuals) Consumer sovereignty in markets Price mechanism Competition between producers (factor markets) and consumers (product markets)

A limited role for government (welfare , infrastructure)

the market plays an important role in determining the solution for the economic problem. It conveys important information through the price determined, which alters the distribution, production and exchange of goods and services. Product market is the interaction of demand for supply of the outputs of production. The price mechanism attempts to solve the economic problem in product markets. The demand curve represents the wants of the individual. Demand and supply together, determine the price and quantity that best represents the individual wants with the limited resources, giving a solution to the economic problem facing all economies. Producers will only produce what is demanded by the economy Market mechanism ensures allocative efficiency: referring to the economys ability to allocate resources to satisfy consumer wants also ensures an equilibrium is reached at two curves The price mechanism is effective because a consumer willing to pay the market price for a good or service will be satisfied by any producer offering the good at market price selling what they produce It also plays a central role in the market factors: is a market for any input into the production process, including land, labour, capital and enterprise Markets are forced by demand and supply to determine the price paid for these factors of production, thus sharing the total output that is received by individuals Individuals will not receive more than their own output MARKET ECONOMY WITH A ROLE FOR GOVERNMENT: AUSTRALIA No economy is purely market based; they contain elements of both economic systems. Combination of market forces and government decisions rule the countrys economy. Government intervenes during downturns such as 2008 GFC. Why Governments intervene in market economy: Resource allocation Provide important things that would not otherwise be provided Restrict production of harmful things Income distribution Create a fairer society and look after people Economic stability Smooth out sharp fluctuations in the economic cycle Ensure stability in the economy and the financial system Governments are there to make markets work better to achieve fairer outcomes. The real challenge is to find the right balance between the market and government intervention.

COMPARING ECONOMIES
Demand
FACTORS AFFECTING MARKET DEMAND Demand can be defined as the quantity of a particular good or service that consumers are wiling and able to purchase at various price levels at a given point in time. There are six main factors that affect demand in the market 1. The price of the good or service itself Consumers must decide whether or not they are willing to pay the set price Some goods are considered necessities for daily life therefore people will buy them regardless of the price change 2. The price of other goods and services Quantity of a good demanded affects the price of other goods Consumers consider substitutes one over another Some goods are also considered complimentary, e.g. DVD and DVD player 3. Expected future prices

If a consumer expects the price of a good to go up in the future, they would bring forward their consumption and increase demand for the product 4. Changes in consumer tastes and preferences As a consumers tastes change over time so will the demand for particular goods Innovation and technological progress lead to consumers demanding new and better products that expense the superseded ones. 5. Level of income As income levels change so will consumer demand - Higher income earners will be more willing to buy more goods and services that they could previously not afford Rising incomes will increase demand for luxury goods, more than necessities Changes in income distribution could change the demand for particular goods. Consumer expectations for the future will alter their decisions to buy certain goods 6. The size of population and its age distribution Will affect total quantity of goods demanded, and age will affect the types of goods demanded Behaviour of other consumers can influence an individuals decision to demand a good or service. one persons demand is affected by the number of people who have purchased the good, there is a network externality. A positive network externality known as the band wagon affect occurs when people demand a good because almost everyone else has one A negative network externality known as the snob affect occurs where demand for a good is higher the fewer the people who own it MOVEMENTS ALONG THE DEMAND CURVE Most obvious factor that influences the demand for a good is its price. the demand schedule The law of demand states that the quaintly demanded by a consumers falls as price rises. When the price of a product is reduced, consumers will buy more of that product. because they can afford it and it is cheaper compared to others More people are willing and able to buy the good at a lower price There are exceptions to this rule EXAMPLE expensive restaurant may experience a rise in the demand as there prices rise, due to them becoming a more sought after symbol. The demand curve As we graph data represented in the demand schedule, it forms the demand curve. Price is usually plotted on the vertical axis and quaintly demand is on the horizontal axis The typical demand curve slopes downwards from left to right, showing the same relationship between price and demand as stated in the law of demand as the price of a product increases, consumer demand will get smaller Movement along the demand curve Assuming all other factors remain constant, any change in the price of a good will lead to a change in the quantity demanded in the opposite direction to the price change. As a result of a price change we get movement along the demand curve which we refer to as expansion and contractions in the demand Expansion demand: is when an decrease in the price of a good or service caused an increase in quantity demand, it is shown by a downward movement along the demand curve. Contraction of demand: is when an increase in the price of a good or service causes a decrease in quantity demanded. It is shown by an upward movement along the demand curve. SHIFTS OF THE DEMAND CURVE

assuming that all factors, other than the one being considered, remains constant. A change in any one of the factors can lead to a shift in the demand curve. A shirt is refer to as increase and decrease in demand, they are brought about by changes in other factors affecting consumer demand and not price change. Increase in demand A movement in the demand curve to the right is called an increase in demand An increase in demand means that consumers are willing and able to buy more of the product ay each possible price than before Increase in demand also means that consumers are willing to buy a given quantity at a higher price than before Decrease in demand A decrease in demand means that consumers are willing and able to less of the product at each possible price than before A decrease in demand also means that consumers are willing and able to buy a given quantity at a lower price than before. The main factors that cause shifts of the demand curve Any factor other than price change can cause the demand for a good to be stronger or weaker than it was previously , will cause a shift in the demand curve Factors that may cause an increase in demand Taking the example of the market for shoes, an increase in demand might be cause by the following factors: Prices of other goods and services A rise in the price for substitute goods will cause consumer to demand more shoes A fall in the price of a complementary good may also increase demand Expected future prices Consumer spending in influenced by their expectations about future price trends If there is a pending tax about to be applied, the demand for shoes will increase now as they want the better deal Consumer tastes and preferences If a certain shoe becomes more popular, consumers want those shoes at the same price. For example quality European imported shoes may be increased in their demand from consumer Consumer income A rise in income would mean that consumers could buy more shoes for the same price that they did before. A redistribution of income that is favourable to higher income earners, may increase the demand for expensive designer shoes. Improves customer expectations about future income and employment prospects

PRICE ELASTICITY OF DEMAND The price of elasticity of demand measures the responsiveness or sensitivity of quantity demanded due to changes in price. The more elastic the demand, the greater its response to a change in price. Business firms and governments need to understand price elasticity of demand so that they can set prices and taxes to maximise their respective revenues. Factors affecting the elasticity of demand include: Type of good Time since a price change The existence of substitutes The product is habit-forming or addictive The proportion of income spend on good

Supply
Supply is the amount of goods or services producers are willing and able to produce at a particular price at a particular point in time The law of supply states that, all other things being equal, the higher the price of a good, the greater is the quantity supplied, and vice versa. For example if the price of shoes is going up, more companies will join the market as they are able to make a profit from the raising price.

Supply has a DIRECT relationship between price and quantity SHIFT IN THE SUPPLY CURVE A change in the factors that affect supply (other than price of a particular good) will lead to a shift in supply Increase in supply: A shift of the supply curve to the right Decrease in supply: A shift of the supply curve to the left FACTORS AFFECTING SUPPLY The price of the good or service itself The market price of the good or service will influence the producers ability and willingness to supply it The price of other goods and service The quantity of G+S supplied at any time will be affected by the prices of other goods and services The state of technology Improvements lower production costs allow more firms to supply more goods a given price Allow firms to adjust production runs to quickly accommodate changing patterns Changes in the cost of factors of production Most important factor ability of firms to supply a products in the market place Any fall in cost of production would allow firm to supply more of good A rise in cost of production would make it more difficult for firms to maintain present supply Quantity of the good available The actual quantity of the good available is an overall limiting factor that affects supply Climatic and seasonal influence Changes in climatic conditions and seasons will obviously affect agricultural production four factors of supply 1. the quantity of goods and services 2. Producers are willing to make 3. At a particular price 4. At a particular point in time MOVEMENTS ALONG THE SUPPLY CURVE Movements along the supply curve occurs as a result of price changes to the good itself Contraction: a decrease in supply, due to an decrease in the price of the good Expansion: an increase in supply, due to an increase in the price of a good According to law of supply, as the price of a certain product rises the quantity supplied by producers will rise. This occurs of the following reasons: Firms already in industry, producing the good becomes more profitable so they increase their production of that good The higher the price also makes producing this good more profitable for other businesses. Which will attract new firms to the industry, this will also cause an increase in quantity supplied PRICE ELASTICITY OF SUPPLY Price elasticity of supply measures the responsiveness or sensitivity of quantity supplied fi to changes in price. The more elastic the supply, the greater response to a change in price. Supply elasticity maries from perfectly elastic (a change in price will totally remove supply of the good) to perfectly inelastic (a change in the price has no effect on quantity supplied). Supply will be more elastic if a firm has more time to respond to a price change, the ability to store stock and the ability to increase production with existing facilities. Factors affecting elasticity of supply include: Time lag after price change Ability to hold and store stock

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Excess capacity

Market equilibrium
Market equilibrium explains how a market economy determines how much of a G+S to produce and the price Includes two assumptions: o That we have pure competition in the market place o There is no government intervention The concept of pure competition means that no participant in the market has the power to influence market outcomes directly The price mechanism determines the equilibrium in the market Price mechanism is the process by which the forces of supply and demand interact to determine the market price at which goods and services are sold and the quantity produced. It is the interplay of the forces of supply and demand, which determine the prices at which commodities will be bought and sold in the market Market equilibrium is the situation where, as a certain price level, the quantity supplied and the quantity demanded for particular commodities are equal ESTABLISHING MARKET EQUILIBRIUM As market equilibrium occurs where the demand and supply curves intersect to the point where quaintly demanded is exactly equal to quantity supplied. Excess demand Competition among buyers for the limited quantity of goods available means that consumers will start bidding up the price The rise in price results in an expansion in supply and a contraction in demand (movement along the curve towards the equilibrium point) The movement will continue to occur as long as there is excess demand, until we eventually reach the intersection Market equilibrium occurs when: this is where the market clears no 1. Quantity demanded = quantity supplied excess supply or demand 2. The market clears Excess supply 3. There is no tendency to change When quantity supplied exceeds quantity demanded (glut in the market) In order to remove the excess supply, sellers will offer to sell at a lower price the fall in price results in an expansion in demand and a contraction in supply (movement along to equilibrium point) Continue to occur as long as there is excess supply until the intersection in met These are examples of the price mechanism in action showing that market forces of supply and demand interact to bring about the equilibrium price at clears the market of any excess produce. At the equilibrium point there is not tendency to change. The market mechanism achieves consistency between the plans and outcomes for consumers and producers without any explicit coordination.

CHANGES IN MARKET EQUILIBRIUM

equilibrium is achieved in an individual market when any consumer who is willing to pay market price for a good or service is satisfied, and any producer who offers their goods or services at market price is able to sell their produce. It occurs when quantity demanded is equal to quantity supplied. If there is an increase in demand it means that more of a good will be demanded at any given price. This will cause a shift in the demand curve to the right. This is the same with supply, if there is an increase it will shift to the right and a decrease to the left. Shift to right = increase Shift to left = decrease ROLE OF THE MARKET Its role is to determine the solution to the economic problem Helps in providing answers to the questions about the production, distribution and exchange of goods and services in the economy Demand curve represents the wants of individuals whereas the supply curve represents the production of firms with limited resources. The interaction of demand and supply determines a price and quantity that best satisfies individual wants with the limited resources available to firms Producers will only produce goods and services for which there is consumer demand Producers allocate resources this way as there is a higher opportunity cost in producing other goods when the price of the product rises Quantity of goods supplied also is a result of the interaction between supply and demand o An increasing demand for product will translate into a higher market price signalling to producers to reallocate resources away from other areas of production, in order to produce more Price mechanism plays a central role in the markets for the factors of production o Demand and supply determine the price paid for individual factors of production (land, labour, capital, enterprise) and thus sharing total output received by individuals Market mechanism also ensures allocative efficiency in the economy o Refers to the economys ability to allocate resources to satisfy consumer wants

GOVERNMENT INTERVENTION IN THE MARKET PLACE Left to operate by itself, the market can still create unsatisfactory outcomes. As equilibrium quantity results from the free interplay of demand and supply it can be considered too high or too low. When a market does not always produce its desired outcomes it is referred to market failure This occurs when the price mechanism make take account of private benefits and costs of production to consumers and producers, but fails to take into account indirect costs such as damage to the environment Problem Market price to high Market price to low Market quantity to high [negative externalities] Market quantity 2 low [positive externalities] Market does not provide good or service Government action Price ceiling: maximum price able to charge for a commodity Price floor: minimum price that can be charged for commodity Taxes: money taken from incomes for government revenue Subsides: cash to businesses from Gov to encourage production Government provides good or service Outcome Reduces prices, quantity shortages Affects distribution of income Increases price, quantity excess Affects distribution of income Increase equilibrium price, reduces equilibrium quantity Reduces equilibrium price increases equilibrium quantity Government must collect taxation revenue to finance its supply of public goods

Public goods cannot be provided by individual firms because they are unable to exclude those who are willing to pay for them. The government provides public goods such as a national defence force and raises taxation to finance them

COMPETITION AND MARKET POWER As there is a large number of firms in each industry individual firms do not have the ability to raise its prices without losing all of its customers to their competition. No firms has market power to be able to raise prices above the competitive equilibrium Firms do enjoy some degree of market power, which results in a higher equilibrium price The degree of competition in an industry is primarily determined by the market structure Market condition Pure competition Monopolistic competition Oligopoly Monopoly Facts A theoretical model of perfect competition, all small businesses one cannot dominate altering market price, price takers selling at price determined by SD Many small firms in the industry, opposite to pure competition, only 1 firm, no close substitutes, greater control, all have some degree of market power A small number of large firms dominate the industry, few large firms dominate industry Only one producer in the industry, only one large firm producing a unique product

Labour demand and supply

A labour market is where individuals seeking employment interact with employers who want to obtain the most appropriate labour skills for their production process. THE DEMAND FOR LABOUR Firms demand labour by offering wages Demand for labour differs from consumer demand for goods and services because the demand for labour is a derived demand Derived demand: where demand for one good or service occurs as a result of demand for another. This may occur as the former is a part of production of the second. The firm must hire more labour to help with the high production levels, increasing labour demand labour is demanded only because it is needed firm the firms to produce goods and services and make a profit. Output of the firm If a firm experiences higher sales, it will increase production and therefore increase demand for labour Such factors that effect the level of output of a firm includes o General economic conditions o Conditions in the firms industry o The demand for an individual firms products Productivity of labour Productivity of labour can be defined as the output per unit of labour per unit of time Labour productivity generally depends on the quality of the workforce. It is possible for the workforce to become more productive simply through investing in technology (capital) and without any improvement in the actual skill or work patterns Increase labour productivity will have either a positive or negative effect o Positive: high productivity means that a fixed number or workers will be producing more goods and services o Negative: increase in productivity on the demand for labour in the short term will depend on the current level of aggregate demand It is easy to substitute between labour and capital Labour costs are a relatively high proportion of its total costs It is more difficult for the firm to pass on increased labour costs in the form of higher prices to consumers THE DEMAND FOR SUPPLY Governments are now paying more attention to the factors that influence the supply of labour Individuals supply labour when they are ready and willing to work in the labour market

Labour supply curve slops upwards Factors affecting supply include: o Pay levels: higher the wage or salary offered, the more people will be prepared to sacrifice their leisure time and supply their labour o Working conditions: attractive working conditions encourage a higher supply of labour to a workplace, whereas unattractive working conditions would discourage workers from joining that workplace o Education, skills and experience requirements: requirements for some types of jobs can limit the supply of labour. All elements of human capital. High levels of human capital are more likely to achieve low unemployment. Changes in availability of education and training will also influence skills levels in workforce o The mobility of labour: occupational mobility is moving between different occupations in response to wage differentials and employment opportunities whereas geographical mobility refers to the ability of a labour to move between different locations in response to improved wage differentials

THE AUSTRALIAN WORKFORCE Defined as that section of the population 15 years of age and above who are either working or actively seeking work. A person is defined as employed if they have one or more hours of work per week A person defined as unemployed if they currently are available for work, are activity seeking work but unable to find Workforce is important in two aspects: o Size: bigger the workforce the greater the contribution it can make to the production of goods and services o Quality: a well educated, highly skilled, healthy workforce is much more productive than one that lacks in these characteristics. The size and quality of the workforce is affected by three main factors: Population size Sets the limit to which the workforce can grow Population growth is influenced by who main factors natural increase and net migration o Natural increase refers to the excess of births over deaths in the population o Net migration refers to the excess of permanent new arrivals to our country over permanent departures aprox 40% of total population growth since WWII Australias natural increase has been steadily declining Depressed economic activity and high unemployment levels leads to the government reducing our migration intake to reduce the unemployment problem. In times of economic growth when there are shortages in the labour market and very good job prospects, governments have tended to raise migration quotas Age distribution Australia has an overall aging population Aging population is a phenomenon that has been observed in many industrialised economies as a result of declining birth rates and an increase like expectancy The potential size of the workforce is lower, while it needs to support a growing population of aged people putting a significant constraint on future economic growth Education patterns Most important factor influencing the quality of a n ations workforce Critical for an economy to have a highly skilled and productive workforce Australia has an tertiary education had average earning of 32% higher than those without education Proportion of young Australians education has risen sharply over recent decades Australias budget for education is average by international standards more reliant on private funding

Labour market outcomes

WAGE OUTCOMES Wages and salaries are the major source of income for most Australian household provides 59% of income Wage incomes produced by the labour market have a substantial influence on how income is distributed Wage outcomes is affected by the following factors: Average weekly earning o Level of average total earnings for all employees id $982.40 per week o Changes in nominal (money) wages do not tell us whether people are better off because they do not take into account change in price levels that might be occurring at the same time. Difference in wage outcomes o Wage differentiating between different occupations different occupations require different skills o Wage differentiating in same occupations geographical mobility, the productivity of labour and the capacity of the firm to pay the individual o Age and gender of an individual alter as older people are more experienced

TRENDS IN DISTRIBUTION OF INCOME FROM WORK The wide spread use of enterprise bargaining (where employers and employees negotiate wage increases at the workplace level) has created a much greater difference in wage incomes for both different industries and individuals. Income distribution refers to the way in which an economys income is spread among the members of different social and socio-economic groups There is a considerable inequality in the distribution of income in Australia although it has become marginally less equal over the past decade The top 20% of income recipients accounted for 40.5% of total income The share of total income accruing to the bottom 40% of income recipients has remained relatively constant in recent years, while the highest income quintile has seen its share of income expand slightly Different wage outcomes across industries has resulted from changes in the structure of the economy NON-WAGE OUTCOMES Are the benefits that many employees receive in addition to their ordinary and overtime payments, such as sick leave, superannuation, a company car, study leave or arrangements for employees to work from home for part of the week. Can vary from one workplace to another and in some industries, workers often earn far more than their regular wage because of substantial non-wage allowances Salary packing is a popular means of supplementing wages, with employees reciving a company car, laptop, child care ect. Non wage outcomes include improving the flexibility for employees in their work patters. Usually included in a flexibility clause THE COSTS AND BENEFITS OF INEQUALITY There are advantages and disadvantages associated with an inequitable distribution of income Advantage: inequality encourages people to work harder to improve their position in the distribution of income, creates and strengthens individual incentives Disadvantage: system of free market capitalism divides society into cases, and that those in the working (under) class have limited opportunities to escape poverty Economic benefits: Inequality encourages the labour force to increase education and skill levels Inequality encourages the labour force to work harder and longer Inequality makes the labour force more mobile Inequality encourages entrepreneurs to accept risks more readily Inequality creates the potential for higher savings ad capital formation

Economic costs of inequality Inequality reduces overall utility Inequality creates conspicuous consumption Inequality can reduce economic growth Inequality creates poverty and social problems Inequality reduces consumption and Inequality increases the costs of welfare investment support Social benefits Systems that determine the distribution of income and wealth does not give everyone the same level of opportunity to pursue their income and wealth goals Inequality exists in Australia due to: o Existing inequality in the distribution of income and wealth tends to perpetuate inequality of opportunity o Not everyone has the same mental and physical attributes and the same potential with regard to the acquisition of income and wealth o People who acquire wealth through inheritance have greater opportunities to invest opposed to this who start with no wealth o People may not have access to the same networks of people that may lead to new opportunities Social costs of inequality Social class division Poverty UNEMPLOYMENT Refers to a situation where individuals want to work but are unable to find a job, and as a result labour resources in an economy are not utilized. Is calculated using the unemployment rate ( page ) Types of unemployment include: o Cyclical unemployment o Frictional unemployment o Structural unemployment o Hard-care unemployment o Long term unemployment o Hidden unemployment o Seasonal unemployment o Underemployment Recent trends include: Upward trend in the average level of unemployment between 1970s and 1990s st Average rate of unemployment fell to an average of 5.5% in the first decade of the 21 century Levels of unemployment peaked in the early 1990s (10.7%) highest since great depression Main reason for such as large increase is the result of a recession (2008) Adding to unemployment is structural change and microeconomic reform Unemployment rates gradually fell in response to sustained economic growth Since 2002, unemployment rate has remained below the average of major OECD countries Lowest point of unemployment was early 2008 3.9% (before late 2008 recession) Recession is the stage of the business cycle where there is decreasing economic activity, defined as two consecutive quarters of negative economic growth (fall in GDP) Structural change refers to the process by which the pattern of production in an economy is altered over time, and certain products, processes of production and even industries disappear while others emerge MOVEMENT AWAY FROM FULL-TIME WORK In recent years we have witnessed a shift away from full time to part time, casual and contract-based employment. These forms of employment give greater flexibility to employers in how they manage their workforce. Part time employment is defined as those employees regularly working 20 hours or less per week. Casual employment occurs when employees have occasional working hours but do not follow as set pattern Australia has the third highest rate of part-time employment in the industrialised world (24.7% - 2009) Some employees prefer part time work as it allows them to balance other responsibilities like family

Such information and communication technology make it possible for some employees to work in more flexible arrangements such as working part-time from home. Another significant trend is the growth of outsourcing and sub-contracting, where organisations pay a private sector company or individual to do non-core functions. These jobs are normally contract based (only last for a limited amount of time) because the jobs only exist while the firm or individual has a contract to work for the other organisation

The changing Australian labour market

THE ROLE OF TRADE UNIONS A trade union is an association of workers that aims to advance their interests of its members by improving their wages and working conditions. Are usually based on particular occupation, industries, firm or a mixture of these. Occupational unions: draw their members from persons who possess a particular occupational skill, or range of skills, regardless of the industry or firm in which they work Industry based unions: cover workers in a particular industry regardless of the type of work that they do Enterprise-based unions: represent only the workings of one specific enterprise General unions: cover a whole range of workers with many different skills across various industries The membership of trade unions declined substantially in recent decades due to a number of factors: o Changes in wage determination o Changes within industries o Changes in the nature of employment Trade unions can influence the labour market in a variety of ways including: Restricting the supply of labour Exercising their bargaining power in negotiations with employers THE ROLE OF EMPLOYER ASSOCIATIONS Are organisations that are formed to represent the interests of businesses, especially in industrial relations and in lobbying the government. They have two main roles: o They represent and promote the interests of their members by lobbying the government on matters such as industrial assistance and industrial relation policies o They assist employers in managing industrial relation issues, such as representing their members in the various industrial tribunals set up to settle industrial disputes Employers associations do not exercise the same degree of market power as unions The actions of employer association have been of benefit to both employers and employees Even if industry assistance helps one sector, it will hurt others and have a negative effect on employment levels in the long run. AUSTRALIAS CURRENT INDUSTRIAL RELATIONS FRAMEWORK Has gradually evolved during the past three decades from a highly centralised system of wage determination towards one that allows more room for wage levels and work arrangements to be negotiated at the level of the individual firm The industrial relations is now governed by the fair work act with a national system for labour market regulation Fair work system has established three main streams in the labour market that determines the pay and conditions of employees o Industrial rewards A set of pay and conditions that are specific to an employees work or industry Provides a safety net of minimum wage and conditions Extend the protections of the national employment standards may include types of employment, arrangements for when work is performed, overtime and penalty rates o Collective agreements

Most common method of wage determination and is negotiated collectively through enterprise bargaining between an employer and employees, usually represented by unions All agreement must comply with the national employment standards Covers all of the workers up to management level in the company or workplace Unions negotiate these arrangements on behalf of all employees Cover issues such wage increase, loadings for additional work hours Individual employment contracts Common law contracts are not a part of the formal industrial relations system but they comply with all the minimum standards in the system Are simple agreements that are often 2 pages and involves add-ons to relevant awards Cannot offer pay rates and conditions that are below the rate that would be paid by the equivalent award. Enforced through ordinary courts a small number of individual contracts made before FWA still operate in the industrial relations system but will slowly be phased out by 2013

Types of financial markets

THE ROLE OF FINANCIAL MARKETS IN THE ECONOMY Financial markets in Australia play a crucial role in the operation of the economy. They create products that provide return for those who have excess funds, making these funds available to those in need of additional money. Are factor markets for capital in the economy They can provide an efficient process by which income that is not used for consumption can still contribute to aggregate demand PRIMARY AND SECONDARY MARKETS Primary financial markets: allow the creation of financial assets (SECURITIES: shares, bonds that provide the holder with ownership of the asset). This is the first time the asset is formed and sold (primary). The money from investors goes straight to the company involved. E.g. the sale of Telstra shares to the public. Business generates money for expansion or the creation of their business. Secondary market: sales of assets that have already been formed in primary markets in the past. Most financial transactions are in the secondary market The main financial markets that exist in economies in the world are: Share of equity market: ownership shares in companies are issued or exchanged The debt market: where debt securities are exchanged, or cash is lent or borrowed The derivatives market: people buy and sell financial assets that are based on the value of other financial assets Foreign exchange market: financial assets from one country are exchanged for assets in another countrys currency Financial Institutions:
Finance companies (Banks): borrow from the public and funds are re-loaned to households/business Investment banks: borrow from companies with surplus funds and lend these to government or larger companies Credit unions: member belong to a particular trade or industry, people can deposit their funds or borrow money Permanent building society: accept deposits from the public and provide funds for home loans Mortgage originators: Wizard and RAMS. Life insurance companies Superannuation funds: receive contributions from individuals and invest their funds into financial assets such as shares Unit trusts: raise money from individuals who become part owners of the trust

FINANCIAL MARKET PRODUCTS

Credit: allows consumers to purchase goods and services in advance of actual payment. Eg. Credit cards offered by banks, credit unions and some businesses. Housing loans offered by banks as well as mortgage businesses such as Aussie. Long term loans to purchase property requiring periodic repayments of interest. Business loans debt that allows businesses to begin or expand, typically borrowed from banks. Short term money market brings people and business together with temporary shortages or surplus funds such as banks. Those with surplus funds such as banks issue forms of debt securities Financial futures are contracts to trade in financial instruments (shares or bonds) at a later date for a certain price. It allows investors to protect themselves against movements in interest rates or share prices by agreeing on a price at which to sell at a later date. Foreign exchange (FOREX) provides a market for people to buy and sell currencies Bonds A bond is a written record of a debt. The borrower sells a bond in return for a loan. The holder of the bond receives interest payments and the final repayment. Bonds can be sold/traded in secondary financial markets.

THE SHARE MARKET Role: The financial market where investors buy and sell shares that give their owner a part-ownership of the company 41% of Australians have shares this is the highest in the world Investors purchase shares to gain a chance in company profits and make capital gains from increases in share prices Australia has a high level of share ownership and the share market plays an important role in the economy, as many people rely on the savings invested in shares for income especially in their retirement years Function: Shareholders invest in shares to gain profit and capital gain from an increase in share price. These profits are known as dividends, it is a profit per share, divided amongst the shareholders according to the amount of shares they have. Capital gains is when an investor sells their shares for more than what they were originally sold for The investor can only loose as much as their initial purchase of the shares Effect on the economy: The share market is often seen as a general indicator of how an economy is performing. It is a reflection of consumer confidence, as this causes increased demand High market prices reflect positive economic conditions, while an economy moving towards recession will have falling share prices Many share purchases are speculative which means they are bought with the intention of being re-sold within a short period, the investor is hoping to make a short term gain. A float is when a company lists itself on the stock exchange and offers its shares to the general public for the first time. Importance of the share market: The share market provides individuals with a source of income and investment through dividends and capital gains. Companies issue shares which provides access to finance for investment and growth. DOMESTIC AND GLOBAL MARKETS: as a resource rich country Australia depends on foreign sources of capital to finance its development. - Foreign exchange markets: enable the movement of funds around the world - Global debt markets: important for Australias economic development because of t he reliance on foreign borrowing - Equity markets: regulated by national governments so exist within individual countries.

REGULATION OF FINANCIAL MARKETS Reserve Bank of Australia: The RBA is Australias central bank, its main roles are to conduct monetary policy and oversee the stability of the financial system. Function: o Conducting monetary policy on behalf of the government: reserve banks actions to influence the cost and availability of money in the Australian economy through interest rates o Control of note issue: sole issuing authority for Australian currency o Regulation of the payments system: ensuring the stability adn efficiency of payment methods such as credit cards, electronic cash, travellers cheques and stored-value cards o Banker to the banks: banks hold exchange settlements accounts with the Reserve Bank Australian Prudential Regulation Authority: The government body established to regulate all deposit-taking institutions, life and general insurance organizations and superannuation funds. They have 2 main regulatory roles: Encourage behaviour by institutions that ill ensure they meet their obligations to the people who place money with them For any ADIs, insurance companies or superannuation funds that experience financial difficulty, APRA has the role of sorting out the institutions financial position and ensuring that policy or deposit holders receive as much of their funds as possible Australian Securities and Investments Commission ASIC is the government body with responsibility for cooperate regulation, consumer protection and oversight of financial service products. They prosecute and charge people (send to jail) Regulate Australian companies and financial markets, with the aim of protecting investors and consumers improving the performance of the financial system Have the power to monitor, investigate and act in situations where the integrity of the financial system has been undermined by the illegal acts of individuals Also have powers to protect consumers against misleading or receptive and dishonest conduct affecting financial products and services

Australian Treasury: have the responsibility for advising the government on financial stability issues and for the legislative and regulatory framework for the financial system. They are the main source of economic policy advice to the government Influence how governments devise budgets, collect taxes, allocate expenditure and implement other policies Council of Financial Regulators: is a coordinating body for financial market regulation that provides cooperation and collaboration among its four members- the RBA, APRA, ASIC and Treasury. During the 1980s deregulation occurred, Deregulation is the removal of government controls over an industry that is intended to make business more responsive to market force. To expose the industry to greater influence from domestic and global market forces.

The money market

BORROWERS: THE DEMAND FOR FUNDS Borrowing is good for the economy and generates economic growth, employment, a high standard of living and quality of life. individuals: Consumers borrow when their demand for goods and services exceeds their current capacity to pay for them. Over 60% of economic growth (GDP) comes from consumers sending. Consumers borrowing inject money into the economy and this stimulates growth. Borrow for housing (mortgage) or consumption

business (firms) Entrepreneurs and business managers borrow to fund the expansion of their businesses. This will generate profit, employment and economic growth. Business borrow for expansion or investment government: The government becomes a borrower of funds when it budgets for a deficit (when its current expenditure is greater than its current revenue)

FACTORS AFFECTING THE DEMAND FOR FUNDS: the level of demand for liquid funds (money liquidity) depends on the features of the financial system and the ease with which one can convert non-liquid assets into money. transactions and speculative motives: people have day to day transactions to be made to purchase goods and services, this means individuals hold a certain amount of money to make these transactions. Speculative motive is buying financial assets with the possibility of making a capital gain or loss. financial innovations: is when innovations in technology such as an increase in ATMs and increased use of credit cars changes the demand patterns for money the main opportunity cost of holding liquid funds is the foregone returns (or interest) that would have been earned by holding financial assets. As long as the benefit of holding liquidity (including lower costs for transactions and no risk of capital losses) outweighs the costs (the return foregone), individuals will seek to hold money rather than financial assets. LENDERS: THE SUPPLY OF FUNDS Individuals, businesses and governments participate in financial markets as lender when they are seeking a return on their wealth. individuals Individuals who hold wealth but do not wish to spend it have a range of options, some invest in assets, while others may invest in shares. They have a minimal role in lending business A business with a good cash flow and profits may choose to deposit its funds into a financial institution Banks are the major lenders in Australia and lend to businesses and individuals government Play minimal role as a lender mainly borrowers international Australian financial institutions can lend money overseas to borrowers. While this does occur in overall terms Australia borrows far more from overseas countries than it lends. The total Australian borrowing from overseas is $2 trillion. The 2 trillion involves mostly equity (investment) and some borrowing as well. INTEREST RATES Cost of borrowing money expressed as a percentage of a total amount borrowed. Quality of funds supplied = the quality of funds demanded. (represents the cost of borrowing and the return from saving) Short term and long term interest rates are based on the length to maturity of the financial assets or securities. Interest rates on loans with a maturity of less than a year are known as short term. Long term securities are often seen as more risky and are also less liquid. Types of interest rates in the short and long term include: lending rates: the rate of interest charged by financial institutions when they lend money to customers Lenders will offer more funds when the interest rates rise as their return is higher

Borrowing rates: rate of interest paid by banks to accept deposits (savings) Will borrow more funds when interest rates are lower as the costs are lower. Borrowers are important for economic growth, if households are borrowing there is increased confidence and spending will create employment.

Some factors that will influence the general level of interest rates include: The demand for capital goods (investment) Inflationary expectations The level of savings in the economy International interest rates The demand for liquid funds CASH RATE As without any other market, when the supply of funds held in the short term money market it too high, the rice of borrowing this money, the cash rate of interest, falls. Whereas, when the supply of funds in the settlements market decreases, the cash rate will rise. role of the Reserve Bank of Australia in determining the cash rate: if the RBA wants to reduce the cash rate, it will buy securities from commercial banks and in exchange deposit additional funds in their exchange settlement accounts. This may either be an outright purchase of securities, or repurchase agreements for securities where the seller agrees to buy the security back at a later date. This would result in downward pressure of the overnight cash rate as there is an increase in the supply of settlement funds. When the RBA sells securities to a bank they subtract from the total exchange settlement balances. Thus decreasing the supply of settlement funds which puts upward pressure on the overnight cash rate. By selling government securities, the reserve bank creates a shortage or surplus of funds in the short term money market, thus affecting the cash rate of interest. Increasing the cash rate means that it becomes more expensive for financial institutions to obtain funds in the short-term money market. Similarly a reduction in the cash rate lowers the cost of borrowing for banks in the short term money market and financial institutions then pass this cost saving on their customers in the form of lower lending interest rates If interest rates fall, this encourages consumption and investment spending, which increases the level of economic activity. If interest rates rise, this deters consumption and investment in spending, and reduces the overall level of economic activity. RBA influence on interest rates to affect the level of economic activity is known as monetary policy.

loosening of monetary policy

cash rate decreases

to maintain margin, banks drecrease market interest rates

economic activity increases

RBA buys securities

excess of borrowable funds

consumer and business pay less on exisiting debt, new borrowers find it easier

increase in consumption and investment spending

Limits of markets
WHY THE GOVERNMENT INTERVENES The free operation of market forces does not always achieve the most desirable economic and social outcomes. Under a completely free market (laissez-faire) individuals may be unable to earn enough money to live inequalities between people and regions may worsen and the market may cause economic instability. Because of this the government intervenes to achieve better allocation of resources, a more equitable distribution of income

tightening of monetary policy

cash rate increase s

to maintain margins, banks increase market interest rates

economic activity decreases

RBA sells securities

shortage of borrowable funds

consumers and business pay more on existing debts, new borrowers find it hard to get funds

consumption and investment spending increases

greater economic stability

Markets are effective in determining what our economy produces and how production is organized but they alone are not enough as they often do not consider social issues, The challenge is to find the right balance, Too much government intervention may stifle innovation, efficiency and growth and Too little exposes us to instability, inequality and lack of basic facilities MARKET FAILURE IN THE PROVISION OF GOODS AND SERVICES Market failure occurs because the operation of market forces creates unfavourable outcomes. Public goods is a good once provided is difficult to prevent anyone from using (non-excludable) will therefore always attract free-riders people who use without contribution - clearly there is no incentives for companies to produce these goods as there is no way they can make a profit. are non-rival - one persons enjoyment of the good does not diminish the potential for others to enjoy it, ie Gov spends money on pollution controls, makes environmental improvements to improve air quality, Merit goods are goods with benefits to the community that go beyond the individual who enjoys them directly. Considered to be merit goods in that they benefit the whole society. Gov plays a role as it funds most hospitals and provides financial support for arts groups

If the market produces a harmful item it is known as a demerit good and it can produce too much of these o Because these items have negative effects there sale may be restricted (licence required to sell alcohol) Governments supply goods through a natural monopoly a market structure in which goods can only be provided by one supplier. Infrastructure, NBN network. Governments maintain ownership of these monopolies because they do not want private owners to have control over pricing as they may be tempted to overcharge(exploit). Governments tend to set a fair price, which covers the cost of providing the good or service but is not excessive to the consumer. MARKET FAILURE IN INCOME DISTRIBUTION The governments role in redistributing income remains on of its most important functions in the economy Left to operate without any government, free markets tend to produce substantial inequality in the distribution of income Inequality will widen over time, because once people become wealthy their will tends to generate more wealth Disadvantaged groups include those with low education levels, migrants from non-English speaking backgrounds, aboriginals and single parent families. Most common form of poverty is relative poverty: refers to those who standards of living is substantially lower than the average for the economy as a whole, and is often defined as a level of income below 30% of average income Governments can never remove all factors that contribute to inequality, they can improve opportunities though: o Universal access to education until end of high school o Special education assistance programs and scholarships o Living allowances for students o Help mature-aged people enter high school education th Concern of inequality was a major reason why the role of the government expanded in the 20 century Governments created welfare, with the intension to create a more equal society MARKET FAILURE IN EXTERNALITIES Externalities are external costs and benefits that private agents in a market do not consider in their decision making process Some externalities can be very good for third parties - positive externalities Negative externalities have harmful effects, are of greater concern to the government. Usually involves looking at the spill-over effect that production and other economic activities have on the environment. MARKET FAILURE IN THE ABUSE OF MARKET POWER Market structures can create imperfect competition. This is when only a small number of firms will survive. In this market situation, the market will produce a small quantity of goods and a higher price Firms in highly concentrated industries possess substantial market power, which makes it easier for them to exploit their customer. Some ways in which they do this includes: Monopolisation: firms using dominate market position to eliminate existing competition Price discrimination: firms sell the same G+S in different markets as different prices Exclusive dealings: firm set conditioned for supply that exclude retailers from dealing with other competitor Collusion and market sharing: firms get together and agree on a pricing and market share arrangement that reduces the competition between them MARKET INSTABILITY: THE BUSINESS CYCLE Without any government intervention, a free market economic system it is likely to experience severe fluctuations in the level of market economic activity, making it difficult to achieve the governments goal of sustaining economic growth boom periods: excess demand for goods and services cause a price increase

Recession: high inflation means an increase in interest rates and a severe downturn in the level of economic activity

Governments intervenes with economic stabilisation policies o Macroeconomic policy: fiscal and monetary policy o Microeconomic policies: competition policy and trade policy

The role of government in Australia

THE STRUCTURE OF THE GOVERNMENT There are three stages of government: The commonwealth (Federal) government, which has overall responsibility for the economy and has the most influence on the economic performance State governments, which play important roles in developing infrastructure, delivering government services and fostering regional development Local governments, which play a relatively minor role, mainly relating to local community facilities and roads THE PUBLIC SECTOR Refers to the parts of the economy that are owned or controlled by the government. It includes all tiers of the government as well as business enterprises Consisting of all three governments as well as government authorities such as the Sydney water corporation. Two important indicators that can demonstrate how the economy has changed as a whole are the public sector outlays (spending) as a % of GDP and public sector employment as a % of total employment. Changes to the nature of government spending has occurred governments have tended to spend less on infrastructure whilst spending more on social welfare payments and community services such as health care. Public sectors remain continually important due to: Changes in the approach to economic management: introduction of Keynesian economics Economic growth: living standards improving. The concentration of our population in larger town and cities have increased demand for expensive community services include policies. The government has also been required to deal with problems created by economic growth, including pollution Growth in social security: governments would provide at least a basic standard of living for all people through the social security or welfare system. Tighter constraints on government spending. Due to political pressure and loss of revenue through excess welfare payments. Size of government may grow because of pressure to spend more on certain community services THE REALLOCATION OF RESOURCES The government can affect the allocation of resources in two main ways: 1. By influencing the way businesses and consumers behave in the market through taxation or spending measures 2. By producing goods and services itself In addition the government relocates resources through: Taxation: o Can have the effect of diverting resources away from certain types of economic activity o The influence of tax system is indirect o Direct: are those that are paid by the individual or business firms from which they are levied they cannot be passed on to someone else o Indirect taxes: are levied on individuals and business firms, but they can be passed on to someone else. It is attached to a good or service rather than an individual Spending

Can either rbe used to directly reallocate resources to a particular secot of the economy, or to influence the decisions of consumers and businesses o Types include: Funding for the arts which otherwise might be unprofitable Grants for starting up businesses or new growth industries Subsidies for telecommunications companies such as Telstra Cash payments to private employment search businesses Government provision of goods and service o Gov involve themselves directly in the production process to achieve a better allocation of resources o Through direct intervention governments were considered better able to provide important goods and services to a larger number of people at a lower price o The governments have largely sold their businesses to the private sector (privatisation) and reduced their direct involvement in the provision of goods and services

THE REDISTRIBUTION OF INCOME The main way in which the government redistributes income through taxation and social welfare payments Redistribution occurs through the wealthiest groups more heavily and redistributing income through social welfare payments to lower socio economic groups, dramatically reducing inequality It is known that: Gross income inequality is severe prior to government intervention As income rises, so too does the level of taxation The majority of government benefits are received by the two lowest quintiles Income inequality after government intervention is reduced substantially through government intervention Different types of tax: Progressive tax Proportional tax Regressive tax Social welfare: o Also known as income support payments account for around 37% of government expenditure o Has a considerable impact on the distribution of income in the economy o If often means tested as social welfare payments are designed to reduce income inequality o Largest area of social welfare is aged pensions o Age pensions is putting significant pressure of budget due to the ageing population STABILISATION AND SUSTAINABLE GROWTH Major problem is that the rate of economic growth changes from year to year. Monetary policy tends to operate as the main stabilisation policy. Fiscal policy also plays a very important role through the direct effect of the governments overall level of spending, taxing and borrowing in a year Monetary policy: Involves action by the reserve bank on behalf of the government Designed to influence the level of interest rates and the supply of money By Gov influencing variables, they are able to influence the overall level of economic activity, inflation and unemployment Used in the domestic market of operations involves buying and selling government securities by RB in order to effect the cash rate of interest and influence the level of interest rates in economy Monetary policy can either be tightened or loosened depending on whether the government wishes to dampen or boost the level of economic activity: o Tight MP: Gov wished to slow down the level of economic activity, putting upward pressure on interest rates to reduce money supply. High interest rates reduce demand for money and dampen consumer investment, drop in aggregate demand would reduce inflationary pressures but leads to a rise in cyclical unemployment

Loose MP: Gov increase level of economic activity, put downward pressure on interest rates increasing the money supply, lower interest rates means increase in demand for money and investment. Rise in aggregate demand would reduce cyclical unemployment, but might also lead to a rise in inflation.

Fiscal policy: Important in influencing growth rates, especially when the economy is in a downturn Macroeconomic policy that can influence resource allocation, redistribution of income and reduce the fluctuation in the business cycle. Includes government spending and taxation and the budget outcome PUBLIC ENTERPRISE There has been a clear shift towards minimising the role of government in the economy, and as the governments direct role in production has been substantially cut back Government business enterprises (GBE) are businesses owned and managed by the government at either commonwealth or state level, and have been role of to the private sector in a process known as corporatisation. It has been felt that they would be run more efficiently as the private rather than GBE Corporatisation occurs when the government encourages public trading enterprises to operate independently from the government, they are a private business in order to improve efficiency and profit Competition is the pressure on business firms in market to lower prices to increase their sales OTHER ROLES IN THE ECONOMY They want to ensure a maximum level of competition in the economy, protecting consumers from unfair business conduct and protecting the natural environment. Competition policy: Wanting to ensure that the market operates efficiently promote a workable competition Sometimes may be necessary to reduce the number of firms in an industry. The remaining firms can then produce on a larger scale and achieve the lowest possible long run average cost of production Appropriateness of certain market structures depends on the specific features of an industry Attempts to achieve a situation where markets are contestable entry barriers to industries should be kept to a minimum by eliminating business practices that restrict potential competition Consumer protection: Now lies with the control from the commonwealth government Ensures fair business conduct by prohibiting practices that restrict competition and imposing penalties on firms that breach these guides Prohibits include: price fixing with competition, misleading advertising and price discrimination Also played a key role in investigating petrol and grocery prices by examining the competition Environmental protection Deals with the impact of economic activity on the environment environmental sustainability Has become significant tissue for governments with two underlying issues: o Use of renewable and non-renewable resources: depleting the worlds stocks of non-renewable resources, government can contribute towards sustainable energy use by supporting alternative resources such as solar panels o Price mechanism inaccurately reflects the externalities involved in production: often involve atmospheric and water pollution extremely serious issue as their consequences cannot be contained international agreements on measures to address global environmental problems

Government in action
THE BUDGET Fiscal policy involves the use of taxation and spending powers through the commonwealth budget in order to achieve certain economic objectives including: Stabilising the level of economic activity Maintaining low inflation

Reducing the level of unemployment Achieving general policy goals in relating to the distribution of income 2011-2012 budget: Before 2008 government has been able to have budget surplus, had record low unemployment they were spending less on welfare employments Government budget position slowly deteriorated as the projections were not meet loss of jobs as a result as well as increasing welfare Return to economic growth average of 2.7% in December 2010. Solid growth has supported employment and company profitability, thereby creating an increase in tax revenue The slowing government recovery of budget is due to a number of factors: o Increased expenditure associated with natural disasters in summer (disaster relief) o Reduced company taxation revenue due to the impact of high A$ and low consumer spendin o Reduced company taxation due to the disruption in revenue caused by natural disasters o Reduced personal taxation as subdued investment markets have reduced capital gains tax payable o (resulting in an overall negative effect on agriculture and economy) Government wanted to remove stimulatory effect of government sector on the economy when it is not needed (reduce/remove fiscal spending) With the gradual tightening of monetary policy by the reserve bank in October 2009 there has been a manageable rate of inflation (opposite to loosening pressure leading to rise in inflation) It is important for the government to get back to budget surplus as there will be a steep decline in the proportion of the population working over the next two decades (ageing) reduces the relative size of the tax base available to the government to fund the needs of a larger population of retirees To come to the 2011/2012 budget the government has to determine to what extend the improved taxation revenue would be allowed to flow through to an improved budget position, as opposed to being used to fund new spending initiatives Fiscal policy stance is current contractionary as there is less government spending less inflation The underlying cash balance position for the 2011/12 financial year was a deficit of $22.6 billion. Resulting in decreasing deficit (54.8- 22.6 = 32.2billion decrease) Government deficit is currently 3.6% of GDP expected to fall to 1.5% in 2011/12 With remaining deficit, the government debt is expected to increase from $82.3 billion in 2010/11 to $106.6 billion in 2011/12 (peak level of debt) Weaker rates of economic growth elsewhere have contributed to much larger deficits being adopted around the world e.g. USA = 10% of GDP In comparison to other developed nations Australia is doing well REVENUE AND EXPENDITURE Commonwealth government get revenue from: Income tax (on individuals and companies) Goods and services tax Excise duty (imposed on producers of specific goods) Customs duty (imposed on importers of goods) Other tax revenue Non-tax revenue Commonwealth expenditure occurs on: o Social security and welfare o Infrastructure and social overhead capital o Industry assistance and development o Protecting the environment o Promoting ecologically sustainable development THE IMPACT OF BUDGET OUTCOMES

The budget outcome gives an indication of the overall impact of fiscal policy on the state of the economy Budget balanced Planned government revenue = Planned government expenditure Budget surplus Planned government revenue > Planned government expenditure Budget deficit Planned government revenue < Planned government expenditure Three possible stances of fiscal policy: Expansionary fiscal policy: government might reduce taxation revenue or increase government expenditure, creating either a smaller surplus or bigger deficit than periods. Aims to increase the level of economic activity Contractionary fiscal policy: government would be planning to increase taxation revenue or decrease government expenditure, creating either a smaller deficit or bigger surplus than previously Neutral fiscal policy: government does not change the budget outcome from the previous year level. Will have no overall effect on the level of aggregate demand and economic activity Automatic stabilisers are instruments inherent in the governments budget that counterbalance economic activity. In a boom they decrease economic activity and in a recession they increase economic activity. Examples include transfer payments and a progressive tax system INFLUENCES ON GOVERNMENT POLICIES Parliament and political parties: Our parliament is divided into a lower house and upper house. New laws must win the approval of both houses. The outcome of the 2010 federal election was that a labour government was elected with 72/150 seats in the house of reps and 31/76 seats in the senate. The government cannot pass legislations without some support from other MPs and senators, which means the government must often negotiate the details of its policies in order to get legislations passed Business in a market economy, successful and growing businesses are crucial for a nations prosperity. Shows the Substantial financial influence that businesses have over political parties. Businesses are involved in discussion and contribute to policy making across a wide range of issues that may affect their activities. Some business groups represent the interests of a particular business sector. The influences of business have grown recently. Alongside the growth of professional lobbyist which represent individual companies Unions Largest organisations by membership in AUS. Mostly represents the interested of their members in individual workplaces, but they are also involved in consultations with governments on many policy issues. The participate in public debates and sometimes issue reports on matters affecting the interest of member Environmental groups Prominent interest groups in recent decades. Forced to take environment issues more seriously as the natural environment is undertaken greater threat now than ever before. political parties now compete to demonstrate their commitment to the environment Interest groups People with concerns, interest or expertise relating to specific issues often form organisations to work together towards common ends, have a strong local focus, resisting a development proposal or raising an issue of concern to a local community. The media In influences government policies. Through determining which issues will receive coverage to how issues will be presented to the public. The distinction between reporting of fact and the presentation of a writer or broadcasters opinion is often blurred International influences International treaties and memberships of international organisations can impose constraints on economic policy making; for example as a result of our membership in the world trade organisation, Australias policy options to assist local industries are limited