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Topic 1: Introduction to Economics

Sub-topic 1 The nature of economics

1.1. The economic problem wants, resources, scarcity
o Wants are unlimited and create utility satisfaction or pleasure that
individuals derive from the consumption of goods and services.
o Types of wants:
Individual wants: based on income and preference (e.g. types of food
or clothes they like/can afford).
Collective wants: whole community usually provided by
government (e.g. parks)
Basic wants: must satisfy for survival food, water, clothing, shelter
Recurring wants: must be satisfied at regular intervals for survival
food, water
Substitute wants: interchangeable used for the same purpose
(e.g. buying a second hand car instead of a new one because it is
Luxury wants: holidays, computers, entertainment, cars, etc.
Complementary wants: derived from other wants cars + petrol
computer + printer

o Resources refer to the factors of production in economics
o Resources are bought and sold in factor markets a marketplace
facilitating the purchase and sale of services of factors of production.
o Types of resources (4 types):
Labour human effort (intellectual or physical) used to produce
goods and services paid through wages/salaries/commission
labour force = anyone available for work (employed + unemployed)
divided by the population.
Land all natural resources such as vegetation, minerals, animals,
climate paid through rent
Capital goods we use to produce other goods and services (e.g.
buildings, machinery) paid through interest
Enterprise/Entrepreneurship the resource organizing the other 3
resources paid through profit (e.g. Kerry Packer).

Exists when there are insufficient resources to satisfy peoples wants.

Refers to people making a choice (e.g. studying vs. gaming)
Limited resources + unlimited wants = scarcity
Economics study of the choices people make to cope with scarcity.
Economic Problem

o Basically, how a society satisfies the unlimited wants (of individuals or

the community) with the limited resources available.
o Our wants are unlimited but resources are scarce (i.e. insufficient for
the demand).

o Four questions (relating to choice) that address the economic problem:

What goods and services are to be produced?
How much will be produced?
How are these goods and services to be produced?
How are these goods and services to be distributed among the
1.2. The need for choice by individuals and society
o The economic problem leads to choice
o Economising individuals making choices by weighing up the
benefits of having more of one good/service over having less of
o Living standards current vs. future allocating more resources to
food, clothing, houses (current) vs. more resources in investment of
capital goods (future).
o Expenditure of taxation revenue by governments new school vs.
new hospital
1.3. Opportunity cost and its application through production
possibility frontiers
Opportunity cost aka economic cost/real cost
o Whenever we satisfy one want, we are giving up the opportunity to
satisfy an alternative want this alternative want is the opportunity
o E.g. Buying a mars bar opportunity cost= Twix bar
o E.g. Going to movies before an exam and scoring 50% rather than
your normal 70% opportunity cost= 20%
Production possibility frontiers (PPF)
o Graphical representation of all the possible combinations of the
production of 2 goods/services (or 2 types of goods/services) that
can be produced at any given time.
o Note: There are four assumptions involved with PPF (all are
The economy only produces two goods
The quantity of resources available are fixed, and remain unchanged
The state of technology is fixed
All resources are fully employed and efficient
o Example:

o Points a-f are working at maximum efficiency

o Outside the frontier unattainable due to limited resources.
o Inside the frontier like point z resources are not being used
o Opportunity cost of each unit of CDs = what you are giving divided
by what you are getting = 15 divided by 5= 3 units of Cola
o Effect of changes in production on the PPF:

Improvement in the technology

of food production

A decline in resources

New/more resources


1.4. Future
of current
choices by

Consumer Goods vs. Capital Goods

o Consumer goods/services items produced for the immediate
satisfaction of individual and community needs and wants.
o Capital goods items that have not been produced for immediate
consumption but will be used for the production of other goods.
o E.g. an orange can be a consumer good (to eat) or a capital good
(for orange juice).
o An economy can choose between producing more consumer goods,
or increase our productive capacity by producing capital goods (the
options can be assessed on a PPF).

Future implications of current choices

o Allocative efficiency where resources are allocated according to

the preferences of consumers and society for certain goods and
o In the long run, producing more capital goods increases production
capacity and economic growth, and will satisfy a larger amount of
consumer demand in the future.
o Inter-temporal budget constraint spending money now may mean
less money in the future, or spending less money now may mean
more money in the future.
o Individuals need to decide whether to spend money (consumer
goods- i.e. holiday) or save money (capital goods- i.e. save up for a
deposit and purchase a property).

o When governments increase spending on consumer goods (and

hence decrease spending on capital goods), they are reducing
economic growth as research and development is at a weaker level.
1.5. Economic factors underlying decision-making by:
Individuals - spending, saving, work, education, retirement,
voting and participation in the political process
Business - pricing, production, resource use, industrial
Governments - influencing the decision of individuals and
o Make decisions on how much of their income they will save/spend
influenced by income, age, expectations, future plans, family
circumstances, job security
o Macroeconomic relationship between income, consumption and
Income (Y) = Consumption (C) + Savings (S)
o Why people save (3 reasons):
Security against unforeseen future events
Investment in income earning assets
Finance the purchase of goods and services in the future
o Work (>income = >savings +>consumption): professional, trade,
semi-skilled, unskilled
o Education (ability to increase knowledge): school, TAFE,
apprenticeships, uni, college
o Retirement: Compulsory superannuation
o Voting/Participation in the political process: Voting patterns reflect
perceptions of individual politicians and the potential effects of their
policy platforms.

o Pricing: costs must be covered but a profit must be gained most
businesses use cost plus pricing price= costs + mark up (profit
o Production: Most efficient combination of capital and labour to use
minimize resource cost + maximize revenue= profit maximization
o Resource use: protect employees Fair Work Act 2009 Ten
National Employment Standards (NES) National Minimum Wage
o Industrial relations: Wage negotiation have become more
decentralized and deregulated under the principle of enterprise
bargaining negotiation of wages now encouraged under the Fair
Work Act 2009 rewards for increasing productivity

o Influence the decisions of individuals and businesses in FOUR main

Governments allocate resources through their spending decisions for
the provision of infrastructure and collective services.
The federal government attempts to stabilise economic activity
through the conduct of economic policies such as monetary and
fiscal policies.
Governments play a redistributive role by implementing a
progressive system of taxation (i.e. individuals are taxed based on
their level of income). This helps redistribute incomes in the
Act as regulators of economic behaviour and attempt to protect
individual consumer rights and increase competition in markets to
raise efficiency and lower prices.
Sub-topic 2 The operation of an economy

2.1. Production of goods and services from resources

natural, labour, capital and entrepreneurial resources

Factors of production
o Note: Overlap with 1.1.
o Factors of production any resources that can be used in the
production of goods and services.
o Input (factors of production) production process output
o Four types:
Natural resources: land (e.g. water, soil) consumers own land for
income (rent)
Labour resources: Human effort physical and mental
Capital resources: Produced means of production social
overhead capital (i.e. infrastructure) another form of capital
including bridges, schools, railways, etc.
Natural resources
Enterprise resources: involves organizing the other factors of

o Each resource is scarce (e.g. labour supply is determined by

population size), however there is a solution in a market economy:
allocate based on consumer demand.
2.2. Distribution of goods and services

2.3. Exchange of goods and services

2.4. Provision of income all 3 together
Goods and Services
o Gross domestic product (GDP) the total value of finished goods
and services produced in an economy in a given period of time.
o Market economies dont distribute output equally, but provide
people with income as a reward for contributing to the production
o The greater the contribution to society the greater the reward
(income) the greater the ability to purchases more goods and
o Market economy does not distribute output equally, but provide
people with income as a reward for contributing to the production
o Free market economy/capitalist system Investment in and
ownership of the means of production, distribution and exchange of
wealth is made and maintained chiefly by private individuals or
corporations (i.e. the government doesnt influence in any way)
o Mixed market economy features characteristics of both capitalism
and socialism private economic freedom (capital) + governments
interfering to achieve social aims.
o Command economy (centrally planned) government determines
what goods should be produced, how much and at what price key
feature of communism (China, Cuba, North Korea).
o How a market economy and planned economy solve the economic

o There has been a clear trend in Australia towards even greater
market capitalism: tariff cuts, extension of free trade, privatisation of
many GBEs
o Government Business Enterprises (GBEs), also known as Public
Trading Enterprises (PTEs) businesses owned and managed by a
2.5. Provision of employment and quality of life through the
business cycle
Business Cycle
o The business cycle (or economic cycle) displays the fluctuations of
economic growth over a period of time.
o Impacts of the business cycle:

2.6. The circular flow of income

Individuals, businesses, financial institutions, governments,
international trade and financial flows
The 5 sectors
o Household sector all individuals who earn an income by selling
resources (labour)
o Firms sector buy resources from households and make income
payments in return for the use of their resources (labour, land).
o Financial sector financial institutions (e.g. banks) who borrow/lend
o Government sector Raise revenue through taxes used to provide
collective goods
o Overseas sector Importers and exporters (i.e. trade flows)

Equilibrium/Disequilibrium + Injections/Leakages
o Equilibrium occurs when the sum of the 3 leakages equals the
sum of the three injections i.e. S + T + M = I + G + X
o Disequilibrium occurs if the sum of the total leakages doesnt
equal the sum of the total injections, causing the levels of income,
output, expenditure and employment to fall/rise.
o S + T + M (leakages) > I + G + X (injections) = contraction + higher
o S + T + M (leakages) < I + G + X (injections) = expansion + lower
o The economy will ALWAYS move itself towards equilibrium at a time
in the future.
Circular flow of income

Sub-topic 3 Economies: Their similarities and differences

3.1. Examine similarities and differences between Australia

and at least one economy in Asia in relation to:
Economic growth and the quality of life
Employment and unemployment
Distribution of income
Environmental sustainability
The role of government in health care, education and social


Topic 2: Consumers and Business

Sub-topic 1 The role of consumers in the economy
1.1. Consumer sovereignty
Patterns of consumer spending and saving/dissaving:
o Variations with income and age
Individual consumers either spend or save their income
In the economy as a whole, as income rises the level of
saving increases
Consumer Sovereignty
o How the pattern of consumer spending determines the pattern of
production and resource allocation.
o Answers 2 questions: what to produce? How much to produce?
o To maximise profits, firms need to:
Achieve efficiency in production in order to minimise costs (i.e.
technical efficiency)
Allocate/shift resources in such a way to satisfy consumer
preferences (i.e. allocative efficiency);
Respond to changing consumer preferences and technological
improvements over time (i.e. dynamic efficiency)
o However, consumers dont have absolute power, and firms use
certain tactics to reduce the sovereignty of consumers. These are:
Deceptive/Misleading conduct (e.g. vitamin water has no vitamins)
Planned obsolescence: designed to wear out quickly/go out of date
Anti-competitive behaviors: operate in markets with limited
competitors (e.g. board games)
Patterns of consumer spending and saving/dissaving:
o Two choices: Spend or Save
o Y = C + S (disposable income= consumption + savings)
o Average propensity to consume (APC) refer to the proportion of an
individuals income that is spent on consumption (goods and services)
rather than on saving APC=C/Y (consumption/disposable income)
o Average propensity to save (APS) refers to the proportion of an
individuals income that is saved rather than spent on consumption
o The main two influences on whether to spend or save is:
Level of income: Lower income levels more income being spent (on
basic needs), whilst higher income levels more savings dont need
to spend extra already covered their costs. Income rises faster
than consumption.

o Others: cultural/personality factors, confidence/future expectations, tax

o Consumption function graph showing consumption (y) vs. income (x)
o Marginal propensity to consume (MPC) proportion of each extra dollar
of income that goes to consumption

o Marginal propensity to save (MPS) the proportion of each

additional dollar of household income that is used for saving.
o Note: MPC + MPS = 1

Factors influencing individual consumer choice
Price of substitutes
Price of complements
Factors influencing individual consumer choice
o Income: higher income earners buy more high quality
o Price: must decide whether they are happy to pay the price
some consumers accept any price for necessities (e.g. food).
o Price of substitute/complementary goods: e.g. if butter is expensive,
some consumers might purchase margarine (substitute). E.g. if cars
price increase, petrol should decrease (complement).
o Consumer tastes and preferences: lead to the highest level of
utility as tastes change over time, so does demand
o Advertising: persuades/informs/reminds consumers of products.

1.3. Sources of income

The return for resources: wages, rent, interest and profits
Social welfare

The return for resources

Natural resources


Social Welfare Payments

o Payments made to increase the incomes of individuals or families
in need of assistance by the government e.g. unemployment
benefits and family allowances more than 1/3 of government
revenue is used to make these social welfare payments.
o Types:
Assistance to the aged: people > 65 years of age and retired from

Family Payments: families with children, means tested according to

their income level
Disability support payment: for people who are not able to work
because of personal factors (e.g. physical illness)
Unemployment benefit: people who are seeking work but cannot find
Sub-topic 2
The role of
business in the

Definition of a
firm and an
What to
quantities to

How to produce
o A business/firm an organization involved in using entrepreneurial
skills to combine factors of production to produce a good or service
for sale.
o An industry the collection of firms involved in making a similar
range of items that usually compete with each other, such as the
financial services industry or the car industry.
o A firms production decisions:
What to produce: influencing factors
Skills and experience of operator (i.e. industry knowledge)
Where is strong consumer demand?
Businesses opportunities (e.g. high consumer demand with few
Amount of capital required to start the business

What quantities to produce: influencing factors

Level of consumer demand
Large production access to capital
Past trends
Impact of changes in external conditions (e.g. change in weather will
increased demand for sunglasses).
The elements involved within the production process
How to produce: influencing factors
Efficiency of the four factors of production (natural resources, labour,

capital and enterprise).

2.2. Business as a source of economic growth and increased
productive capacity
Goals of the firm
Maximizing profits
Maximizing growth
Increasing market share
Meeting shareholder expectations

Goals of the firm

o Maximising profits: profit motive the process by which a business
seeks to maximise profits by using the lowest-cost combination of
resources and charging the highest possible price.
o Meeting shareholder expectations: company directors must serve
the interests of shareholders legal responsibility most
overriding concern for business managers
o Increasing market share: increasing sales revenue increase profits
increase sales improve business (working conditions, salaries,
o Maximising growth: allows business to achieve profits long term
leads to satisfying other objectives (e.g. increasing market share)
improves business (salaries, prestige, working conditions)
o Satisficing behavior: satisficing behavior the idea that firms will
attempt to pursue a satisfactory level in all goals (profit
maximization, sales maximization, etc.) rather than maximizing any
single goal

2.3. Efficiency and the production process

Internal and external economies of scale
Diseconomies of scale

Production vs. Productivity

o Production the total amount of goods and services produced to
increase production you can employ more employees OR work them
for longer hours.
o Productivity the quantity of goods and services the economy can
produce with a given amount of inputs such as capital and labour
an increase in production means the firm is making more efficient
use of its resources increased productivity means the firm is
satisfying a greater number of wants using the same level of
resources hence it is efficient e.g. labour increases by 10%,
production increases by 50%.
o Benefits of productivity:
Able to satisfy more wants
Increase in the living standards
Less wastage of our scarce resources
Lower production costs and higher profits for the business firm
A lower inflation rate
Higher incomes
Improved international competitiveness of our industries
o How to achieve productivity:

Specialisation of labour: break down production process into subprocesses employees specialize in a particular sub-process
become faster and faster (experts) avoid wasting time from one
process to another.
Specialisation of natural resources: when a large number of
businesses produce similar goods/services congregate in the same
area to reduce production costs by sharing common infrastructure
Specialisation of capital: large scale production when
businesses grow so large they can use highly specialized capital
equipment in their production

Internal economies of scale

o The cost saving advantages that result from a firm expanding its
scale of operations average cost per unit of production falls as
output grows this leads to decreased prices e.g. a can of coke
cost $2, but a box of 24 costs $14.40 ($0.60) the firms output
level is below the technical optimum ideal position for a firm to be
o Average cost per-unit cost of production, obtained by dividing the
total cost of producing a certain level of output by the total quantity
Internal diseconomies of scale
o The cost disadvantages faced by a firm as a result of the firm
expanding its scale of operations beyond a certain point the firms
output level is above the technical optimum
Advantages of Internal Economies
Disadvantages of Internal
of Scale
Diseconomies of Scale
Take advantage of specializationof Management can lose touch with
daily operations due to size
Invest in more efficient capital May lead to duplication and
paperwork (impact on decision Buy raw materials in bulk which willmaking process)
Lack work workplace relations
reduce per-unit cost
between employees and
R&D to find ways of further reducing
per-unit costs
Decreases in managerial and
Find it easier and cheaper to raise
administrative efficiency.
finance for business expansion.
o Improving efficiency:

External economies of scale

o The advantages that accrue to a firm because of the

growth of the industry in which the firm is operating, and is not
the result
of a
changing its
own sale of
happens outside
a firm
E.g. as an
industry grows,
so does the

diseconomies of

o The

faced by a

firm because of the industry in which the firm is operating, and

is not the result of a firm changing its own sale of operations.
o E.g. the cost of raw materials can rise

2.4. Impact of investment, technological change and ethical

decision-making on a firm through:
Production methods
Types of products
Environmental sustainability.

Production Methods

Impact of technology, investment

and ethical decision-making on
Technological innovation has increased
the productive capacity by using
existing resources more efficiently
Search engine (i.e. Google) gives
immediate access in allowing
consumers to compare prices between
competing firms forcing firms to
reduce their costs to compete with
overseas competitors

Outputs & Profits
Types of Products
Environmental Sustainability

Technological changes has made

previous jobs redundant (unneeded)
firms minimize expenses with less staff
Technology Improved quality of
products + lower production costs=
profit maximization
New technology expands the range of
products that can be produced.
Development of stock markets through
global computer networks attracts
investments funds from over the world
Businesses focus on minimizing
pollution/waste + increase the use of
renewable energy demand for ecofriendly business practices has
increased through consumer
expectations + new regulations.

Topic 3: Markets
Sub-topic 2 Demand and Supply

2.1. Demand- law of demand, individual and market

demand, the demand curve

o Demand the quantity of a particular good that consumers
are willing and able to purchase at various price levels at a
given point in time want it plan to buy it can afford it.
o Law of demand states all else being equal, as the price of a
product decreases, quantity demanded increases; likewise, as
the price of a product increases, quantity demanded
o Individual demand the demand of each individual consumer
for a particular good or service.
o Market demand demand by all consumers for a particular
good or service.

o Demand schedule list the quantities demanded at each

different price (ceteris paribus)
o Demand curve show the relationship between the quantity
demanded of a good and its price (ceteris paribus) slopes
downwards from left to right
o Demand schedule used to create demand curve

2.2. Demand- factors affecting demand price, income,

population, tastes, prices of substitutes and
complements, expected future prices

Factors affecting demand (increase in demand/decrease in


The price of the good or service itself: however, some goods

are considered necessities and price doesnt influence
consumers decision.
Increase/decrease of price of other goods and services: e.g.
this is where consumers consider substitutes (e.g. price of
butter increases, demand for margarine increases).
Expected increase/decrease in future prices: e.g. you want an
IPhone 6, but the IPhone 7 is about to come out (which will
decrease the price of the IPhone 6), so you wait a bit
(decreasing the demand for the IPhone 6).
Changes in consumer tastes and preferences: more/less
fashionable OR technology/innovation improves product
(e.g. Foxtel-waiting for program vs. Netflix-instant access).
The level of income: more/less income e.g. more income
more willing to spend increase demand for luxury goods
Size of the population and its age: increasing/decreasing size
of population + a change in age distribution e.g. Australias
aging population will increase demand for retirement villages,
aged care services, etc.
2.3. Demand- movements along the demand curve and
shifts of the demand curve

Movements along the demand curve

o A contraction in demand occurs when an increases in price
causes the quantity of demand to fall
o An expansion in demand occurs when a decrease in price
causes the quantity demanded to rise.

Shifts of the demand curve

o An increase in demand consumers willing to buy more of
product at each possible price before caused by other
factors (e.g. consumer tastes/preferences, increased income)
curve shifts outwards (right)
o A decrease in demand willing to buy less of product at each
possible price before caused by factors (other than price)
e.g. expected future prices shifts curve inwards (left)

2.4. Price elasticity of demand

Significance of price elasticity of demand market
Price elasticity
Elastic, inelastic and unit elastic
Calculation of elasticity using total outlay method

Price elasticity- elastic, inelastic and unit elastic

o Price elasticity of demand measures the responsiveness of
quantity demanded to a change in price calculated as the
percentage change in quantity demanded divided by the
percentage change in price.
o Types of demand:
Elastic demand: A strong response to a change in price e.g.
price decreases by 10%, demand increases by 50%.
Unit elastic demand (unitary): A proportional response to a
price change (total amount spent by consumers remains
unchanged) if you have $20 to spend on food, no matter
the price of food, you will still be spending $20
Inelastic demand: A weak response to a price change e.g.
price of petrol increases by 10%, demand decreases by 0.5%.
Calculation of elasticity using total outlay method
o Measuring PED (Price elasticity of demand) total outlay

Significance of price elasticity of demand

o Businesses: deciding on their optimal pricing strategy elastic
lower prices OR inelastic increase prices
o Government: when pricing e.g. public transport fees AND
changes in some other indirect taxes (e.g. sales tax)
o Market research is used by businesses/government to analyse
the effects of changes in pricing.
o REMEMBER: Revenue= Price x Quantity

Price Elasticity and the Demand Curve

o Price elasticity is the change in quantity demanded over a
certain price range, NOT over the entire length of the curve
slope of demand curve doesnt show PED.
o Upper elastic AND lower inelastic

o Perfect elasticity:

If price changes by any percentage, quantity

demanded will dramatically fall
E.g. bananas being sold at a market stall at
$5. If the price increases, consumers will
another stall. If the price decreases,
wont be making as much profit.
o Perfect inelasticity:

Quantity demanded remains constant

when price changes occur.
Refers to products that are unique e.g. If
the Mona Lisa was being sold at $10,000
and this got increased to $1 billion, there
will still only be one to be sold.
2.5. Factors affecting elasticity of
Necessities and luxuries
Existence of close substitutes
Proportion of income spent on the good
The length of time since a price change

Factors affecting elasticity of demand

simply go to

o Whether the good is a luxury or necessity: Necessities (e.g.

bread/milk) have an inelastic demand, whilst luxuries (e.g.
expensive restaurants) are elastic.
o Whether the good has any close substitutes: goods with close
substitutes (e.g. cereal) often have HIGHLY elastic demand
consumers can simply swap brands, whilst goods with few or
no substitutes (e.g. water suppliers) often have inelastic
o The expenditure on the product as a proportion of income:
goods that take up a small amount of income (e.g. coffee)
would have a lower price elasticity of demand, whilst more
expensive items (e.g. cameras) tend to be more elastic.
o The length of time subsequent to a price change: when a price
of a good increases initially the quantity demanded will be
similar consumers take time to become aware and adjust to
the price change they need time to seek alternatives and
identify substitute products.
o Whether a good is habit-forming (addictive) or not: goods that
are addictive (e.g. alcohol, cigarettes) are typically inelastic.

2.6. Supply - law of supply, individual and market

supply, the supply curve

o Supply quantity of a good or service that all firms in a

particular industry are willing and able to offer for sale at
different price levels at a given point in time
o Market supply the sum of the individual firm supplies of
individual producers at the various price levels.
o Law of supply all else equal (Ceteris Paribus), an increase in
price results in an increase in quantity supplied higher
price, higher quantity supplied
o Supply curve price (y-axis) & quantity (x-axis) looks like
y=x graph

2.7. Supply- factors affecting supply price/cost of

factors of production, prices of substitutes and
complements, expected future prices, number of
suppliers, technology

Factors affecting Supply (increase in supply/decrease in

o Fall/rise in price of other goods: e.g. price of good X stays the
same, while the price of good Y increased, which increases
profit suppliers produce more of good Y
o Future price of the good: if the supplier believes the
good/service price will increase in future supply of the good
will increase
o More/less favourable climatic and seasonal influence: e.g. a
drought causes agricultural supply to decrease.
o Improvement/unavailability in technology: improving
technology lowers production costs increases supply at a
given price
o Fall/increase in the cost of factors of production: decrease in
factors of production increase in supply

o Increase/decrease in quantity of the good available: e.g. there

is only limited amounts of some resources (e.g. oil, paintings)

2.8. Supply- movements along the supply curve and

shifts of the supply curve

Reasons for law of supply

o As the law of supply states, as the price of a certain products
rises, the quantity supplied by producers will rise.
o This occurs for THREE reasons:
Profit motive: increase production to increase profit
Production costs: higher output higher production costs
higher prices to cover these costs
New entrants: higher price more profitable product
attracts other firms to industry increasing supply
Movements along the supply curve (caused by changes in
o A contraction of supply is when a decrease in the price of a
good decrease the quantity produced downward movement
o An expansion of supply is when an increase in the price of a
good causes an increase in the quantity supplied upward

Shifts of the

Supply Curve (caused by


o An increase in supply means firms are willing and able to

supply more of a product at each price level than before
firms supply a given quantity at a lower price than before
o An decrease in supply means firms are willing and able to
supply less of a product at each price level than before
firms supply a given quantity at a higher price than before

2.9. Market price

Market equilibrium using diagrams

Movement to equilibrium
Effects of changes in supply and/or demand on
equilibrium market price and quantity through the use
of diagrams
Effects of changing levels of competition and market
power on price and output
Market Equilibrium
o Market equilibrium the situation where, at a certain price
level, the quantity supplied and the quantity demanded of a
particular good are equal

o Price mechanism 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 in
market economy it attempts to solve the economic problem
o Markets not in equilibrium:
Surplus: supply > demand drop price expansion in
demand and contraction in supply

Deficit/Shortage: demand > supply rise in price

expansion in supply and contraction in demand (movement
along curve to equilibrium point) this is the price
mechanism in action

o Changes in equilibrium price and quantity can be changed

caused by an increase/decrease in demand/supply the
factors that cause this are the factors that cause
increase/decrease in demand/supply (e.g. substitute price,
o Example: decrease in supply increases price but reduces

2.10. Alternatives to market solutions the role of

Ceiling prices, floor prices

Market Failure
o When markets do not produce the desired outcomes, it is
called market failure occurs when in any given market, the
quantity of a product demanded by consumers does not
equate to the quantity supplied by suppliers
o Market failure when price mechanism accounts for the
private costs for production (the cost the firm pays to
purchase capital equipment, hire labour and buy materials),
but not the social costs of production these social costs are
known as negative externalities unintended consequences
of the production process occur when production impose
external costs on third parties occur outside of the market
(spill-over effects)
o Private costs are faced by producer or consumer directly in a
o Social costs indirect E.g. impact of road fumes on lungs
or e.g. 2. External costs of cleaning up litter and the dropping
of chewing gum
o Externalities a major cause of market failure occur in
nearly every market can be positive and negative
Ceiling and floor prices
o Government have price intervention through:

Ceiling prices: a regulation that makes it illegal to charge a

price higher than a specified level
Used to stop exploitation of consumers (by excess prices
charged by non-competitive industries e.g. petrol) price set
below market equilibrium redistribution of money from
sellers to buyers
LEADS TO government rationing (impose taxes and provide
goods that the market wont supply) AND black markets (illegal
Floor prices: minimum price charged for a product
Designed to give a producer a minimum return often used
to assist farmers in agriculture in making enough to stay in
that business
Price set above the market equilibrium supply will be
greater than demand causing a surplus this can be
overcome by the government buying the excess production

Merit, public and demerit goods

o Public goods goods that private firms are unwilling to
supply as they are not able to restrict usage and benefits to
those willing to pay for the good governments provide
these goods Non-excludability and non rivalry in
o Merit goods goods that are not produced in sufficient
quantity by the private sector because individuals do not
place sufficient value on those goods e.g. schools, hospitals,

o Demerit good a good or service whose consumption is

considered unhealthy, degrading, or otherwise socially
undesirable due to the perceived negative effects on the
consumers themselves e.g. beer, cigarettes, drugs

Sub-topic 3 Variations in competition

3.1. Market structures

Pure competition
Monopolistic competition
Monopoly. (Diagrams using revenue and costs for the
market models are not required.)

Market Structures
o So far we have assumed if a firm does have market power it
can increase equilibrium price and lower equilibrium quantity
this assumption is INCORRECT governments intervene to
limit market power (more market power, more intervention
o Market structure the number and relative size of the firms
within an industry, the nature of the product being sold and
the ease with which new firms can enter into that industry
o In economics, there are FOUR theoretical market structures:
Pure competition: a model of perfect competition price
Monopolistic competition: many small firms in the industry
imperfect competition (not pure competition or monopoly)
SOME control on price but not market power of a

Oligopoly: a small number of large firms dominate the

industry most common in Australia monitors behaviour
of other rival firms competes through advertising
Monopoly: only one producer in the industry price setter

o The further right on the scale, the greater the degree

of monopoly power exercised by the firm
o Note: monopoly is the opposite of pure competition