TOPIC 2: CONSUMERS AND

BUSINESS
THE FOCUS OF THIS TOPIC IS AN INVESTIGATION OF HOW CONSUMERS AND BUSINESSES MAKE DECISIONS ABOUT THE
CHOICES THEY FACE, RECOGNISING THAT IN A MARKET ECONOMY BOTH ARE MOTIVATED LARGELY BY SELF-
INTEREST.
TOPIC 2 – SYLLABUS PART A
BRAINSTORM

 What roles do consumers play in the economy?

THE ROLE OF CONSUMERS IN THE
ECONOMY
CONSUMER SOVEREIGNTY
CONSUMER SOVEREIGNTY

 Consumer sovereignty is based on consumers sending signals to producers

through their demand for goods and services, i.e. patterns of consumer spending
determines the pattern of production and resource allocation.
 Where their demand is high relative to supply, prices will rise.
 Producers will then notice that higher profits can be made by producing those
items for which demand is greatest.
 As a result, they will shift resources into those other forms of production.
 As an economy experiences an upturn and consumer incomes rise, the demand
for luxury goods increases, and so does their production.
FACTORS THAT REDUCE CONSUMER
SOVEREIGNTY

 Marketing: marketing strategies

aim to manipulate the behaviour
of consumers.
 Misleading or deceptive
conduct: deceives consumers,
leading them to pay for items that
they do not really want to buy,
e.g. weight-loss programs,
baldness treatments.
FACTORS THAT REDUCE CONSUMER
SOVEREIGNTY (CTD)
 Planned obsolescence: by emphasising the importance of keeping up with the
latest fashions and most recent products, firms can manipulate consumers to buy
a product more often than they would otherwise, e.g. new versions of iPhones.
 Anti-competitive behaviour: firms that operate in markets where there are few
other sellers can also diminish the ability of consumers to choose what they
really want.
TASK

 Propose and justify a government

policy to protect consumer
sovereignty against misleading or
deceptive conduct like Kellogg’s
cereal.

The 20% increase in attentiveness was compared

to having a glass of water for breakfast but they
fail to include this information.
PATTERNS OF CONSUMER SPENDING AND
SAVING/DISSAVING

 Where:
 Y=Disposable (after tax) income
 C=Consumption expenditure
 S=Savings
SPENDING VS SAVING

 Average propensity to consume

(APC): the proportion of total
income that is spent on
consumption.

 Average propensity to save (APS):

the proportion of total income that is
not spent, but is saved for future
consumption.
SPENDING VS SAVING

 The levels of consumption and savings vary with income.

 Low income households will spend a large proportion of disposable income and
have a low propensity to save, i.e. they have a high APC and a low APS.
 Households with a high level of disposable income will spend a lower proportion
of their income but have a higher propensity to save, i.e. they have a lower APC
and a higher APS.
VARIATIONS IN SAVING IN THE ECONOMY AS
A WHOLE

 While those economies with higher per capita incomes tend to save a greater
proportion of their income, the relationship between income and savings level is
weak at an economy-wide level.
Country GDP per capita ($US, 2015) Gross Saving (%GNI,
2014)
Luxembourg 101,450 23
Norway 74,734 40
Australia 56,327 24
United States 55,836 18
Japan 32,477 22
Brazil 8,538 16
South Africa 5,691 15
Indonesia 3,346 31
India 1,581 33
Uganda 675 19
FACTORS INFLUENCING THE DECISION OF
WHETHER TO SPEND OR SAVE

 Brainstorm the factors that influence your decision of whether to spend or save.
 Cultural factors, e.g. in some East Asian economies people tend to save more of their
income than people in other industrialised economies; previous generations tended to
save more than people today.
 Personality factors, e.g. some people are more cautious and prefer to have savings in
case of any future need.
 Confidence and future expectations, e.g. when consumers are worried about the
economic outlook, they are more likely to exercise caution and increase their savings.
 Any specific future spending plans, e.g. saving for a holiday or a car.
 Tax policies can make it more attractive to save (e.g. lower taxes on superannuation
savings) or to spend (e.g. the abolition of consumption taxes).
 Availability of credit, e.g. spending is likely to be higher if credit is readily available.
 The most significant factors are level of income and age.
 VARIATIONS WITH INCOME

 As income rises, people tend to save a higher

proportion of their income.
 Consumers on lower incomes spend
proportionately more of their disposable income
than people on higher incomes.
 As incomes rise, so too does the level of
consumption. However, because incomes rise
faster than consumption, their average
propensity to consume falls.
 Consumption function: a graphical
representation of the relationship between
income and consumption for an individual or an
economy. It is usually upward sloping with a
gradient less than 1 and with a positive y-
intercept.
VARIATIONS WITH INCOME (CTD)

 Marginal propensity to consume (MPC): the proportion of each extra dollar of

income that goes to consumption. This is also the slope of the consumption
function.

 Marginal propensity to save (MPS): the proportion of each extra dollar of

income that is saved.

 Individuals and households on higher incomes have a higher MPS and lower
MPC relative to individuals and households on lower levels of income.
 SAVINGS FUNCTION

S = -C0 + sY
The saving function expresses savings in
terms of autonomous saving (i.e. saving where:
unrelated to changed in level of income)
and induced saving (i.e. saving related S is total saving
directly to changes in level of income) -C0 is autonomous saving
s is the marginal
propensity to save or MPS
Y is disposable income
EXAMPLE OF CONSUMPTION & SAVING AT
DIFFERENT LEVELS OF INCOME
 EXAMPLE OF CONSUMPTION & SAVING AT
DIFFERENT LEVELS OF INCOME
At an income level of zero, autonomous consumption is 50 and dissaving (where
consumers go into debt because consumption exceeds income) is -50
 EXAMPLE OF CONSUMPTION & SAVING AT
DIFFERENT LEVELS OF INCOME

As income increases, the level of dissaving decreases until the breakeven level of
income of 100 is reached, where all income is spent but savings are zero (i.e. Y = C =
100, and S = 0)
 EXAMPLE OF CONSUMPTION & SAVING AT
DIFFERENT LEVELS OF INCOME
At an income level of 150, consumption is 125 and saving is positive 25
 EXAMPLE OF CONSUMPTION & SAVING AT
DIFFERENT LEVELS OF INCOME

At an income level of 200, consumption is 150 and saving is 50

 CONSUMPTION FUNCTION

Q. What is the equation of the

Expenditure

600 adjacent consumption

500 function?
400

300 C = C0 + cY
200

100 We answer this in two steps:

45o 1. Calculate the C0
0
0 100 200 300 400 500 600
2. Calculate the cY
Income (Y)
 CONSUMPTION FUNCTION
Expenditure

600

500
Step 1 -
400 What is the autonomous
300 consumption (C0) in the
200
adjacent diagram?
100

45o
0
0 100 200 300 400 500 600

Income (Y)
 CONSUMPTION FUNCTION

Q. What is the autonomous consumption

(C0) in the adjacent diagram?
Expenditure

600

500

A. $200
400

300
Therefore
200 C = C0 + cY

100 C = 200 + cY
45o
0
0 100 200 300 400 500 600 Now we need to calculate the MPC (c)
Income (Y)
 CONSUMPTION FUNCTION

Saving
i.e. earning more
Expenditure

600
than you spend
500
Q. What is the purpose of the
Dissaving
S>C 45o line?
400 i.e. spending more
than your
300 earning
A. To show the break even
200
C>S point of when savings is
100

45o
greater than consumption
0
0 100 200 300 400 500 600

Income (Y)
 CONSUMPTION FUNCTION

MPC = ΔC
Expenditure

600 ΔY
500 = 350 - 300
400 400 - 300
350
300 = 50
100
200

= 0.5
100

45o Y1 Y2
0
0 100 200 300 400 500 600
Therefore c = 0.5
Income (Y)
 CONSUMPTION FUNCTION
Expenditure

600

500 Q. What is the equation of

400 the adjacent consumption
300
function?
200

100 A. C = 200 + 0.5Y

45o
0
0 100 200 300 400 500 600

Income (Y)
 YOUR TURN #1
Expenditure

600

500 Q. What is the equation of

400 the adjacent consumption
300
function?
200

100

45o
0
0 100 200 300 400 500 600

Income (Y)
 YOUR TURN #2
Expenditure

600

500 Q. What is the equation of

400 the adjacent consumption
300
function?
200

100

45o
0
0 100 200 300 400 500 600

Income (Y)
TASK

Consider a person earning $1000 a week who consumes $700 of their income. Suppose
that when they receive a 20% pay rise, their consumption rises to $800 a week.
Calculate the following:
a) Their average propensity to consume at their new income level
b) Their average propensity to save at their new income level.
Now suppose that this person decides to halve the amount of time they spend at work so
they can complete a part-time university course. Their income falls to $600 a week.
Assuming they have a constant marginal propensity to consume, calculate the
following:
c) Their new level of consumption
d) Their new level of saving
ANSWER
IN THE ECONOMY AS A WHOLE…

 As a country’s national income rises, the overall level of savings in the economy
should rise at a faster rate.
VARIATIONS WITH AGE: THE LIFE-CYCLE
THEORY OF CONSUMPTION

 When people are young, they tend to

receive lower levels of income because
they lack skills, experience and education.
Therefore, they tend to spend most of their
income and save very little – in fact they
would often tend to dissave (or borrow) in
order to finance their education (e.g.
HECS).
 Once people start working, and especially
in middle age, their incomes rise and they
would tend to consume a smaller
proportion of their income, as they start
saving and accumulating assets for
retirement.
VARIATIONS WITH AGE: THE LIFE CYCLE
THEORY OF CONSUMPTION (CTD)

 In retirement, people no longer earn

income from their labour, and they
consume out of past savings and
wealth, or rely on government
pension benefits.
 As an individual grows older, their
average propensity to consume
initially falls (as their income rises)
and then subsequently rises again
after retirement.
TASK

 If high income earners tend to save a larger proportion of their income than lower
income earners, identify which economy’s average propensity to consume would
be higher – one with a relatively equal distribution of income, or one with a very
unequal distribution of income.
FACTORS INFLUENCING
INDIVIDUAL CONSUMER CHOICE
 FACTORS INFLUENCING INDIVIDUAL
CONSUMER CHOICE

 Economists assume that in their

expenditure decisions, consumers
aim to maximise their utility
(satisfaction derived from the
consumption of goods and services).
 Achieving a higher utility means that
an individual has satisfied more of
his or her wants.
 Individual demand: the demand of
each consumer for a particular good
or service.
THE LEVEL OF INCOME

 As individuals earn higher incomes,

they tend to choose to buy more
items, and items of higher quality.
THE PRICE OF THE GOOD OR SERVICE ITSELF

 Some goods are considered

necessities for daily life, and people
will need to buy them regardless of
price changes, e.g. fruit and
vegetables.
 However, consumers are likely to
reduce their demand for other goods,
particularly luxury items, as price
increases.
PRICE OF SUBSTITUTES

 A substitute is a good that

consumers may choose to buy in
place of another good, e.g. if the
price of margarine rises, consumer
demand for butter, which is a
substitute, will also tend to increase.
 Identify two pairs of substitute
goods.
PRICE OF COMPLEMENTS

 A complement is a good that is used

in conjunction with another good,
e.g. if the price of BluRay players
falls, we would expect an increase in
consumer demand for BluRay
players as well as for its
complement, BluRay movies.
 Identify two pairs of complement
goods.
CONSUMER TASTES AND PREFERENCES
 A consumer who has a preference for fruit juice and who dislikes soft drinks will tend to
spend more on juices and consume relatively less soft drink (this is linked to the concept
of utility).
 As consumer tastes and preferences change over time, so too will the demand for
particular goods, e.g. clothing that is coming into fashion will face an increase in
demand, while consumer demand for clothing that is going out of fashion will decrease.
 Innovation and technological progress lead to consumers demanding new and better
products at the expense of superseded ones.
 Explain, using examples, how changes in technology influence consumer choice.
ADVERTISING

 Advertising can make demand for

goods and services less responsive to
price increases by building
consumer loyalty to particular
brands over time.
 What would be an example product
that you would be loyal too
regardless of price.
SOURCES OF INCOME
RETURN FOR RESOURCES: WAGES, RENT,
INTEREST AND PROFITS

 Wages from labour: this is the main source of

income for consumers. Includes wages and
salaries as well as non-wage income such as
fringe benefits, employer contributions to
superannuation and workers compensation
payments.
 Rent from land, e.g. investment properties.
 Interest from capital: returns from
superannuation or other investment funds or
through the ownership of shares which pay
dividends.
 Profit from entrepreneurial skill, e.g. small
business owners earning a profit.
EARNED VS UNEARNED INCOME

 Earned income: income earned from working as an employee, e.g. wages and
salaries.
 Unearned income: non-wage income, e.g. dividends and interest
SOURCES OF HOUSEHOLD INCOME
SOCIAL WELFARE

Transfer payments: income collected through

taxation and then transferred from
governments to consumers. More than a third
of government revenue is used to make social
welfare payments including:
 Assistance to the aged: aged pension for
those aged over 65 and retired.
 Unemployment benefits: for people
seeking work but unable to find it.
 Disability support payment: for those who
are not able to work because of personal
factors such as physical illness.
 Family payments: for families with
children, means tested according to their
income level.
SOCIAL WELFARE EXPENDITURE
EXPLAIN THE RELATIONSHIP BETWEEN
INCOME AND WEALTH.

There is a strong correlation between income and wealth. People with little wealth
usually have low incomes, while people with more wealth usually have higher
incomes. This is because wealth generates income, and in many cases high income
can generate increasing levels of wealth. High income earners usually have high
saving rations, which allows them to accumulate wealth such as property and
financial assets, which in turn generates unearned forms of income such as profits,
rent, interest and dividends.
THE ROLE OF BUSINESS IN THE
ECONOMY
DEFINITION OF A FIRM AND AN
INDUSTRY
TOPIC 2 SYLLABUS – PART B
DEFINITION OF A FIRM AND INDUSTRY

 A business firm is an organisation

involved in using entrepreneurial
skills to combine factors of
production to produce a good or
service for sale.
 An industry is the collection of
firms involved in making a similar
range of items that usually compete
with each other, e.g. the financial
services industry or the car industry.
INDUSTRY CATEGORIES

 Primary: all firms engaged in the extraction of natural resources, e.g.

agriculture, mining, fishing, hunting, forestry.
 Secondary: all firms engaged in the manufacturing of usable products from the
natural resources produced by the primary industry, e.g. processing of minerals
and other natural resources into consumer goods such as cars, electrical goods,
furniture and food.
 Tertiary: firms selling final goods and services to consumers and other
businesses, e.g. retailing, wholesaling, education, health, finance, insurance, etc.
 Quaternary: ICT services.
 Quinary: personal services
A FIRM’S PRODUCTION DECISIONS:
WHAT TO PRODUCE

 The skills and experience of the business operator – a

person is likely to be most successful operating in an
industry that they know well, where they understand the
demands of consumers, the nature of production, how to
maintain quality and where they may also have personal
contacts.
 Industries where there is strong consumer demand –
provides more opportunities for business expansion.
 Specific business opportunities – a gap in the market or
a niche market.
 The amount of capital required to start the business – an
entrepreneur is likely to be attracted to a business that has
lower start-up costs as this may minimise their risk.
A FIRM’S PRODUCTION DECISIONS:
HOW MUCH TO PRODUCE

 Based on the firm’s assessment of the level of consumer demand and its ability to
convert that demand into sales.
 If it produces too much, the unsold goods may spoil, but if it produces too little,
it may harm relationships with potential customers.
 Importance of market research.
 For those firms that require large production runs in order to maximise efficiency,
the pressure to produce a large quantity of output may conflict with a lack of
access to capital.
 Some businesses may be able to respond quickly to the level of demand, e.g. a
café.
A FIRM’S PRODUCTION DECISIONS:
HOW TO PRODUCE

 The production process involves

combining a range of resources
(inputs) in order to create goods and
services (outputs).
 A firm’s decision about how to
produce depends upon the relative
efficiency of the four factors of
production, which can change over
time.
 Firms will choose the combination
of factors of production (CELL) that
is most efficient.
QUESTIONS

1. Describe the effect of the following factors on a firm’s decision of how much to
produce:
a) Population growth
b) Increased number of firms in the industry
c) Reduced availability of storage space
d) Declining consumer demand over time
2. Explain why a firm might choose a higher proportion of labour than capital in its
production process.
BUSINESS AS A SOURCE OF ECONOMIC
GROWTH AND INCREASED PRODUCTIVE
CAPACITY
BUSINESS’S CONTRIBUTIONS TO THE
ECONOMY

 A healthy, growing private sector will generate a higher rate of economic growth
and a stronger revenue base to fund the services provided by government.
 Growing businesses also employ more people and reduce the incidence of
unemployment.
 Businesses can also contribute to regional development and tourism, which
leads to improved infrastructure e.g. Barossa Valley wineries.
 Growth in individual businesses increases an economy’s productive capacity
over time, leading to improved living standards, reflected in an outward shift of
the PPF.
 Outline two ways a business might increase its own productive capacity.
GOALS OF THE FIRM:
MAXIMISING PROFITS

 Profit maximisation is the main

objective of firms.
 Profit is the difference between the
firm’s total revenue (output sold
multiplied by price) and its total
costs of production.
GOALS OF THE FIRM:
MAXIMISING GROWTH

 Maximising the rate of growth of the

firm’s assets.
 In the long run, a larger asset base
should allow a business to achieve
higher profits and can also lead to
higher salaries and prestige
(although it can sometimes lead to
business failure).
 GOALS OF THE FIRM:
INCREASING MARKET SHARE
 Because the entrepreneurial function of larger
businesses today is generally split between
the owners (shareholders) and paid managers,
the goal of profit maximisation may not
always be the highest priority.
 The shareholders take on the function of risk
and seek maximum profit as the reward for
this risk.
 However, paid managers take on the
organisational function and may seek
increased salaries, power and prestige as their
rewards. Their perceived managerial ability,
and thus their rewards, may be more
dependent upon increasing sales rather than
maximising profits.
GOALS OF THE FIRM:
MEETING SHAREHOLDER EXPECTATIONS

 The main responsibility of company

directors, who make the decisions
for a business firm, is to serve the
interests of shareholders.
 Shareholders are often interested in
maximising short-term returns on
their investment.
 This can create a conflict between
actions that maximise share price
and dividends in the short term, but
are likely to reduce the firm’s value
in the longer term.
GOALS OF THE FIRM:
SATISFICING BEHAVIOUR

 Satisficing behaviour is the idea that firms will

attempt to pursue a satisfactory level in all goals
(profit maximisation, sales maximisation, etc.)
rather than maximising any single goal.
 E.g. a firm may seek to earn a satisfactory level of
profit (an acceptable rate of return on investment for
shareholders) rather than maximising profits. This
may be in the firm’s interests in the long run,
because excessive profits may invite new
competitors into the industry, or may provoke the
government to impose regulation on the industry.
 Other firms may operate as “social enterprises”, with
the goal of positive social or environmental impact,
such as recycling or green energy businesses.
QUESTION

 Explain why lowering prices might be beneficial for achieving the goals of a
firm.
EFFICIENCY AND THE PRODUCTION
PROCESS
PRODUCTIVITY

 Productivity refers to the quantity of goods and services the economy can
produce with a given amount of inputs such as capital and labour.
 An increase in productivity is defined as an increase in output per factor of
production (input), per unit of time.
 Distinguish between an increase in production and an increase in
productivity.
PRODUCTIVITY (CTD)

Increasing productivity is desirable because it means that the firm is making more
efficient use of its limited resources, and living standards improve due to:
 Less wastage of scarce resources
 Lower production costs and higher profits for the business firm
 A lower inflation rate – because of lower production costs, firms do not have to
raise the prices of the goods they produce and may even be able to reduce these
prices.
 Higher incomes – since labour is more productive, firms can afford to pay better
wage rates to workers without increasing prices.
 Improved international competitiveness of our industries
 SPECIALISATION AND PRODUCTIVITY
TYPE DEFINITION EXAMPLE
Division of labour Occurs when businesses break The assembly-line approach to
(specialisation of labour) down their production process car production, where each
into a number of sub-processes, worker completes a small task
allowing labour to specialise in in the construction of each
a particular part of the process, vehicle.
and thus avoiding the time and
effort of moving from one
process to another.
 Specialisation:
Location of industry factors ofOccurs
production
when aare used
large moreofintensely
number for a smaller
The concentration of advanced
(specialisation
number of of natural businesses that produce similar technology industries in the
production processes.
resources) goods and services congregate Macquarie Park industrial area
in the same area to reduce in Sydney’s north-west.
production costs by sharing
common infrastructure
requirements.

Large-scale production Occurs when businesses grow A large wine producer that uses
(specialisation of capital) so large they can use highly specialised machines to bottle,
specialised capital equipment in cork and label wines.
their production process.
ECONOMIES OF SCALE

 Economies of scale are factors that cause the average cost of producing
something to fall as the volume of its output increases.
 E.g. it might cost $3,000 to produce 100 copies of a magazine but only $4,000 to
produce 1,000 copies.
 The average cost in this case has fallen from $30 to $4 a copy because the main
elements of cost in producing a magazine (editorial and design) are unrelated to
the number of magazines produced.
TYPES OF ECONOMIES OF SCALE

There are two types of economies of

scale:
 Internal: the cost saving that accrue
to the firm because it became more
efficient in allocating its resources.
 External: the reduction in average
costs due to factors outside the firms
direct control.
 TWO PHASES IN LONG RUN AVERAGE COST
(LRAC)

Cost saving advantages that result from Cost disadvantages that result from
Economies of Scale
expansion Diseconomies of Scale
expansion

i.e. the average cost per unit becomes i.e. the average cost per unit becomes
cheaper to make more expensive to make
INTERNAL ECONOMIES OF SCALE

 Economies of scale are experienced

when average costs per unit of
production fall as the size of output
grows.
 Internal economies of scale: the
cost saving advantages that result
from a firm expanding its scale of
operations. They occur when a
firm’s output level is below the
technical optimum.
INTERNAL ECONOMIES OF SCALE

 By becoming larger, the firm is better able to take advantage of specialisation of

labour by breaking up the process of production into different stages.
 A large firm will be able to invest in more efficient capital equipment.
 A large firm can buy its raw materials in bulk, which reduces the per-unit cost
of these inputs (economies of size).
 A large firm can generally find a market for its by-products, whereas a smaller
firm would have to discard them as waste.
INTERNAL ECONOMIES OF SCALE (CTD)

 A large firm can put resources into research and development, which can
expand new production lines, and further reduce per-unit costs in the future by
implementing improved production techniques.
 A larger firm can invest in human capital, improving the skills of its labour
force through training programs that are specifically tailored for the firm’s needs.
 Larger firms usually find it easier and cheaper to raise finance for business
expansion.
INTERNAL DISECONOMIES OF SCALE

 Internal diseconomies of scale: the cost disadvantages (specifically, the increase in

marginal costs per unit) faced by a firm as a result of the firm expanding its scale of
operations beyond a certain point. The firm’s output level is above the technical
optimum.
 The management of the firm may become too complex and costly to co-ordinate
as there is a lack of communication between different departments and different
layers of management.
 Increased output may only occur with more variable factors (labour and raw
materials) which may raise variable costs and increase average costs.
 Congestion in the production process, errors in production, higher costs in
distribution and administration of the business may raise costs to such an extent that
average costs keep rising and become difficult to control and reduce.
WRITE A PARAGRAPH EXPLAINING THIS
DIAGRAM
INTERNAL ECONOMIES AND DISECONOMIES
OF SCALE

 As the firm increases the scale of its operations up to

output level X, its per-unit production costs are declining,
as revealed by the falling long-run average cost (LRAC)
curve of the firm. The firm can continue to take advantage
of internal economies of scale up to this point.
 If the firm increases its scale of production past output
level X, its per-unit production costs start to rise, as
revealed by the rising LRAC curve of the firm. Past this
point, internal diseconomies of scale will now outweigh
internal economies of scale.
 Point X represents the most efficient level of production
for the firm (technical optimum). At this point, average
costs of production are at the lowest possible level. This is
the point where the firm has taken maximum advantage of
internal economies of scale, without having to suffer
excessive internal diseconomies of scale.
 The firm should continue to grow up to point X, but
not past it.
EXTERNAL ECONOMIES OF SCALE

 External economies of scale: the advantages that accrue to a firm because of the
growth of the industry in which the firm is operating (factors outside the firm’s
control).
 Increasing localisation of industry generally means that all firms in a particular
region would enjoy certain cost-saving advantages, such as locating near a highly
populated area with a supply of skilled labour, a plentiful supply of necessary
inputs and a major consumer market.
 As an industry as a whole grows, all firms in that industry generally derive some
extra benefits, such as private or government-sponsored research and
development to help promote the industry, or the provision of other beneficial
services such as transport.
 A growing, competitive and more sophisticated capital market would be of
benefit to all firms as it could provide cheaper investment funds from a wide
variety of sources.
EXTERNAL DISECONOMIES OF SCALE

 External diseconomies of scale: cost disadvantages faced by a firm because of

the growth of the industry in which the firm is operating, and are not the result of
a firm changing its own scale of operations.
 Increased congestion and pollution.
 Higher resource costs as firms compete for available inputs.
 Increased government regulation of the industry, which adds to compliance
costs.
 Higher labour costs due to skills shortages.
WRITE A PARAGRAPH EXPLAINING THIS
DIAGRAM
TASK

 Explain how internal and external economies and diseconomies of scale arise
as a firm expands its production. (10 marks); 20 minutes.
 Self-assessment – go through your answer and highlight in:
 Yellow: Following the directive verb.
 Blue: Economic terminology
 Green: Evidence – examples and diagrams (must be correctly labelled and correctly
explained).
 Pink: Linking back to the question.

 Is your answer sustained, logical and cohesive? Have you only included relevant
information? Did you get straight to the point? Do ideas flow logically from one to
the next?
RETURNS TO SCALE

Return to scale refer to the relationship between inputs and outputs. As a

firm alters its plant size, the ratio of its inputs to outputs may also change:
 Increasing returns to scale occur when inputs (e.g. land, labour, capital
and enterprise) are for example, doubled, and output more than doubles.
 Constant returns to scale occur when inputs for example, are doubled,
and output exactly doubles.
 Decreasing returns to scale are when inputs are doubled, but output
increases by less than double.
IMPACT OF INVESTMENT,
TECHNOLOGICAL CHANGE AND ETHICAL
DECISION-MAKING ON A FIRM
RESEARCH TASK

Choose an industry that has undergone major changes in the past decade, such as the
telecommunications industry, food industry or energy industry, and answer the
following questions:
a) How has the industry changed? – consider number of business firms, profit
levels, number of customers, etc.
b) What impact has technological change had on businesses in the industry?
c) How has ethical decision-making affected what products or services are
produced or how they are produced?
Be prepared to present your findings to the class.
DEFINE ETHICAL DECISION-MAKING

 When business decisions about

production methods, employment
and other matters are made taking
into consideration the impacts on
broader society and the environment,
and not simply to maximise profits
for the firm.
PRODUCTION METHODS

 As a result of investment and

technological change, production
methods may change from being
labour intensive to capital intensive.
 Production methods may become
more mechanised, computerised,
automated and digitalised.
 This can increase the speed of
production and reduce average
costs.
PRICES

 Lower production costs may be

passed on to consumers in the form
of lower prices.
 Search engines give consumers
immediate online access to any
number of businesses locally or
overseas, so that they can quickly
compare prices between
competing firms.
EMPLOYMENT

 Technological change has made many

previous jobs redundant (creating structural
unemployment).
 The increased competitiveness of overseas
firms has caused some firms to cut back local
manufacturing operations or move
operations offshore, resulting in job losses
within Australia.
 The growth of new technologies provides
new job opportunities, with strong demand
for employees with specific IT skills.
 Ethical decision-making also influences
employment decisions, such as strategies to
actively seek to recruit women.
OUTPUT AND PROFITS

 Businesses that invest in technology are likely to be able to increase output and
offer better quality products at a lower price.
 By using the latest technology, they are better able to respond to changes in
market demand and to customise their output to the specific needs of the
marketplace, which further increases demand and results in higher output and
increased profitability.
 This can lead to a virtuous cycle of investment, output growth and expanding
profits in the longer term, however, businesses must be prepared to make a
substantial investment in technology in the shorter term.
 However, there is no guarantee that a business that invests in new technologies
will necessarily be successful.
TYPES OF PRODUCTS

 Technological change creates

completely new products and
industries.
 Improvements in technology are a
major reason why some people
regularly update products such as cars,
cameras, computers and sound systems.
 Ethical decision-making in business has
also played a role in the production of
new types of products and services,
such as organic food, renewable energy
and recycled paper.
GLOBALISATION

 The development of global money and stock markets,

mediated by global computer networks, has made it
possible for businesses to attract investment funds
from across the world, and for individuals to
diversify their investments.
 The low cost of communications allows information
to flow more freely from overseas to consumers and
business, allowing them to make better-informed
decisions about production and consumption.
 Businesses are also better able to access overseas
markets for their goods and services, such as through
their websites.
 Ethical decision-making is also impacted by
globalisation, as through greater access to foreign
markets, businesspeople are able to source products
that may be cheaper because they have been produced
in an economy with fewer regulations, e.g. child
labour, sweatshops, etc.
ENVIRONMENTAL SUSTAINABILITY

 Involves minimising pollution and waste,

preserving the natural environment, and
increasing the use of renewable energy.
 Businesses may change their activities to
make them more environmentally
sustainable in response to demands by
consumers, new regulations or financial
incentives from governments, or because of
business ethics that value the natural
environment.
 Efforts to make business more
environmentally sustainable are a
significant driver of investment in new
technologies.
ESSAY

 Discuss how ethical decision-making may influence the production methods of a

firm and improve environmental sustainability. (20 marks)
 Self-assessment: use a different coloured highlighter for each of the following
criteria to evaluate your response. List your strengths and areas for improvement.
 Following the directive verb
 Use of examples and statistics (supporting evidence)
 Use of economic terminology
 Linking back to the question