LESSON 1- SECTORS OF THE Australia’s Economy

Sectors of the economy

ECONOMY Circular Flow of Income

 Complete the
following information

AUSTRALIA’S ECONOMY
into the sheet
provided

In Australia we have a mixed economy or market economy

Within a market economy the market runs itself but with some influence and
participation by the government.
The five sectors of the economy can be classified into: Households, Firms, Financial
Institutions, The Government and the Overseas sector.
HOUSEHOLDS - CONSUMPTION
The household sector makes up the consumers of the economy.
When households spend money on goods and services it is
called consumption.
Consumers as a group can influence firms on what is produced by their collective
power called “consumer sovereignty”
HOUSEHOLDS- OWNERS OF FOP
Households also are the owners of all factors of production (resources)- land,
labour, capital and enterprise.

Households sell their FOP to firms in return for income.

FOP Income
Land Rent
Labour Wages
Capital Interest
Enterprise Profit

Households use this income to buy goods and services from the firms, which is called
consumption.
PRODUCERS/ FIRMS/ BUSINESSES
Producers are the businesses that supply the goods and services.
In order to produce these goods and services they must buy the factors of
production (FOP) from the households.
THE CIRCULAR FLOW OF INCOME (2 SECTOR
MODEL)
Households sell FOP to firms

Households use their

income to buy
goods and services
from firms

Firms give households income in exchange for their FOP

 ECONOMIC ACTIVITY
IS AN IMPORTANT

EQUILIBRIUM TERM TO KNOW!

An economy is said to be in equilibrium, when there is no change to the level of

production, employment and income (called economic activity)

In the 2 sector model, if households spend ALL their income on consumption of goods
and services from firms, firms have no incentive to produce more or less ( if they
produce more goods, no one will buy them -as households have no more income to
spend and firms won’t produce less because they will lose potential revenue).

Hence in equilibrium, production stays constant, so firms will demand the same
quantity of resources from households ( eg labour), so households income will remain
constant.
THE CIRCULAR FLOW OF INCOME MODEL

Two sector model

Income (Y)  Households
 Firms

Resources All household income (Y) is spent

on consumption (C)
Households Firms All output (O) produced is
purchased by household
expenditure (E)
Output (O)
No financial, government or
Expenditure (E) overseas sector
Equilibrium is where there is no
tendency for change in E, Y or
O
Equilibrium is where Y = E = O
FINANCIAL MARKETS – 3 SECTOR MODEL
Realistically households do not spend (consume) all their income. Some of their income
is saved and not spent.

Households will save money in banks and other financial institutions ( the financial
sector) to receive interest.
When money is saved it is said to be a leakage from the circular flow of income, as it
reduces the amount of money that goes to firms in the form of consumption, which can
then reduce the level of production and economic activity.
FINANCIAL MARKETS – 3 SECTOR MODEL
Financial markets are an important sector of the economy, because they link savers
with borrowers.

Others can borrow these savings from the financial institutions eg firms can borrow
to fund expansions to their business ( such as building a new factory or buying new
equipment) – this type of spending by firms is called Investment.

Investment by firms is referred to as an injection into the circular flow, as the money
firms borrow and then spend will go to other firms that produce the goods/ services
firms require eg firms may buy machinery from another firm.
EQUILIBRIUM IN THE 3 SECTOR MODEL
For economic activity to remain constant, leakages must equal injections.

Equilibrium in the 3 sector model occurs when:

Savings = Investment
 THE CIRCULAR FLOW OF INCOME MODEL
Income (Y)

Three sector model

 Introduce financial sector
Resources
 Leakage of savings (S)
 Injection of investment (I)
Households Firms
Y = C + S and O = C+I
Output (O) therefore equilibrium
Leakages

requires S = I

Injections
Expenditure (E)
Disequilibrium
Savings (S) Investment (I)  S > I means Y, E & O will fall
Financial sector
(recession)
 S < I means Y, E & O will rise
(boom)
THE GOVERNMENT SECTOR – THE FOUR SECTOR
MODEL
The Four sector model includes the government sector
Local, state, territory and federal governments.

Along with the leakage of savings, some household money is also leaked from the circular flow
in the form of taxes.

Governments raise revenue through taxes, rates, fees and charges.

Taxes is the revenue for the government and this money can be injected back into the circular
flow when the government spends money on providing collective goods and services (e.g.
defence, law & order, education, health and welfare payments)
THE GOVERNMENT SECTOR – THE FOUR SECTOR
MODEL
The Government sector is also an important sector, as the revenue it raises from taxes
can be used to improve the living standards of society.

The revenue the government raises from taxes can be injected back into the circular
flow when the government spends money on providing collective goods and services
(e.g. defense, law & order, education, health and welfare payments).
 THE CIRCULAR FLOW OF INCOME MODEL
Income (Y)

Four sector model

 Introduce Government sector
Resources
 Leakage of taxation (T)
 Injection of government spending
Households Firms (G)

Output (O) Equilibrium requires

Leakages

S+T = I + G

Injections
Expenditure (E)
Disequilibrium
Savings (S) Investment (I)  S+T > I+G means Y, E & O will
Financial sector fall (recession)
Government  S+T < I+G means Y, E & O will
Taxation (T) spending (G) rise (boom)
Government sector
EQUILIBRIUM IN THE 4 SECTOR MODEL
Economic Activity will remain constant when

Savings + Taxation = Investment + Government expenditure

S+ T = I + G
THE 5 SECTOR MODEL- THE OVERSEAS SECTOR
The 5 sector model introduces
 The Overseas sector

Along with households buying Australian produced goods and services, they also buy
goods and services from overseas, these are called imports. Import spending is
another leakage from the circular flow, because the money spent on imports does not
go to Australia firms instead to overseas firms.

However, Australian firms also sell Australian goods and services to overseas, called
exports. Export income is an injection into the circular flow, as overseas money is
given to Australian firms.
DISEQUILIBRIUM IN THE CIRCULAR
FLOW OF INCOME
Lesson 2
CIRCULAR FLOW OF INCOME – 5 SECTOR MODEL

Leakages Injections
EQUILIBRIUM IN THE 5 SECTOR MODEL
Economic Activity will remain constant when:
Leakages equals injections

Savings + Taxation + Imports = Investment + Government Expenditure + Exports

S+T+M= I+G+X
DISEQUILIBRIUM
When an economy is in equilibrium we have learnt the level of production does not
change, which will mean firms will require the same amount of FOP from households
and hence households income will not change.

This is not ideal, we want an economy to grow, ie increase their level of production so
that households can receive more income to improve their standard of living.

If the level of injections and leakages do not equal each other the economy is said to
be in disequilibrium and there will be changes to the level of production and income
for households (ie a change to economic activity).
UPSWING IN THE ECONOMY
If leakages are less than injections, ie:

S+ T+M I+G+X

More money will be injected into the circular flow, meaning

 firms will start producing more
 firms will need more FOP
 households will have more income.
 More income for households can then increase the level of consumption and further improve economic
activity.

This is referred to as an upswing in the economy. And if we are producing more goods and
services it is referred to as Economic Growth.
DOWNTURN IN THE ECONOMY
If leakages are greater than injections, ie:

S+ T+M I+G+X

More money will be leaked out of the circular flow, meaning

 firms will start producing less
 firms will need less FOP
 households will have less income.
 Less income for households can then reduce the level of consumption and further worsen economic
activity.

This is referred to as a downturn in the economy.

INJECTIONS AND WITHDRAWALS ACTIVITY

Complete the table in your

workbooks
SIDE NOTE: AGGREGATE DEMAND
The 5 sector model actually is showing where all the money of an economy is spent.

Consumption – consumers demand of goods/ services

Investment – firms demand of goods/ services
Government expenditure – governments demand for goods/ services
Exports – overseas demand for Australian goods/ services
Imports – Australia’s demand for overseas goods/ services
AGGREGATE DEMAND
The total demand for Australian goods and services, impacts how much is produced, how much
FOP is needed (land, labour capital, enterprise) and hence how much income households
receive (i.e: economic activity)

Hence instead of referring to leakages and injections, economists actually refer to an increase
or decrease in Aggregate Demand

Aggregate demand ( the total demand for goods and services in an economy) comprises:

AD = C + I + G + (X –M )

We need to take import spending away- because this spending does not go to Australian firms
and hence doesn’t encourage our production.
AGGREGATE DEMANDS INFLUENCE ON ECONOMIC
ACTIVITY
If AD : ( C + I + G+ (X –M), increases , economic activity increases

If AD decreases, economic activity will also decrease.

FLUCTUATIONS OF ECONOMIC ACTIVITY-
CHANGES TO GDP
Firms will only make the quantity of goods people are willing to buy, which is shown
through Aggregate Demand

The total value of production, can be measured in $ terms, called Gross Domestic
Product (GDP).

So if AD changes, the level of production changes, GDP will change, which means
changes to household incomes.
TOTAL OUTPUT (GDP)
As firms only make what people are willing to buy, GDP can be calculated by the sum
of AD.
GDP = AD = C + I + G + ( X – M)
WHAT IMPACTS AGGREGATE DEMAND

There are many reasons why Aggregate Demand will change and hence why GDP
will fluctuate.

We will learn about these reasons in future lessons.

However the fluctuations in GDP can be illustrated through the Economic Business
Cycle.
THE BUSINESS CYCLE
These changes in total output ( or GDP) over time is called the business cycle.

Trough
 Outline of the Business Cycle

SECTION 2- THE BUSINESS CYCLE To be used with Session 2 student

worksheets
THE BUSINESS CYCLE
Changes in total output ( or GDP) over time is called the business cycle.

Trough
CONTRACTION /DOWNSWING IN THE BUSINESS
CYCLE
When Aggregate Demand falls, firms will reduce how much they produce, so output
will fall and hence GDP will fall.

With less production, firms will require less labour so unemployment can rise.

This type of unemployment is called Cyclical unemployment because it occurs as a

result of a contraction in the business cycle.
THE UNEMPLOYMENT RATE
The level of cyclical unemployment in an economy can be measured by changes in the
unemployment rate.

The unemployment rate measures those people who are aged 15 years or over, who
are not working but are actively seeking work, as a percentage of the total labour
force.

Unemployment Rate = Unemployed x 100

Labour Force 1
WHAT IS THE LABOUR FORCE
The labour force is the part of the population 15 years and over who are either
working (more than one paid hour per week) or not working but are actively seeking
work.
CALCULATING THE UNEMPLOYMENT RATE
Use the formula calculate the labour force and the unemployment rate for this
economy.

Population 15 years and over 500 000

People working more than 1 paid hour 300 000
per week
People not working but are actively 50 000
seeking work
CALCULATING THE UNEMPLOYMENT RATE
Solution

Labour force = Employed and Unemployed seeking work

Labour force = 300 000 + 50 000 = 350 000

Unemployment rate = Unemployed actively seeking x 100

Labour force 1
50 000 x 100 = 14.28%
350 000 1
STUDENT ACTIVITY
Question sheet to practise unemployment calculations
IMPACT OF THE DOWNSWING
With less production (less GDP for the economy) and lower levels of employment, household
incomes will fall. This will reduce the standard of living for households.

Furthermore with less income, there will be less consumption, which reduces AD further which
further decreases in economic activity.

This downswing (contraction) will continue, with the lowest point referred to as a trough in the
business cycle.

At some point there will be a change in the Australia economy or global economy that will
cause Aggregate Demand to increase.
EXPANSION OR UPSWING IN THE BUSINESS CYCLE
When Aggregate Demand is growing, firms will increase their output to meet this
demand. This is reflected by an increase in GDP and is referred to as Economic
Growth

As firms will need more labour, cyclical unemployment will fall and household incomes
will rise, encouraging increased living standards, further consumption and further
economic activity. However there will be growing inflationary pressure.
INFLATION
There is a concern of growing inflation during periods of expansion, as it reduces
the real value of money (the amount people can buy with their existing income).
Inflation during an upswing can result for two reasons.

Demand Pull Inflation: If firms cannot produce enough output to meet the growing
demand, consumers can bid up prices ( similar to a house auction where there are
many bidders wanting to buy the one house). This cause for increased overall prices is
referred to as Demand Pull Inflation.

Cost Push Inflation: If prices start to rise, employees may demand higher wages to
maintain their real incomes. These increased costs for business, can be passed on to
consumers as higher prices. This cause for increased overall prices is called Cost Push
Inflation.
EFFECTS OF THE BUSINESS CYCLE: INFLATION
Activity: Read pages 310 – 313 from New Concepts in Commerce answer the
following

1. Define the term Inflation

2. Explain how inflation is calculated using the CPI?
3. Explain the effects of inflation on the economy.
4. Research: What is Australia’s current inflation rate.
CONTINUING EXPANSION
An upswing in the business will continue, reaching a peak, until something in the
domestic or global economy causes aggregate demand to fall and at which stage
the economic cycle will begin to contract again.

The overall cycle of upswings, peaks, downswing and troughs, is referred to as the
business cycle and is shown on the next slide.
THE BUSINESS CYCLE
These changes in total output ( or GDP) over time is called the business cycle.

Trough
THE IMPACT OF THE GLOBAL
ECONOMY ON AUSTRALIA
AUSTRALIA IN THE GLOBAL ECONOMY
Australia is very integrated in the global economy as a result of the following:
Trade in goods and services – Australia Exports goods to overseas and we also
import goods from overseas
Financial Flows- Australia borrows money from overseas to fund business ventures,
such as by selling shares in Australian companies to foreign owners. Australians also
invest in overseas companies (large investments by superannuation funds)
Transnational Corporations – Overseas companies open and operate in Australia as
well as Australian companies operating in overseas economies.
Migration - Australians migrate overseas for work opportunities, likewise people from
overseas migrate to Australia
Advances in ICT – Information, communication and technology has encouraged this
integration between Australia and the rest of the world.
AUSTRALIA IN THE GLOBAL ECONOMY
Because of Australia being so connected to the rest of the world, our economy will be
impacted by issues that occur in other economies.
AUSTRALIA’S TRADE IMPACT
One influence on Australia’s Aggregate Demand and hence economic activity and
GDP, is the demand for Australian exports by overseas.
With AD = C + I + G + (X-M), the economic activity of other nations will influence
Australia’s GDP.
COMPOSITION OF EXPORTS
Mining commodities: iron ore, coal and natural gas (referred to as commodities) comprise over 50%
of Australia’s exports.
Mining exports are a major influence on Australia’s export income, as commodity prices are set on
the world market, influenced by global demand and supply.

Think of the World Market as one shop.

In the world there are only 2 main suppliers of iron ore; Australia and Brazil. So any Iron Ore they
wish to sell goes into the shop.
Many countries however need Iron Ore, because it is used to make steel. So if economies need a lot
of Iron Ore this can increase the demand for Iron Ore, and with limited supply in “the shop”, this
increased demand can force the prices up for Iron ore.
Increased Iron Ore prices, benefits Australia, because we will get more export income as a result,
improving the (X-M) component of AD.
EXPORT COMPOSITION
Service exports have also grown in importance for Australia in the last few decades,
particularly international tourism into Australia and international students studying in
Australia at university.

Manufacturing exports, has reduced in importance over the last few decades, mainly
the result of other economies (particularly in the Asian region) being able to produce
manufactured goods more cheaply due to lower wages in these countries.
Manufactured goods tend to comprise our biggest proportion of imports.
AUSTRALIAN EXPORTS
AUSTRALIA’S TRADE DIRECTION
Prior to 1960’s Australia’s main trade partner was the UK – but the UK joined the
European Union and introduced high levels of protection and reduced Australia’s
export access.

Major trading partner then became Japan until 1990’s

Now China is Australia major trading partner – accounting for 36% of Australia’s
exports.
AUSTRALIA’S IMPORTS
Australia still imports from European markets as we still require technology,
machinery and passenger motor vehicles, however China again has become a large
import supplier for manufacturing.
AUSTRALIA’S TRADE DIRECTION
Prior to 1960’s main trade partner was UK – but joined the European Union and
introduced high levels of protection and reduced Australia’s export access.

Major trading partner then became Japan until 1990’s

Now China is Australia major trading partner – accounting for 36% of Australia’s
exports
AUSTRALIA’S TRADE PARTNERS

ASEAN Nations
IMPACT ON EMPLOYMENT In future lessons, we will learn about specific
events that have impacted Australia’s economic
IN AUSTRALIA conditions. However beyond cyclical influences,
Australia’s connection with the rest of the world
has resulted in 2 particular ongoing occurrences.
Outsourcing occurs when an organisation pays
another business to perform a function that it does
not regard as a core part of its business focus. 1) Cheaper and larger variety of goods and
services available for consumers. Cheaper import
prices which may be a positive aspect for
consumers, has impacted the competitiveness of
Australian producers.

https://www.9news.com.au/motoring/holden-
closes-its-doors-2010s-how-it-changed-us-
decade-in-review/432c10e6-8354-4e2f-abb1-
de2c52f21c7b
IMPACT OF EMPLOYMENT The reshoring debate in Australian
IN AUSTRALIA manufacturing
EU Aut omat ion

By John Young, APAC Director, EU Automation

2) Outsourcing of Australian Friday, 11 December, 2020

manufacturing to overseas markets –

which has resulted in less manufacturing
jobs available in Australia
QUICK RESEARCH ACTIVITY
Using the article provide choose one of the Australian products/ companies which
have been outsourced and use your research skills to answer the following questions.

1) Name of Company
2) Year production ceased in Australia
3) Reasons specified by the company for offshoring their production
4) Number of employees who lost their jobs as a result of this offshoring process.
5) What impacts does offshoring have to the Australian economy.
THE IMPACT OF THE GLOBAL
ECONOMY ON AUSTRALIA
AUSTRALIA IN THE GLOBAL ECONOMY
Because of Australia being so connected to the rest of the world, our economy will be
impacted by issues that occur in other economies.
AUSTRALIA’S TRADE IMPACT
One influence on Australia’s Aggregate Demand and hence economic activity and
GDP, is the demand for Australian exports by overseas.
With AD = C + I + G + (X-M), the economic activity of other nations will influence
Australia’s GDP.
EXPORT INFLUENCES ON THE AUSTRALIAN
ECONOMY
Because export volumes and prices are a significant influence on Australia’s AD and
hence economic activity (business cycle), changes within our major trading partners
can significantly influence the Australian economy.

Specific examples where global activity influenced Australia’s AD are:

The Phase 1 & 2 & 3 Mining Boom, 2003- 2011
GFC (2007- 2009)
COVID19 - 2020
Trade conflict between China and Australia
CHINA AND THE AUSTRALIAN
MINING BOOM
CHINA’S DEVELOPMENT

https://www.youtube.com/watch?v=kdSLPUh45wY
CHINA’S DEVELOPMENT

From the 1980’s China has continued to develop the

infrastructure of their economy. Which intensified in the
early 2000’s.

The focal point of this development was the Eastern

Coast of China, where Special Economic Zones were
established as part of the Government’s Open Door
Policy.

Within Special Economic zones the Chinese government

along with overseas companies (called Foreign Direct
Investment) commenced an intensive infrastructure
development program, building factories, ports, rail,
buildings etc. All of which needed steel.
HOW DOES AUSTRALIA BENEFIT.
To make steel you need Iron Ore and Coal.

Australia is the world’s largest supplier of Iron Ore.

As China substantially increased their demand for Iron Ore and Coal, the prices for Iron Ore
and Coal tripled from 2003 – 2011. In addition China was buying far more iron ore and coal
as they continued to expand their economy.

As result Australia’s export income substantially increased. Boosting the (X-M) of aggregate
demand, providing more income for the economy and contributed to Australia’s Economic
Growth.
MINING BOOM PHASE 1 Impact on Australia from Phase 1:

The Mining boom in Australia

can be broken into 3 distinct Export volumes and prices increased the X-M
component of AD.
time periods
High export demand required more labour and
to encourage workers the mines were offering
Phase 1 : 2003 – 2008 : very high wages.
Prices and volumes of Iron
ore and Coal increased as a GDP grew on average over 3.5% each year
result from the demand from
China By 2007 GDP per capita ( per person) was
$45 103, $7227 higher than 2006 levels.
MINING BOOM PHASE 1
PHASE 2 The Australian economy recovered from
the GFC which impacted Australia
between September 2008 to early
2009.
Phase 2: 2009 – 2011:
With again strong demand from China,
Prices and volumes continued to Iron ore and coal prices continued to rise
rise. To keep up with the but new mines were needed to keep up
with the demand.
demand, Mining firms needed
to build new mines –Investment
Phase of the mining boom. As a result mining companies continued
to increase their investment by building
new mines and purchasing mining
equipment.
AD was boosted substantially by
increases in Investment. And economic
growth was 3.4% in 2011/ 2012
EXTRACT FROM THE RBA
The world price of Australia's mining exports more than tripled over the 10 years to
2012, while investment spending by the mining sector increased from 2 per cent of
GDP to 8 per cent. This ‘mining boom’ represents one of the largest shocks to the
Australian economy in generations.
The mining boom increased Australian living standards substantially. By 2013, the
boom is estimated to have raised real per capita household disposable income by 13
per cent, raised real wages by 6 per cent and lowered the unemployment rate by
about 1¼ percentage points
PHASE 3 As new mines began to become operational,
the supply of iron ore increased substantially.

Although demand from China was still

Phase 3: 2012 – 2015 : growing, with more supply, the prices for Iron
Ore fell; although they were still far higher
More supply of Iron ore as than pre 2000’s.
a result of Phase 2, reduced
the prices of iron ore, but As the opportunity for super profits were
Australia continued to grow now not present, mining investment ceased
but the economy continued to grow as a
the volume of Iron ore result of X volumes.
exported. With lower X prices, the end of mining
investment and less labour needed in the
sector, Economic Growth (although still
growing ) commenced to slow down.
By 2013/2014 the Economic growth rate
was only 2.5%
GOVERNMENT POLICY TO INFLUENCE
THE BUSINESS CYCLE.
CONTROLLING INFLATION AND UNEMPLOYMENT
To reduce fluctuations in the business cycle to ensure low levels of cyclical
unemployment and low levels of inflation the government conducts counter- cyclical
policies termed macroeconomic policies.

The two macroeconomic polices are:

Fiscal Policy
Monetary Policy
FISCAL POLICY
Fiscal Policy is a macroeconomic policy conducted by the Federal Government.

The main tool of fiscal policy is the Federal Budget which is released in May each
year.

The budget provides an estimate of the intended expenditure the government will
outlay and the estimated revenue the government will receive in the coming financial
year.
FISCAL IN OPERATION
The government will manipulate their net government expenditure (Government
spending less taxes- the G component of Aggregate Demand ), to influence the level
of income circulating in the economy to influence other components of Aggregate
Demand; specifically Consumption and Investment, and hence economic activity.
AN EXPANSIONARY FISCAL STANCE
During periods of a downswing or trough in the Business Cycle, GDP is falling and there is a
risk of increasing levels of unemployment.

To counteract this, the government will try to stimulate AD, to encourage more production and
hence employment.

To achieve this the government will either increase government expenditure and/ or decrease
taxation. This is reflected in an increase in the G component of AD. And is referred to as an
expansionary fiscal stance.

The injection of G will increase disposable income levels for households and encourage
Consumption. This will further increase AD, which should encourage production and hence
increase the demand for labour.
GLOBAL FINANCIAL CRISIS: THE NEED FOR
EXPANSIONARY FISCAL POLICY
The US sub-prime crisis of 2007 degenerated into the GFC: financial conditions
deteriorated quickly and financial and real asset prices collapsed. The world
economy sharply changed course to the deepest recession since World War I.
GFC: THE NEED FOR
EXPANSIONARY FISCAL POLICY
The globally connected nature of financial markets meant
that the shock in international markets was quickly felt in
Australia. Financial asset prices declined sharply and
accessing international finance became increasingly
difficult. Many people were scared about their job
security, which is referred to as low consumer confidence.
This sparked a reduction in consumption and an increase in
savings. With decreased consumption, businesses started
to make less goods and services so demanded less FoP.
This came in the form of employees being fired
(unemployed) or having their hours reduced
(underemployed).
 GFC: THE NEED FOR EXPANSIONARY
FISCAL POLICY
This meant that their was a dramatic
increase in the Household Saving Rate from
3.2% in the March quarter of 2008 to
10.9% in the December quarter of
2008. Source: Australian Bureau of Statistics

Which resulted in household consumption

falling significantly in 2008 and 2009.

Changing Patterns in Household Saving and Spending | Speeches | RBA

GFC: THE NEED FOR EXPANSIONARY FISCAL
POLICY

Furthermore, export demand from other However, the Chinese government

advanced countries (e.g. US) fell as they implemented a huge stimulus program
continued to be affected by the GFC that involved a lot of construction  this
further decreasing AD. needed Australian commodities 
reduced the effects on AD somewhat as
this demand was reflected in Australian
export revenue
GFC: THE NEED FOR EXPANSIONARY FISCAL
POLICY
Business confidence was also very low so firms were discouraged to borrow money to
fund Investment.

Low business confidence resulted in business Investment declining.

GFC: THE NEED FOR EXPANSIONARY FISCAL
POLICY
Think back to the Circular flow, leakages and injections.
What happened in 2008/9 in Australia? Complete this section of the worksheet.
GFC: THE NEED FOR EXPANSIONARY FISCAL
POLICY
Yep Leakages were far exceeding injections,
resulting in falling economic activity and GDP
growth to be -0.5% in the December quarter of
2008 (technically not a recession as there was only
one quarter of negative growth).
And unemployment peaked at 5.8% in 2009.
However, this rate is significantly lower than we
would expect given how much GDP had fallen –
this is because many workers had their hours
reduced instead of being fired  the
underemployment rate increased significantly
more.
GFC: THE NEED FOR EXPANSIONARY FISCAL
POLICY
As the impacts of the GFC became apparent, the Government realised they would
urgently need to stimulate economic activity and encourage job security so that
consumption would grow and unemployment would not continue to rise.

They needed to inject money back into the circular flow (into the economy).
GFC: THE NEED FOR EXPANSIONARY FISCAL
POLICY
Read the SMH article (https://www.smh.com.au/business/saving-the-nation-
20090203-7wsb.html) – Fiscal stimulus during GFC to learn some of the ways fiscal
policy was used to inject money into the economy to counteract falling AD and
growth.
 GFC: FISCAL POLICY SUCCESS

Source: https://treasury.gov.au/speech/the-return-of-fiscal-policy
CONTRACTIONARY FISCAL STANCE
During periods of an upswing or peak in the Business Cycle, economic activity is high
and inflationary pressure will occur. In most circumstances the government will rely on
Monetary Policy to counteract this however, Fiscal Policy may support MP through a
contractionary fiscal policy stance.

To achieve this the government will either decrease government expenditure and/ or
increase taxation. This is reflected in a decrease in the G component of AD. And is
referred to as a contractionary fiscal stance.

This leakage of G will decrease the disposable income levels for households and
discourage Consumption. This will result in AD falling, which should reduce upward
pressure on prices and hence control inflation.
MONETARY POLICY
Monetary Policy is another macroeconomic policy (still referred to as government
policy) but is conducted independently from the government by the Reserve Bank of
Australia.

The Reserve Bank of Australia has an objective of keeping the inflation rate between
2-3% on average over the business cycle (ie 8- 10 years) and keeping cyclical
unemployment low.
HOW DOES MONETARY POLICY WORK?
All banks operating in Australia must hold an account with the RBA, these accounts are
called Exchange Settlement Accounts.

One purpose of the Exchange Settlement Accounts is to enable banks that need funds
to borrow from other banks who have excess funds.

The interest rate that banks charge each other for this lending is called The Cash
Rate. The Cash Rate is set by the Reserve Bank of Australia.
MONETARY POLICY
Although Monetary Policy will assist Fiscal Policy by lowering the Cash Rate Target
when economic activity is low, Monetary Policy is mostly effective when used to
reduce aggregate demand to combat growing inflationary pressure.

Tightening (Contractionary Monetary Policy)

The RBA will aim to dampen AD through increasing the Cash Rate Target and through
the Transmission Mechanism this increase to the CRT will reduce inflationary pressure.

The next slide will show how the transmission mechanism occurs.
 TRANSMISSION MECHANISM
An increase in the cash rate target will increase the cost for banks to borrow money from each other will
increase.
Transmission mechanism
1) To maintain profit levels Banks will pass this increased cost of their borrowing on to their customers
through higher interest rates
2) Households with a loan e.g a mortgage, will have to use more of their money to pay the interest on these
loans. This will reduce their disposable income for Consumption reducing the demand for goods and
services
3) Firms borrow money from the banks to fund investment (buying machinery, building bigger factories). If
the cost to borrow money goes up, firms will put off investing. Hence Investment will decrease, thus
decreasing demand for capital goods and services.
4) Thus, there will be a decrease in both C and I and hence Aggregate Demand
5) Lower Aggregate Demand will then reduce pressure on prices (inflationary pressure), by decreasing
Demand Pull Inflation
MONETARY POLICY FROM 2022- 2023
MONETARY POLICY FROM 2022- 2023
Australia has been experiencing large increases into inflation since the end of COVID.
To reduce Aggregate Demand’s influence on this inflation the RBA has continued to
steadily increase the cash rate since May 2022, where the Cash Rate Target was
raised from 0.1% to 0.35%.
Since then, with continued inflationary pressure the RBA has continued to run a
contractionary stance on Monetary Policy, lifting the CRT 15 times since May 2022,
with the CRT raised to 4.35% as of November 2023.
ESSAY WRITING FOR ECONOMICS
BUILDING AN ESSAY PARAGRAPH
Very simply every paragraph in an essay for Economics or Business Studies follows this
paragraph structure.
S – Starting sentence or Topic sentence
E (elaborate) -
1) Define the key term identified in the topic sentence
2) Provide the theory ( textbook or classnotes) to explain how this concepts works.
3) Provide the theory to explain how this concepts impacts the issue you raised in your topic sentence

A (application) - Provide an example of when this theory applied in real life, what was done and
the impact that resulted.

L – (link) – Closing sentence that reiterates the point you made in the topic sentence.
TOPIC SENTENCE

So so important- how could you tell it was a hamburger without the top of the bun!

The topic sentence addresses the essay question and identifies the one issue you will
be discussing in your paragraph. The phrasing of the sentence will depend on what
the question is asking you to address.
For example, if it was an “Evaluate” question, the topic statement should include
some form or judgment such as “ Monetary Policy is very effective at…”. This would
be different to an “Explain” question, where a topic sentence could begin “ Monetary
Policy can be used to …..”
THE MEAT
The Elaborate component of your paragraph is where you explain the theory to the
reader. In Economics and Business essays you assume that the reader does not know
much about the topic, so you are teaching the reader about it.

1) Define the key term identified in the topic sentence

2) Provide the theory ( textbook or classnotes) to explain how this concepts
works.
3) Provide the theory to explain how this concepts impacts the issue you raised
in your topic sentence
THE SALAD AND TOPPINGS
Apply your theory
Just like a burger, the salad and toppings makes the burger more valuable.

In the Application stage of your paragraph you are showing how the theory has
actually occurred in real life. Here you again explain what and when it happened,
why it happened and the impact (usually discussing if it was effective or the issues
that limited its impact)
CLOSING STATEMENT
Like the top bun, the bottom bun holds the hamburger together

A closing sentence should reiterate your topic sentence – again addressing the
question and directive term and concept you have argued

Eg “ Hence Monetary Policy has been very effective at …..”

ESSAY PRACTICE - 1. BREAK DOWN THE
QUESTION Directive verb: explain – Key words of the
relate cause and effect question

Explain the likely impact the changes in the Australian

household savings ratio and government expenditure had
on the levels of economic output (ie aggregate demand) in
the Australian economy during the global financial crisis.
 ESSAY PRACTICE – 2. PLAN YOUR RESPONSE
Explain the likely impact the changes in the Australian household savings ratio and
government expenditure had on the levels of economic output (ie aggregate demand) in the
Australian economy during the global financial crisis.

1. Introduction
2. SEAL paragraph #1 – increase in Aus household savings rate  reduction in AD
3. SEAL paragraph #2 – increase in government expenditure  increase in AD
4. Conclusion
ESSAY PRACTICE – 3. INTRODUCTION
Introduce your topic
Include background information (context) on the topic- what is happening?/ why is it
important?/ what is causing it?
Your introduction should briefly summarise what your report will be about

Structuring your introduction:

C- Context (What is the topic?)
A- Analysis (What will your report be explaining/ discussing?)
T- Thesis (What is you main line of argument?)
 ESSAY PRACTICE – 3. INTRODUCTION - SAMPLE
Explain the likely impact the changes in the Australian household savings ratio and
government expenditure had on the levels of economic output (ie aggregate demand) in the
Australian economy during the global financial crisis.

The global financial crisis (GFC) refers to the period of extreme

stress in global financial markets and banking systems between
mid-2007 and early 2009. The GFC caused a shortage of finance
around the world and, as such, put substantial financial and Highlight the
elements of
economic strain on businesses, governments and households, CAT on your
including in Australia. In Australia, households increased the worksheet
proportion of their income that they saved due to a fall in
consumer confidence. In response, the Australian government
increased its expenditure in the economy to counter the effect of
increased savings.
 ESSAY PRACTICE – 3. INTRODUCTION - SAMPLE
Explain the likely impact the changes in the Australian household savings ratio and
government expenditure had on the levels of economic output (ie aggregate demand) in the
Australian economy during the global financial crisis.

The global financial crisis (GFC) refers to the period of extreme

stress in global financial markets and banking systems between
mid-2007 and early 2009. The GFC caused a shortage of finance
around the world and, as such, put substantial financial and
economic strain on businesses, governments and households,
including in Australia. In Australia, households increased the
proportion of their income that they saved due to a fall in
consumer confidence. In response, the Australian government
increased its expenditure in the economy to counter the effect of
increased savings.
 ESSAY PRACTICE – 4. SEAL PARAGRAPHS
Explain the likely impact the changes in the Australian household savings ratio and
government expenditure had on the levels of economic output (ie aggregate demand) in the
Australian economy during the global financial crisis.

Activity – fill in the gaps in the sample paragraph

 ESSAY PRACTICE – 4. SEAL PARAGRAPHS
Explain the likely impact the changes in the Australian household savings ratio and
government expenditure had on the levels of economic output (ie aggregate demand) in the
Australian economy during the global financial crisis.

The GFC resulted in an increase in the proportion of household income that

was saved. Savings refers to the proportion of disposable income that
households do not spend. Savings is a leakage from the circular flow of
income. An increase in leakages results in a decrease in the level of an
economy’s economic output. This is because an increase in savings will lead
to a reduction in consumption, which is a component of aggregate demand.
Aggregate demand refers to the total level of demand for goods and services
in an economy and is the equivalent to a country’s economic output (GDP).
There was an increase in the household savings ratio from 3.2 per cent in
2008 to 10.9 per cent in 2009. This correlated with a fall in the GDP growth
rate from 2.6 per cent in 2008 to 1.6 per cent in 2009. Thus, it can be shown
that the increase in the household savings rate during the GFC can be linked
to a fall in aggregate demand (or economic output).
 ESSAY PRACTICE – 4. SEAL PARAGRAPHS
Explain the likely impact the changes in the Australian household savings ratio and
government expenditure had on the levels of economic output (ie aggregate demand) in the
Australian economy during the global financial crisis.

Activity – highlight SEAL in different colours.

What do you notice about the balance between elements?

 ESSAY PRACTICE – 4. SEAL PARAGRAPHS
Explain the likely impact the changes in the Australian household savings ratio and
government expenditure had on the levels of economic output (ie aggregate demand) in the
Australian economy during the global financial crisis.

The next paragraph is about the impact of government

expenditure on the level of economic output. Our statement
sentence must have the key words of the question AND identify
the answer. E.g.
Government expenditure may have contributed to an increase in the level of
aggregate demand (or economic output) later in the GFC.
 ESSAY PRACTICE – 4. SEAL PARAGRAPHS
Explain the likely impact the changes in the Australian household savings ratio and
government expenditure had on the levels of economic output (ie aggregate demand) in the
Australian economy during the global financial crisis.

Our explanation section needs to contain the economic definitions and

theory relevant to the question. E.g.
Government expenditure refers to the level of government spending in
the economy. Government expenditure is an injection in the circular
flow of income. This means that it will increase levels of economic
output. Government expenditure is also a component of aggregate
demand. An increase in government expenditure will lead to an increase
in the level of aggregate demand in an economy.
 ESSAY PRACTICE – 4. SEAL PARAGRAPHS
Explain the likely impact the changes in the Australian household savings ratio and
government expenditure had on the levels of economic output (ie aggregate demand) in the
Australian economy during the global financial crisis.

Our analysis section applies the theory from the previous section
to the GFC case study and draws out the implications for the
economy. E.g.
The government announced a $42 billion stimulus package in
2009. This increase in government expenditure may have
contributed to an increase in the GDP growth rate from 1.4 per
cent in October 2009 to 2.6 per cent in January 2010.
 ESSAY PRACTICE – 4. SEAL PARAGRAPHS
Explain the likely impact the changes in the Australian household savings ratio and
government expenditure had on the levels of economic output (ie aggregate demand) in the
Australian economy during the global financial crisis.

Our link sentence contains the key words of the question,

addresses the directive verb and identifies the answer to the
question you have argued in the paragraph.
 ESSAY PRACTICE – 5. CONCLUSION
Explain the likely impact the changes in the Australian household savings ratio and
government expenditure had on the levels of economic output (ie aggregate demand) in the
Australian economy during the global financial crisis.

The conclusion should summarise your arguments and provide a

brief answer to the question. E.g.
An increase in household savings in Australia experienced early in the GFC
contributed to a slowdown of the economic growth rate. The increase in
government expenditure in response appeared to have contributed to an
increased rate of economic growth. Therefore, it can be shown that
government expenditure during times of economic crisis may be a way of
stabilising aggregate demand (or economic output).
STUDENT ACTIVITY
Using a SEAL paragraph, explain the use of monetary policy to dampen aggregate
demand to curb inflationary pressure in recent years in Australia.
OTHER ROLES OF FISCAL POLICY
In addition to smoothing out fluctuations in the business cycle. The Australian
government also implements policies to influence :
•The distribution of income in Australia
• Environmental sustainability

Read the information on each and complete the questions in your booklet.
ECONOMIC COMPARISON – AUSTRALIA & CHINA
You will be doing a comparison of the living standards in Australia and China.
Together, we will go through China and it will be your task to research Australia in
order to write a comparison of the two economies.
 STAGES OF LIVING STANDARDS (ECONOMIC
DEVELOPMENT)

Emerging Advanced
Economy Majority of population
has high income and
More income and
Developing Economy high living standards –
improved living
income
Very low incomes- standards but not all
>$12000/capita/
<$2000/capita/ have this – incomes
annum
annum $2000-
Aus median income
$12000/capita/
$51,000/capita/
annum
E.g. Ethopia annum
E.g. China

We are looking at how China moved from developing to emerging status (but its still is
not yet at Advanced like Australia)
 Note this case study
is part of the y11
and 12 Economic
course

CHINA Growth and Development

CHINA
China has become the worlds largest economy in GDP

It accounted for 18.5% of global GDP in 2022, surpassing USA of 15.2%.

Exports - Accounts for 10.7% of worlds exports.

Imports - Accounts for 25% of world demand for steel and 35% of worlds demand
for iron ore and coal.

China is the largest country in the world in terms of population with over 1.39b
people.
CHINA’S HISTORY
China became a socialist economy in 1949, ruled by Chairman Mao Tse Tung.
In the era of Chairman Mao’s communist rule, China was a closed economy i.e. limited
trade and financial flows with other economies.
During this time it suffered from very low growth, high levels of poverty and very low
levels of economic development.
CHINA’S REFORM
China has made rapid progress in economic growth and economic development by
reforming its economy from a planned or socialist economy to a market or capitalist
economy.
CHINA’S ECONOMIC REFORM
After Chairman Mao’s death in 1978, Deng Xia Ping became Chairman of the
Communist party.
Chairman Xia Ping implemented economic reforms between 1978 and 1997,
including the introduction of the One Child Policy in 1979.
SHENZEN
CHINA A CLOSED ECONOMY
1990 GNI/capita $US PPP - $250
850 million people living on less than $1.90 per day
Life expectancy in 1960 – 43 years
NOW
On a PPP basis China is the largest economy in the world.
In 2022 China accounted for :
 18.5% of global GDP
 12% of world exports
 18.1% of the world’s population
TRADE LEVELS

1980 – $1.2b US
2017- $231. 5b US

The volume of China’s exports grew annually

by 8.8% between 2005 and 2022 and
exports accounted for 20.7% of GDP in 2022
OTHER CHANGES
Indicator Previous Now
Economic growth 10.1% per annum, 1990- 2015.
COVID did impact China, with 2022
growth at 3%
GNI/ Capita PPP $250 / year 1990 $17 504 (2021) - Aus $51 500
8% per annum growth (1975- 2015)

Absolute Poverty levels 850 million – 88% of pop 1.4 million - .7% of pop in 2015
in 1980
Still 24.5% below $5.50 US/ day, 7%
below US $3.20/ day

HDI 0.36 (1986) 0.752 -2017 (ranked 86th of 189)

Life Expectancy 43 years – 1960 76 years - 2017
ECONOMIC GROWTH
ECONOMIC GROWTH
During the 1990s- 2000’s the main drivers for China’s growth was exports and
Foreign Direct Investment.
China is now transitioning to domestic sources of growth, ie consumption, and hence
growth rate has slowed from 10% to 6% average.
Still however, Exports make up 20% of China’s GDP and Investment makes up 44%
of GDP.
TWO LARGE CHANGES THAT CHANGED CHINA
Although there were many policies of reform that have occurred in China since 1979,
arguably the two biggest reforms were

Agricultural reforms – Household Responsibility System

Open Door Policy
AGRICULTURAL REFORMS- 1978 TO 1994
Before the reforms, rural households worked under the commune system, whereby ALL
production was handed over to the government for a minimum fee. There was wide
ranging poverty and famine in these areas.
Under the reforms, the commune system was replaced with the Household
Responsibility System. Households were required to provide to the government a set
quota of produce but households could sell surplus output once the quota had been
reached.
IMPACT OF AG REFORMS
It encouraged households to work harder and more efficiently, hence increased total
output and GDP.
Gave rural households more income and more food, hence reduced those living in
absolute poverty.
Surplus income from households was invested in privately run town and village
enterprises (TVE’s) responsible for the light manufacturing of industrial goods – this
provided further income and access to more goods and services for rural households.
OPEN DOOR POLICY - 1980
Arguably the most important policy reform for China.
China opened its borders to foreign trade and investment.
Established Special Economic Zones (SEZ’s) in the southern and eastern coastal
provinces of China.
In the SEZ’s overseas companies were offered low tax rates and less stringent
government regulation, with this and the benefit of cheap labour and electricity,
Multinational Corporations were attracted and established manufacturing operations
within these zones.
China joined WORLD TRADE ORGANISATION in 2001.
IMPACT OF THE OPEN DOOR POLICY
Jobs were created within the MNC manufacturing plants- providing income for
households and improving living standards
Increased exports – as MNC’s mainly manufactured for export
Introduced Western technology and management skills to China, which flowed on to
domestic firms, increasing productivity and GDP
Through WTO membership, China gained greater access to world export markets,
increasing income from exports and hence GDP and growth
IMPACT OF OPEN DOOR POLICY
To further encourage Foreign Direct Investment and to reduce bottlenecks and
capacity constraints that reduce export potential, the Government continues to fund
infrastructure projects– building roads, railways, bridges, dams, airports and ports.
During the GFC when exports were low, the government boosted China’s economy
through funding such infrastructure. This provided jobs and income to China residents
and offset issues from falling export income.
POSITIVE IMPACTS OF REFORM
Substantial Economic growth since 1980. GDP increases, in turn increase GDP per
capita
Greater tax revenue for governments to spend on health, education and
infrastructure
Reduced poverty levels in China
Substantial improvements to Economic Development measured through increase in HDI,
through improvements of HDI indicators of:
EMPLOYMENT
Labour force - by occupation:
1990 2006 2015

Agriculture 27% 12% 7%

Industry 41.6% 48% 41%

Services 31.3% 40% 52%

ISSUES- INCOME INEQUALITY
Due to the Governments Hukuo System which restricts people from migrating from
their birth precinct, rural residents have been unable to benefit from the large
development and job opportunities that have become available in the urban areas.
The result in significant income inequality – Urban/ rural divide.
NEGATIVE IMPACTS – INCOME INEQUALITY
Increased GINI coefficient from 0.30 in early 1980’s to 0.382 in 2019 (the closer to
1 the more income inequality)
Urban/ rural divide
 FDI concentrated to Coastal regions of China. Hence jobs available in urban
areas, rural still predominately Agriculture and small industry production
 1.3% of population in 2021 classified as living below the international
poverty line of US$3.65 per day and 24.7% below an income of US$6.85
per day.
 Hukou system, restricts internal migration, hence rural residents restricted
from moving to SEZ’s.
DISTRIBUTION OF INCOME
China has a dualistic economy – urban areas vs rural areas
Average income in SEZ’s is 150% higher than the national average
compared to poorest areas of China where they receive 50% of
national average.
URBAN CHINA
LIFE IN URBAN CHINA
RURAL CHINA
LIFE IN RURAL CHINA
POLLUTION
China’s green house gas emissions in 2020 were 100% higher than the USA.

Over 70% of electricity is sourced from coal fire power stations which pollute the air.
Only 20% of household and industrial waste is properly disposed of and only 10%
of sewerage is treated, the rest is dumped into lakes and rivers causing water
pollution.
ISSUE – ENVIRONMENTAL DAMAGE
IMPACT OF POLLUTION
Estimated up to 300m people are drinking contaminated water every day in China
Estimated that unless pollution is controlled by 2020, it will cause 600 000 premature
deaths in urban areas and 20m cases of respiratory illness per year.
Estimates that up to 7% of Chinas annual GDP is lost because of pollution and could
rise to up to 13% if not addressed.
GOVERNMENTS RESPONSE TO ENVIRONMENT
China became a signatory to the Paris Agreement in 2015 and have agreed to cut
carbon emissions by 60- 65% per unit of GDP by 2030.
In 2015 the government invested US$6.5b to new spending measures to fund hydro
and nuclear power development eg Three Gorges Dam project
Have closed down some Coal Burning Power Stations
STUDENT RESEARCH AND RESPONSE ACTIVITY - ECONOMIC
COMPARISON BETWEEN CHINA AND AUSTRALIA
Research the Australian economy over the last decade (omit the impacts of COVID)
 Average GDP growth rate
 Average household income
 Income Inequality (GINI index)
 Economic Development (HDI – elements and indicators)
 3 other areas which you feel are important indicators of the living standards of Australian residents.

Using your research on Australia and the information presented to on China and complete a written
response to the following question. Remember to use SEAL paragraphs. Try and use evidence (such as
statistics you have) to substantiate your answer.
“ Living standards in Australia are better than the living standards of China.” Discuss (You don’t have to
agree but you will need to support your answer with evidence). 300 words (at least 3 paragraphs).
 The Price Mechanism

MARKETS
 SYLLABUS

· explain the price mechanism and the interaction of demand and supply within
a market
· investigate the concept of a market and the various types of markets, for
example retail markets, labour markets, financial markets, stock markets
(ACHEK027)
explore customary trading practices of Aboriginal Peoples and Torres Strait Islander Peoples and the
nature of participation in historical and contemporary markets, for example trade in rare and valuable
goods, changes in technologies and ideas, use of cultural knowledge in enterprising ways (ACHEK028)
 One of the biggest decisions
an economy must make is
how to use their limited

THE resources to produce the

goods and services the
economy needs.

ECONOMIC
PROBLEM The issue is resources are
limited but the wants of
society are infinite, so the
economy must decide what
they will make and what
they will forgo
 CUSTOMARY TRADING PRACTISE OF ATSI PEOPLES

Read Jacaranda New Concepts in Commerce (4th Ed) p93-94 and answer 2.9
Exercise: Knowledge and Understanding q1-4, 6.
 THE PRICE MECHANISM

In today’s society decisions of what to produce are based on the interaction of

consumer demand and firms supply, ie. the Price Mechanism.

Take for example the house auction scenario. If there is one house for sale (supply)
by there are 5 people who want to buy the house (demand), what happens.
The consumers will bid up the prices to gain the house. The auction will finish when
the highest bid is made and the supplier is happy to sell at this price.
THIS DEMAND AND SUPPLY INTERACTION IS REFERRED TO AS THE PRICE
MECHANISM. THE PRICE MECHANISM ESTABLISHES HOW MUCH OF A GOOD WILL
BE PRODUCED AND FOR WHAT PRICE.
● https://online.clickview.com.au/libraries/videos/36235981/the-laws-of-supply-and-
demand
 MARKET EQUILIBRIUM
Price
D
S Occurs when…
1. Quantity demanded = quantity
supplied (0Qe)  establishes
Pe equilibrium price (0Pe)
2. The market clears

D 3. There is no tendency for change

S
0
Competition amongst buyers and
Qe Quant it y amongst sellers works to set
equilibrium price and quantity
without explicit cooperation
 CHANGES TO SUPPLY AND DEMAND

Very simply though, demand and supply can change. Consider the demand for snow
gear in winter compared to summer. When demand increases ( remember the number
of buyers at the auction ) the prices for the goods will increase. As the prices rise
firms will be willing to allocate more of their resources to making more snow gear ( as
there is more profit to be made). Hence we can see how the Price Mechanism will
influence what is made and how much is made.
This is shown on the diagram below.
 INCREASE IN DEMAND

Price D2
D1
S ▪ Increase in quantity demanded at any
price
P2 ▪ Competition amongst buyers will bid
P1 up price

▪ Increased price causes expansion in

supply
D2
D1
S ▪ New equilibrium with higher price and
0 quantity
Q1 Q2 Quant it y
THE MARKET MECHANISM

From NCIC (4th Ed), complete 2.5 Exercise: Knowledge and

Understanding q5- 8
LABOUR MARKETS
THE LABOUR MARKET

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 LABOUR MARKET GRAPH
FACTORS INFLUENCING
THE DEMAND FOR LABOUR
How will a firm know how much “labour” (or how many
workers) they need?

How will a firm determine what price they are willing to pay
for labour(wages)?
AN EXAMPLE…
THE DEMAND FOR LABOUR

The demand for labour is a derived demand. The

demand for labour is derived from the demand of
goods and services within the economy.
FACTORS INFLUENCING DEMAND FOR LABOUR

Output of the Firm Productivity of Cost of other inputs

Labour
Aggregate Demand Output per unit of Cost of Labour versus
labour input other inputs (i.e.
capital)
Conditions in the Investment in skills Cost of labour versus
firm’s industry and technology cost of foreign
labour
Demand for an
individual firm
ACTIVITY

• Read the articles on changes to Australian industries and answer the

questions in your workbook.
TYPES OF UNEMPLOYMENT

With changes to industry some people lose their jobs and do not
possess the skills that are needed for jobs available. These people
are classified as Structurally Unemployed.

Structural unemployment is one of many different types of

unemployment. Read the information provided to complete the
worksheet on different types of unemployment.
SUPPLY OF LABOUR

In the Labour Market, people supply their labour to firms who demand it. Generally, the supply of labour for a
particular industry or firm will be influenced by aspects including:

 The level of skills/ qualifications/ experience needed for a job

 The working conditions of the industry or firm
 The wages or salaries paid.

Read the article on Pay levels in Australia and answer the questions in your workbook
SUPPLY OF LABOUR IN AUSTRALIA

Read the article on Australian Salaries and answer the questions in your
workbook