Definitions

Wants – material desires of individuals or the community such as an overseas holiday or expensive
clothing

Utility – this means satisfaction or pleasure from consuming goods and services that are either needs
or wants

Individual wants – the desires of each person determined by the personal preference and income
levels of each person

Collective wants – the wants of the whole community such as hospitals, schools, fire fighters, police
and transport networks

Choosing wants – since wants are unlimited but resources are limited, some wants are satisfied
sooner than others

Recurring wants – food, clothes, petrol, access to the internet (goods/services that are constantly
wanted over time)

Complementary wants – a want that naturally follows the initial want e.g. petrol is a complementary
want of a car

Wants change with time – for example, you can afford more luxury items as your income rises over
time

Choosing wants – since wants are unlimited but resources are limited, some wants are satisfied
sooner than others

Recurring wants – food, clothes, petrol, access to the internet (goods/services that are constantly
wanted over time)

Wants change with time – for example, you can afford more luxury items as your income rises
 Chapter 1: What is Economics About?
The Economic Problem
Infinite wants, but limited resources (land, labour, capital)

We can’t satisfy all our wants, so we choose our highest preference

Wants, Resources and Scarcity

To live a good quality life, people obtain goods and services

Essential goods/services are considered needs Desired goods/services that make their lives
e.g. Food, Shelter, Health, Education easier and provide pleasure are considered
wants
e.g. Luxurious clothing, new car

Markets and government then work out which wants are our highest priority and how we can
organize production to satisfy the greatest number of wants

Key Groups in Australian Economy

Individuals (Consumers/Households)
- Have ever dynamic needs and wants
- Through spending choices, determine what goods and services are produced in an economy

Businesses (Firms, Companies)

- Employ millions of workers
- Produce most of the goods and services for: Therefore, fundamental in Australian economy
o Individuals
Influence quality of life greatly
o Other businesses
o Government

Government
Government plays three key roles in the economy:

1. Reallocate resources to priority sectors of society and economy

2. Redistribute income and wealth from the rich to the poor to create a more equitable society

3. - Employ workers
- Build public infrastructure This generates economic activity and guarantees a
- Provide goods and services good quality of life
 The Key Economic Issues
All economies, attempt to answer the following questions:

1. What to produce?
- Because of limited resources, not all wants can be satisfied
- Must decide which wants to satisfy, and which to not
- Therefore, the economy decides what goods/services to produce

2. How much to produce?

- Includes allocation of resources efficiently whilst attempting to maximize satisfaction
- Must decide how much of each good/service to produce
- Minimizes resource wastage and leaving individuals unsatisfied

3. How to produce?
- Must look for most efficient method of production
- Aims to produce using the least number of resources whilst maximizing consumer
satisfaction

4. How to distribute production?

- Must decide whether it wants an equitable distribution of products, or inequitable
distribution
- Inequitable distribution often results in a more efficient system

Opportunity Costs (Economic Cost, Trade Off)

- Opportunity cost is the impact of satisfying one want at the cost of another want
- Opportunity costs are dealt with by individuals, businesses, and governments
Must choose one desire
Individuals Have simultaneous desires Limited by savings over another desire
e.g. car and house e.g. Purchase a car instead
of buying a house

Must pursue one product at the

Wish to have wide product Limited by profit cost of another product/multiple
Businesses range and staff products
e.g. sell shoes and shirts e.g. Must make shoes instead of
simultaneously making two items
like shoes and shirts

Wish to improve society’s Must prioritize projects to

Governments Limited by money
quality of life satisfy most number of wants
e.g. Access to education, e.g. Build a hospital instead
hospitals, public transport, of new train line
infrastructure
 Production Possibility Frontier (PPF)
- Shows combinations of two alternative products that can be produced in an economy
- Shows what would result if all the economy’s resources were divided among production of
two goods

They show the opportunity costs that arise from making choices in an economy

A PPF can only constructed when:

1. The economy only produces two goods

2. The state of technology is fixed
3. The quantity of resources is fixed
4. All resources are fully employed

Impacts on PPF
Technology
Technology: Refers to technique involved to make a product

New Technology Improved More output in less

e.g. better techniques, better efficiency/production time from same
machinery resources

An economy will produce more of one good/service

Resources
Resources: Refers to inputs into production e.g. coal, water, workers

New Resources
Increase in inputs More output
e.g. coal, water, workers,

An economy will produce more of both goods/services

Unemployment
Unemployment: Refers to people looking for work but are unable to find any

Or

Inputs not being utilized to their full potential

Unemployment
Decrease in production Decrease in output,
e.g. Workers being
and efficiency leaving wants
unemployed, coal remaining
unsatisfied
unused

An economy will produce at a point below the line

Future Implication of Current Choices
Capital Goods: Items that are produced for the production of other goods

Consumer Goods and Service: Items that are produced for immediate satisfaction

Economies

Might choose to prioritize production of capital goods over consumer goods

Short Term Long Term

- Will not be able to satisfy consumer - Will increase its productive capacity
wants to full capacity immediately - Will expand their abilities to produce
consumer goods in future
- Will be able to satisfy consumer wants
better in future
- Will experience a higher level of
economic growth

Individuals

Might choose to buy a house instead of going on holiday.

Short Term Long Term

- Saving up a mortgage will result in a - Home ownership improves financial
significant sacrifice for individuals security
- Followed by years of scrimping to pay - Won’t have to pay rent
off mortgage - Have an asset they can pass down to
children

Businesses

Identifying next wave in business growth

Short Term Long Term

- Spending money and time in - Will develop a successful business
researching next wave of business - Will achieve financial success
growth
- Spending money and time developing a
plan

Governments

May choose to priorities satisfying immediate needs, such as welfare, over funding expenditure such
as education and infrastructure

Short Term Long Term

- Increase welfare benefits - Lower levels of economic growth
- Increase healthcare - Less innovating
- Weaker infrastructure
The Economic Factors Underlying Choices

Individuals
Economic choices by individuals are shaped by various factors, such as:

 Age  Expectations  Family Circumstances

 Income  Future Plans  Personality Factors

- Individuals must decide how much of their income to save and to spend

- Makes decisions in relation to their plans on education, work, family.

e.g., an individual may decide to partake university, forgoing income for several years, but
will be rewarded with higher income in future

Business
Businesses face many choices in various aspects of their operation, such as:

- Must decide on marketing strategies – if they are selling to a mass audience or more
exclusive customers

- Must decide on product pricing – may choose to higher price, and target with less sales, to
maximize profit

- Face ethical issues – in relation to nature, whether they use more expensive recyclable
products, over non-recyclable

- Must decide wage levels – may employ people on wage levels set by industrial awards, or
negotiate agreements with their staff
Government
Governments influence on economy is a result of influencing businesses/individuals’ decisions as
well as providing goods and services directly

Governments have influence over the economic choices of individuals and businesses by:

- Manipulating economic choices of individuals by controlling prices of certain activities –

heavy taxation on cigarettes to discourage smoking/ provide incentives to encourage joining
health insurance by rebating tax of income earners

- Influencing economic behavior by prohibiting certain activities and imposing fines on those
that break these laws – heavy fines apply to businesses in same industry that meet to set
prices, giving a disadvantage to their competition
 Chapter 2: How Economies Operate
The Production of Goods and Services
Goods and services are outcomes of the production process, in which their products satisfy our
wants and needs

Goods: Tangible things e.g. food, cars, phones

Services: Intangible acts that benefit us e.g. watching movie, receiving medical help

Factors of production (resource) are any resources that can be used in the production of goods and
services. The four main factors of production include:

Features Rewards
Natural Resources (land) Include all naturally occurring Rent – covers all the income
materials used in the rewards received from use of
production process natural resources
e.g. soil, water, forest, mineral
deposits

Labour Physical and mental human Wages – payments for working

effort used to produce goods which can include salaries,
and services regular payments,
commissions
Capital The goods produced to help in Interest
production of other goods and
services
e.g. machinery, tools,
computers, roads, railways

Enterprise The organisation of the other Profit –

factors of production in order profit = total revenue – cost of
to produce goods and services production
 Distribution and Exchange of Goods and Services

Total amount of goods/services

produced in a year by an economy

Gross Domestic Product (GDP)

Measure of total amount of income earned
by owners of these economies

Step 1 Step 2 Step 3

Economy assigns a worker an income
Income received by worker Worker gives that income
based on:
allows them to purchase to economies when
- Skills
goods/services from an purchasing their
- uniqueness
economy goods/services
- hours worked
- capacity to produce
goods/services

Advantages of this system Disadvantages of this system

- Makes people work harder and longer - Inequality – sick, elderly or disabled
to earn more income people aren’t able to contribute and
have to rely on social welfare payment
- Encourages people to undertake
education/training to become more - The system empowers people with a
skilled unique skillset/education to receive a
higher income than the less
experienced/uneducated people

Money: a medium of exchanging goods and services

- Allows for easier transactions

- Used when one business doesn’t want ay goods/service in exchange for their goods/service
e.g., a babysitter will be paid cash for their service instead of being exchanged a different
good/service

Barter: non-cash exchange for a good/service e.g., a babysitter gets exchanged a car wash for their
service
Business Cycle
Business Cycle: refers to the fluctuations in the level of economic activity due to a combination of
domestic or global factors

Expansion (upswing)
Consumer Spending: Increasing
Sales/Profit: Increasing
Wages/Salaries: Increasing
Business Investment: Increasing
Unemployment: Decreasing

Peak (highest point on business cycle) - Rising income and quality of life
Consumer Spending: Highest - Unemployment at lowest –
Sales/Profit: Highest significant wage growth
Wages/Salaries: Highest - Inflation reaches highest point
Business Investment: Maximum Amount
Unemployment: Lowest

Contraction (downswing)
Consumer Spending: Decreasing
Sales/Profit: Decreasing
Wages/Salaries: Decreasing
Business Investment: Decreasing
Unemployment: Increasing

Trough (lowest point on business cycle) - Falling income and quality of life
Consumer Spending: Lowest - Unemployment at highest –
Sales/Profit: Lowest significant spike in social welfare
Wages/Salaries: Lowest spending
Business Investment: Holding off - Increase in saving of income
Unemployment: Highest
Circular Flow of Income Model
Individuals
- Concerned with their activities in earning an income and spending it on goods and services.
- Rely on businesses for:
o an income in return of their labour
o goods and services which they can consume with their income

Business
- Concerned with all activity involved with buying factors of production and using them to
produce and sell goods and services.
- Rely on individuals for:
o production of goods and services
o the consumption of goods and services

Savings..
- Money is put aside and withdrawn from the circular flow
- Results in a leakage from the circular flow
- Leads to reduction in size of circular flow of income, and reduction in level of economic
activity

Investment..
- Defined as any current expenditure that is made in order to obtain benefits in the future.
e.g. purchase of capital goods by businesses, in order to gain profits from the output the
machinery produces in future
- Represents an injection into the circular flow, increasing the size of circular flow of income
and level of economic activity

Governments
- Imposes taxes on individuals and businesses, and uses this tax revenue to undertake various
government expenditures
- Tax represents a leakage from circular flow, causing a reduction economic activity, as it
reduces individuals’ funds that can be used to purchase goods and services
- Expenditure represents an injection into the circular flow, as it provides income to
government employees as well as income to unemployed

Imports..
- Payments for imports are regarded as leakage from the circular flow, as money is withdrawn
from the Australian economy and paid to overseas business
- Reduces size of circular flow, causing decrease in economic activity.

Exports..
- Regarded as injection into circular flow, as money is paid to Australian business by
consumers overseas
- Increases the size of economic activity, with rising income, output and employment
opportunities.
 Leakages.. Injections..
- Savings (S) - Investment (I)
- Taxation (T) - Government Expenditure (G)
- Imports (M) - Exports (X)

Equilibrium: when leakages equal injections

Leakages = Injections

Disequilibrium: when there is an inequality between leakages and injections

Downturn: Leakages > Injections

Upturn: Injections > Leakages

Circular flow of income:

 Chapter 3: How Economies Differ
The Market Economy
Pure Market Economy
- Theoretical Economy
- Consumers and businesses make all the decisions on production of goods and services
- NO government intervention

Main features include:

Product Markets:
Where buyers and sellers interact to determine the price and quantity of goods/services

Price Mechanism:
The process of supply and demand interacting to determine the price and quantity of a good/service

Factor Markets:
The process of supply and demand interacting to determine the price and quantity of factors of
production (resources)

Planned Economy
- Government makes all decisions on production of goods and services e.g., North Korea,
Vietnam

Advantages Disadvantages
- Maximise equality and fairness - Fails to allocate factors of production as
- Remove barriers from classes in society efficiently as mixed market economy

- No single individual can be extremely

wealthy because all factors of
production is owned by government

Mixed Market Economy

- Consumers, businesses, and government make decisions on production of goods and
services e.g., Australia, America

Main features include:

Private Ownership of a Property

Individuals have every right to own factors of production, and use it to generate income

Consumer Sovereignty
Based on their demand, consumers determine what is produced, and how much is produced

Competition
Pressure on businesses to lower prices or increase quality, in order to compete with other
businesses in same industry
Free Enterprise
Society is free to use their resources as they please e.g., a man is free to create his own business and
is free to choose what to produce and how, and, workers are free to choose their occupation or if
they even want to work

Australia: a market economy with a role for the government

The Australian government intervenes in its economy in three ways

1. Reallocation of Resources
The government intervenes in production to increase efficiency of allocation of resources. They do
this in three ways:

Supplier of Infrastructure
- When necessary goods/services are not provided by private businesses, the government
intervenes and provides them e.g., too expensive for private business to fund a railway
system, so government intervenes and builds it

Providing Essential Goods for national security reasons

- Government become sole provider of essential goods/services, whilst banning private
businesses from doing so e.g., supply of water, sewerage systems, emergency services

Regulating Business Behaviour

Government implements rules for businesses, to prevent any inequity in the business sector

2. Redistribution of Resources
The government intervenes to distribute resources more fairly. They try to improve the spread of
income in two ways:

Social Welfare Payments

The government use income from taxation to provide the unemployed with social welfare payments

Progressive Income Tax

Government redistributes overall income to achieve a more equitable share of resources. They do
this by taxing higher income earners more than lower income earners and using the income to fund
social welfare payments.

3. Economic Stability

The government intervenes to prevent fluctuations in the business cycle and ensure stability in the
economy. This is done in two ways:

Fiscal Policy
Government manipulates transfer payments and taxation policies to in encourage/discourage
economic activity

Monetary Policy
Government manipulates the cash rate, leading banks to reduce/raise interest, impacting consumer
decisions on whether to spend/save
 Chapter 4: Consumers in the Market Economy
Consumer Sovereignty

Consumer Sovereignty: Consumers determine what is produced and how much is produced, based
on their demand

- Business will produce whatever goods/services are in demand to maximise profit

- Results in business shifting resources to cater for consumer demand

Businesses are able to diminish consumer sovereignty, through:

Marketing
By advertising their products, businesses manipulate consumers into buying their product
e.g., beauty products

Misleading Conduct
Fake advertising can lead to consumers purchase a good they don’t want e.g., weight loss programs

Planned Obsolescence
Businesses make goods that will wear out, so consumers buy it again e.g., Apple phones eventually
break after a couple years, so you must buy a newer one

Anti-Competitive Behaviour
Businesses only make goods compatible with each other, forcing consumers to buy the
complementary goods from the business e.g., Apple phones can only be charged from an Apple
charger
Decisions to spend or save

Consumers can either spend or save their income

Y=C+S
Disposable Income Savings

Consumption Expenditure

Average Propensity to Consume (APC)

The proportion of a consumer’s income that’s spent

Average Prosperity to Save (APS)

Proportion of a consumer’s income that’s saved

APS + APC = 1

A variety of factors that influence levels of spending and saving in the economy include:
1. Income Levels and Future Expectations:
- As income rises people tend to save a higher proportion of income

2. Cultural Factors:
- Consumers in developing countries tend to save their income for future generations

3. Confidence and Future Expectations:

- When consumers are woried about stability of their future, they are inclined to save
- If they are confident about their future, they are likely to consume more and save less
4. Life Stage and Age Distribution:
- Young people lack skills/experience and therefore receive a lower icnome, resulting in them
spending majority of income
- As people start working in middle age, their income rises and consume less, saving for
retirement
- In retiremnt, people no longer earn income, and consume out of past savings

5. Government Policies:
- Can make it more enticing to save (lowering tax on superannuation)
- Can make it more attractive to spend (lowering consumption tax)
Factors Influencing Individual Consumer Choice
The main factors that influence consumer expenditure include:

1. Level of Income
- Must consider if their level of income could afford
- Individuals who earn higher income tend to purchase items of higher quality

2. The price of the good itself

- Must decide if they are willing to pay the nominated price for the item, given their level of
income
- Necessities will need to be purchased regadless of price

3. The price of the substitute and complement good

- Consumers will often purchase the cheaper substitute good
- Consumers are often forced to purchase the complement of their goods e.g., a phone
charger when they have bought a phone

4. Consumer taste and prefernce

- Consumers will purchase goods that giver them the highest satifsction
- Consumer taste will change over time -> as taste change so will demand for goods

5. Advertising
- Can create demand for goods/services
- Can build loyalty to particular brands, making demand less impacted to price increases
Sources of Consumer Income
Consumers gain their income from a variety of sources, including factors of production and social
welfare payments.

Factors of Production
Wages from Labour

- Consumers are paid in the form of a wage or salary in return for their labour

Rent from Land

- Consumers own land that generates income when rented

Interest from Capital

- Consumers earn interest from their investments

Profit from Entrepreneur Skills

- Business owners receive profit from their business, which is considered a return for their
entrepreneurial skills

Social Welfare (Transfer Payments)

Age Pension

- For people over 66 and have retired

Parenting Payment

- For primary carers of children according to their income level

Disability support pension

- For people with a permanent condition that prevents them from working

Jobseeker Payment

- For people between 22-66 looking for work

 Chapter 5: Business in the Market Economy
Business Firms and Industries
Firm (business) – an organisation that combines entrepreneurial skills with factors of production to
produce goods and services to generate profit

Industry – refers to a collection of firms that make a similar product to each other e.g., motor vehicle
industry includes Volvo, Audi, Toyota

Production Decisions
What to Produce
Several factors influence what a business will produce. Including:

Skills and Experience of Business Owner

- Owners will most likely begin operating a business that utilises their current
skills/experiences

Level of Consumer Demand

- Owners will sometimes operate a business in an industry where consumer demand is high
- This maximises chances achieving optimal sales/profit

Degree of competition

- If there is a perceived gap in the market

Capital required to start the business

- Business owners will have to decide if they are able to afford starting up the business

How Much to Produce

Several factors influence how much a business will produce. Including:

Consumer Demand

- Need to be aware of quantities consumers are demanding

- Allows them to avoid over-producing (wasting) or under-producing (not satisfying
customers)

Production Run

- Production Run: amount of processes needed to produce a good/service

- Easier to supply goods produced from a low production run (quicker), compared to high
production run

Product Lifestyle

- Product Lifestyle: how long a product has been out (beginning, growth, maturity, post-
maturity)
- Depending on product age, owners can determine quantities to produce e.g., in beginning
stage owners must anticipate how many sales they will get but in maturity stage owners can
refer to sales history
 How to Produce
A business must now decide how it will produce. It must consider the efficiency of the factors of
production:

Access to Natural Resources

- Firms may decide what to produce based on availability of natural resources

- Will determine if business will rely on renewable or non-renewable energy to power their
manufacturing

Quantity and Quality of Labour

- Business may decide using labour-intensive methods of production based on

quantity/quality of labour

The quantity of labour will influence the The quality of labour will influence
volume and type of goods a business whether a business will produce
produces using on labour or machinery
e.g., China has huge labour markets, so
majority of goods produced will be labour
intensive

Level of Capital Stock

- May decide using capital-intensive methods of production based on quality/quantity of

capital goods

The quantity of capital will influence The quality of capital will determine
whether a business will produce using what industries will form in an
labour or machinery economy

The Sharing Economy

- Refers to the digital platforms that connect consumers to businesses

- Enables firms to minimise office space
- Allows their staff to choose their own hours and own customers e.g., Uber
What business contribute to the economy

The performance of businesses has a major impact on the performance of an economy. Business
stimulates economic growth in several ways:
- They produce goods and services – economy grows in size/volume
- They employ people – enables households to purchase goods/services
- Pay high amounts of taxes – funds government infrastructure like roads, railways etc.
- Buy goods/services from other businesses – fuels further production of businesses

Business increases productive capacity of an economy by:

- Increasing capital growth
- Investing in new technology
- Create/find new resources

Goals of the Firm

Objectives of a firm include:

Maximising Profits

- Main objective of firm

- Making biggest possible profit or smallest possible loss
- Profit = total revenue – cost of production

Meeting Shareholder Expectations

- Company directors generally aim to meet expectation of shareholders

Increasing Market Share

- Increase market share (% of sales the business has in the overall market)
- Market share shows consumer preferences of one business over another

Maximising Growth

- Maximise growth of the firm’s assets

- Larger asset base allows for higher profits in future

Satisficing Behaviour
- Means to achieve a satisfactory level across all goals, rather than maximising one goal
Efficiency and Production

Productivity
Productivity: refers to how much an economy produces with a given quantity of resources, per unit
of time.

Increased productivity: as input increases, output increases proportionally e.g., one concreter can
pave three driveways in an hour, but two concreters pave ten driveways in an hour

Increased production: Increase in output produced

Increased productivity can improve living standards by:

Less Wastage of Resources
- Able to produce more with less resources

Lower production costs and higher profits for businesses

- Since more output can be generated from less input, costs will fall whilst revenue will rise

Lower Inflation Rates

- Because of lower production costs, business can lower consumer prices

Higher Incomes
- Since labour is more productive, businesses can afford to pay staff more without increasing
prices

Specialisation and Productivity

Specialisation: the process of using factors of production intensely for a small number of production
processes e.g., a mechanic hires people that have specific skills in smash repair to ensure they can
repair vehicles faster

Type Definition Example

Specialisation of Labour When businesses break down The assembly line in
their production processes production of toys, each
into sub processes, allowing worker completes a specific
for labour specialisation in a small task in construction
particular part of the process

Specialisation of natural When businesses in same Concentration of advanced

resources industry, congregate in the technology industries in the
same area to reduce costs by Macquarie Park industrial area
sharing infrastructure
Specialisation of capital When a business grows so A large wine producer that
large, they can use specialised uses specialised machines in
capital equipment in their the production process
production
Internal Economies and Diseconomies of Scale
Internal Economies of Scale: as output increase, production costs decrease (average costs per unit of
production falls as output rises)

Business can achieve internal economies of scale by:

Specialisation of Labour

- Workers specialise in one step of production to reduce time

Investing in more efficient capital equipment

- Purchasing new machinery and equipment that increase efficiency

Selling its wasted materials

- Selling unused stock to gain revenue e.g., Qantas sell unused food to OzHarvest

Purchase inputs in bulk

- Bulk buying generally reduces the price e.g., A business can purchase steel in higher
quantities, and receive a discount

Internal Diseconomies of Scale: as output increases, production costs increase

Business might experience internal diseconomies of scale by:

Overexpansion of product range

- Increasing product range means an increase in production prices, however increased

product range doesn’t guarantee more sales

Dilution of Business Culture

- Culture that had previously bred success, may disappear as new untrained staff are hired

Outsourcing

- When product is poor quality, refunds and warranties will rise

External Economies of Scale: events outside of business control reduce production costs

Business might experience external economies of scale by:

Location of Industry

- Transport costs can fall if located closer to suppliers

Research and Development by Government

- Government fund research for business, reducing business costs

Competitive Financial Markets

- If more banks start opening, businesses can ask rival banks for cheaper interest rates

External Diseconomies of Scale: events outside of business control increase production costs

Business might experience external diseconomies of scale by:

Increased Pollution

- Governments may implement tax on businesses that pollute

Increased Minimum Wage

- If government increase the minimum wage, costs rise

Commodity Prices

- If prices of raw materials rise, the business production prices will increase
Investment, technological change and ethical decision making

There are various new technologies and ethics that impact a business’s conduct. They impact various
factors of businesses such as:

Production Methods
Technology
Increase use of machinery over staff
Lower production cost, increased efficiency, reduced staff level, larger output

Prices
Technology
Provides consumers with online access to all businesses – allows for comparison of prices between
rivals
More informed consumers
Squeezed profit margins

Employment
Technology
Machines have replaced labour – reduced staffing levels

Ethical
Some businesses seek to employ women – due to their historical mistreatment
Employ from groups that have traditionally been mistreated

Output and profits

Technology
Able to offer higher quality products at cheaper prices –
Easier to respond to changes in market demand – increase sales and profit

Types of Products
Technology
Creates new products
Updates new products
Broadens range of products for businesses making easier to satisfy consumer demand

Ethical
Driven by ethical consumerism (ethics of consumers)
Influence production of environmentally conscious goods/services

Globalisation
Technology
Makes it possible for business to attract investments from around the world
Through easier communication, allows information to travel from overseas to buyers

Ethical
Businesses source their products for cheaper from overseas
Business ensures these products were ethically produced (not forced labour, low wages, unsafe
working conditions)
Environmental Sustainability
Technology
Using more sustainable technology
 Chapter 6: Demand

Factors affecting market demand

Name of factor How/why the factor either increases or decreases market demand for
affecting market goods/services
demand
The price of the - Must consider if their level of income could afford
good/service - If goods are necessities, they will be purchased regardless of price
itself
The price of - Consumers will often purchase the cheaper substitute good
other goods and - Consumers are often forced to purchase the complement of their
services goods e.g., a phone charger when they have bought a phone

Expected future - If consumers expect an increase in price for a certain product, its
prices demand will increase (vice versa)
-
Changes in - Consumers will purchase goods that giver them the highest satifsction
consumer tase - Consumer taste will change over time -> as taste change so will
and preference demand for goods

The level of - As people earn higher incomes, they will be able to purchase more
income goods
- The more higher income earners in an economy, the greater the
demand for luxury goods

The Size of the - Population size will affect the quantity of goods demanded
Population and - Age distribution will affect which goods are demanded
its age
distribution

Movements along the demand curve

Law of demand: as price of a good rises, quantity demanded by consumers falls

Price change will result in movement along the demand curve, in the form of either a contraction or
expansion

Contraction
When a price increase causes a demand
decrease
P1 increases to P2 causing Q1 to demand to Q2

Expansion
When a price decrease causes a demand
increase
P1 decreases to P3 causing Q1 to increase to Q3
Shifts of the demand curve

Factors that increase demand (e.g., shoes):

Prices of other goods and services

- A rise in price of substitute goods will cause consumers to demand more shoes
- A fall in price of complementary goods may also increase demand

Expected Future Prices

- If consumers expect prices will increase, they will purchase earlier, increasing demand

Consumer Taste and Preferences

- If a particular shoe becomes more fashionable, more consumers will consume it and
increase demand

Consumer Incomes
- A rise in income would mean consumers can afford to buy more shoes, increasing demand
- Increased confidence in future income would also increase demand

The size and age distribution of the population

- An increase in size of population will increase demand for shoes
- Change in age distribution will increase demand for certain types of shoes

Factors that decrease demand (e.g., shoes):

Prices of other goods and services

- A fall in price of substitute goods
- A rise in price of complementary goods

Expected Future Prices

- If consumers expect prices will decrease, they will wait to purchase it, decreasing demand

Consumer Taste and Preferences

- If a particular shoe becomes less fashionable, it will decrease demand

Consumer Incomes
- A fall in income would decrease demand

The size and age distribution of the population

- A decrease in size of population will decrease demand for shoes
Price Elasticity of Demand
Price Elasticity of Demand: a concept that measures change in quantity demand for goods and
services following a change in price

Types of Elasticity of Demand

Elastic Demand
A strong response of quantity demanded to a change in price (consumer spending falls)
- Price increases & Revenue decreases

Unit Elastic Demand

A proportional response of quantity demanded to a price change (consumer spending remains same)
- Price increases and revenue remains constant

Inelastic Demand
Little to no response of quantity demanded to a change in price (consumer spending increases)
- Price increases & Revenue Increases

Perfectly Elastic Demand

Consumers demand an unlimited quantity of a good at price

point P1

Consumers have no demand for the product if the price was

above P1

Perfectly Inelastic Demand

Consumers are willing to pay any price to obtain a good or

service

e.g., consumers who have a life-threatening illness that is

treated by one drug will be willing to pay any price to obtain
that drug
Significance of Price Elasticity of Demand
Pricing Strategy
- Firms could lower prices to raise total revenue if they knew consumer demand would rise
because of price decrease

Profit Maximisation
- Firms could rise prices if they knew consumer demand would not fall by much following a
price increase

Governments use of Price Elasticity Data

Setting Prices for Community Services
- Government would need to know what the impact of an increase in price of public transport
would do to demand

Determine Correct Taxation Rates

- Governments tax goods with inelastic demand (cigarettes, petrol) to raise tax revenue

Factors affecting Elasticity of Demand

Luxury vs Necessities
- Necessities will have relatively inelastic demand
- Luxuries would have relatively elastic demand

Existence of Close Substitutes

- Goods with close substitutes have highly elastic demand
- Goods with few substitutes have an inelastic demand (consumer has no choice)

Impact on Disposable Income

- Expensive items have elastic demand
- Cheap items have inelastic demand

Habit Forming Goods

- Goods that tend to be habit forming, tend to have inelastic demand
E.g., people who have a habit of smoking or drinking will continue habits even if price rises
 Chapter 7: Supply
Law of supply: price and quantity supplied have a positive relationship e.g., if price of a good goes
up, quantity supplied goes up

Factors affecting market supply

The main factors affecting market supply include:

The price of the good or service itself

- If market price is too low and doesn’t cover production costs, producers would cease
supplying

The price of other goods and services

- If market price product X was higher than product Y, business would be inclined to start
supplying product X as it would increase profit

The state of technology

- Improvements in technology allow for an increase in supply and lower production costs

Changes in cost of factors of production

- Low cost of factors of production would allow firms to increase supply
- High cost of factors of production would cause firms to decrease supply

Movements along the supply curve

Price change will result in movement along the supply curve, in the form of either a contraction or
expansion

Expansion
If product price rises, business supply of that product increases

Contraction
If product price falls, business supply for that product falls
Shifts of the supply curve

Factors that increase supply

- A fall in the price of other goods
- An improvement in technology used in production
- A fall in cost of factors of production
- An increase in quantity of resources available used in production

Factors that decrease supply

- A rise in the price of other goods
- A certain technology being no longer available
- A rise in cost of factors of production
- An increase in quantity of resources available used in production

Price Elasticity of Supply

Price Elasticity of Supply: a concept that measures change in quantity supplied for goods and
services following a change in price

Types of Elasticity of Supply

Elastic Supply
- A strong response of quantity supplied to a change in price

Unit Elastic Demand

- A proportional response of quantity supplied to a price change

Inelastic Demand
- Little to no response of quantity supplied to a change in price

Perfectly Elastic Supply

Suppliers supply an infinite quantity of the good at price point 0P

Suppliers wouldn’t supply the good at all if it were to fall below point 0P
Perfectly Inelastic Supply

The quantity supplied is fixed and won’t change, regardless of the

price

e.g., a piece of art whereby only one exists

Factors affecting Elasticity of Supply

Time lags after a price change

The ability to hold and store stock

- The more storage a firm has, the more elastic the supply is
- If a firm has high stock, they can increase supply on demand whenever price increases

Excess Capacity
- If a firm has excess capacity, they have an elastic supply, because they can increase their
supply by operating at higher a capacity e.g., a business operating at half capacity can double
their output by operating at full capacity

- If a firm is operating at full capacity, they will have an inelastic supply

 Chapter 8: Market Equilibrium

The concept of Market Equilibrium

Market: A place where buyers and sellers interact. Sellers offer a good/service to buyers, in
exchange for money

Product Market: Where buyers and sellers interact to determine the price and quantity of
goods/services e.g., clothing retailers, supermarkets

Factor Market: The process of supply and demand interacting to determine the price and quantity of
factors of production (resources) e.g., financial markets, labour markets, land markets

Establishing Market Equilibrium

Market Equilibrium: situation where, at a certain price level, the quantity supplied for a good is equal
to quantity demanded

The point where the quantity demanded is equal to the quantity supplied

Role of The Market

Solving the economic Problem
The interaction of supply and demand determines a price and quantity that best satisfies an
individual’s wants, with limited resources available to firms

Allocating Resources according to the lowest opportunity costs

Solving the Economic Problem in the Factor Market

Demand and supply forces in factor market determine the price paid for factors of production
e.g., a surgeon will receive high wages, because the supply of surgeons is limited (due to the amount
of years required to obtain the skills) compared to their high demand
 Chapter 9 – Labour Demand and Supply

The Demand for Labour

- Demand for labour is a derived demand, derived from the demand of goods/services in the
economy
e.g., when demand for g/s increase, firms must increase output, meaning they must hire
more labour to produce more, increasing labour demand

Output of the Firm

Because labour is a derived demand, a firms demand for labour is influenced by its level of output

Factors that influence a firm’s output, and in turn influence their demand for labour are:

General Economic Conditions (aggregate demand)

Aggregate Demand: refers to the total demand for goods and services within the economy

When the economy is enjoying a growth, aggregate demand is strong, meaning business have more
sales and need more staff to make goods and services

If the economy is in a recession, this usually results in a reduced demand for labour

There are three reasons why changes in economic activity do not lead to immediate changes in
labour demand:
1. When aggregate demand increases, firms may satisfy this higher demand by working
existing staff more efficiently and intensively
2. Firms don’t retrench staff in a downturn in hope that the economic downturn eases in
the short term
3. Employment contacts may have terms and conditions that restrict firms from
retrenching staff
Conditions in the firm’s industry
Because labour is a derived demand, changes in patterns of consumer demand will impact the
demand for labour

Therefore, a change in consumer tastes and preferences will see a change in allocation of labour
between different industries

e.g., because of an increase in demand for technology, the ICT industry is expected to employ
929,000 workers by 2025, three times the amount of ICT employees in 2005

The demand for an individual firm’s product

If a firm is effective in selling its g/s to the market, and has a good reputation, this will cause an
increase in sales and consumer demand, increasing output and as a result increase the firms demand
for labour

The Productivity of Labour

Labour productivity is influenced by the quality of the workforce, education levels, skills, health and
motivation.

Short Term labour productivity impacts in labour demand:

- If aggregate demand is rising at a faster rate than the increased productivity,

demand > supply, so businesses will increase demand for labour to meet the higher level of
aggregate demand
- If aggregate demand is unchanged, but labour productivity is increasing, supply > demand,
meaning businesses will have excess capacity and will not need any more labour, demand
for labour will decline because the higher productivity means that businesses can cut back
on workers and still produce the same quantities as before
- If aggregate demand is falling but labour productivity is increasing, demand for labour will
fall even more, because businesses will have to reduce output to match demand in order to
maintain profits

Long Term Labour productivity impacts on labour demand:

- Higher labour productivity should increase firms labour demand as firms substitute labour
for other factors of production
Cost of other Inputs

Firms often have to decide how to combine capital and labour in their production process
The Limits of Markets
Why do governments intervene?

Government Intervention: steps taken by government to correct undesirable outcomes caused by

the interaction between buyers and sellers as well as employers and employees

Market failure is the key reason why governemnt’s intervene

Market Failure: refers to situations when market forces create unfavourable/undesirable/unfair/

inefficient outcomes.

Types of Market Failure include:

- Non provision of g/s
- Unequal income distribution
- Negative externalities
- Abuse of market power
- Economic instability

Non-Provision of Goods and Services

- Goods which display public goods characteristics aren’t produced/under produced by private
businesses because private businesses cannot charge people to pay for these goods
-
- Public Good charcteritics: non excludable and non rival
- E.g., clean air, street lights, public parks

Non excludable: businesses can’t charge people fees to use the product.

Non rival: one person’s consumption of a public good does not diminish the potential for another
person to consume that same public good

Government Intervention:
Merit Goods
Goods that benefit the whole community but are under produced need to be produced/funded by
the government e.g., hospitals
Demerit Goods
Goods that harm the community or are overproduced need to be restricted by the government. This
is achieved through taxation, complete bans, age restrictions, fines to producers
e.g., tobacco (tax), alcohol (age)
Collective Goods and Services
Goods that are used by the majori of people but aren’t produced by the private sector because it is
too expensive and won’t produce profit
e.g., roads, railways, national defensive
Distribution of Income
Problem: the free market does not consider the social costs of wealth only being held by a small
portion of the community
As the rich get richer through their factors of production, those in poverty increase

Government intervention:
Improve opportunities for people in disadvantaged groups
Gov use fiscal policy to fund health care, education, provide special education programs, offer living
allowances for students, provide businesses with measures to employ disadvantaged people

Provide decent social welfare payments

Funding a comprehensive welfare system, including unemployment payments, aged pension

Progressive Income Tax

Those who earn relatively high incomes get taxed a higher proportion of their income, which is
transferred to those lower earners through welfare payments

Market Fails to Account for Externalities

Externalities: unintended costs and benefits that buyers and sellers don’t consider in their decision
making process e.g., airlines and passengers do not consider aircraft noise when negotiating prices

Externalities occur when the price mechanism fails to take into consideration the true social costs
or benefits of production.
This is due to the fact that buyers and sellers don’t have to pay for the social costs or do not profit
from social benefits

Negative Externalities: the unintended harmful impacts of producing g/s on the

environment/community
e.g.,
Pollution: business may reduce transport costs by transporting via roads instead of trains, but in
doing so, the use of road transport adds noise and air pollution to local communities, and may cause
damage to roads, discomfort to locals, and respiratory problems from worsened air quality

Positive Externalities: the unintended positive impacts of producing g/s on the

environment/community
e.g.,

Government intervention:
Taxation, Levies, Fines
Governments can discourage production and consumption of g/s that generate negative
externalities through imposing taxation, levies, and fines on those producing and consuming
unhealthy/harmful products
e.g., levies placed on producers of tobacco/alcohol – aims to discourage production of these
products

Subsidies
Governments can encourage businesses to produce g/s that generate positive externalities by
providing funding to these businesses that benefit the community
 Chapter 10 – Labour Market Outcomes

Wage Outcomes
 Chapter 14 – The Limits of Markets

Why governments intervene

Government Intervention: steps taken by government to correct undesirable outcomes caused by
the interaction between buyers and sellers as well as employers and employees

Governments intervene to solve problems caused by market failure

Market Failure: refers to situations when market forces create unfavourable outcomes.

Market failures include:

1. Non provision of g/s
2. Unequal income distribution
3. Negative externalities
4. Abuse of market power
5. Economic instability

Market Failure in the provision of goods and services

Overarching Problem:
The market fails to provide or under-produces certain necessary g/s

Areas of market failure include:

Non provision of public goods
Public goods are non-excludable and non-rival, therefore the private sector doesn’t provide these
goods because they can’t generate income from providing them e.g., streetlights, public parks

Government must step in and provide public goods

Market underproduces merit goods e.g., sport stadiums, movie cinemas

Governments step in by directly providing merit goods (operating and funding themselves) or
indirectly providing them (through financial support for private sector)

Market overproduces demerit goods e.g., alcohol, tobacco

Gov’t restricts their production through:
- Taxes
- Bans
- Age restrictions

Non provision of collective goods

Goods that are used by majority of the community but are too expensive to be supplied by the
private sector or not desirable to be supplied by private sector

- Gov’t provides national defence force, health services, education, roads themself
- Gov’t monopolises the supplication for the g/s when it is efficient for only one company to
supply the g/s
Market Failure in income distribution
Overarching Problem:
The free market fails to consider the social costs of wealth being predominantly held by a minority of
the population
↓
The rich get richer  Once people get wealthy, their wealth expands through assets they own (earn
interest and rent)

Concurrently, the poor remain poor  Children from low-income families don’t get same education
opportunities as wealthy children. Without education the children are stuck in low-income jobs and
the cycle repeats

Gov’t intervenes by:

Gov’t implements progressive income tax  those on higher wages get taxed a higher proportion of
their income, which can be transferred to low-income earners through:
Gov’t funding a comprehensive welfare system, including:
- Unemployment payments
- Aged pension
- Single family supplements

Gov’t can also improve the income distribution by using fiscal policy to:
- Fund universal health care and education
- Provide education programs
- Offer living allowances for students

Market Failure in externalities

Externalities: unintended costs and benefits that buyers and sellers don’t consider in the price
mechanism process

- Externalities occur when the price mechanism fails to take into consideration the true social
costs or benefits of production.
- This is because buyers and sellers don’t have to pay for the social costs or do not profit from
social benefits

Positive Externalities: the unintended positive impacts of producing g/s on the

environment/community

Subsidies
- Governments can encourage businesses to produce g/s that generate positive externalities
by providing funding to them

Negative Externalities: the unintended harmful impacts of producing g/s on the

environment/community

Taxation, Levies, Fines

- Governments can impose taxation, levies, and fines, to discourage production and
consumption of g/s that generate negative externalities
e.g., levies placed on producers of tobacco/alcohol – aims to discourage production of these
products
Licensing
- Gov’t can implement licensing programs that require businesses to seek approval before
producing a g/s that has negative externalities

Legislation that bans production

- Gov’t can outright ban production of g/s that generate high negative externalities