Topic 1- Introduction to Economics

The nature of economics

The economic problem – wants, resources, scarcity:
 The economic problem: resources are scarce in relation to infinite human wants
 Economies attempt to solve the economic problem by answering the four functions of
the economy: What to produce? How much to produce? How to produce? To whom to
distribute?
 Wants- Material desires of an individual for comfort/pleasure can be individual or
collective.
 Characteristics of wants- Unlimited, can be recurrent/complementary, changed by
age, must be prioritized.
 Utility- Satisfaction derived from consumption.
 The four factors of production are: land (paid in rent), labour
(paid in wages), capital (paid in interest) and enterprise
(paid in profit)
Choice
 Both individuals and society are limited by scarcity. This
implies that people want more than what is achievable.
Choices have to be made on a daily basis by all consumers,
firms and government to prioritize wants as economic
resources are limited, but human needs and wants are
unlimited, so therefore choice is needed.
Opportunity cost & production possibility frontiers:
 Opportunity cost- the cost of the alternative want foregone
by satisfying a want.
 Opportunity cost can be graphed as a production possibility
frontier from a production possibility schedule. Point A is all
food and Point B is all clothing, Point C is a mixture. All points
represent full employment of resources/full productive
capacity. A point inside of the curve means unemployment of
resources.
 Improvement in technology, a resource discovery or
productivity increase all lead to a curve
shift outward.
 A frontier in reality is curved as resources
can’t usually be substituted at a constant
rate.
Future implications of choices by individuals,
businesses and governments:
 Consumer goods- y axis (items produced
for immediate satisfaction of needs and wants) and Capital
goods- x axis (produced for the production of other goods) are
graphed on a curved PPF.
 Individuals, businesses and governments engage in economic
activity to achieve allocative efficiency (maximising use of
limited resources available)
 Individuals, business and governments all face the following
implications on living standards:
- Spend resources/money now ->Higher now -> Lower in the
future
- Save resources/money now ->Lower now -> Higher in the
future
Economic factors underlying decision-making
 Income = Consumption + Saving, Y= C+S
 Higher income earners spend more in total than lower but save higher percentage of
income.
 Individual
- Spending: consumption is carried out to satisfy needs and wants.
- Saving: saving is carried out to spend later, invest or to spend once a certain point is
achieved.
- Work: the higher the skills needed/education/qualification for a job, the higher the
income earned, therefore, higher potential levels of saving & consumption (standards of
living)
- Education: the higher the level, generally the higher level of income earned, therefore
higher levels of saving & consumption (standards of living)
- Retirement: employers must contribute 9.5% of employee’s salary to superannuation.
- Voting and political participation: voting may reflect one’s economic decisions.
 Businesses
- Pricing: businesses aim for profit maximisation, usually determined by: price =
production costs + mark up. Important as costs must be covered to gain profits- price
depends on costs, demand and competition levels
- Production: business decides on the most efficient combination of resources to use.
- Resource use: businesses must utilise resources to most valued use (allocative
efficiency)
- Industrial relations: Negotiation of wages and working conditions are important
because they determine employee productivity and promote motivation and job
satisfaction.
 Governments – influence the decisions of individuals and businesses.
- Governments allocate resources which provide infrastructure.
-Federal government attempts to stabilise economic activity through (monetary/fiscal)
economic policies.
- Governments redistribute income through taxation.
- Government regulates economic behaviour to consumer rights and increase
competition in markets raising efficiency and lowering prices.
The operation of an economy
Production of goods and services from resources
 The 4 factors of production are: land (paid in rent), labour (paid in wages), capital (paid
in interest) and enterprise (paid in profit). These are used by businesses to produce g/s.
Distribution of g/s:
 Distribution of g/s determined by income.
 Income determined by: education, training, qualifications, skills, experience, type of
employment.
 Income redistributed by government through taxation.
Exchange of g/s:
 Economies use money as a medium for exchanging g/s.
 Prices are indicators of relative value of g/s.
 The exchange of g/s occurs in markets.
Provision of income:
 Individuals paid factor income payments in return for the resources ‘given’ to be utilised
in production (either rent, wages, interest or profit)
 Final Income = Gross Income + Social Wage – Taxation – Indirect Taxes
 Government redistributes income (social welfare payments)
Provision of employment and quality of life through the business cycle:
 Employment in Aus created through private and government sectors
 Primary industry – raw material extraction,
 Secondary industry – manufacturing
 Tertiary industry – providing services
 Quality of life depends on quantity and quality of g/s in the economy and community.
 The business cycle is fluctuations in the level of economic growth.
- Recession- decreasing economic activity: expenditure, output, income and
employment are at the minimum level and government attempts to stimulate economic
activity.
- Boom- expenditure, output, income and employment peak (as economic activity
peaks) and shortages of resources lead to inflation.
- Upswing phase – expenditure, output, income, employment and government spending
increase.
- Downswing phase –expenditure, output, income and employment begin to fall.

The circular flow of income

 In the five sector model equilibrium occurs when
S+T+M=I+G+X
 Leakages-The removal of money from the circular flow
decreasing the level of economic activity.
 Injections- The input of money into the circular flow
increasing the level of economic activity.
 Disequilibrium occurs when leakages do not equal
injections
- leakages > injections: Income, Output, Expenditure and
employment will fall (leading to a recession and a
contraction in the flow)
- leakages < injections: Income, Output, Expenditure and employment will rise (leading
to a boom and an expansion in the flow)
 If disequilibrium occurs, changes in expenditure, output, income and employment will
lead to equilibrium being regained in the economy.
Individuals- Supply factors of production to firms in exchange for incomes, which is then
used on savings, taxation, consumption/expenditure and imports.
Businesses- Buys factors of production to produce and sell g/s. Depend on supply of
resources and consumption of g/s.
Financial Institutions- Intermediaries between savers and borrowers of money. Needed
for mobilising savings, using them for investment.
Governments- Imposes taxes, using revenue to fund government expenditure.
International Trade and Financial Flows- Involves transactions with the rest of the
world, including imports, exports and international money flows.
Economies: their similarities and differences
Australia and Japan-
Economic Growth and Quality of Life- Japan and Australia are two of the largest economies
of Asia and are the only Asian nations part of the G20. Both have experienced slower
growth than other Asian nations over the past few decades. They are both industrialised
and have relatively high quality of life when looking at the world.
Employment and Unemployment- Japans unemployment rate has been lower than
Australia’s since the mid 1980’s. Australia has similar employment patterns to Japan with
most employed working in the tertiary sector.
Distribution of Income- They both have a relatively even distribution of income
Environmental Sustainability- Australia has over double the CO2 emissions of Japan per
capita. Australia has significantly lower Water productivity than Japan also.
Role of Government in Health Care, Education and Social Welfare- They have similar
market economies. They also have similar percentage of GDP government expenditure.
They both have a strong government role in provision of health care and education. Japan
has almost double the social welfare spending of Australia due to pensioners.
Topic 2- Consumers and Business
The role of consumers in the economy
Consumer sovereignty: patterns of consumer spending and saving/dissaving: variations
with income and age.
 Consumer sovereignty- the pattern of consumer spending determines the pattern of
production and resource allocation.
 Y = C + S; Income=Consumption+ Savings
 Consumption Function- Relationship between income and consumption stating
income rises faster than consumption.
𝐶
 Average Propensity to Consume- Proportion of total income spent on consumption 𝑌
𝑠
 Average Propensity to Save- Proportion of total income spent 𝑌
 Marginal Propensity to Consumer- Proportion of each extra dollar of earned income
spent on consumption
 Marginal Propensity to Save- Proportion of each extra dollar of earned income saved
for future consumption.
 Individuals and economies with higher incomes have a higher APS and MPS and lower
APC and MPC, vice versa is true
 MPC + MPS = 1
 Breakeven point: C=Y, S=0
 Saving: C<Y, Dissaving: C>Y
 Consumer consumption patterns vary with age as
consumers’ preferences and needs change, as well as
employment and incomes.
 Dissaving occurs in childhood and old age with saving
occurring in adulthood
 Factors that influence saving: cultural and personality factors, expectations of the
future, tax policies, availability of credit, age, income
Factors influencing individual consumer choice
 Income- increase in income levels is accompanied by an increase in total amount of
spending and an increase in the total amount of saving. Spending decreases as a
percentage of income and saving increases as a percentage of income (as income
increases, APC and MPC decrease , APS and MPS increase)
 Price- consumers will buy the least expensive brand of a good (with quality and
quantity being constant), as price increases, demand decreases.
 Price of substitutes- as price of a product increases, the demand for a lower-cost
substitute increases.
 Price of complements- the demand for the product decreases, as the price of
complements increases.
 Preferences/tastes- change in tastes or preferences towards a g/s may lead to an
increase in demand.
 Advertising- Has a major impact on consumer choice, with the aim of building brand
loyalty.
Sources of income
 Income- the return for resources
 Wages- income from labour supplied
 Rent- income from land supplied
 Interest- income from capital supplied
 Profit- income from enterprise (return from investments)
 Social welfare- income supplied by government for those in need of assistance
including elderly, disabled and unemployed.
The role of business in the economy
Define; firm, industry and a firm’s production decisions:
 Firm- any business organisation which uses resources to produce g/s to satisfy
consumers’ needs and wants usually in return for profit.
 Unincorporated firm- sole traders and partnerships; have unlimited liability.
 Incorporated firms- private and public companies; have limited liability.
 Industry- group of firms producing a similar range of g/s.
 Quaternary industry- Provide knowledge and information.
 Quinary industry- firms and individuals who provide personal services.
A firm’s production decisions include:
- What to produce?: Specific business areas of strong knowledge and demand with known
requirements to establish.
- How much to produce?: Aiming for maximum profit with little to no shortages/surpluses,
based on market research, demand and access to capital.
- How to produce?:Resources and technology required, production decisions depending on
efficiency to attempt to produce output at minimum cost.
Business as a source of economic growth and increased productive capacity and goals of
the firm:
 When the private sector is healthy, higher economic growth occurs and government has
a stronger revenue base to fund services. A growing business leads to employment of
more people, leading to a reduction in the unemployment rate. Business and Industry
can also lead to the development of a region, improving way of life. It also improves the
productive capacity of an economy over time, through capital goods which is why
government often provides incentives and injections to business.
 The main goals of a firm are: profit maximisation, growth maximisation, increasing
market share, meeting shareholder expectations and satisficing behaviour
Efficiency and the production process: productivity, internal and external economies and
diseconomies of scale:
 Productivity- how much is produced with a given quantity of resources per unit of
time.
 Productivity improves living standards due to the ability to satisfy more wants through
less wastage, lower production costs/higher profits for firms, lower inflation rate, higher
incomes, increased international competitiveness of industry.
 Production- Total amount of g/s produced
 The main sources of productivity improvements in the production process are:
- the division/ specialisation of labour- firms break down production process into
sub-processes, allowing labour to specialise in a specific part of the production process.
- the specialisation/localisation of land/industry- firms locating near each other or
specific locations to reduce production costs by sharing common requirements.
- the specialisation of capital/large scale production- Firms using highly
specialised capital equipment in the production process.
 Internal economies of scale- Cost saving advantages resulting from a firm’s
expansion of operations. They may be; better ability to: take advantage of
specialisation of labour, invest in more efficient capital
equipment, find a market for its products, put resources
into R & D etc for a strong future, raise finance for
expansion and bulk-buying.
 Internal diseconomies of scale- Cost saving
disadvantages resulting from a firm’s expansion of
operations beyond a certain point. These disadvantages
include inefficiency increase, duplication of jobs, lack of
personal relationships, decline in managerial/administrative efficiency.
 Technical Optimum- Most efficient level of production for a firm. Average costs of
production at lowest point possible. As this is approached on the curve per-unit
production costs are falling and once it passes this point, they begin to rise.
 External economies of scale- advantages due to industry growth the firm is part of.
They include: increasing localisation, healthy capital market and extra benefits.
 External diseconomies of scale- disadvantages due to industry growth the firm is
part of. They may be: Increased pollution, transport issues, raw material cost rises due
to higher demand.
The impact of investment, technological change and ethical decision making on the firm
 Ethical Decision Making- Business decisions considering society rather than profits
only. This is often influenced by government legislation.
 Production methods- investment and technological change has changed production
methods from being labour intensive to being more capital intensive leading to
increased efficiency and lower costs.
 Prices- Technology lead to a better informed market place, squeezing profit margins
and reducing costs.
 Employment - investment and technological change will lead to a requirement for
specialist labour skills and structural unemployment (due to labour saving production
methods)
 Output- investment and technological change may increase output which may be of
higher quality.
 Profits - investment and technological change may lead to an increase of profits in the
future.
 Types of Products- Technological change creates new products and industries, ethical
consumerism lead to the creation of new products and the altering of old ones.
 Globalisation- Driven by technologies which has “made the world smaller”.
 Environmental sustainability- firms need to ensure, the best they can, their
production methods don’t contribute to environmental issues.

Topic - 3 Markets
Demand
Demand- The quantity of a particular good or service that consumers are willing and able
to purchase at various price levels at a given point in time.
Individual Demand- Demand of each individual consumer.
Market Demand- Demand by all consumers for a good or service.
Law of demand- Quantity demanded by consumers’ falls as prices rise.
Ceteris Paribus- An economic assumption used to evidence the relationship between two
variables, meaning other factors stay constant.
Demand Schedule- Table showing the demanded quantity of a good at different price
levels, at a given point in time.
The Demand Curve- A graphical representation of the data presented/demand schedule,
slopes downwards left to right.
Movements along the Curve: Only Price Changes (Ceteris
Paribus)
Contraction of Demand- Increase in price of g/s causes
quantity demanded to decrease; it is an upward movement along
the curve.
Expansion of Demand- Decrease in price of g/s causes an
increase in quantity demanded; it is a downward movement
along the curve.

Shifts of the Curve: Shift due to factors other than price.

Increase in Demand- Shift right from d1 to d2, consumers are
willing and able to buy more at each possible price than before.
At p1, demand has increased from originally q1 to q2 (more
demand for same price), also means consumers are willing to
buy the same quantity for a higher price, at q1 the original price
was p1, following demand increase, for q1 the consumer will now
pay (p2) a higher price (same demand for higher price).
Decrease in Demand- Shift left from d1 to d2, consumers
are willing and able to buy less at each possible price than
before, at p1, quantity demanded has decreased from q1 to q2 (less demand for same
price). Consumers are willing and able to buy a given quantity at a lower price than
before. At Q2, consumers were willing to pay P2, following demand decrease, now willing
to pay the lower price of P1 (Same quantity for lower price).
Factors Affecting Demand-
Price of the g/s- Necessities are bought regardless of price change, other goods
(wants/luxuries) are likely to have a reduced demand from a price increase.
Price of complements/substitutes- A rise in substitute product prices will lead to a
demand increase, whilst a rise in complement product prices will lead to a demand
decrease.
Income- An income level rise would mean more consumers would be willing and able to
purchase more expensive products increasing their demand, a shift in income distribution
would alter demand for different g/s. Also expected future incomes and prospects will
influence their decisions to buy certain g/s.
Population- Size determines the overall quantity of goods demanded, change in age
distribution affects the types of goods demanded.
Expected Future Prices- If consumers expect a future price increase, current demand
would increase. If consumers expect a price decrease they are likely to wait, therefore a
decrease in current demand.
Tastes and Preferences- Demand for (trendy) items in fashion will increase, whilst items
out of fashion would decrease in demand.
Price Elasticity of Demand- Measures the responsiveness of quantity demanded to a change
in price, calculated as the % change in quantity divided by % change in price.
Elastic Demand- Strong response to change in price.
Inelastic Demand- Weak response to change in price
Unit Elastic Demand- Proportional response to change in price (total consumer spending
amount remains unchanged).
Relatively Elastic Demand- Quantity demanded-very responsive to price change.
Relatively Inelastic Demand- Less than proportionate change in quantity demanded.
Importance of Price Elasticity of Demand-
Business- Need to understand it for the goods they sell in order to decide on their optimal
pricing strategy.
Government- Need to understand price elasticity of demand when pricing g/s it provides
to the community. Also needs to have the ability to predict the effects of changes in the
level of indirect taxes and special levies.
Total Outlay Method- Calculate the price elasticity of demand by looking at the effect of
changes in price on the revenue earned by producer.
-Slope of demand curve should not be used to determine price elasticity of demand.
Perfectly elastic=Horizontal, Perfectly Inelastic= Vertical.

Factors Affecting Elasticity of Demand-

Elastic Demand Inelastic Demand

Luxuries Necessities
Close substitutes Few or no close substitutes
Expensive Items- Large proportion of Cheap Items- small proportion of
income income
Long run demand- takes time to adjust Short run demand- May not respond
to price or seek alternatives. greatly
Durable goods Non durable or habit forming goods
Supply
Business Firms determine how the demands of consumers are
to be met through producing g/s.
Supply- Quantity of g/s that all firms in a particular industry
are willing and able to offer for sale at different price levels in a given period of time.
Individual Supply- The supply of a business firm.
Market Supply- Sum of individual firms supplies of individual producers at various price
levels.
Law of Supply- As the price of a certain product rises, the quantity supplied by producers
will rise. (usually due to a view of higher profitability)
The Supply Curve- A graphical representation of the data presented/demand schedule,
slopes upwards left to right.
Supply Schedule- based on ceteris paribus, shows quantity supplied over a range of
prices at a given point in time.
Movements along the Curve: Only Price Changes (Ceteris Paribus)
Contraction of Supply- Decrease in price of g/s causes quantity supplied to decrease; it
is a downward movement along the curve.
Expansion of Supply- Increase in price of g/s causes an increase in supply demanded; it
is an upward movement along the curve.
Shifts of the Curve: Shift due to factors other than price.
Increase in Supply- Shift left from s1 to s2, producers are willing and able to supply
more at each possible price than before. At p1, supply has increased from originally q1 to
q2 (more supply for same price), also means producers are willing to supply the same
quantity for a lower price, at q1 the original price was p1, following supply increase, for q1
the producer will now produce (p2) at a lower price (same supply for lower price).
Decrease in Supply- Shift right from s1 to s2, producers are willing and able to supply
less at each possible price than before, at p1, quantity supplied has decreased from q1 to
q2 (less supply for same price). Producers are willing and able to produce a given
quantity at a higher price than before. Producers were supplying Q2 at P2, following
supply decrease, now willing to supply for the higher price of P1 (Same quantity for
higher price).
Factors Affecting Supply-
Price of the g/s- If market price is too low, a producer may not be able to cover costs of
production, therefore wouldn’t supply the product.
Price of other g/s- A rise in another product’s prices will lead to an increased supply in
that product due to increased profitability and vice versa.
Expected Future Prices- If producers expect a future price increase, perhaps due to a
demand increase, supply would be increased due to possibility of increased profit.
State of Technology- Improvements will lead to lowered production costs, allowing a
greater supply at a given price, along with the possibility to adapt faster to changing
demand.
Changes in the cost of factors of production- A fall would allow firms to supply more of
a good; a rise would make it difficult to maintain current production levels. A rise in the
price of a factor of production would lead to a decrease in supply of g/s whose production
relied on that production factor.
Quantity Available- A limiting factor, perhaps due to a scarcity of resources.
Number of Suppliers- As more suppliers enter an industry, supply increases and vice
versa.
Climatic/Seasonal Influence- Some products rely on different climates and seasons
where supply is at its highest and vice versa.
Price Elasticity of Supply- Responsiveness of quantity supplied to a change in price.
Calculated as % change in quantity supplied divided by % change in price.
Unit Elastic Supply- Proportional response to change in price.
Relatively Elastic Supply- Quantity supplied proportionately greater than an increase in
price- very responsive to price change
Relatively Inelastic Supply- Less than proportionate change in quantity supplied.
Elastic Supply- Strong response to price change.
Inelastic Supply- Weak response to price change.
Factors Affecting Elasticity of Supply-
Factors causing supply to be elastic Factors causing supply to be inelastic
Longer time periods Shorter Time Periods
Ability to hold stock in inventory Unable to hold stock- perishable items
Firms have excess capacity- not using Resources being used to full capacity
all resources fully. Can respond to
change through using resources more
intensively.
Market Price
Price Mechanism- The interplay of forces of supply
and demand, which determine the prices at which
commodities will be bought and sold in the market.
Market Equilibrium- Situation where, at a certain
price level, quantity supplied and quantity demanded
of a product is equal- in this situation there is no tendency for change,
and the market clears (no excess demand or supply). Graphically it is
where the demand and supply curves intersect.
Excess Demand- Demand > Supply: Leads to a price rise due to a
shortage, resulting in an expansion of supply and a contraction of
demand, continuing until equilibrium.
Excess Supply- Supply > Demand: Sellers must drop their
price due to an excess supply, resulting in a demand expansion
and supply contraction until equilibrium.
Changes in Equilibrium-
Increase in Demand- Leads to an increase in equilibrium price
and quantity. To get to new equilibrium- demand has increase and now exceeds supply,
forcing a price rise- leading to a supply expansion, continuing until new equilibrium.

Decrease in Demand- Leads to a decrease in equilibrium price and

quantity. To get to new equilibrium- Price is dropped as supply exceeds
demand. Supply contracts until new equilibrium.
Increase in Supply- Lowers equilibrium price, raises quantity. As there are
more products available, there is a contraction in demand occurring until new
equilibrium, thus lowering price.
Decrease in Supply- Raises equilibrium price, lowers quantity. Due to a
decrease in supply, there are fewer products available, therefore an
expansion in demand, until new equilibrium.
Role of the Market-
Product Market- The interaction of demand for and supply of the outputs
of production.
Factor Market- A market for any input in the production process.
Solutions to the economic problem-
Allocative Efficiency- The economy’s ability to allocate resources to
satisfy consumer wants. This is productive as it is the best way to use
resources to achieve the maximum number of wants in a society.
The importance of relative price in reflecting opportunity costs in the g/s and factor
markets
Price Mechanism- Efficient as any consumer willing to pay the market price will be
satisfied and producers will be able to sell all they produce.
The market price of a commodity reflects the opportunity cost associated with it.
(Alternatives to Market Solutions) Role of Government-
Market Failure- Price mechanism may take account of private
benefits and costs of production to consumers and producers, but fails
to take into account indirect social costs and social benefits. -Leads to
government intervention.
Price Intervention- main reason is to affect the distribution of income.
Price Ceilings- The maximum price that can be charged for a commodity. They
redistribute money from sellers to buyers. Leads to excess demand.
Price Floors- The minimum price that can be charged for a commodity. They redistribute
money from buyers to sellers. Leads to excess supply.
Quantity Intervention-
Externalities- Items not taken into account in the operation of the price mechanism
Positive Externalities- Social Benefits (positive impacts coming from the individual
consumption of collective g/s).
Negative Externalities- Social Costs (negative impacts coming from the individual
consumption of collective g/s)
Public Goods- Goods which private firms are unwilling to supply as they are not able to
restrict usage and benefits to those willing to pay for the good- provided by government.
Merit Goods- Goods not produced in sufficient quantity by private sector as individuals
don’t value those goods (e.g. health care). Government may subsidise to lower prices and
increase consumption.
Problem Government Action Outcome
Market price too Price ceiling Reduces price- Quantity Shortage
high
Market price to Price floor Increases Price- Quantity Excess
low
Negative Taxes Increases Equilibrium Price, Reduces
externalities Equilibrium Quantity
Positive Subsidies Reduces Equilibrium Price, Increases
externalities Equilibrium Quantity
Public goods Government Government collects taxation revenue
provided g/s to fund supply.
Variations in Competition-
Market Structure- Number and relative size of firms within an industry, nature of the
product sold and ease of entry for new firms.

Market Number and Product Barriers to

Structure size of firms characteristics entry
Pure Many small Homogenous No barriers to
Competition firms product entry
Monopolistic Many Differentiated Relatively
Competition relatively products easy
small firms
Oligopoly Few , Differentiated Extremely
relatively products high
large firms
Monopoly One large firm No close Extremely
substitutes high
Effects of changing levels of competition and market power on price and output
As more competition enters a market each firm has less influence on price setting or less
market power and: more competition -> more output -> lower price

Topic 4- Labour Markets

Demand for and supply of labour
The demand for labour (by individual firms):
 The demand for labour is derived from the demand for the g/s that labour is used to
produce. Therefore, an increase in the demand for a g/s, there will be an increase in the
demand for labour for production.
Factors affecting demand include:
o (Outputs) Output of the firm- If a firm is experiencing higher demand for their
products, they will demand more labour to increase production output levels. This is
affected by-
- Economic Conditions- Aggregate demand is the total demand for g/s in the
economy. When a firm’s products are in high demand, firm’s demand more labour as
this is what is needed to produce more. This demand for labour is highly affecting by
fluctuations in the business cycle. Firms tend to operate at excess capacity so when
change occurs, firms can fully employ existing resources
- Conditions in the firms industry- Changes in consumer demand leads to
proportionate labour demand changes.
- Demand for individuals firm’s products- Despite a negative change in the industry a
firm is part of, if the firm can gain increased market share due to their products being in
demand, it may experience growth in its output despite the
opposite occurring to the industry as a whole.
o Productivity of Labour- The firm must determine
organisation of production, deciding on technology or labour. Labour productivity is
the output per unit of labour per unit of time.

o (Inputs) Cost of Other Inputs- Comparing cost of labour (including wage rates and
on-costs) vs other inputs, main substitute being capital. When this substitution is easy,
firm’s demand for labour becomes more elastic.
- Higher Cost of Labour = Less demand for labour as capital is used instead.
- Firms measure full cost of labour vs full cost over time of capital investment
- Capital costs are interest rates for funds, firms may get special tax allowances in the
situation of investment.
- Firms may operate overseas for cheaper labour, therefore, demand for labour in certain
industries is influenced by numerous countries.
The supply of labour- Potential employees offering their services to firms.
Factors affecting labour supply-
 Pay Levels/Remuneration Package- The higher the pay, the higher a person would
sacrifice leisure time.
 Working Conditions- Encourage a higher supply of labour, this is covered by the
National Employment Standards which sets a number of minimum conditions for
Australian employees regarding leaves, hours etc.
 Human Capital- Countries with higher levels more likely to achieve lower
unemployment. Due to amount of sacrifice, time and effort, there may be a lower
labour supply to those occupations requiring higher education. This is influenced by
gov’t funding.
 (Mobility of Labour)- Responsiveness to changes in demand for labour in different
areas/industries.
 Occupational Mobility of Labour- Ability to move between occupations due to
employment opportunities and wage differentials- influenced by education requirements
and professional associations.
 Geographic Mobility of Labour- Ability to move between locations due to
employment opportunities and wage differentials- influenced by personal upheavals and
relocation costs.
 Participation Rate- % of civilian population aged 15+ in the workforce.
 Participation Rate =

 Factors Influencing Participation Rate:

 Economic State- It times of high growth and prosperity, the populace is more inclined to
actively seek work, during a recession; employees are worried about job security.
 Aging Population Trends
 Changing Social Attitudes such as women in the workforce
 School Retention Rates- It is likely students enter the workforce later due to schooling
commitments.
 Other factors include gov’t policies and restrictions and education requirements.
The Australian workforce:
 Workforce/labour force- number of employed persons and unemployed persons
actively seeking work.
 Employed- One+ hours of work per week
 Unemployed- People available and actively seeking to work, but unable to find a job.
 Unemployment rate =

General Characteristics of Aus Workforce

 Population Size- Growth experience through migration and natural increase. A skilled
migrant is a migrant with qualifications.
 Age distribution- Aging population means more people outside working age, meaning to
workforce may decline.
 High quality education prepares future generations for productive working lives,
providing a foundation of skills allowing specialisation of labour, many Australians now
undergo tertiary education.

Labour market outcomes

Differences in incomes from work:
 Wage outcomes (rate of wage growth, distribution of income, fringe benefits., relative
wage) vary for people based on: income group, gender, occupation, age, cultural
background.
 Trends in Distribution of Income- Much greater since the early 1990’s when
enterprise bargaining became more popular. Family benefits have offset increase wage
differentials. Also declining union memberships has also lead to more inequality
amongst occupations.
 Non Wage Outcomes for different occupations- Include fringe benefits, leave,
salary packaging, bonuses, flexible working patterns and superannuation
 Arguments for a more equitable distribution of income: increase
consumption/utility levels, support aggregate demand, alleviate poverty and isolation.
 Arguments against a more equitable distribution of income: prevent a potential
reduction in allocative efficiency, to boost national saving, investment, growth and
employment creation, to create an incentive effect on workers and producers, to
prevent a higher tax burden on taxpayers and reduce government spending, to prevent
poverty traps from emerging.

Labour market trends:

- Unemployment/Underemployment –rising unemployment due to slow growth (now
6.25%)
- casualisation of workforce causing underemployment (2011-12: 7.2%)
-Part-time work – increasing (24.6% 2013)
-Casualisation of work – caused by increase in part-time work
-Outsourcing – increasing
-Contractors and Sub-contracting – increasing
Types of unemployment-
 Frictional unemployment – people moving between jobs.
 Seasonal unemployment – unemployment caused by season change
 Structural unemployment – a mismatch of labour skills due to changing
industry/technology
 Cyclical unemployment –contraction in labour demand, workers who are let go due to
lowered g/s demand.
 Long term unemployment – unemployment for over 12 months
 Hard core unemployment – people deemed unemployable
 Hidden/disguised unemployment – Have given up actively seeking work
 Underemployment – People who would like to work more.
Labour market institutions:
 Industrial Relations System-
 Unions- An association of workers aiming to advance members interests by improving
their wages and conditions. (They influence wage outcomes, exercise bargaining power
negotiating with employers, restrict supply of labour)
 Employer associations- Lobby groups representing business interests, (lobby gov’t on
industrial relations policies, assist employers in managing industrial relations issues).
 Current employment/industrial framework- The Ten National Employment
Standards (Fair Work Act 2009), national minimum wage, modern awards, enterprise
agreements.
 Modern awards- industrial awards provide minimum wages and working conditions for
employees specific to their industry.
 Enterprise agreements- Workplace agreement negotiated collectively through
enterprise bargaining between employers and employees.
 Common Law Contracts- Simple agreement involving add-ons to relevant awards
between an employer and employee, enforced through court of law.

Topic 5 – Financial Markets

Types of financial markets
 Financial Markets- Marketplace where buyers and sellers participate in asset trades-
create products that provide a return for those who have excess funds, making these
available to those who need additional money.
 Financial Intermediaries- Firms that receive the savings of individuals/firms and
redistribute them through loans to those will use the funds.
 Primary market- Markets in which firms raise funds by selling financial assets to
investors.
 Secondary market- Markets involving trade of financial assets between investors.

Sources of Saving Reasons for Borrowing

Proportion of household income not Demand for g/s exceeds capacity to
spent on consumption. purchase them
Gov’t budget surplus Gov’t budget deficits
Accessing foreign savings Lending to overseas borrowers
Businesses not distributing parts of Funding business expansions
profits to owners
 Consumer Credit- Allows consumers to purchase g/s ahead of payment.
 Housing Loans- Offered by financial institutions to purchase property.
 Business Loans- Loan allowing business’ to invest in operations.
 Bond Market- Where bonds are traded- A bond is a written document issued by the
lender to the borrower stating interest and initial loan. Lenders receive regular interest
payments followed by the final payment of the debt at the end of the allocated time.
 Short term money market- The trading of financial instruments of high liquidity-
temporary shortages/surpluses of funds.
 Financial Futures- Contracts to trade financial instruments for a certain price in a
future transaction.
 Forex Market- Market for buying and selling foreign currencies.
 Superannuation- An obligatory account of retirement savings which is often invested
into financial products to gain profit.
 Share Market- Financial market where investors buy and sell shares (financial assets
providing the owner with a part ownership of a company).
 Share Market Roles are: Linking public companies needing equity for expansion and
people wanting to invest (aiming for capital gains/dividend income), and to provide a
marketplace for share trading.
Domestic/Global Markets
 Australia influences global market, global market influences Australia.
 More integrated due to technology improvements.
 Deregulation has encouraged higher participation in domestic market.
 Forex Market, Global Debt Market- international borrowing/lending, equity
markets- shares issued and traded.
 IMF oversees international financial market stability.

Regulation of financial markets

 RBA – Functions:
- Controlling banknote issuing- only issuing authority in AUS
- Conducting monetary policy- Influencing interest rates to affect economic activity
levels.
- Systemic Stability- Creates guidelines for financial institution stability.
- Payment System Regulation- Ensuring efficiency of Payment Methods.
- Banker to the banks- Holder of financial institutions exchange settlement accounts
allowing transactions between banks.
- Advise Governments- through economic state and financial market assessments.
 Australian Prudential Regulation Authority (APRA) - responsible for prudential
supervision of deposit taking institutions.
 Australian Securities and Investments Commission (ASIC) - responsible for corporate
regulation, consumer protection and oversight of financial service products.
 Australian Treasury- Advises Gov’t of financial stability issues and financial system
framework (regulatory and legislative)
 Council of Financial Regulators- Coordinating body for regulators providing
cooperation and collaboration.
Borrowers
Individuals- Personal purposes- Mortgages, Short term loans, credit cards
Businesses- Expansion, R & D Investment, Special Projects, Overcome cash-flow
downturns.
Governments- Increase spending, tax cuts, spending outgrown revenue, Infrastructure
project funding.

Factors affecting the demand for funds

The demand for funds driven by 3 motives- Transactionary motive (demanding funds
for buying goods and services), Precautionary motive (demanding funds for
unpredictable circumstances), Speculative motive (demanding funds to invest for capital
gains.)

Lenders
 Individuals- Lend to financial institutions for a return- may be through shares, bonds
or an interest-bearing deposit.
 Businesses- Deposit funds into financial institutions if interest more lucrative than
internal investment- or if immediate plans do not involve expansion.
 Governments- Whilst in surplus- a government may invest money (e.g international
loans) to maintain positive balances.
 International- Known as foreign liability (must be repaid) - to finance domestic
consumption & investment.
Financial aggregates measured by the RBA

 Money- a financial management which is a medium of exchange, store and measure of

value, and a standard for deferred payments.
 Aggregates: Currency- comprises holdings of notes and coins by the private non bank
sector.
 Money base- Currency+ Bank Deposits with RBA.
 M3- Money Base + All Bank Deposits
 Broad money- M3 plus non bank financial institution deposits + NBFI deposits in banks
 Credit- system allowing for deferred purchases.
 Money supply- Total amount of funds in the economy with the 4 characteristics of
money.
Interest rates:
 Interest Rate- The cost of borrowing money expressed as a percentage or the reward
received for lending money.
 Monetary policy- use of interest rates to affect the level of economic activity. The RBA
does this through DMO.
 Objectives of monetary policy: 2-3% inflation, full employment, long term economic
growth to improve living standards.
 Lending Rate- The rate charged by financial institutions for a loan.
 Short Term Loan Interest Rate usually higher than long term.
 Borrowing Rate- The rate offered for the use of one’s money.
 Short Term Deposit Interest Rate usually lower than long term.
 Real interest rate = nominal interest rate – inflationary expectations
Factors influencing Interest Rates
- Investment/Capital Goods- Stronger Investment Demand Upward Pressure
- Savings- Higher Savings Downward Pressure
- Liquid Funds- Increased Preference Upward Pressure
- Inflationary Expectations- Higher Expectations Upward Pressure
- Gov’t Budget- If in debt Upward Pressure
- International- Higher rate overseas: overseas lending Upward Pressure
Domestically
- DMO- RBA affects supply in Short-term money market to alter cash rate influencing loan
returns.
 DMO- Actions by RBA in the Short Term Money Market to buy and sell securities-
outright or through repurchase agreements (seller agrees to repurchase security at a
later date) to influence the cash rate and general level of interest rates to influence the
overall level of economic activity.
- Conducted directly between RBA and financial institutions through Exchange Settlement
Accounts (ESA).
- Banks hold a proportion of their funds in ESA’s to settle transactions with the RBA and
other banks.
- At the end of every day, the transactions cancel each other out and the balance is
transferred- some banks end the day in surplus (and can therefore lend) or in debt
(therefore borrow funds).
 Short Term Money Market (Market for settlement funds)- The market where banks
exchange money through either borrowing or lending funds depending on whether their
ESA’s are in surplus or debt.
 When supply of funds in ESA is high, cash rate falls, when supply of funds is too low,
cash rate rises.
 When Money supply is high, Interest Rates are low and when money supply is
low, interest rates are high.
 RBA affects cash rate by either buying or selling
gov’t securities to create a surplus or shortage in the
short term money market influencing cash rate.
 Changes in the cash rate influence changes in
interest rates as the cash rate is an interest rate
itself- the overnight interest rate on ESAs; also a
change in the cash rate will lead to a change in costs
of borrowing funds in the market and banks tend to
pass these onto customers.

Topic 6- Government and the economy

Government Intervention in the economy
Limitations of the operation of the free market
 Under a completely free-market system, not all community needs and wants are
satisfied.
 Due to different income levels, inequalities worsen, free-market may cause
economic instability.
 Need for gov’t intervention by changing and influencing outcomes when not
satisfying to all of society to gain more favourable outcomes.
 Gov’ts need to be involved, but not over-involved.
 Markets consider private economic interests, not broader social interests.
Provision of g/s, public goods, merit goods
Market Failure- Occurs as the operation of market forces creates unfavourable
outcomes. Gov’t intervention required to solve problems regarding market failure.
Market failure can occur in five areas of economic activity: provision of g/s,
inequality in income distribution, negative environmental externalities, monopoly
power, and fluctuations in economic activity
Public Goods- A good which is difficult to prevent people (free-riders) consuming
without payment- impossible to exclude users, therefore individuals and businesses
would receive no gain out of and have no incentive to prove them, therefore the
gov’t intervenes. They are non-diminishable goods (one person’s satisfaction
doesn’t impact another’s).
Merit Goods- Created for the community as a whole rather than for specific
individuals due to the gov’t feeling they benefit the community despite individuals
undervaluing them- due to an inadequate quantity of these, gov’t intervenes
providing more.
Demerit Goods- Overly produced items which bring harm to the community which
are restricted or highly taxed by gov’t.
Collective Goods- Gov’t provided g/s which benefits the community.
Natural Monopolies- G/S which can only be provided by 1 supplier (gov’t) due to
the required large investment.

Inequality in Income Distribution- disadvantaged groups, relative poverty

 Gov’t reduces inequality by interfering in market economy to add stability.

 Some are disadvantaged as they are susceptible to poverty/low-education in a
free-market economy.
 Gov’t attempts to create equality through universal free education, grants, tax
changes, living allowances, scholarships and increasing social mobility- most of
which are classified under the ‘welfare state’- a system of welfare benefits to
attempt to create equality amongst society.
 Absolute Poverty- People who receive less than the minimum income- below
the ‘poverty line’.
 Relative Poverty- People who do not receive enough income to have the
average standard of living.

Externalities and the Environment (Market Failure in Externalities)

 Externalities- External costs and benefits created by firms in the production

process which aren’t considered in the firms decision making as they don’t
directly affect the business (side effects related to the supply/demand
mechanism).
 Positive externalities- Unintended positive outcomes (benefits) of operations.
 Negative externalities- Unintended negative outcomes (costs) of operations.
 Excessive exploitation of limited cost environmental items such as air and water
leads to pollution, exhaustion and/or degradation.

Monopoly Power- formation of and government ownership of monopolies,

privatisation, corporatisation and competition

 Monopolisation- When a dominant firm uses market position to eliminate

existing competition.
 Price Discrimination- When a firm sells the same type of g/s in different
markets at different prices.
 Exclusive Dealings- When a firm sets conditions for supply that exclude
retailers from dealing with other competitors.
 Collusion and Market Sharing- When firms agree on a pricing and market-
sharing agreement that reduces effective competition, inhibiting new entry.
 Public utilities or public trading enterprises (PTEs) become natural monopolies if
they supply the entire market demand with an efficient scale of plant, their unit
costs decrease as output increases, making it difficult for new firms to enter the
market.
 With an absence of direct competition monopoly firms have the potential to
abuse their market power by restricting output or raising prices. Such actions
may reduce effective competition and consumer sovereignty.
 Governments monitor and regulate monopoly behaviour through competition
policy to regulate prices, encourage competitive behaviour, and prevent anti-
competitive conduct in markets and consumer protection from
deceptive/misleading conduct by firms in markets.
 Government reforms to make PTEs more efficient include:
- Privatisation- the sale of part or all of a PTE to the private sector.
- Corporatisation- structuring PTEs like private sector enterprises by making them
financially independent.
- Deregulation- removing restrictions.
Fluctuations in economic activity- business cycle and adverse effects of booms and
recessions
- Business Cycle- Fluctuations in economic growth levels due to domestic or
international factors.
- Booms- Upper turning point, as resources have
become scarce”.
- Recessions- Where economic growth is at its
lowest, indicators of economic performance have
‘bottomed out’.
- Problems caused by the turning points of the
business cycle are the economic costs of higher rates of unemployment in
recessions, and higher rates of inflation in booms. Both of these economic problems
can cause living standards to fall in the community.
- Fluctuations are unfavorable as it leads to instability in consumer spending,
inflations, production and employment levels.
- Economic Stabilization- Minimization of business cycle fluctuations, through:
Fiscal Policy- Macroeconomic policy influencing resource allocation, distribution of
income and economic stabilization.
Monetary Policy- Macroeconomic policy influencing cost and supply of money to
influence economic outcomes.

Macroeconomic Policies Microeconomic Policies

Influence Entire Economy Individual businesses and

firms

Examples Fiscal and Monetary Policies Competition and Trade

Policies

Role of Gov’t in Aus

Functions of Local, State and Commonwealth Gov’t and Constitutional
Powers

 Powers, functions and responsibilities of the Commonwealth gov’t are defined in

the Australian Constitution (also defines legislation powers for federal and state
gov’ts).
 Commonwealth- overall responsibility for the economy and most influence on
economic performance- have exclusive powers (power to make law over national
responsibilities).
- Main revenue sources: Income Tax, GST, Excise Tax, Customs duties and non-
tax revenue e.g interest.
- Main Responsibilities: Trade, Foreign Affair, Immigration, Defence, etc
 State (6+2 territories)- Concurrent (shared with federal) and residual (powers
controlled by states) powers
- Main revenue sources: Fines, stamp duty, federal gov’t subsidies, and national
agreements between states.
 - Main responsibilities: Roads, Public Transport, Police, Education, Housing, Health
etc
 Local (565) - Powers delegated from state legislation.
- Main revenue sources: Land Rates, Licences, Interest and Gov’t subsidies.
- Main Responsibilities: Footpaths, Parks, Local Roads, Libraries, garbage
collection etc.
 Making of an act of federal parliament:
- Bill proposed by gov’t
- Draft submitted to PM and cabinet then redrafted by relevant department
- Introduced into House of Reps- 1st reading (announcement),
- 2nd reading (Outline of purpose by controlling minister),
- Debated until motion to pass bill to a committee stage- considered clause by
clause and amended
- 3rd reading (Vote and passing)
- Same process through senate to become statute/law
- Royal assent: signing of bill by Gov General

Size of the Public Sector

 The public sector refers to the parts of the economy owned and controlled by the
gov’t including all tiers of the gov’t as well as Gov’t Business Enterprises (e.g.
Sydney Water, City Rail). Size of public sector measured through:
- Total public outlay- shows the proportion of total annual expenditure by all levels
of government compared with the expenditure for the economy as a whole.
- Public sector employment- proportion of Australian employees who work in the
public sector; as percentage of total employment.
- Employment levels in the public sector have declined due to the contracting of
many activities to the private sector.
 Public sectors importance has increased due to 3 factors:
1. Change in approach to economic management from more active role to less
through spending cuts.
2. Provision of gov’t g/s- pressure on improved services
3. Social Security Growth- Provision of basic standard of living through welfare lead
to higher reliance (welfare state), gov’t spending reduced by tightening access to
benefits and superannuation changes.

Economic functions of Aus Gov’t

Reallocation of Resources- changes production patterns in the economy, through:
Taxation and Spending (influencing businesses and consumer behaviours) and
production of public goods.
- TAXATION: Role of Taxation- Divert resources away from certain activities
deemed undesirable and towards others due to tax leading to the alteration of
prices- through taxes, gov’t influence consumer demand.
- Direct Taxes- Taxes paid by the individuals and businesses on which they are
levied, e.g company tax.
- Indirect Taxes- Taxes levied on individuals and firms but are passed onto g/s- not
paid directly by the businesses.
- SPENDING: Gov’t spending can reallocate resources to a particular sector
- Gov’t spending may influence individuals to buy certain G/S by reducing an
industry’s costs & therefore reducing selling prices.
- Gov’ts can provide:

o Funding/subsidies for items seen as unprofitable.

o Grants to establishing businesses/growing industries that have low finance
accessibility.
o Cash payments to private employment search businesses aiding the
unemployed.
- Gov’t provision of G/S: Gov’ts can intervene directly in production process to
achieve better resource allocation e.g NBN, postal networks, etc.
Costs Benefits

Inefficiency in separating their Minimising overpricing and less exploitation of

enterprises consumers

Potential monopolisation issues Can provide to a large range of people for low
price

Redistribution of Income- Done through Taxation and Social Welfare Payments:

-Progressive Tax- Higher income earners pay a greater proportion of their income
as tax than lower income earners. E.g Income Tax
-Proportional Tax- All income earners pay proportionally the same amount of tax.
-Regressive Tax- Higher income earners pay a smaller proportion of their income as
tax than lower income earners. E.g GST
-Tax Base- Items taxed by gov’t.
-Tax Threshold- Level of income below which income tax is not payable.
-Average Tax Rate- Average Rate of Tax- proportion of total income earned paid in
the form of tax.
-Marginal Tax Rate- proportion of each extra dollar earned that must be paid in tax.
- Redistribution to lower socio-economic groups performed through social welfare
payments Stabilisation of economic activity: Policies designed to smooth
economic fluctuations
- Govt’s play important role in stabilising economic activity and sustaining EG
Stabilisation occurs through monetary and fiscal policies:
Monetary Policy- action of RBA influencing level of interest rates and MS
- Main instrument- DMO (buying and selling gov’t securities by RBA to influence
interest rates).

Tightening MP- during boom Loosening MP- during recession

Change to interest rate Increase Decrease

Demand for Money Decrease Increase

MS Decrease Increase

Consumption/Investment Decrease Increase

Spending

Eco Act Decrease Increase

Inflationary pressures Decrease Increase

Unemployment Increase Decrease

Economic Growth Slowing Stimulated

- Fiscal Policy- Action by gov’t altering Gov’t Expenditure, Savings and Taxation to
manipulate economic growth and unemployment.
Gov’t Business Enterprises-
- Businesses owned and managed by state or commonwealth gov’ts.
Privatisation- Gov’t business enterprises sold off to private sector to increase
efficiency e.g Telstra
Corporatisation- Public enterprises encouraged to act as private business
enterprises with the removal of gov’t bureaucratic interference with their operations
and making managers independent and accountable to increase efficiency and
productivity. e.g Sydney Water

Other- Competition and Environmental Policies

Competition Policy-
- Gov’t aim to promote workable competition: The maximum level of competition
compatible with the market structure & specific conditions of the industry.
- Gov’t policies assume competition produces more efficient resource use, lower
production costs, increase product innovation, and lower selling prices.
- Must be balanced against economies of scale.
- Aim for contestable markets- minimisation of barriers to entry by eliminating anti-
competition practices- outlawed through Competition and Consumer Act 2010.
- ACCC monitors competition policy and upholds consumer protection legislation.
Consumer Protection-
- Competition and consumer act 2010- other outlawed practices include price fixing,
misleading advertising, price discrimination and mergers restricting competition.
- Australian Consumer Law 2011- Consolidation of older laws, new provisions
strengthening consumer warranties, additional product safety regulations &
consumer protection against unfair contract terms.
- ACCC conducts enquiries into pricing structures, recommends industry changes
and gives negative publicity to overpriced firms.
Environment Protection-
- Gov’t intervenes to ensure environmental sustainability through supporting
alternative energy sources and incentives for fossil fuel reductions. Main concerns
are:
1. Non-renewable resource use- use of production inputs where stock of the resource
is permanently reduced due to production/consumption.
Renewable resources- production inputs which replenish over time- consumption
has no impact on future.
2. Externailites- external costs and benefits of production e.g air pollution leading to
climate change or water pollution from chemical spills, toxic waste etc

Federal Budget

The budget process

- The budget is the gov’t tool for the implementation of fiscal policy showing govt’s
planned expenditure and revenue for the next financial year
- Fiscal Policy- Macroeonomic policy influencing resource allocation, reduction of
business cycle fluctuations and redistribution of income.
The Commonwealth Budget is an official document which outlines the government’s
planned revenue and expenditure for the coming year
Types of budgets
Budget Surplus- Planned Gov’t revenue> Planned Gov’t Expenditure
Balanced Budget- Planned Gov’t revenue< Planned Gov’t Expenditure
Budget Deficit- Planned Gov’t revenue= Planned Gov’t Expenditure

Revenue and expenses

REVENUE
- Income Taxes: Company (tax on profits), Resource Rent Tax (tax on minerals),
Superannuation Tax, Personal Income (PAYG) Tax, Capital Gains Tax (Tax on
profits after selling assets).
- Taxes on g/s: GST (Tax of 10% on all g/s), Excise duty (Tax on undesirable
goods), Carbon Pricing Mechanism (environmental tax on carbon emissions),
Miscellaneous taxes/charges/fees.
- Non-Tax revenue- GBE Profits, Interest, Dividends and Royalties.

EXPENSES
- Social Security & Welfare- Payments assisting the disadvantages attain an
average standard of living.
- Education- Funding to schooling, universities and TAFES.
- Health- Funding for health care operations.
- Infrastructure- Funding for new/upgrades of infrastructure
- Environmental Protection- Funding for upkeep of environment

Economic indicators Boom Recession

Inflation Increasing Decreasing
Consumer Spending Increasing Decreasing
Demand Increasing Decreasing
Production Levels Increasing Decreasing
Economic Growth Increasing Decreasing
Unemployment Rates Decreasing Increasing
Savings Decreasing Increasing
Interest Rates Decreasing Increasing
Foreign Investment Increasing Decreasing
Currency Increasing Decreasing
- Change in budget outcomes occur due to fiscal policy changes.
- Contractionary Fiscal Policy Stance- Decrease economic activity through
dampening aggregate demand through either reduced taxation or increased
expenditure.
- Expansionary Fiscal Policy Stance- Stimulating economic activity through
aggregate demand through either increased taxation or reduced expenditure.
- Neutral Stance of Fiscal Policy Stance- No changes in budget outcome from year
to year, therefore no effect on aggregate demand & eco act levels.
- Automatic stabilisers- Instruments inherent in gov’t budget which counter-balance
economic activity. 2 main examples: progressional income tax system and
unemployment benefits:

Increase in eco act Decrease in eco act

Income levels Increase Decrease

Taxation revenue Increase Decrease

Unemployment Decrease Increase

Gov’t expenditure Decrease Increase

Production Increase Decrease

Consumer Spending Increase Decrease