Topic 1: The nature of economics
Topic 1: The nature of economics Economics is the study of factors affecting production, consumption and distribution of goods & services involving individuals, businesses and government.The economic problem – wants, resources, scarcity Economic Problem: Scarcity Efficient allocation of limited resources to satisfy unlimited and competing wants Resources: Factors of Production (FOP)Used to produce goods and services to satisfy our needs and wants. The quality and quantity of these resources will determine the standard of living of a communityLand (rent), labour (wages), capital (interest), enterprise (profit) Needs Individual (each person), collective (community), basic (essential), luxury, recurring (continually satisfied), substitute (interchangeable/substitutional), complementary The need for choice by individuals and society Our wants are unlimited but resources are scarce – not adequate to satisfy all our wants; we must choose which wants to satisfy in order of preference Opportunity cost and its application through production possibility frontiers Opportunity cost Cost of the alternative foregone by choosing the current consumption/production decision Opportunity cost = what is foregone/what is gained PPF (Production Possibility Frontiers) Maximum production potential of the economy given finite amount of resources Assumptions 1/ Only two goods are produced 2061210158750002/ All resources are fully employed 3/ Level of technology is fixed 4/ Resources are fixed; can be used to produce both goods 3536959652000Outward shift of the PPF represents economic growth; maximum potential of production has increased as curve moves outwards Future implications of current choices by individuals, businesses and governments Aim: Maximise returns from existing resources Allocative efficiency: maximising use of limited resources to produce maximum output Consumer goods: Items produced for the immediate consumption of the individual and communityCapital goods: Items not produced for immediate consumption but are used for the production of other goods and servicesConsumer goods satisfy our wants now; capital goods will help satisfy our wants into the futureCurrent Choice Current Implications Future Implications Individuals Spend money/use resources higher living standards lower living standards Save money/resources lower living standards higher living standards Business Invest in capital reduced cash flow, less increased production, profit to owner, high risk potential profit/growthGovernment Increase gov. spending higher debt improved quality of life + economic growth Economic factors underlying decision-making by: Individuals, business, government Individuals Business Government Spend vs save Work vs study Retire vs work Voting: What party will manage unemployment, inflation and interest ratesDepends on: Pricing of products Levels of production Resource use (FOP) Industrial relations (pay/conditions of workers) Influence individuals/businesses: Taxes/subsidies influence purchasing and production The operation of an economy Production of goods and services from resources – natural, labour, capital and entrepreneurial resources 4 key economic issues: What to produce: Resources are finite, must choose what to produce How much to produce: Allocate resources efficiently to maximise production How to produce: Method of production; in any economy most efficient will be used How to distribute production: Who will have access to the goods Factor Factor Income/Return Description Limitations Land Rent Natural resources/physical ground used for production The amount of natural resources available for productionLabour Wages Human skills utilized to produce goods and services The supply of labour: production size, labour market skill and people’s willingness to workCapital Interest Equipment used to produce other goods and services The supplies of capital: willingness of government and the private sector to invest, level of domestic saving available for investmentEnterprise Profit Risk in utilizing the other factors of production for business ventures The supply of entrepreneurial skills: size of the population and the ability and willingness of individuals to innovate and take risksDistribution and exchange of goods and services GDP (Gross domestic product): Total value of goods and services produced by an economy within a given period Money is a medium of exchange; it creates efficiencies in transactionsMarket EconomyMixed-market Economy Commander Economy Private incomes of individuals Private Incomes + government welfare Governments choose who get what Provision of income and employment Market economies tend to have uneven distriution of income: individuals accumulate wealth/income; ability to earn income depends on education, training, sklls, experience Government provide minimum income to financialy unstable; pensions, allowances, etc, funded through progressive taxation Primary Involved in raw material extraction: agriculture, mining, forestrySecondary Process raw materials/input into finished goods: food processor Teritary The provision of a service: teaching, nursing Business cycle -1711849700Trend line is less volatile and more stable with effective government spending Recession: 3 consecutive quarters of negative GDP growth Depression: A serious and continuing recession Impact during expansion Impact during contraction Individuals Consumer confidence rises Increased output Increased wage growth Lower unemployment Higher inflation Increased quality of life Consumer confidence falls Decrease output Lower wage growth Higher unemployment Lower inflation Decreased quality of life Business Increased production Increased investment in new equipment/expansion Increased profits Decreased production Decreased investment in new equipment/expansion Decreased profits Government Increased collection of company and personal taxes Reduced spending on social welfare payments (unemployment) Decreased collection of company and personal taxes Decreased spending on social welfare payments (unemployment)The circular flow of income Equilibrium (S + T + M = I + G + X) The state with no tendency to change Disequilibrium: injections/ leakages imbalanced Leakages > Injections Shrinkage of income/employment/GDP Falling economic growth Injections > Leakages Increase in income/employment/ GDP Rising economic growth International Trade/Financial Flows: Transactions with the rest of the world (imports/exports) Equilibrium: Injections = leakages Topic 2: Consumers and Business The Role of Consumers in the economy Patterns of consumer spending and saving/dissaving Consumer sovereignty: Consumer demand for products determines production and resource allocation. Consumers can either spend or save: Y = C + S; Income=Consumption+ SavingsDissaving; Consumption > Income Average Propensity to consume and save APC: Proportion of total income that is spent APS: Proportion of total income that is saved APC = Consumption/income APS = Saving/incomeAs income rises, average propensity to consume decreases, as a smaller proportion of income is spent on autonomous consumption in order to satisfy basic needs Low income households have a higher APC, as a larger proportion of income is spent on autonomous consumption Marginal Propensity to consume and save How much of an extra dollar of income would individuals consume or save 1517259204226458421197241MPC: Proportion of every extra $ earnt that is spent 26426757816MPC = consumption/ income (where means change in amount) 1543392203835458421197241MPS: Proportion of every extra $ earnt that is saved MPC = saving/income MPC + MPS = 1 Individuals and economies with higher incomes have a higher APS and MPS and lower APC and MPC, vice versa is trueRelationship between consumption and disposable income 1046480-5651500Consumption Function Consumption = autonomous consumption + (MPC x disposable income) C = Co + cY Lifecycle theory of income consumption and spending Individuals fund consumption by borrowing when their income is low (young years) and saving when income is high (working years) in order to afford retirement during non-working years Factors influencing individual consumer choice Consumer Incomes As incomes increase, so does total consumption Price of product/service If a produces price increases demand decreases Consumer taste and preference As trends in society change, so does patterns of consumer spending Advertising Increased advertising increases consumer consumption Price of substitutes If price increases, consumers will buy cheaper alternatives Price of complements As prices of goods increase, demand for that product and its complementary products decrease Source 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 Businesses in the economy Definition of a firm and an industry Firm: Any business which uses resources to produce goods/services to satisfy consumers, usually in return for profit. Industry: A group of firms producing a similar range of products Quaternary: Provide knowledge and information. Quinary: Firms and individuals who provide personal services. A firms production decisions What to produce: Must be profitable. Based on products with high consumer demand. How much to produce: Aiming for maximum profit with little to no shortages/surpluses, based on market research, demand and access to capital. Break-even point (BEP): The point in which revenue meets total costs. It shows the minimum number of sales required to cover costs.How to produce: Resources and technology required to efficiently produce output at a minimum cost.Businesses as a source of economic growth and increased production capacity When the private sector is healthy, higher economic growth occurs and government receives stronger taxation revenue to fund expenditureMain goals of the firm Profit Maximisation Maximising revenue & minimising expenses. The greatest positive difference between total revenue and total costIncrease revenue by rising prices and/or increasing amount sold Minimise expenses through efficient allocation of resources Growth Maximisation Maximising market share at the expense of some profitIncreasing investment into the business Merging two businesses or vertical/horizontal expansion Changing legal structure Increasing Market share Being the dominant firm in an industry Expanding product range through diversification/differentiation Introducing more effective marketing Developing better relationship with customer base to satisfy needs Meeting shareholder expectations Ensuring business success in order to provide dividends Satisficing behaviour Balancing and satisfying all goals simultaneously.Attaining minimal expectations in order to reduce maximum exertion that is unnecessary to achieve acceptable outcomesSuffice expectations rather than exceed them (bare minimum) Efficiency and the production process Efficiency: Minimise costs whilst maximising output Technical Producing goods at the lowest costAllocative Allocating resources to maximise satisfactionDynamic Responding to changing consumer preferencesProductivity: How much is produced with a given quantity of resources per unit of time. Productivity = output/input Less wastage of scarce resources Lower production costs and higher profits for firms Higher incomes due to more productive labour Improve international competiveness due to increased productivity Technical Optimum Point where a business is able to produce the maximum output at the lowest cost per unit Increases in production beyond the technical optimum will lead to rising average costsAdvantage of large scale production: lower average cost per unit Law of Diminishing Returns At a certain point, employing an additional factor of production will increase output in the short run, but decline in the long runEconomies of Scale Reduction in cost per unit of output as output increases Economies Business increasing in size, reducing cost per unit Diseconomies Business increasing in size, increasing cost per unit 4508525146000Internal economies/diseconomies of scale 11870612094988(Bulk buying) 00(Bulk buying) 35846161387947(Management) 00(Management) 7376041698563(Better equipment)00(Better equipment)Externalveconomies/diseconomies of scale 52705393700043894551227*reduces transport, inventory costs (Ryde technology Park) 00*reduces transport, inventory costs (Ryde technology Park) 2792260158425Government for improvements, funding, etc 00Government for improvements, funding, etc Impact of technological change, investment and ethical decision making on a firm Production Methods Labour intensive capital intensive Increased efficiency leading to lower costs Prices Lower production costs passed onto consumers through lower prices Generic and non-generic brands increase range of consumer choice Employment Specialist labour skills and increased need for retraining Structural unemployment due to capital based production methods Output New investment and technology may result in increased output and opportunity for improved range/quality of products Profits Better investment and production process may lead to increased profit Types of Products Technological change creates new products and industriesHorizontal/vertical integration or diversification of product baseGlobalisation The process by which businesses or other organizations develop international influence or start operating on an international scale.May increase profits for business Environmental sustainability Firms must ensure production methods limit environmental destruction Ethical production process may increase customer base due to social attitudes Topic 3: Markets Market Where buyers and sellers exchange goods and/or services at a particular priceProduct markets Where produced goods and services are bought and sold Factor markets Where factors of production are bought and sold. (land, labour, capital)The role of the market Determining solution to the economic problem Solutions to the economic problem- Allocative Efficiency- Allocation of resources to satisfy maximum number of consumer wants. Goods/services are allocated to consumers who value them most Only the lowest cost producers supply goods Importance of relative price (reflecting opportunity costs)Factor markets determine opportunity costs of productive resources Relative price reflects the opportunity cost of selecting one alternative relative to another alternative.Relative price can be used to help determine the best way to allocate scarce resourcesDemand and Supply Law of Supply As price increases the quantity supplied increases Law of Demand As price increases the quantity demanded decreases Demand: Law of demand, individual and market demand, the demand curve Law of Demand: As price increases, the quantity of demand decreases Demand A consumers willingness and ability to pay a particular price for a certain product or serviceIndividual Demand Demand for a product by an individual consumer Market Demand Combined demand of all consumersFactors affecting demand Price Price rises demand contracts (A to B)Prise falls demand expands (A to C) Increased IncomeIncreased demand for luxury goods (right shift) Increased Population Increased demand for goods (right shift) Increased Taste/preference Increased demand (right shift) Increase of substitute goods Increased demand (right shift) Expected future price increase Increases demand for goods today (right shift) Increase complement goods Decrease demand for good (left shift) Movements along the demand curve/shifts of the demand curve Increase/decrease NON-PRICE factors - Contraction/expansion PRICE factors Increase in demand: entire demand curve shifts horizontally to the right Decrease in demand: entire demand curve shifts horizontally to the left 650240431800036734753302000Expansion of demand: larger quantity demanded as price falls (A C) Contraction of demand: smaller quantity demanded as price rises (A B) Supply: Law of supply, individual and market supply, the supply curve Law of Supply: As price increases the quantity supplied increasesSupplyQuantity that producers are ready, willing and able to supply for purchase at a given price at a given time. Individual Supply Supply of an individual business Market Supply Combined supply of all producers Factors affecting supplyPrice Price rises supply expands (A to C) Price falls supply contracts (A to B) Number of suppliers Increased supply as market supply increases (right shift) Cost of FOPDecrease in supply of goods (left shift) Changes in technology Increased productivity reduces cost of production Increase in supply (right shift) Expected future price Decreases supply producers may sell the good later at a higher future price (left shift) Price of other goods Decreases supply of first good as producers may switch to producing other good’s who’s price have increased (left shift) Movements along the supply curve/shifts of the supply curve Increase in supply: entire supply curve shifts horizontally to the right Decrease in supply: entire supply curve shifts horizontally to the left 3656965704850054800511430000Contraction of supply: reduced quantity supplied as price falls (A B) Expansion of supply: larger quantity supplied as price rises (A C) Market Price: Market equilibrium392620563500Market equilibrium: Quantity supplied and quantity demanded of a particular commodity are equalMarket clears (no excess demand or supply) Demand = supply Price Mechanism: Forces of supply and demand, which determine the prices of products. Movement to equilibrium Excess demand Price is too low Sellers increase prices to contract demand Increased prices = sellers supply more 3835402667000Excess supply Price is too high Sellers reduce price to encourage expansion in demand Lower prices = sellers supply less 3624943937000Effects of change in supply/demand on equilibrium price and quantity (diagrams) Increase Demand Increases equilibrium price/quantity (right shift) Decrease Demand Decreases equilibrium price/quantity (left shift)2735953991400141846793728000732667929905001897278108453985055253131000fIncrease in supply Decreases equilibrium price/quantity Decrease in supply Increases equilibrium price/quantity3530603111500Changing levels of competition and market power Greater?competition?among sellers results in a lower product market priceMarket price mechanism equalises changes in forces of demand or supply through allocative efficiency - equilibrium price/ quantity adjust to remove surplus or shortage in the market’Market power: Ability of a firm to influence, raise and maintain prices within its industry Leads to reduced output Ceiling prices and ceiling floors Ceiling Price Maximum price set by government that can be charged for a product When price is considered too high Results in excess demand below equilibrium priceE.g: Medicine Ceiling FloorMinimum price set by government that can be charge for a product When price is considered too low Results in excess supply above equilibrium price E.g: labour market minimum pay 3253287949780037647157208003253287949780032532879497800Market failure 59200244159700The inability of businesses to act appropriately in all circumstances, leading to government intervention.Market Failure Summary ProblemGovernment ActionOutcomeMarket price too highPrice ceilingReduces price- Quantity ShortageMarket price to lowPrice floorIncreases Price- Quantity ExcessNegative externalitiesTaxesIncreases Equilibrium Price, Reduces Equilibrium QuantityPositive externalitiesSubsidiesReduces Equilibrium Price, Increases Equilibrium QuantityPublic goodsGovernment provided g/s: nonrival/excludable Government collects taxation revenue to fund supply. Price elasticity of supply/demand: Significance of price elasticity of demand – market research Allows producers to accurately predict how changes in price will impact total revenue and profitabilityE.g: slightly increasing cost of bread/milk will not decrease demand as it is essential Governments can effectively predict the outcomes of indirect taxes on prices, market demand, resource allocation and taxation revenueE.g: higher taxes imposed on addictive goods will not significantly impact demand Elastic, inelastic, unit elastic supply/ demand Elastic demand/supplyStrong response to change in price Price increases, demand/supply contracts, revenue decreases Perfectly elastic Consumers will demand an infinite quantity at a certain price but nothing at all at a price above this.Producers will supply an infinite quantity of the good at a certain price but nothing if the price increasedInelastic demand/supply Weak response to change in price Price increases, demand/supply remains, revenue increases Perfectly inelastic Consumers are willing to pay any price in order to obtain a given quantity of a good or service. These are considered necessities.Producers are willing to supply the exact same quantity of the good regardless of price Unit elastic No response to change in price Price increases, revenue remains the same Calculation of elasticity Total outlay method: Total outlay = price x quantity demanded 8784156744348791356801948805754191948852554213542793858285115-649695309300Factors affecting elasticity of demand Luxury or necessity good Price elastic demand (sensitive to price change) Existence of close substitutes Absence of close substitutes: price inelastic demand Lots of close substitutes: price elastic demand Whether the good is habit forming Addictive goods: price elastic demand Time since price increase Long time since price increase: price elastic demand as new cheaper products are brought it Proportion of income spent on the good Smaller proportion: price inelastic Larger proportion: price elastic Factors affecting elasticity of supply Time since price increase Longer time: price elastic supply Might take a long time for producers to responds (changing schedules/equipment) – supply more responsive after a longer period Ability to store stock If inventory can be stored, supply tends to be more price elasticStock can be taken from storage to supply market quickly Excess production capacity Excess capacity: price elastic Production can be increased to respond to more demand Variations in Competition Market structures Market StructureNumber and size of firmsProduct characteristicsBarriers to entryPure CompetitionMany small firmsHomogenous productNo barriers to entryMonopolistic CompetitionMany relatively small firmsDifferentiated productsRelatively easyOligopolyFew , relatively large firmsDifferentiated products Extremely high MonopolyOne large firmNo close substitutes Extremely highInflation Healthy between 2-3% Inflation represents rise in demand firm’s increase production Topic 4: Labour Markets The Demand for labour by individual firms Labour – a derived demand Derived from the consumer demand for goods and services Increased in demand for products = increase in demand for labour for production Demand for labour varies inversely with the price for labour Factors affecting demand Price Price increases: contraction of demand Price decreases: expansion of demand Microeconomic factors (non-price) Economic Activity Rise in aggregate demand causes higher levels of economic activity increased demand for labour AD = C + I + G +(X-M).Downturns/recessions: decrease Upturns/booms: increaseNature and size of industry Labour intensive: lots of employees (construction) Capital intensive: fewer employees (mining)The manufacturing industry has become significantly more capital intensive Productivity of labour Labour productivity = Output/Labour UnitsIncreased total productivity: raises demand for productive workers extra units of labour hired produces increased output at a lower cost Decreased total productivity: decreases demand for workers. Extra potential output is more costly with every additional labour unit hiredEmployers will demand labour until the Law of Diminishing Returns sets inGeneral wage rates Labour cheaper than capital: increased demand for workersCapital cheaper than labour: decreased demand for labour. (capital deepening)Structural change and expectations Tariff cuts decreased workforce E.g. : less competitive reduced their workforce Shift towards demand for employees in the services-based sector Expected rise in demand more people employed Industrial relations climate Rising ‘on-costs’ (leave entitlements, superannuation, etc.) results in lower demand for labourRestrictive regulation results in lower demandThe Supply of labour Factors affecting the supply of labour Wage rate Substitution effect: As wage increases, workers are more willing to sacrifice leisure time for work increased supplyIncome effect: When income is sufficient, workers are less willing to sacrifice as much leisure time decreased supply Working conditions Working conditions improve more likely to offer labour (flexible working hours, fringe benefits, superannuation, leave entitlements) Government policies like paid parental leave and benefits increase labour supply Education and training Higher skill: lower supply of labour (limited pool of suitable applicants) Lower skill: larger labour supply Mobility Geographic Ability of workers to move from one job location to anotherMining workers willing to relocate cause of attractive remunerationOccupational Ease with which workers are able to move from one job or occupation to anotherTransfer skills across different occupations Higher rates of labour mobility will increase the elasticity of supply of labourSize of populationIncrease in population increases labour supply Age distribution Countries with populations in the working age group of 15-65 will tend to have a larger workforceParticipation rateMeasure of the proportion of the working age population who are either employed or looking for work.Participation?Rate=Employed+UnemployedWorking?Age?PopulationDetermined by school leaving age, wage levels, retirement, women in the workforce Labour market institutions Influence labour supply E.g: advocating for higher wage rates encourages increased supply of labour The Australian workforce Definitions Employed Work for more than 1 hour a week UnemployedWorking less than 1 hour a week but actively seeking and available to work General characteristics Around 11.9 million people employed > 65% work full-time 46% are female39% are aged > 45 16% aged 15-24 years Labour market outcomes Differences in reward that different types of workers receive in exchange for their labour Wage outcomes Income groups Wages/salaries, major source of income (56% 2019) Dividends Gov. transfers (welfare) Property incomes (rent) Skills Higher skilled job = higher income Skills are less-common, in higher demand, harder to attain (uni, more study, etc) Lower skilled job = lower incomeSkills are more common, in less demand, easy to attain Unattractive working conditions = higher rate of payAge Younger males and females earn less income than older adult male and female workers (less experience, etc) Income for males and females is maximum in the 35-54 age groupMigrants Migrants from English speaking countries earn more Migrants from non-English speaking countries have difficulty finding jobs lower incomes Employment/income levels relate to length of residency in Australia Participation rate of migrants is significantly higher (96-98%) compared to 65.7% for the rest of the population.Indigenous Australian’s Amongst the lowest income earners in the Australian communityHeavy reliance on government welfare payments for incomeGender Gender pay gap: difference between men’s and women’s average weekly full-time equivalent earnings expressed as a percentage of men’s earnings.The full-time pay gap for women is 13.9% less than menReasons for differences in outcome for women: Glass Ceiling (barrier preventing women from being promoted to higher roles)Discrimination and bias in hiring and pay decisionsFemale-dominated industries and jobs attract lower wagesWomen’s disproportionate share of unpaid caring and domestic workLack of workplace flexibility to accommodate caring and other responsibilities, especially in senior rolesWomen’s greater time out of the workforce impacting career progression and opportunities.19056767300Non-wage outcomes Non-monetary benefits that employees receive Superannuation, company car, holiday leave, other fringe benefits Trends in distribution of income from work overtime Much greater since the early 1990’s when enterprise bargaining became more popular. - - Family benefits have offset/balanced increase wage differentials. Declining union memberships lead to more inequality amongst occupations. Arguments for/against more equitable distribu tion of income For:More consumer satisfaction among the poor Reduces social class divisions Less corruption and illegal activities for financial gainPrevent higher tax burden on taxpayers and reduce government welfare spending Against: Potential reduction in allocative efficiency Lack of incentive effect on workers and producers to work for higher wage Labour market trends Unemployment Cyclical: rising to peaks of > 10% in 1980/90s recessions MB1: significant decrease in unemployment due to investment MB2 (post GFC): rising commodity prices high levels of investment, decreasing unemployment 2012: commodity prices decline, slowed economic growth and rising unemployment 2017: decreasing unemployment due to rise in women working full-time in NSW Types of Unemployment Frictional People moving between jobs Seasonal Caused by season change Structural Mismatch of labour skills due to changing industry/technology Cyclical Contraction in labour demand, workers who are let go due to lowered g/s demandLong-termUnemployment for over 12 monthsMay experience problems finding work due to loss of skills Hard-core People deemed unemployable/experience regular periods of unemployment Severe mental/physical disability, substance abuse, criminal record Hidden Have difficulty or are discouraged from actively finding work Not looking, therefore considered unemployed UnderemploymentPeople who want and are available to work more hours Due to the rise in part-time employment compared to full-time work Underemployment rising steadily (more people working but want longer hours) 27% of part-time workers consider themselves underemployed Underutilization Underutilisation rate = unemployment rate + underemployment rate More resources available in the economy to use (potential economic growth) Underutilisation greater for women than men (more casual employment) Steadily rising: 1.8 million workers unemployed/underemployed = under-utilised Casualization More part-time jobs created than full-time jobs Wages rates are usually higher to compensate for lack of other entitlements (paid, leave, etc) 35% of jobs in the economy are part-time (teenagers higher represented) Outsourcing Outsourcing non-core business functions to external organisations (school outsourcing cleaning) Helps reduce costs and improve focus on core business functions Off-shoring: Work is done overseas Outsourcing: Someone else does work for youContractors/ Subcontracting Contractors Run their own business and sell their services to others (employ subcontractors) Subcontractors Carries out work for a company as part of a larger projectLabour market institutions Unions, employer associations, current employment/industrial framework Unions Represent workers on a collective basis. Aim to increase rights, entitlements and working conditionsAustralian Council of Trade Unions (ACTU) peak union body Trade Union memberships steadily declining 46% in 1986, 20% 2012Increased corporisation, decline of manufacturing industries, decentralization of wage determination, general fall in confidence of union ability Note: Critics of union action to raise minimum wage argue that it creates unemployment among low skilled/paid workersEmployer associations Represent business groups in similar industries/aims in industrial relations mattersSeek to protect the rights of members in negotiations with trade unions.E.g: Australian Industry Group (AIG), Business Council of Australia Influence Seek wage moderation to maintain profitability and competitiveness of businesses. Enterprise bargaining with employers provided higher wages for more productive employees demand for productive labour has risen along with wages.Fair Work Aus. Institutions (Aim to settle disputed between employees and employers) Fair Work Australia Vary awards, make minimum wage orders, approve agreements, determine unfair dismissal claims, order good faith bargaining and industrial action Fair Work Ombudsman Enforce the laws through the court system if needed Inspectors investigate breaches Current employment /industrial framework Ten National Employment Standards (Fair Work Act 2009) Minimum employment entitlements that have to be provided to all employees Max. weekly hours, request flexible arrangements, leave, etcNational minimum wage Currently $19.84 Employment contracts Modern awards Provide minimum wages and working conditions for employees specific to their industryEnterprise Agreements Workplace agreement negotiated collectively through enterprise bargaining between employers and employees. Common law Contracts Simple agreement between an employer and employee, enforced through court of lawMust satisfy BOOT test Topic 5: Financial Markets Types of financial markets Markets, Domestic/global markets Primary Money from an investor goes directly to the borrower. E.g. When shares are first floated and bonds and debt securities are purchased directly from the issuerSecondary Securities already issued in the primary market are traded between investors. Companies who issued securities do not receive any money. E.g. Trading on the ASXA Financial Market consists of agents, brokers, institutions, and intermediaries, facilitating the sale and purchase of financial products.Domestic Supply/demand of goods and services within a single country Global Supply/demand of goods and services in the entire world Consumer credit Allow an individual to buy now and pay back the original amount with interest at a later date Aus. credit card debt $42.6 billion (ASCI,Jan 2020)Housing loans/mortgage Offered by financial institutions to purchase property.Business loans Loan allowing business’ to invest in operationsSupport start up, expansion and cash flow management Short term money market Enables individuals, business’, financial institutions or government agencies to borrow or lend money for short periods of timeUsually under 6 months but almost always under 1 yearBond market /Commonwealth Government Securities (CGS)Instrument of debt issued to raising funds through borrowing. Face value Size of the loan; written on the bond document. Coupon rate Fixed income that the bond holder receives. Similar to an interest rate. Yield Yield=Coupon?Rate?x?Face?ValuePrice?of?the?BondInterest rates falls, yield falls bond traded for less Generally issued by government/large businesses to raise money Bond auctions; bid on interest rate/how much to invest Australian office of Financial Management allocates bond to bidders with the lowest interest rates Financial futures/derivativesFutures Contract Contract to buy/sell a specific asset at a predetermined price for a fixed quantity at some future date. Buyer and seller are obligated to fulfil the terms of the contract at the future dateOptions Contract Option to buy or sell asset on or before the option’s expiration time at the pre agreed priceNot an obligation, so typically more expensive ‘Hedge’: minimising potential losses in the futureForeign exchange Value of a currency in terms of another currencyInternational transactions currency must be converted Traded for purpose of travel, trade, investment, speculation Fluctuate with changes in demand/supply of currencyDepreciation: downward movement of one currency against another Lowers value of AUS $ compared to foreign currencies Each foreign unit buys more AUS, One AUS $ buys less foreign $Winners Losers Exporters of goods/services more profitabilityTourists visiting AUS Aus. tourism industry Importers of goods/servicesAus. tourists travelling overseasAustralian consumers Appreciation: Upward movement of one currency against another Rises value of AUS $ compared to foreign currencies Each foreign unit buys less AUS $, One AUS $ buys more foreign $Winners Losers Importers of goods/services Aus. tourists travellingAustralian consumers Exporters of goods/services less profitability Tourists visiting Australia The Share Market Market in which securities are bought and sold; a stock exchange.RoleShareholders Primary reason for investment: capital gains Right to vote for board of directors/receive dividends from profitManagement fiduciary duty: run company to benefit shareholders Share price rise anticipation of future capital gains Business Publicly listed companies trade on stock exchange Float: selling shares for first time on ASX Business can raise funds through equity finance, not debt financeIssuing new shares dilutes control of existing shareholders High share price confidence in management etcLow share price expose company to a take over bid Economy Share-market performance indicator of country’s economic performance Indicator of ‘confidence/sentiment’ in the economy ‘bullish’ share market results in greater investment by shareholders increase investment, higher growth rates Share markets are efficient allocators of scarce resources companies with growth potential usually raise more funds in ASXFunction Facilitates: The sale of new shares or equities (primary market) - called a floatBuying and selling of pre-existing shares (secondary market)Trading of other securities, eg. Options, futures and bondsAllows businesses to raise funds for establishment and growth Share price set by market forces of demand and supply Higher share price indicates a business is doing well Low share price forces management to improve performance Impact Efficient investment and market capitalisation Healthy share markets result in higher share liquidity (buy and sell shares easily invest more) Preferable to avoid debt Easier access to investment funds higher investment spending increased production, GDP, economic growthImpact how companies manage investment (equity/finance)Efficient share market: more Equity instead of Debt FinancingInvestors Rising share prices measured by the share market index (ASX 200). – Rising index indicates rising business confidence and investmentFalling share prices can result in the wealth effect (investors feel less wealthy due to a fall in their share values).May lead to lower spending, higher leakages downturn Share market and investment assets Share market rising: investors demand more shares, pushing up prices in comparison to other investment assetsShare market falling: investors move funds to other investments In a bullish (rise) share market, investors might choose to speculate in shares in anticipation of quick profits speculative bubble Regulation of financial markets Reserve Bank Australia RBA Conducting Monetary Policy Systemic Stability Control of Notes Issue/currency Regulation of the Payments System Banker to the bankers Responsible for holding Australia’s reserves of Gold and Foreign Banker and source of economic advice to the governmentAPRA Regulates and enforces guidelines set by the RBA for all deposit taking financial institutions. E.g: Banks, Insurance, Superannuation Funds, Credit Unions, Building Societies Issuing or withdrawing bank licenses Setting standards regarding debt, risk and liquidity Approving changes to structures and operations Reviews of systems and management Enforcement of regulations if neededAPRA’s main responsibility is to ensure that all institutions are capable of repaying the people who hold deposits and funds with them.ASIC Responsible for monitoring the functioning of companies operating in Australia. Works to protect consumers and investors and maintain integrity in company processesCompanies Securities Industry and Markets Formation - ASX Registration - Bonds markets Reporting - Futures markets Australian Treasury Anticipate and analyse policy issues, understand government/stakeholder circumstances and respond rapidly to changing events E.g: Manage Australian GovernmentFunction Provide policy advice regarding budget, taxation, financial sector, foreign investment, etcManage federal financial relations Work with state governments on key policy areas Council of Financial Regulators Crisis management – promote stability of the Australian financial system and efficient regulation by Australian regulatory agencies Regulate all four other regulators (RBA, ASIC, APRA, treasury) Function Identify important issues/trends in financial systems which impact financial stability Ensuring appropriate coordination among agencies to respon to financial instability Engage with work of international institutions, forums and regulators which relate to financial system stability BorrowersBorrowers Individuals Personal purposes (purchase products) mortgages, loans, credit BusinessExpansion, R & D investment, overcome cash flow downturns Government Running budget deficits (more spending than taxes) infrastructure, tax cutsFactors affecting the demand for funds Transactions and speculative motives Transactions motive Funds are held for day to day transactions + regular paymentsPrecautionary motive Funds are kept aside to provide for future emergenciesSpeculative motive Funds are kept aside to be invested in expectation of a higher return.Financial innovations Changes in payment options reduce demand for cash money for transactions (apple pay) Lenders Individuals Lend to financial institutions for return shares, bonds, interest-bearing deposit BusinessDeposit if interest rates are more lucrative than internal investment Government Whilst in surplus- a government may invest money (e.g international loans) to maintain positive balancesInternational Known as foreign liability (must be repaid) - to finance domestic consumption & investmentFinancial Intermediaries Holds funds from lenders in order to make loans to borrowers Bank, building society, insurance company, superannuation funds Financial aggregates measured by the Reserve Bank of Australia Meausring money supply Money Base All currency (notes and coins) in circulation + bank deposits with the RBA M3 Money Base + Bank Deposits Broad money M3 + NBFI deposits – NBFI deposits in banks Interest rates Types of rates in the short/long term Lending rates Interest rate which banks charge for loans to their customers. This is higher than the borrowing rate.Borrowing rates Interest rate which banks pay their deposit holders for their funds. This is lower than the lending rate.Note: Profit is made by having a higher lending rate than borrowing rate. The difference between the borrowing and lending rate is called the interest rate differential/margin Short term Generally lower than long term rates due to low riskLong term Generally higher than short term rates due to higher riskRole of the RBA in determining the cash rate Cash rate: interest that every bank has to pay on the money it borrowsIncreasing cash rate RBA sells government securities/bonds decreases liquidity/ supply of funds in banks Exchange Settlement Accounts (ESA) cash rate increases Decreasing cash rate RBA buys government securities/bonds increases liquidity/ supply of funds in banks Exchange Settlement Accounts (ESA) cash rate decreases Liquidity: Amount of funds available in the cash marketSummary: determine cash rate by altering supply of money Influence of the cash rate on interest rates Interest rates usually mirror changes in the cash rate to some extent Cash rate rises banks raise interest rates less consumption/investment decreases economic activity inflation decreases Cash rate falls banks reduce interest rates more consumption/investment increases economic activity rising inflation Topic 6: Government and the Economy Government intervention in the economy Free market: Operates without government intervention; prices determined by unrestricted competition between individuals and businesses. Provision of goods and services Goods and services Underproduction: not at the socially optimal position because they are not valued sufficiently by consumers Overproduction: cause negative externalities because costs associated with the production/consumption are not included in the price mechanism Public goods Goods not provided by private sector as they annot make profit selling themNonexcludable/non rival (electricity) Government collects taxation revenue to fund these servicesMerit goods Positive unintended consequences of consumption/production of the good Distribution of income Disadvantaged groups Free market result in wider difference in income and higher income equality. The aged (no pensions or medicare) Disabilities (no NDIS)Young (no youth wage, minimum wage) Hard re-entry into labour market (no paid parental leave) Structural unemployment (no ov. Training) No unemployment benefits Indigenous worse off (no funding on welfare, training, healthcare) Lower income/jobs for migrants (no gov. support) Relative poverty Lives on less than 30% of the average income within the economy Free market: Households do not pay taxes and do not receive welfare payments. No laws in relation to minimum wage and conditionsAdvantages people with high income jobs Gov intervention improves: Equality: taxes higher income earners more which reduces difference Redistribution: tax used to fund welfare for low earners, reduces difference in income Monopoly Power Formation Natural: may be due to limited infrastructure (Sydney water gov. owned) Not feasible/cost worthy to establish competition Owernship of scarce resource: owner has exclusive control over a physical resource (only supplier of raw metal) Exclusive control of intellectual property Acquistion/merger: after acquisition there is only one supplier. If Coles and Woolworths merged Risk of high pricing, no incentive for productivity improvmenets and less innovation. Achieve higher profits through the absence of competition Privitisation The transfer of a business, industry, or service from the Government sector to private ownership and control.Corporisation Change a government owned organisation into a privately owned company. Shares owned by Government Commerical funding arrangements (interest paid on loans/expectation of return from dividends) Competition If there are no laws that prevent anti-competitive behaviour firms may pursue profit maximisation to increase price and profit Buyout/takeover: Possible if company has large market share. Establishes monopolist supplier with no competition can increase prices and profit Collude with competiton: Collectively agree on higher prices to be charged by all suppliers. Reduces competition, increases prices, negatively impacts customersFluctuations in economic activity Booms (econoimc growth) Increases inflationary pressures Reduces international compeitiveness reduces exports, increases imports Eroders real wages/value of savings Increased wages must be greater than inflation to maintain living standardsRecession (reduced growth)Decreases inflationary pressures Lower levels of demand lower demand for labourUnemployment rises quickly in recession and reduces slowly in expansion No social/unemployment welfare lower living standard for unemployed Without government intervention, there can be no moderations in economic activity. The Role of GovernmentLevels of Government Local State Federal Constitutional powers Size of the public sector Rellocation of resoruces Direct TaxTaxes where impact and incidence are the same.Income tax, corporate tax Indirect Tax Tax which is imposed on one entity but is passed on to another entity. Incidence and impact are different. Goods and services tax Expenses Redistribution of income Progressive Tax?rate increases as the taxable amount (income) increasesRegressive Tax rates higher for low-income earners than high-income earners Proportional Same rate of?tax?from each taxpayer, irrespective of incomeGov. welfare Government funded services (education,healthy) and provision of minimum income (Newstart Allowance, Pensions) Stabilisation of econoimc activity Monetary policy Open market operations (buying/selling of CGS) Transmission mehchanism Fiscal policy Adjustment of government spending and taxation through the Federal BudgetAims to ensure internal and external stability of the economyAutomatic Stabilisers Features of budgets that moderate the economy without direct intervention by policymakers.Taxation and Welfare Discretionary spending Deliberate changes in government spending or taxation in response to domestic or global economic events NDIS funding Budget Stance Expansionary Net increase in government expenditureMay be due to lower tax or increased gov. spendingContractionary Net decrease in government expenditureMay be due to higher tax or lower gov. spending Neutral Government Expenditure = Taxation RevenueBudget Outcomes Surplus - T > GBalanced – T = G Deficit - T < GsGovernment business enterprises Other Competition Environ. Policy Influences on government policies in Australia Political parties Business Unions Environmental groups Welfare agencies Media Other interest groups International ................
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