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ECONOMICS REVISION

Introduction to Economics:
Focuses on the need for choice by individuals, businesses, and governments.
Consumers and Business:
Investigates how consumers and businesses make decisions about the choices they face.
Markets:
Covers the operation of markets, including price determination and government intervention.
Labour Markets:
Examines the market for labour resources, including contemporary institutions and
outcomes.
Financial Markets:
Looks at the operation of financial markets in Australia, including the roles of various
institutions and the influence of the Reserve Bank.
Government and the Economy:
Studies the role of government in a mixed economy, focusing on economic management and
market issues.

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1. Introduction to Economics
The Economic Problem

● Wants vs. Resources:

○ Wants are the desires people have for goods and services. These are
unlimited, meaning people always want more or different things.
○ Resources are the inputs used to produce goods and services. These
include:
■ Land: Natural resources like minerals, water, and forests.
■ Labour: Human effort, including both physical and intellectual work.
■ Capital: Machinery, buildings, and tools used in production.
■ Enterprise: The ability to combine the other resources to produce
goods and services efficiently.
○ Scarcity: This is the fundamental economic problem. Resources are limited,
but wants are unlimited, leading to the need for choices.

Opportunity Cost

● Definition: Opportunity cost is the value of the next best alternative that is foregone
when making a decision. For example, if a person chooses to spend money on a
concert ticket, the opportunity cost might be the meal they could have bought with
that money.
● Application: Opportunity cost applies to individuals, businesses, and governments:
○ Individuals: Choosing between spending money on leisure activities or
saving for future needs.
○ Businesses: Deciding whether to invest in new technology or expand
production capacity.
○ Governments: Allocating budget resources between healthcare and
education.

Economic Systems

● Market Economy:
○ Definition: An economy where decisions on production, investment, and
distribution are driven by the forces of supply and demand, with minimal
government intervention.
○ Characteristics: Private property, freedom of choice, self-interest,
competition, and limited government.
○ Examples: United States, Australia.
● Mixed Economy:
○ Definition: A mixed economy combines elements of both market and
planned economies. While most decisions are made by private individuals
and businesses, the government intervenes in the market to correct market
failures and ensure economic stability.
○ Characteristics: Government intervention in the form of regulations,
subsidies, and public services alongside private enterprise. The government

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 may own key industries such as healthcare, education, or transportation, but
most other sectors are driven by market forces.
○ Examples: Australia, the United Kingdom, and most modern economies.

Production Possibility Frontier (PPF)

● Definition: The Production Possibility Frontier is a curve that illustrates the maximum
possible output combinations of two goods or services that an economy can achieve
when all resources are fully and efficiently employed, given the current state of
technology.
● Points on the PPF:
○ On the Curve: Indicates that resources are being used efficiently, and the
economy is producing the maximum possible output of goods.
○ Inside the Curve: Indicates inefficiency, where resources are underutilised or
unemployment exists.
○ Outside the Curve: Currently unattainable with existing resources and
technology, but it represents potential future growth if resources increase or
technology improves.
● Opportunity Cost and the PPF: The slope of the PPF indicates the opportunity cost
of producing one good over another. Moving along the curve shows the trade-offs
between the two goods—producing more of one good requires producing less of the
other.
● Shifts in the PPF:
○ Outward Shift: Represents economic growth, which could be due to an
increase in resources, an improvement in technology, or better education and
training for the workforce.
○ Inward Shift: Represents a decline in economic capacity, possibly due to a
decrease in resources, natural disasters, or a significant loss of capital or
labour.

The Circular Flow of Income

● Definition: The Circular Flow of Income model illustrates how money flows through
the economy between households, firms, the government, and the foreign sector.
● Components of the Circular Flow:
○ Households: Provide factors of production (labour, land, capital, enterprise)
to firms and receive income (wages, rent, interest, profit) in return.
Households spend this income on goods and services produced by firms.
○ Firms: Produce goods and services by employing the factors of production.
They sell these goods and services to households, other firms, the
government, and the foreign sector.
○ Financial Sector: Includes banks and financial institutions that facilitate
saving and investment. Households save money in financial institutions,
which is then loaned to firms for investment.
○ Government: Collects taxes from households and firms and spends on
public goods and services like infrastructure, education, and healthcare. The
government also provides welfare payments and subsidies.

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 ○ Foreign Sector: Represents trade with other countries. Households and
firms buy imported goods and services, while domestic firms export goods
and services to other countries.

Economic Objectives

● Efficiency: Achieving the maximum output from available resources. This includes
allocative efficiency (resources are distributed in a way that maximises overall
benefit) and productive efficiency (goods are produced at the lowest possible cost).
● Equity: Fair distribution of income and wealth. This can involve policies like
progressive taxation or welfare programs to reduce inequality.
● Sustainability: Ensuring that economic growth does not compromise the ability of
future generations to meet their needs. This includes managing resources, reducing
environmental impact, and addressing climate change.
● Economic Growth: Increasing the capacity of the economy to produce goods and
services over time, usually measured by the growth in real GDP.
● Full Employment: Achieving a situation where all who are willing and able to work
can find employment at current wage rates.
● Price Stability: Maintaining a low and stable inflation rate to avoid the costs
associated with high inflation, such as reduced purchasing power and uncertainty in
the economy.

Types of Economies

● Traditional Economy: An economy based on customs, traditions, and beliefs.

Economic decisions are typically based on historical methods of production and
distribution. These economies are often found in rural or indigenous communities.
● Command Economy: An economy where the government or central authority
makes all decisions about production and distribution. The government owns most of
the resources and businesses, and it determines what goods and services are
produced, how they are produced, and who receives them. Examples include North
Korea and, historically, the Soviet Union.

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2. Consumers and Business
The Role of Consumers

● Consumer Sovereignty: The idea that consumers determine what goods and
services are produced by their purchasing decisions. Businesses respond to
consumer preferences by adjusting production.
● Patterns of Spending and Saving:
○ Spending: Consumers spend their income on goods and services to satisfy
their wants.
○ Saving/Dissaving: The portion of income not spent is saved. Saving tends to
increase with higher income and age.
● Factors Influencing Consumer Choice:
○ Income: Higher income generally leads to higher spending, though the
proportion of income spent on basic needs decreases as income rises.
○ Price: The cost of goods and services impacts consumer choices, with higher
prices typically reducing demand.
○ Substitutes and Complements: The availability and price of substitute
goods (alternatives) and complementary goods (used together) affect
consumer decisions.
○ Preferences/Tastes: Cultural, social, and personal preferences significantly
influence consumer choices.
○ Advertising: Effective advertising can shape consumer preferences and
demand.

The Role of Business

● Definition of a Firm: A firm is an organisation that uses resources to produce goods

and services to satisfy consumer needs.
● Production Decisions:
○ What to Produce: Firms decide based on consumer demand, profitability,
and resource availability.
○ How Much to Produce: Production levels are determined by market demand
and the cost of production.
○ How to Produce: Firms choose production methods that minimise costs and
maximise efficiency, often considering technological advancements.
● Business Goals:
○ Profit Maximisation: The primary goal is often to increase profit by
producing where marginal cost equals marginal revenue.
○ Growth: Firms may seek to expand in size, market share, or geographical
reach.
○ Increasing Market Share: Firms aim to increase their percentage of sales in
the market relative to competitors.
○ Satisficing: Rather than maximising profits, some firms aim for satisfactory
levels of profit and growth to meet stakeholder expectations.

Impact of Investment, Technological Change, and Ethical Decision-Making

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● Investment: The allocation of resources to new capital, technology, or processes to
increase productive capacity and efficiency.
● Technological Change: Advances in technology can lead to more efficient
production processes, lower costs, and the introduction of new products. This can
also influence employment and the skills required in the workforce.
● Ethical Decision-Making: Firms increasingly consider the ethical implications of
their actions, including environmental sustainability, fair labour practices, and
corporate social responsibility.

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3. Markets
The Role of the Market

● Determining Solutions to the Economic Problem: Markets allocate resources

based on supply and demand, determining what goods and services are produced, in
what quantities, and at what prices.
● Relative Prices: Prices reflect the opportunity cost of goods and services in both the
goods and services market and the factor (resource) markets.

Demand and Supply

● Demand:
○ Law of Demand: As the price of a good decreases, the quantity demanded
increases, and vice versa.
○ Demand Curve: A graph showing the relationship between the price of a
good and the quantity demanded.
○ Factors Affecting Demand: Income, prices of substitutes and complements,
tastes/preferences, population, and future expectations.
○ Movements Along vs. Shifts in the Demand Curve: A movement along the
curve is caused by a change in the price of the good, while a shift is caused
by changes in non-price factors (e.g., income).
● Supply:
○ Law of Supply: As the price of a good increases, the quantity supplied
increases, and vice versa.
○ Supply Curve: A graph showing the relationship between the price of a good
and the quantity supplied.
○ Factors Affecting Supply: Costs of production, technology, prices of related
goods, future expectations, and the number of suppliers.
○ Movements Along vs. Shifts in the Supply Curve: A movement along the
curve is caused by a change in the price of the good, while a shift is caused
by changes in non-price factors (e.g., production costs).
● Market Equilibrium:
○ Equilibrium Price: The price at which quantity demanded equals quantity
supplied.
○ Surpluses and Shortages: Surpluses occur when supply exceeds demand,
leading to price reductions. Shortages occur when demand exceeds supply,
leading to price increases.

Price Elasticity of Demand and Supply

● Price Elasticity of Demand (PED):

○ Definition: Measures the responsiveness of quantity demanded to a change
in price.
○ Elastic vs. Inelastic Demand: If PED > 1, demand is elastic (consumers are
sensitive to price changes). If PED < 1, demand is inelastic (consumers are
less sensitive to price changes).

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 ○ Factors Affecting PED: Availability of substitutes, necessity vs. luxury,
proportion of income spent on the good, time period.
● Price Elasticity of Supply (PES):
○ Definition: Measures the responsiveness of quantity supplied to a change in
price.
○ Elastic vs. Inelastic Supply: If PES > 1, supply is elastic (producers can
increase output easily). If PES < 1, supply is inelastic (producers cannot
easily increase output).
○ Factors Affecting PES: Time period for production, availability of resources,
capacity of production.

Market Structures

● Pure Competition: Many small firms, identical products, no barriers to entry, and no
single firm can influence market prices.
● Monopolistic Competition: Many firms, differentiated products, some control over
prices, low barriers to entry.
● Oligopoly: Few large firms dominate the market, products may be identical or
differentiated, significant barriers to entry, potential for collusion.
● Monopoly: One firm dominates the market, unique product with no close substitutes,
significant barriers to entry, the firm is a price maker.

Government Intervention

● Price Controls:
○ Price Ceiling: A maximum price set by the government below the equilibrium
price, leading to shortages.
○ Price Floor: A minimum price set by the government above the equilibrium
price, leading to surpluses.
● Market Failure:
○ Public Goods: Non-excludable and non-rivalrous goods that the market may
not provide efficiently (e.g., national defence).
○ Externalities: Costs or benefits of production or consumption experienced by
third parties (e.g., pollution).
○ Government Intervention: Taxes, subsidies, regulations, and public
provision to correct market failures.

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4. Labour Markets
Demand for and Supply of Labour

● Derived Demand: Labour demand depends on the demand for the goods and
services that labour helps produce.
● Factors Affecting Labour Demand:
○ Output of the Firm: Higher demand for goods increases the demand for
labour.
○ Productivity of Labour: More productive labour increases demand.
○ Cost of Other Inputs: If other inputs (e.g., capital) are cheaper, demand for
labour may decrease.
● Factors Affecting Labour Supply:
○ Wages/Remuneration: Higher wages attract more labour.
○ Working Conditions: Better conditions attract more workers.
○ Human Capital: Education, skills, and training affect labour supply.
○ Mobility of Labour: Geographic and occupational mobility impact labour
supply.
○ Participation Rate: The proportion of the working-age population that is
either employed or actively seeking work.

The Australian Workforce

● Workforce Composition: Includes employed and unemployed individuals.

● Characteristics of the Workforce: Age, gender, educational background, cultural
diversity.
● Trends in Employment:
○ Unemployment: Types include cyclical (due to economic downturns),
structural (mismatch between skills and jobs), frictional (temporary
transitions), and seasonal (due to seasonal demand).
○ Underemployment: Part-time workers wanting full-time work.
○ Casualisation: Increase in casual or temporary jobs.
○ Outsourcing and Subcontracting: Employment of external firms to perform
tasks.

Labour Market Outcomes

● Wage Differentials: Differences in wages based on occupation, gender, age, and

education.
● Non-Wage Outcomes: Job security, work conditions, benefits, and job satisfaction.
● Arguments for and Against Income Redistribution:
○ For: Reduces poverty, increases equality, and improves social stability.
○ Against: May reduce incentives to work and invest.

Labour Market Institutions

● Unions: Represent workers, negotiate wages and conditions, and engage in

collective bargaining.

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● Employer Associations: Represent employers in negotiations with unions and
government.
● Industrial Framework: Legal framework governing employment, including awards,
enterprise agreements, and contracts.

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5. Financial Markets
Types of Financial Markets

● Primary Market: Where new financial assets (e.g., shares, bonds) are issued and
sold for the first time.
● Secondary Market: Where existing financial assets are traded among investors
(e.g., stock exchanges).
● Types of Financial Assets:
○ Consumer Credit: Loans for personal use, such as credit cards or car loans.
○ Housing Loans: Mortgages for purchasing homes.
○ Business Loans: Loans to firms for capital investment.
○ Short-Term Money Market: Trading of short-term debt instruments like
treasury bills.
○ Bond Market: Long-term debt securities are issued and traded.
○ Foreign Exchange Market: Currencies are traded, determining exchange
rates.
○ Share Market: Shares of companies are issued and traded.

Interest Rates

● Types of Interest Rates:

○ Short-Term Rates: Rates for loans with shorter maturities (e.g., overnight
loans).
○ Long-Term Rates: Rates for loans with longer maturities (e.g., 10-year
bonds).
● Role of the Reserve Bank of Australia (RBA):
○ Cash Rate: The interest rate set by the RBA, influencing other interest rates
in the economy.
○ Monetary Policy: The RBA adjusts the cash rate to control inflation, manage
economic growth, and influence the exchange rate.

Regulation of Financial Markets

● Reserve Bank of Australia (RBA): Controls monetary policy, manages the cash
rate, and oversees the stability of the financial system.
● Australian Prudential Regulation Authority (APRA): Regulates banks, insurance
companies, and superannuation funds to ensure financial stability.
● Australian Securities and Investments Commission (ASIC): Regulates corporate
behaviour, financial markets, and protects consumers and investors.
● Australian Treasury: Advises the government on economic policy, including taxation
and financial regulation.

Factors Influencing Interest Rates

● Demand for and Supply of Funds: Affected by economic activity, inflation, and
government borrowing.

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● RBA’s Monetary Policy: Adjustments to the cash rate influence overall interest
rates.
● Global Factors: International interest rates and capital flows affect domestic rates.

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6. Government and the Economy
Government Intervention in the Economy

● Market Failures: Occur when the market does not allocate resources efficiently or
equitably. Common causes include:
○ Public Goods: Non-excludable and non-rivalrous goods like national
defence, which markets may underprovide.
○ Externalities: Costs or benefits that affect third parties (e.g., pollution,
education).
○ Monopoly Power: Where a single firm controls the market, leading to higher
prices and reduced output.
● Role of Government:
○ Regulation: Setting rules for market activity to ensure fairness and efficiency.
○ Subsidies: Financial assistance to support desirable activities or reduce the
cost of essential goods.
○ Taxation: Taxes are used to redistribute income, fund public services, and
discourage harmful behaviour (e.g., tobacco taxes).
○ Public Provision: Direct provision of goods and services (e.g., healthcare,
education).

Taxation and Government Spending

● Types of Taxes:
○ Progressive Tax: Higher income earners pay a higher percentage of their
income in tax (e.g., income tax).
○ Regressive Tax: Lower income earners pay a higher percentage of their
income in tax (e.g., GST).
○ Proportional Tax: All income levels pay the same percentage of their income
in tax.
● Government Budgets:
○ Surplus: When government revenue exceeds spending.
○ Deficit: When government spending exceeds revenue.
○ Balanced Budget: When government spending equals revenue.
● Fiscal Policy:
○ Expansionary Fiscal Policy: Increasing government spending or cutting
taxes to stimulate economic activity.
○ Contractionary Fiscal Policy: Reducing government spending or increasing
taxes to slow down economic activity.

Welfare and Income Redistribution

● Social Welfare Programs: Government programs designed to provide financial

assistance to individuals in need (e.g., unemployment benefits, pensions).
● Income Redistribution: The government uses progressive taxes and social welfare
payments to reduce income inequality.
● Arguments for Redistribution: Promotes social equity, reduces poverty, and
increases social stability.

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 ● Arguments Against Redistribution: May reduce work incentives and economic
efficiency.

Economic Objectives of Government

● Economic Growth: Increasing the capacity of the economy to produce goods and
services over time.
● Full Employment: Achieving a situation where all who are willing and able to work
can find employment at current wage rates.
● Price Stability: Maintaining a low and stable inflation rate.
● External Stability: Ensuring that a country’s international transactions are
sustainable over time.
● Income Redistribution: Reducing income inequality through taxation and welfare
policies.
● Environmental Sustainability: Promoting economic development that does not
deplete natural resources or harm the environment.

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