“Economics is the study of the way we try to satisfy our

material wants with the limited means available to us.”

Topic 1: Introduction to Economics

Economic Problem: (1.2 - 2.2)

-​ The economic problem centres on HOW to satisfy unlimited wants with limited
resources.
-​ Main concern is scarcity
-​ Thus, it is the problem of CHOOSING between alternative wants. It means that some
wants will be satisfied, others unsatisfied.

Terms:
Needs - goods and services required to satisfy the basic necessities of life.

Collective wants - wants that are generally of benefit to the community as a whole. E.g. School,
Hospital.

Recurrent wants - wants which must be satisfied over and over again. E.g. food, oil, petrol

Production - process of producing goods and services using resources.

Opportunity cost - a want which is foregone in order to satisfy another want.

Utility - the satisfaction from consuming a good or service.

Intertemporal consideration - CHOICE between picking between present or future to buy

something.
GDP - measures monetary value of final goods and services in a given period of time.

Intermediate Goods - Products that are used in production process to make other goods. I.e
Ingredients of final product.

Market - network of buyers + sellers seeking to exchange product at certain price.

____________________________________________________________________________

Introduction to the economy:

Why the economic problem will not be solved:

Resources → limited
Wants → unlimited
THEREFORE SCARCITY.

Intertemporal consideration - CHOICE between picking between present or future to

buy something.

Characteristics of wants:
Wants are people’s desires for goods and services.
1.​ Wants Are unlimited
2.​ Wants are competitive
3.​ Wants vary between people, time and places.
4.​ Some wants are recurring
5.​ Some wants are complementary

MNEMONIC: CURVC

Types of wants:
-​ Individual wants → wants of each person according to preferences and income. E.g
Types of food
-​ Collective wants → wants that are demand by a community. Eg. health care
-​ Recurrent wants → wants that must be continually satisfied. E.g food
 -​ Complementary wants → wants which are derived from other wants. E.g cars and petrol

Goods vs Services:
-​ Goods are tangible objects that satisfy consumer’s wants.
-​ Services are tasks performed for others by individuals or firms.

Types of Goods:
-​ Capital goods (aka intermediate goods) - goods which are used to produce more
goods and services. E.g tools, machinery, vehicles.

-​ Free Good - goods that you dont have to pay for and do not have ownership. E.g air

-​ Economic goods - A good or service that satisfy’s consumers wants and has exchange
value

-​ Consumer goods - Products that satisfy wants directly.

-​ One-use good - goods that can be only be used once. E.g matches

-​ Durable goods - goods that are durable.

Difference between economic vs consumer good?

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Resources
Resources - inputs used in the production of goods and services
E.g materials, workers, knowledge
Factors of production (FOP): 4
-​ Capital
-​ Enterprise
-​ Land
-​ Labour
Mnemonic: CELL

Characteristics (features/qualities) of resources:

-​ Known - Australia's iron ore only became a resource when they were discovered.

-​ Accessible - advances in technology have made, anbd will continue to make

inaccessible materials into accessible resources.

-​ Capable of producing goods & services which will satisfy wants:

-​ Rich farmland is a resource
-​ Land in a busy city is still a resource because despite being infertile, it can still be
used to produce goods and services.
-​ BUT infertile land in a remote part has no productive use → not resource

-​ Scarce - scarce compared to our wants as they are always UNLIMITED.

Mnemonic: SCAK

Different societies produce different goods:

Reflects the different cultures and traditions and resources available.

Factors of Production:
-​ Land
-​ Land - covers all USEFUL NATURAL resources.
-​ Includes mineral deposits, rivers, forests.
-​ Quality of land is restricted to what nature provides

-​ FIXED nature of land causes problems.

 -​ As populations grow → we demand more goods & services → increase in
resource BUT unlike other resources, Land cannot be increased.
​
-​ Rent: the return to LAND:
-​ Owners of land receive payment known as RENT.
-​ Owner may be paid:
-​ A fixed amount
-​ A share of land’s production

-​ Labour
-​ Labour is HUMAN EFFORT used in producing goods and services. It includes
PHYSICAL and MENTAL effort.
-​ E.g construction workers, shop assistance
-​ Amount of labour for an economy depends on many factors:
-​ Size of population
-​ School leaving age
-​ Retirement age

-​ Wages: the return to LABOUR:

-​ Wages - payments for LABOUR/PERSONAL EFFORT in the production
process.
-​ Factors that affect Return to LABOUR:
-​ Productivity of workers
-​ Lvl of skill
-​ Experience
-​ Demand for G&S

-​ Capital
-​ Goods which are used to produce more G&S.
-​ E.g machinery, factory buildings, higher education
-​ Increases productivity of other resources.
-​ Productivity:
-​ Refers to G&S that can be produced with given resources in a set
period of time.
 -​ Capital → improves living standards → increases productivity, working hrs
decrease, employment/incomes/profits increase.

-​ Capital → improves productivity of other resources → allows more production

from same no. of workers + natural resources.

-​ Savings are necessary for creation of capital.

-​ INTEREST: Return to Capital

-​ Cost of using capital.
-​ Institutions pay interest to encourage saving.

-​ Enterprise
-​ Contribution made by an entrepreneur.
-​ Entrepreneur → takes responsibility for organising, takes initiative, bears
risk. INITIATIVE, RESPONSIBILITY, RISK
-​ Management vs enterprise:
-​ Management - ORGANISING people + resources and seeing potential in
new production
-​ Enterprise - has prop. Of management + DRIVE and nerve to put ideas
into practice.

-​ PROFIT: the return to Enterprise

-​ Income/reward for taking initiative and risk to go into business + take risk
of implementing new idea which has not proved successful.

-​ Profit (everday meaning) - wages for physical + mental effort put into
production.

____________________________________________________________________________
Opportunity cost:
-​ The amount of one good we have to forgo when we choose to produce another.
-​ Can be applied to individuals, businesses, and the government.
-​ Individual
-​ With limited resources may have to choose between satisfying his desire
for a car and a boat. If chooses car, he has to forgo boat.

-​ Business
-​ Firms must also make a choice in the allocation of its scarce resources.
-​ If entrepreneur decides to produce shoes, he gives up opportunity to
produce something else e.g furniture.

-​ Government
-​ Has limited resources to satisfy community wants.
-​ If government allocates resources to construction, it may be at expense of
new school.

Production Possibility Frontier:

-​ Curve on graph that illustrates the possible quantities that can be produced of two
products.
-​ Can demonstrate how opportunity costs arise from individuals.
-​ Also demonstrates the maximum possible production of all goods and services.

-​ Technology:
-​ With the application of new technology, we may be able to develop more efficient
methods of production. → allows to produce higher quantity of goods with the
same resource. → This can be represented by the outward shift of PPF.
-​ Simplified: improvement in technology → results in outward shift of PPF
curve.
 -​

-​ New Resources:
-​ Anything that increases availability of production will increase PPF.
-​ Includes new resources, expansion of population through immigration,
new technology → increasing no. of ppl working.
-​ As a result, we can produce more goods which push PPF outward.
-​ Simplified: new resources → more goods produced → push PPF
curve outward.

-​ Unemployment + allocation of resources:

 -​ Unemployment - where a person or resource is not utilised/work to fullest
would place the economy within/below PPF. This is because we are not
working to the fullest of ability.
-​ If all resources not fully employed, or/including labour i.e
unemployment → producing within PPF curve as shown below.

Summary;
Any point on curve shows maximum production of economy.
Any point below curve shows underemployment of resources. UNEMPLOYMENT
Any point above the curve shows unsustainable/unattainable production.

-​ Shape of PPF
-​ Is drawn concave because we cannot move across the ppf without any
loss of productive capacity.
-​ Every trade-off is not equal.
-​ Cost of production generally increases as we increase volume of output.

As economy moves along production possibility frontier → There is opportunity cost involved.

In drawing up ppf, it’s assumed that;

-​ All resources are fully employed
-​ Resources and technology are fixed
 -​ Only two types of goods are produced

The future implication of current choices by individuals, businesses

and gov.t:
-​ The economy chooses between producing consumer goods vs capital goods.
-​ While capital goods do not satisfy wants immediately,
-​ They will satisfy in future.
-​ It will also increase productive capacity and higher lvl of economic growth.
-​ Can be applied to individuals, businesses, governments:
-​ Individuals:
-​ May choose to go without an overseas holiday and instead take out a
mortgage to purchase a house. In the longer term → will improve
financial security. Making choice

-​ Business:
-​ Prioritising and choosing which sector of business would be most
successful in the long run. Making choice
-​ Business are most effective when they identify where next wave in
business growth is likely to come from.

-​ Governments:
-​ Decision of gov.ts have long term implications, both for gov.t and entire
economy.
-​ May choose to give highest priority to satisfy immediate wants eg. health
care. ⇒ As a result, provides less funding for education, infrastructure →
leading to lower lvl of economic growth in long run because we will have
lower skill base in workforce.
-​ The difficult situation for gov.t is that it may be politically popular to satisfy
immediate wants than to plan for the future.
The economic factors underlying choices:
-​ Following section reviews factors that affect economic decision making for;
-​ Individuals
-​ Choices shaped by age, income, future plans,
-​ personality factors e.g some like risk, some prefer security
-​ E.g: student decides to pursue education longer, forgoing income for
several years, in long run will gain more income.
-​ Individuals can also contribute to economic decision making by voting in
elections.

-​ Business
-​ Choices by pricing its products
-​ Choices regarding production and resource use including long life expensive
equipment.
-​ Negotiate wage lvls set by industrial awards, or personalised contracts.

-​ Governments:
-​ Significant influence over economic choices made by businesses and individuals.
-​ E.g taxing cigars
-​ Influence population by prohibiting certain activities and imposing heavy penalties
-​ E.g businesses in same industry are prohibited to meet → because it
degrades competition and harms interest of consumer.

The Classroom video:

The concept of opportunity cost - a want which is foregone in order to satisfy another want.
This is relevant to gov.ts as they have to satisfy one community want over another. An example
of this is the gov.t must choose between consumer or capital goods. If choosing consumer good,
the gov.t will meet the wants of the population now but may sacrifice quality of life in the future.
Conversely, capital goods.

Capital accumulation - growth in wealth through investments or profits.

Economies seek to accumulate capital because it would produce more goods + services in the
future which would increase standard of living.
Standard of Living vs Quality of Life:
Standard of living - refers to the lvl of wealth, comfort, and necessities to a certain
socioeconomic area.

Quality of life - a subjective term that can measure happiness.

Australia’s Economy:
-​ Mixed market economy
-​ Who receives goods + services
-​ Price mechanism → people with higher income satisfy more wants, lower income
satisfy less wants.

Specialisation:
-​ Process of concentrating labour on a certain type of production to become more efficient.
-​ Benefits:
-​ Choose to do things they like
-​ Gain skill and efficiency through repetition.
-​ Specialisation creates interdependence because they all depend on each other.

Types of Budgets:
-​ Surplus → tax > gov.t expenditure
-​ Gov.t Have additional money that can be reinvested
-​ Slows economy when economy is high
-​ Deficit → tax < gov.t expenditure
-​ Drives economy when economy slows down.

-​ Balanced → tax = gov.t expenditure.

Paradox of thrift:
A situation in which people tend to save more money, thereby leading to a fall in aggregate
savings of the economy as a whole
An increase in saving leads to a decrease in aggregate demand and thus a decrease in gross
output which will in turn lower total saving.

Leakages vs Injections:
Leakage - Leakage describes capital or income that escapes an economy or system in the
context of a circular flow of income model. Includes savings, taxations and imports.

Injections - expenditure that is not a direct function of income, but is ‘injected’. E.g Investment,
Gov.t expenditure, exports.

Types of Economies:

-​ Barter economy → Exchange of goods + services between two or more parties without
the use of money. (used in the developing world.)

-​ Centrally Planned/Command economy (opposite to market economy)

-​ → economic system where gov.t body makes economic decisions regarding
production and distribution of goods. (communist)
-​ 5 yr plan based on gov.t priorities to plan economic growth.
-​ Aka SOCIALIST

-​ Pure/Free Market Economy (opposite to planned economy)

-​ → factors of production (resources) are owned by individuals.
-​ All major economic decisions are made by individuals and private firms
motivated by self interest.
-​ What is produced and how much is determined by supply + demand and
signalled to producers through a price system.
-​ Aka CAPITALIST

-​ Command Economy
-​ → Factors of production (resources) are owned by gov.t .
 -​ Another term for planned economy.

-​ Mixed Economy → Essentially a market economy with a fair degree of gov.t intervention.

-​ Socialist economy → Mixed economy with high degree of gov.t intervention.

-​ Laissez Faire Economy

-​ → almost complete absence of gov.t intervention in economic activity.
-​ Weaknesses:
-​ Some become wealthy
-​ Majority are exploited into poverty
-​ Volatile (unpredictable) cycle of boom and bust. h

-​ Open market economy

-​ Is an economic system with no trade barriers to free market activities.
-​ No market barriers, such as :
-​ Unfair licensing agreements
-​ Arbitrary taxes
-​ Subsidies
-​ Sectors 2,3,4

-​ Closed market economy:

-​ An economy that does not participate in international trade → meaning it would
not import or export goods and services from another country

Characteristics of a Market Economy (Dixon pgs 30-32):

Market - network of buyers + sellers seeking to exchange products at certain price.

Characteristics of market economy:

1.​ Private Property
-​ Individuals have the right to own resources and use them to acquire wealth.
 -​ Each individual has the right to bequeath his property to someone else at time of
death.

2.​ Freedom of Enterprise

-​ Each person is free to seek wealth in any way he chooses.

-​ Each producer is free to hire resources, allocate them to produce products and
sell them.

-​ Each worker is free to choose from the avenues of employment.

-​ Each consumer is free to choose how he will spend his income → fundamental in
capitalist (market economy) → because individuals determine what an economy
will produce.

3.​ Extensive Competition is Desirable:

-​ There is a very large no. of buyers and sellers → so no one can by any actions of
his own influence the price of a good.
-​ No one can manipulate the market
-​ competition avoids the abuse of power.

4.​ Self Interest:

-​ Each economic unit will try to achieve the best for itself.
-​ Producers → try to maximise profits.
-​ Owners of FOP→ try to achieve the highest income for their resources.
-​ Consumers → will try to purchase at the cheapest price.

5.​ Extensive Specialisation by Factors of Production:

-​ Specialisation refers to practice whereby FOP produce one or part of product
exclusively, thereby drive an income, and spend it on the proceeds of other
specialists.
-​ E.g land may be used for many purposes in agriculture but because of climatic
conditions, it may be more efficient if it specialised in one crop.
6.​ The use of money
-​ Money:
-​ Earn money by selling FOP
-​ Allows transactions from a distance. E.g cheques
-​ Is more convenient

-​ Barter
-​ Involves producers swapping their output for the products their household
needs.

7.​ Extensive use of Capital Equipment:

-​ Resources have to be diverted from producing consumer goods in order that
capital goods may be produced.
-​ → means today’s consumers have to make sacrifices to their living standards in
order for more wants to be satisfied in future.

-​ So by producing capital goods, we ensure the continued production of consumer

goods.
-​ In market economy:
→ the motive for undertaking capital expenditure is the profit that await.

-​ In command economy:
→ planners decide how much capital equipment will be produced.

8.​ The use of a System of Markets:

-​ In market economy, economic decisions of millions of economic units are
coordinated by the price mechanism.
→ i.e a system of markets which determine the prices of all goods + services and
all FOP.
-​ If there is sudden influx of buyers in market, competition amongst buyers will
force price up.
-​ If there is sudden influx of sellers in market, competition among sellers will force
price down.
Product market:
-​ The interaction of demand for and supply of g+s.
-​ Consumers constitute for demand
-​ sellers/firms make up supply of products.

Factor market:
-​ Market for any input into FOP.
-​ Changes in demand + supply in the product market will also influence D+S in the factor
market.

The Mixed Economy:

Mixed economy - one where the decisions concerning production and distribution are made by a
combination of market forces and the gov.t

Why the gov.t chooses to intervene in the free play of market forces?

Because the free market doesn’t always provide the most efficient allocation of resources
for economy:

1.​ Some necessary goods + services may not be provided under a pure market system:
-​ E.g gov.t owned train + railway system
-​ Private enterprises at the time did not have funds for this.

2.​ Some necessary G+S are provided by gov.t rather than being left to private individuals:
-​ For reasons of security and stability
→ it is safer to have a defence force in hands of gov.t than to have private
armies.

3.​ Markets don’t always operate freely and in best interest of the economy:
-​ Gov.t provides regulations to ensure that producers who have assumed market
power do not exploit consumers.
 -​ Gov.t can ban undesirable G+S (Drugs)

Why the gov.t chooses to intervene in the distribution of output (income)?

Because the free market won’t necessarily provide a socially desirable or fair distribution.

1.​ Under the price mechanism, there would be no income earned by those who do not
produce. I.e invalid, elderly, and unemployed.
-​ The gov.t overrides the market forces and REDISTRIBUTES income by:
-​ Taxing earners
-​ Making TRANSFER payments → eg old age/invalid pensions,
unemployment benefits.

2.​ The gov.t also causes an overall redistribution of income in the interests of a more
EQUITABLE (even) sharing of production.
-​ It does this through the use of PROGRESSIVE INCOME TAX system.
-​ High income earners pay proportionately more tax than low income
earners → leading to more even distribution of after tax income.

How the mixed economy attempts to solve economic problem:

a)​ What to produce?

-​ Gov.t can be a producer.
-​ It can provide collective goods and services such as schools, roads, defence
force.
-​ It can also limit undesired production of goods (drugs).

b)​ How much to Produce?

-​ The gov.t can limit production of some goods.
-​ The gov.t can encourage australian producers competing with foreigners to
increase output by
 -​ Placing IMPORT RESTRICTIONS and TAXES on imports entering
Australia.
-​ Granting subsidies (money handouts) to Australians.

c)​ How to Produce?

-​ The gov.t can influence the cost of factors of production, and therefore how they
are used in the production process.
-​ Labour vs capital.

d)​ How production will be shared?

-​ Through progressive income tax and transfer payments, the gov.t redistribues
income, thus changing distribution of production.

Circular flow of Income:

Model that shows how g+s flow through the economy.

2 sector: Y = C (Income = consumption)

-​ Households
-​ Firms

3 sector: Y = C + S (Income = consumption + savings)

-​ Introduces financial sector
NOTE:
Y = E = O (Income = expenditure = output)

Effect of financial sector:

S > I (savings > investment) → economic contraction

S = I → equilibrium

S < I → Economic growth

4 sector:
-​ Introduces Gov.t Sector

Effect of gov.t sector:

G.E > T → Budget deficit → gov.t spends more money than collected in tax → economic growth
(used in TROUGHS)

G.E = T → Balanced Budget

G.E < T → Budget Surplus → Gov.t spends less money than collected in tax → Economic
Contraction (used in PEAKS

5 Sector:
Economy up to this point (2,3,4 sector economy) = Closed economy
5 sector = Open economy

Leakages:
-​ Savings
-​ Taxation
-​ Imports

Injections:
-​ Investment
-​ Gov.t expenditure
-​ Exports
Economy expansion → Leakages < Injections

Economy Contraction → Leakages > Injections.

Business Cycle:
Economy Expansion:
-​ INCREASE
-​ Production → business produce more output
-​ Employment → businesses need more workers to produce more output
-​ Wage → need to attract and keep workers by offering high wages
-​ Consumer spending → ppl spend more because of high wages
-​ Price → price increase as consumers spend more. Known as INFLATION
PEWCIP

Economy Contraction:
-​ DECREASE
-​ Production → businesses produce less output
-​ Employment → businesses need fewer workers due to fewer output
-​ Wage → demand for jobs become higher, businesses do not need workers.
-​ Consumer spending → decrease as ppl earn less income
-​ Price → decrease as people cannot afford. Known as DEFLATION
PEWCP
Overall it can lead to decline in the quality of life.
____________________________________________________________________________

Topic 2: Consumers and Business

Consumer Sovereignty:
In the market economy → consumers determine what is produced.

Consumer sovereignty → the idea that consumers hold the power to influence production
decisions, based on what goods and services they purchase.

Business conducts that REDUCE consumer sovereignty:

-​ Marketing
-​ Advertising exerts powerful influence over spending patterns of consumers.

-​ Marketers conduct research into wants, interests of consumers → mass

marketing (tv commercials) + direct marketing (targeted social media
advertisements.)

-​ Consumer sovereignty diminished by manipulative/deceptive marketing

practices.

-​ Misleading/Deceptive Conduct
-​ Consumers deceived by false claims about product.
-​ Eg ‘fresh food’, weight loss + anti aging products → make consumers pay
for items they don’t want to buy.

-​ Planned obsolescence
-​ Firms produce g+s designed to wear out quickly → encourages consumers to
make further purchases.
-​ Eg keeping up with latest technology → smartphone manufacturers
update phone models with new features.

-​ Anti competitive behaviour

-​ Firms operate in markets with few sellers → to diminish ability of consumers to
choose what they really want.

Factors influencing individual consumer choice:

Utility - satisfaction that individuals derive from the consumption of goods and services.
In aiming to maximise utility, consumers have to choose which g+s to buy,
-​ in this choice they are constrained by the market price of goods and services and
their level of income.

Factors affecting consumer’s expenditure choice:

1.​ The level of income
-​ Individuals earn higher incomes ⇒ choose to buy more items and items of
quality.
-​ $300,000 income vs $30,000 income

2.​ Price of good/service itself

-​ Necessities will have to be consumed regardless of price
-​ Demand for luxury goods decrease as price increases.

3.​ Price of substitute and complement goods

-​ Substitute ⇒ good that consumers buy in place of another good. Eg tea and
coffee.
-​ Price of tea increase = consumer demand for substitute coffee, increases.

-​ Complement ⇒ good that’s used in conjunction with another good. Eg DVD and
DVD player
-​ Price of DVD fall = increase in consumer demand for DVD + complement, DVD
player.

4.​ Consumer tastes and preferences

-​ Individuals choose g+s that give them maximum utility.
-​ Consumer tastes + preferences change = demand for specific goods change
-​ Innovation + technology progress = change in consumer demand.

5.​ Advertising
-​ Can create demand for a g+s where none existed.
-​ Can make demand for g+s less responsive to price increase by building
consumer loyalty.

Sources of Consumer Income

Returns to factors of production: (rent; wages; interest and profit)
Market/Earned Income
-​ Receiving an income from a factor that you have sold.
Eg teacher receiving a salary from selling labour.

Social Welfare:
Non market/Unearned Income
-​ No factors are sold here because the recipients can’t sell factors. I.e ppl in need, aged,
disabled.

Social welfare payments (transfer payments)

-​ payments made to increase incomes of families in need by gov.t
-​ Income collected through taxation, transferred from gov.t → consumers.

Examples of transfer payments:

-​ Age pension - ppl over 66

-​ Parenting payment - carers of young children

-​ Disability support pension

-​ Jobseeker payment

Sources of household income:

Social welfare expenditure:

CONSUMER WORKBOOK CHAPTER REVISION GC

Decisions to Spend or Save:

Average propensity to consume (APC) - proportion of total income spent on consumption.

Average propensity to save (APS) - proportion of total income that is saved for future
consumption.

Factors influencing spending and saving in an economy:

-​ Income levels and future expectations:
 -​ If income levels rise, or inequality of income rises ⇒ savings rise.
-​ If ppl uncertain about future, savings rise.

-​ Cultural factors:
-​ personality/culture factors such as asian economies tend to save more than
industrialised economies. Previous generation save more than the current.

-​ Confidence and future expectations

-​ Confident = spend more
-​ Not confident = save more

-​ Life stage and age distribution:

-​ Consumption and savings behaviours change over time.
-​ Young adulthood → late middle age (income is highest) → retirement old age.

-​ Government policies:
-​ Low tax, superannuation = more attractive to save
-​ Abolition of consumer tax = more attractive to spend

-​ Availability of credit
-​ Spending is higher if credit is cheap.

Most significant factors are level of income and age.

Disposable income: the amount of money an individual has to spend or save after tax or
mandatory charges have been deducted.

Income:
As income rises, people tend to save a higher proportion, therefore APS rises and APC falls.

Have to know how to interpret and draw graph.

The consumption function becomes less steep
because, in reality, as income increases, MPS
increases whilst MPC decreases.

This aligns with the relationship where people

with lower incomes spend a higher proportion of
their income on necessities than people with
higher incomes.
 -​ Consumers on low income spend proportionately more of Y than those on higher
incomes.
-​ This is because the cost of essentials is relatively fixed.

When income rises faster than consumption:

-​ APS increases
-​ APC decreases

Marginal propensity to consume (MPC) - proportion of each extra dollar of income that goes
to consumption.
-​ Change in consumption/ change in income.

Marginal propensity to save (MPS) - proportion of each extra dollar of income that is saved.
-​ Change in saving/ change in come.

As a person’s income rises, their MPC tends to fall and MPS tends to rise.
Therefore consumption tends to become less steep as income rises.

This relationship can be applied to the economy as a whole.

-​ As national income rises, the overall lvls of savings rise.
-​ Not always true for all economies tho, eg USA.

Age:
Individuals who have higher incomes save more to accumulate wealth and assets for
retirement, whereas low-income earners must use a higher proportion of their income just to
meet the necessities.
Thus overtime, APC falls (as income rises) and then rises again after retirement.
Known as the life cycle theory of consumption.
When young, individuals receive low income and tend to spend it, therefore MPS/APS is low
MPC/APC is high.
Dissavings - refers to the behaviour where an individual spends money beyond their available
income, leading to borrowing.

In work, you receive a higher income, meaning that the proportion consumed would be less than
when you were young, hence APC decrease and APS increases. This is also because you need
to save for retirement.

In retirement, you usually don’t earn money so you will consume most of your ‘income’/assets.
Therefore APC tends to rise again and APS tends to fall.

Production Time Periods

Changes in the demand for its product will lead the firm to make adjustments to its levels of
output.
Adjustments can include:
-​ Employing more labour - short/quick
-​ Building larger plant (factory) - long

Total Physical Product (TPP): - the total amount of output that results from combining the
given factors of production.

Marginal Physical Product (MPP): - The change in TPP that results from the addition of one
more variable factor to our given fixed factor (s).
Average Physical Product (APP) - The average output per variable factor (TPP divided by no.
of variable factors)

The Short Run:

A period of time too short to allow the firm to alter its plant size

Yet long enough to allow change in level at which that plant is utilised.

Thus:
-​ Capacity of firm is fixed
-​ Output can be varied ⇒ utilising larger amounts of labour (Raw materials) with a fixed
plant.

Factors:
Some are FIXED. (land → fixed)
Some are variable. (labour → variable)

The Long Run:

A period of time which is long enough for the individual firm to change the quantities of ALL
resources employed, including size of plant.

Allows enough time for firms to be created and entered and old firms to close and leave
industry.

Factors:
All factors are variable.

The Law of Diminishing Returns:

While we keep adding variable factors to a given fixed factor of production, there will be a point
where MPP will start to decline.
For the law of diminishing returns, it is assumed that at least one variable is fixed.

Economies and Diseconomies of Scale:

In the long run ⇒ all factors are variable.

Internal Economies of Scale: (increasing returns to scale)

Refers to reductions (advantages) in average costs as firm increases its plant size/size of own
operations.
Internal ecos of scale results in lower per unit production costs.
Internal factor ⇒ business has control over

Technical optimum - the lowest average cost and the most efficient point in output.

Causes of Internal Economies:

1.​ Bulk buying:
-​ Can buy raw materials in bulk and gain discounts which reduce input costs.

2.​ Better access to finance

-​ Larger firms find it easier to access finance as they have less credit risk than
smaller firms.

3.​ Increased use of capital

-​ As firm expands, it will become possible to purchase more efficient machinery
which is essential for high volume of output.

4.​ Increased Specialisation of labour

-​ As firm expands, workforce expands allowing for greater division of labour.
Resulting in productivity increase.

As scale grows ever larger, volume level reaches beyond ⇒ Problems Emerge (internal
diseconomies of scale)

Internal Diseconomies of Scale: (Decreasing returns to scale)

Refers to Increase in average costs when the firm increases the production beyond the
technical optimum.
I.e disadvantages the firm experiences if it growths too much without further investment.
Main cause:
-​ Increasing problems with management.
-​ Top management loses touch with day to day operations
-​ Because it delegates responsibility to those further down ladder. POOR
COMMUNICATION
-​ ⇒ mistakes increase and admin becomes less efficient ⇒ increasing cost of
performing business functions, increasing avg cost.

External Economies of Scale: (increasing returns to scale)

Result of forces outside the control of the individual firm.

REFER to reduction in average cost per unit due to an outside source (business has no control),
without any change in firm’s operations.

Relate to SCALE of industry. (increase)

Main Cause:
-​ Increasing localisation of industry. (firms in industry are closer to each other – can
benefit)
Other Causes:
-​ Improved transport facilities provided by gov.t ⇒ reducing fuel cost and time.

-​ Better education and training of labour force ⇒ funded by gov.t programs.

-​ Lower resource prices for industry ⇒ Discovery of new materials

-​ Increased shared R&D ⇒ funding allocated to unis

External Economies of Scale: (Decreasing returns to scale)

Refer to increase in firm’s average costs due to outside factors even without any change in the
firm’s output.

Causes:
-​ Increased taxes or tolls by gov.t → company tax increase, M2 tolls rise

-​ Resource Constraints → supply chain interrupted. COVID19 → inflation on inputs.

-​ Gov.t Regulations → more paperwork and compliance take up more time ⇒ increasing
cost. Eg WHS regulations.

Topic 3: Markets
Role of the market
Market - a situation in which buyers and sellers interact with each other for the purpose of
exchange.

-​ Electronic markets ⇒ involve electronic commerce such as online shopping, auctions.

Product/G+S markets - refers to where and how final g+s are bought and sold.
Eg market for meat and fish, groceries, household goods.
Sold in retail and wholesale markets

Factor Markets - refer to markets where FOP are bought and sold. Such as
-​ Labour market

-​ Capital market
Ect.

Interaction between product and factor market involves derived demand.

Derived Demand:
Refers to the demand for productive resources, which is derived from the demand for final
goods and services / output.

Eg if consumer demand for new cars ROSE. ⇒ producers INCREASE demand for productive
inputs used to produce new cars.

Equilibrium:
-​ Market situation in which there is no tendency for change.
-​ Determined through interaction between product and factor market.

Market equilibrium:
-​ There is no tendency for the price and quantity demanded or supplied to change.
Markets are equilibrating devices as it determines:
-​ What is produced
-​ To whom is produced
-​ How it is produced
-​ How much is produced.

Markets are the main price mechanism for solving the economic problem of scarcity.
They discriminate in favour of:
-​ People who have the capacity to purchase g+s.
-​ People who are first in market to purchase
Discriminate against:
-​ Least amount of capacity to pay for g+s.

Role of prices in market economies:

1.​ Prices reflect relative scarcity of g+s in terms of their supply.
2.​ Prices help allocate resources to g+s which yield the highest return.
3.​ Prices act as incentives. For producers and entrepreneurs to take risk in organising
FOP.
4.​ Prices act as a rationing device. Market clearing.
5.​ Prices are equilibrating device.

Opportunity cost:
-​ Refers to the cost of the alternative consumption of g+s foregone.

Relative prices reflect the relative opportunity costs in product and factor markets.
 -​ Ceteris paribus (all other things being equal)

Demand and Supply and Market Equilibrium

Microeconomics - the study of the economic behaviour of individuals, households, firms and
markets.
Eg how are prices in the market determined? Factors that cause change.

Macroeconomics - the study of determination of aggregate economic activity or activity in the

economy as a whole.
Eg how inflation, unemployment arises.

The market or price mechanism

The economic problem of scarcity of resources is solved by the operation of markets.

Markets - situation in which buyers and sellers are in contact to exchange goods and services.

-​ What goods should be produced?

-​ How much should be produced?

-​ How are G+S produced to minimise costs?

-​ To whom should g+s be distributed?

Demand:
Demand - refers to the consumer’s willingness and ability to pay for goods at a particular price
and time.

Law of demand - states that quantity demanded varies inversely with price. And vice versa.
Individual demand - refers to the demand for a good or service by an individual in the market.
Market demand - refers to the sum of individual demands for a certain g or s.

Demand Curve:
Graph where price is on vertical axis and quantity demanded is on horizontal axis.

Factors affecting individual demand:

1.​ Price of the good or service. - the higher the price the less quantity demanded.
2.​ Price of other goods and services. - relative price of substitute and complementary
goods will affect demand for a g or s.
3.​ The level of individual income - the higher the individual income, the most quantity
demanded.
4.​ The personal preferences and tastes of consumer/ trends in style - changes in
fashion and technology may lead to consumers switching their demand.

Factors affecting market demand:

1.​ All factors above (affecting individual demand)
2.​ Size of population, age composition, socio-economic status.
-​ Increase in size of pop. could increase market demand for g or s.
-​ An ageing population could increase demand for healthcare, pharmaceutical
-​ A higher socio-economics status could increase demand for luxury goods.
 3.​ Distribution of consumer income
-​ Equal distribution - rise in demand for luxury goods.
-​ Unequal distribution - rise in demand for necessities.
-​ Both because of communities as a whole.
4.​ Consumer expectations about the future:
-​ If consumers expect price to rise, they buy more now → demand increases.
-​ If consumers expect price to fall, they buy less now → demand decrease.
5.​ Lvl of technological progress
-​ A technological breakthrough for a new product may experience increased
demand.

Downward sloping curve as it reflects the law of demand.

-​ When price increases, less would be demanded.
-​ When price decreases, more would be demanded.

Movements along the Demand Curve:

DUE TO PRICE CHANGE.
-​ When only price changes, there is a change in quantity demanded.

-​ A contraction in demand is the result of a price rise. LEFT UP

-​ An extension in demand is the result of a price fall. RIGHT DOWN
Shifts in the Demand Curve:

Determinants:
1.​ Consumer tastes and preferences -
2.​ Buyers income
3.​ Price of other goods

Substitution effect:
When the price of one good rises, consumers would look for a cheaper alternative to increase
their purchasing power.
-​ When goods have close substitutes, rise in price would see an increase in demand for
good.
-​ Fall in price of substitute would see decrease in demand for good.

Income effect:
When the price of one good rises, consumers will experience a fall in their real income and
reduce their consumption.

Supply:
Supply - refers to the quantity of G+S offered by producers/sellers in a market.
-​ Producers are motivated by profit maximisation and seek to sell at the greatest
quantity and price.

-​ Consumers, on the other hand, are motivated by utility maximisation and seek to
purchase the greatest quantity of a g+s at a minimum price.

Supply curve:
Curve slopes upwards from left to right as more g+s are supplied as price increases.
-​ Reflects producers’ desire to maximise profits.
 -​ And fact that, greater quantity → greater production → higher costs → higher price.

Price Elasticity of Demand:

Price elasticity of demand measures the responsiveness of quantity demanded to a change in
price. Calculated as percentage change in QD/percentage change in price.

Elastic Demand: A strong response to a change in price.

-​ Increase in quantity demanded is proportionately higher (>) than fall in price.
-​ Eg luxury goods

Unit Elastic Demand: A proportional response to a price change (total amount spent by
consumers remains unchanged)
-​ Proportionate change in quantity demanded = the proportionate change in price.

Inelastic Demand: A weak response to a price change.

-​ Quantity demanded is proportionately less than the increase in price.
-​ Eg necessities (med. treatments)

Importance of price elasticity of demand:

Important to business firms and government.

Businesses need to understand price elasticity of demand to decide on optimal pricing

strategy.

-​ If demand was relatively elastic → firms would know that lowering price would greatly
expand volume, thus increasing total revenue.

-​ If demand was relatively inelastic → firms could increase the price, leading to an
increase in revenue, since reduction in sales would be less than price increase.

-​ Businesses usually engage in statistical market research to determine consumer

preferences, and price elasticity of demand.

The Gov.t needs to understand price elasticity of demand to price g+s for community.
Also needs to be able to predict effects of changes in level of any indirect taxes such as:
-​ Sales taxes
-​ Excise duties
-​ Special levies
These are imposed on goods such as alcohol, tobacco, petrol.
Gov.t → gauge the responsiveness of demand in order to estimate the amount of revenue they
will raise.

Relationship:
Explains why they impose excise duties on relatively inelastic goods such as, tobacco,
alcohol, petrol.

Market Equilibrium:
-​ Market equilibrium is a situation where price and output are determined through the
interaction of demand and supply.

-​ Market equilibrium is also a situation in which there is no tendency for change in either
the price or quantity of a good or service.
Conditions that alter demand:
-​ Consumer incomes
-​ Consumer tastes
-​ Trends in fashion
-​ Changes in tech, population, tax rates.

Conditions that alter supply:

-​ Costs of production
-​ Prices for FOP
-​ State of technology
-​ Producer expectations about the future.
Market structures:

Topic 4: Labour Markets

PRELIMINARY ECONOMICS: LABOUR MARKETS Study

Guide
Note Taking – What’s Important

MUST COVER ABOUT LABOUR MARKETS - LABOUR DEMAND AND SUPPLY

Introduction

Define ‘labour market’

●​ Labour market: where individuals seeking employment interact with employers who
want to obtain the most appropriate labour skills for their production process.

Why is a healthy labour market important?

●​ A healthy labour market is crucial for economic growth and social stability, as it
ensures optimal productivity, drives consumer spending, and supports income
distribution, reducing poverty and inequality. When businesses can find the right talent,
 they innovate and perform better, contributing significantly to the overall economic
prosperity and resilience of a society.

9.1 DEMAND FOR LABOUR

Define ‘derived demand’

●​ Derived demand refers to the demand for labour which is derived from the demand for
goods and services within the economy.
○​ Example: If the demand for a good such as wheat increases, then this leads to
an increase in the demand for labour, as well as demand for other factors of
production such as fertilizer.

Influences on the Demand for Labour:

●​ The output of the firm

●​ General economic conditions (aggregate demand)
○​ Aggregate demand → refers to total demand for goods and services within the
economy.
○​ Demand for labour reflects changes in the business cycle:
■​ When the economy is experiencing strong growth → firms experience
high sales resulting in higher demand for labour.
■​ During an economic downturn → there is mostly less demand for labour,
with exceptions such as accountancy practices (specializing in
bankruptcy).
○​ Changes in economic activity don’t always lead to immediate change:
■​ There is a time lag for observing and increasing/decreasing levels of
demand due to firms tending to operate at excess capacity.
■​ When aggregate demand increases, firms can satisfy in the short run
using existing labour and capital resources.
■​ When aggregate demand decreases, firms delay making staff redundant
to avoid significant costs of finding and training new staff.
●​ Conditions in the firm’s industry
○​ Change in consumer tastes for different goods and services will result in a
change in the allocation of labour between different industries.
○​ Demand for labour will increase in industries that see an increase in demand for
their products and decrease in those experiencing lower consumer demand.
●​ The demand for an individual firm’s products
○​ A firm’s output is ultimately determined by its effectiveness in selling its goods
and services in the marketplace.
○​ Factors influencing this include:
■​ Quality of the product
■​ Reputation
■​ Size of the firm
 ○​ Even if there’s a decline in the industry, it is possible for a firm to achieve growth
if it can increase its market share.
●​ The productivity of labour
○​ Productivity of labour: Output per unit of labour per unit of time.
○​ Labour productivity depends upon the quality of the workforce, including
education, skill, and health levels, and how efficiently labour can be combined
with other factors of production.
○​ Investing in technology can also increase productivity.
○​ Impact on demand for labour:
■​ Short run: Higher labour productivity means a fixed number of workers
producing more goods and services.
■​ If aggregate demand is rising faster than productivity, firms will
require more labour.
■​ If aggregate demand is unchanged, firms will have excess
demand as labour productivity rises, leading to a decline in the
demand for labour.
■​ If aggregate demand is falling but labour productivity is rising, the
demand for labour will fall even more.
■​ Long run: Higher productivity makes labour more attractive compared to
other factors of production like technology (capital). If labour productivity
is not as efficient as capital, firms will reduce their demand for labour.
●​ The cost of other inputs
○​ Capital: Manufactured products used to produce goods and services.
○​ A firm's demand for labour is more elastic when:
■​ It’s easy to substitute between labour and capital.
■​ Labour costs are a high proportion of total costs.
○​ Cost of capital is influenced by factors such as interest rates and the tax
structure.

Distinguish between the Output factors and the Input factors that influence labour
demand

9.2 SUPPLY OF LABOUR

Influences on the Supply of Labour:

●​ Pay levels
○​ Wage is an important determinant of the supply of labour. Higher wages attract
more people to supply their labour.
○​ Non-wage incentives in the employee’s remuneration package, such as company
cars, influence willingness to supply labour.
●​ Working conditions
○​ Attractive working conditions, such as flexible hours, the opportunity to work from
home, and holiday leave, entice a higher supply of labour.
○​ The opportunity to travel is another attractive working condition.
 ●​ Education, skills, and experience requirements
○​ Education, skills, and experience requirements can limit the supply of labour.
○​ Countries with relatively high levels of human capital are more likely to achieve
low unemployment.
○​ Changes in education and training influence skill levels in the workplace.
●​ The mobility of labour
○​ Occupational mobility: The ability of labour to move between different
occupations in response to wage differentials and employment opportunities.
○​ Geographical mobility: The ability of labour to move between different locations
in response to improved wage differentials and employment opportunities.
■​ Factors limiting geographical mobility include costs of relocating and
personal upheaval associated with moving.

Important Labour Market Terms:

●​ Working age population: The number of people in the economy who are ≥ 15 years
old.
●​ Labour force/Workforce: Consists of all the employed and unemployed persons in the
country at any given time.
●​ Labour force participation rate:
○​ Formula: (Labour Force / Working Age Population) × 100
○​ Factors such as working conditions and the state of the economy influence the
participation rate.
○​ Short-term factors:
■​ The state of the economy (business cycle) is the most important
influence.
■​ Participation rate is pro-cyclical, supporting and following the trends of the
business cycle.
○​ Long-term factors:
■​ Trends in the ageing of the population affect participation rates.
■​ Increased participation of married females in the workforce.
■​ Increased school retention rates.

How can government policy influence the supply of labour?

●​ Government policy decisions can affect the supply of labour.

●​ Australia fills gaps in the labour market through immigration.
●​ Professional associations impose standards of education and continuing training, which
restricts the supply of labour in certain occupations.
●​ Government can limit the supply of labour by imposing certain qualifications and
licensing restrictions.

9.3 THE AUSTRALIAN WORKFORCE

Define ‘unemployment’
 ●​ Unemployment: The situation where individuals want to work but are unable to find a
job, resulting in labour resources not being utilized in the market.

Explain how the size and quality of the workforce is affected by the following factors:

●​ Population size:
○​ The larger the total population, the greater the workforce.
○​ Population growth is influenced by:
■​ Natural increase (excess of births over deaths).
■​ Net migration (excess of permanent new arrivals over permanent
departures).
○​ Slow population growth leads to slow economic growth in the long run.
●​ Age distribution:
○​ The proportion of the working population affects workforce potential.
○​ The trend is an increase in people aged 65 as the baby boomers move into
retirement, creating an ageing population and economic challenges.
○​ Fertility rates are decreasing, and the working population fluctuates, affecting
labour supply.
●​ Education patterns:
○​ Education is the most important factor influencing the quality of the workforce.
○​ Higher education and training lead to higher incomes and lower unemployment
rates.
○​ More Australians are spending years in education, with a significant percentage
having post-secondary qualifications.
○​ Australia’s spending on education is significant.

9.4 EXTENSION: LABOUR MARKET EQUILIBRIUM

Explain how the following labour market curves are influenced:

●​ Supply:
○​ Individuals weigh the utility derived from leisure and satisfaction from real
income.
●​ Demand:
○​ Factors influencing demand for labour include the level of economic activity,
productivity, costs of capital, and skill levels.

Explain what the equilibrium in the labour market represents:

●​ Labour market equilibrium represents the point where the supply of labour equals the
demand for labour.

What effects will happen with a change in labour market equilibrium?

●​ Changes in labour market equilibrium can affect the level of employment and wages.
Explain how the following will affect the level of employment:

●​ Level of economic activity (aggregate demand)

●​ Productivity
●​ Change in relative costs of capital and labour
●​ Level of skill and labour mobility

Topic 5: Financial Markets

Financial markets → create products that provide a return for those who have excess funds,
making these funds available to those who need additional money for consumption or
investment.
-​ ^Role: to channel funds from surplus units (savers - lend) to deficit units (borrowers and
investors - borrow).

Financial Intermediary → A financial intermediary is an entity that acts as the middleman

between two parties in a financial transaction, such as a commercial bank, investment bank,

This is done through markets:

Primary market: where financial securities such as debt, shares, bonds and options are issued
for the first time for capital raising purposes.
VS
Secondary market: where financial securities are bought and sold according to investment
transfers for investors managing a portfolio of shareholdings.

Financial Securities - Securities are fungible and tradable financial instruments used to raise
capital in public and private markets. eg shares, options, bonds
-​ A wide array of investments, such as stocks, bonds, notes, debentures, limited
partnership interests, oil and gas interests, and investment contracts.

Financial Market vs Product Market: Similarities & Differences

Similarities:
1.​ Facilitation of Trade:
-​ Financial Market: Facilitates the exchange of financial assets such as stocks,
bonds, and currencies.
-​ Product Market: Facilitates the exchange of goods and services between buyers
and sellers.
 2.​ Price Determination:
-​ Financial Market: Prices of financial instruments are determined by supply and
demand, as well as market participants' expectations and economic factors.
-​ Product Market: Prices of goods and services are also determined by supply and
demand, influenced by factors like production costs, consumer preferences, and
competition.

Differences:
-​ Nature of Goods Traded:
-​ Financial Market: Deals with intangible assets like stocks, bonds, and derivatives.
-​ Product Market: Deals with tangible goods and services such as food,
electronics, and clothing.

-​ Purpose:
-​ Financial Market: Primarily exists to allocate capital, provide liquidity, and enable
investment.
-​ Product Market: Exists to satisfy the needs and wants of consumers by providing
goods and services.

THE ROLE AND FUNCTION OF THE SHARE MARKET

ASX (Aus Securities exchange) is an example of a secondary market.

-​ Secondary markets → make financial instruments more attractive by increasing
liquidity. (ability to ‘on sell’ or buy existing securities.)
-​ Determine market price of securities through interaction of d+s. Eg security prices
include share and bond prices.
-​ Share price: amount it would cost to buy one share in ownership of the
company.
-​ Bond price: the present discounted value of future cash stream generated by a
bond

The share market in Australia serves two main functions:

1. It acts as an intermediary between listed public companies needing equity funds to
grow and expand their operations, and people with funds to invest who are seeking
capital gains and dividend income.
2. It provides a market place for the trading of shares (i.e. buying and selling) and
other listed securities at the current market price determined by the forces of demand
and supply in the financial market.
Effect on Economy:
The stock market is often a sentiment indicator that can impact gross domestic product (GDP)
either negatively or positively.

An upswing in the economy, when economic growth is increasing, creates business confidence
and, as a result, a healthy performance on the stock market. But the relationship or link between
the two is neither simple nor direct.

A bull market is when the equity markets are rising. The stock market affects gross domestic
product primarily by influencing financial conditions and consumer confidence. When stocks are
in a rising trend—a bull market—there tends to be a great deal of optimism surrounding the
economy and the prospects of various stocks.

In a bear market, investors rush to sell stocks to prevent losses on their investments. Typically,
those losses lead to a pullback in consumer spending, particularly if there's also the fear of a
recession. A recession is often defined by two consecutive quarters of negative—or
contracting—GDP growth.

Derivatives market: The derivatives market is where financial products, which are derived from
the financial securities traded in primary and secondary markets, such as swaps, futures and
options, are traded through futures contracts.
The Sydney Futures Exchange is a derivatives market and part of the ASX.
-​ Swaps: derivative contracts between two parties who agree to exchange assets with
cash flows for a specified period of time.
-​ Futures: a type of derivative contract agreement to buy or sell a specific commodity
asset or security at a set future date for a set price.
-​ Options: a form of derivative financial instrument in which two parties contractually
agree to transact an asset at a specified price before a future date.
-​ Derivatives: a type of financial contract whose value is dependent on an underlying
asset, group of assets, or benchmark.

Debt and Equity Markets:

Debt market: where debt instruments (mortgage, personal loans, bonds) are issued at a fixed
or variable rate of interest.

Equity market: consists of the issue of shares, options, warrants at a value, in return for a
share of the company’s future stream of profits in the form of dividends.
Franked and unfranked dividend.

Superannuation:
4/7/24

1992: 9% - SGC (Super Guarantee Charge)

-​ Super designed to replace the age pension and to provide a better standard of living in
retirement.
-​ Employers had to pay 9% of an employee's gross Y (income) into a super fund of their choice
quarterly (it became a business expense they could deduct in their tax.)

2010s: 9% → 12% (9% judged to be too little for retirement.)

-​ SGC rates rose gradually (currently 11.5%) and will rise to 12% on 1 Jul 2025.
-​ The other Super is Voluntary Super contributions by the employee. This is a choice made by
employees.
-​ They can contribute up to $30K p.a (salary sacrifice) and pay only 15% tax. This compares quite
well to paying your highest MRT.

eg $135K → $190K - 37cents PAYG scale

eg 190K plus - 45cents PAYG scale

SMSF:

Self Managed Super Fund

-​ Manage your own super.

Regulation of financial markets - the role and functions of current

institutions

Reserve Bank of Australia:

Role:
-​ The reserve bank conducts Monetary Policy to achieve its goals of price stability, full
employment and the economic prosperity and welfare of Aus. people.
Function:
-​ Responsible for ensuring overall financial stability. It does this by managing and
providing liquidity to financial institutions, monitoring risks and cooperating with Council
of Financial Regulators.
-​ Responsible for producing and issuing Australia’s banknotes. Both as a means of
payment and a store of value.

Australian Prudential Regulation Authority (APRA):

Role:
-​ Central role is the prudential regulation of banks, insurance companies and most of the
superannuation industry.

Functions:
-​ APRA licenses banking, insurance and superannuation businesses to operate and
SUPERVISES them to ensure that under all reasonable circumstances, the financial
promises made to beneficiaries are kept.
-​ Supervision → subject to ongoing supervision to ensure it is meeting APRA prudential
requirements by examining data and reports on institutions.
-​ Enforcement → if concerns, APRA will seek to work cooperatively or undertake
enforcement actions to protect interests of beneficiaries.

Australian Securities and Investments Commision:

Role:
-​ Is to maintain, facilitate and improve the performance of the financial system and
entities in it.
Function:
-​ Market Regulation and Oversight: ASICS monitors and regulates financial markets,
ensuring transparency, fairness, and integrity. This includes overseeing the conduct of
companies, market participants, and ensuring compliance with financial laws and
regulations.

-​ Consumer Protection: ASICS works to protect consumers from financial fraud and
misconduct. It provides guidance, information, and enforcement actions to ensure that
financial products and services are offered responsibly and ethically.
 -​ Corporate Governance: ASICS enforces corporate governance standards, ensuring that
companies adhere to proper financial reporting, disclosure, and accountability practices.
This helps maintain investor confidence and the overall stability of the financial system.

Australia Treasury:
Role:
The Australian Treasury’s role is to anticipate and analyse economic policy issues, understand
gov.t and stakeholder circumstances and respond rapidly to changing events and directions.

BORROWERS IN THE FINANCIAL SYSTEM - DEMAND FOR FUNDS

The main borrowers in the debt market include individuals, firms and governments. Debt
finance includes all funds borrowed in financial markets.
The debt market is often categorised by the maturity (term or length) of the loan. Short term
loans range from ‘at call’ in the Short Term Money Market (STMM) to twelve months. Long term
debt instruments refer to debt maturities that are greater than twelve months, varying from
two, five to 30 years.

Individuals:
Main form of borrowing include:
-​ mortgage loans for housing, redraw facilities on equity in homes, personal loans to buy
cars and consumer durables, loans for home renovations, overdrafts

Businesses:
Pay for mortgages, overdraft loans (short term)
Why → To cater for expansion of business

Governments:
Why → to pay for special infrastructure project or to fund a deficit budget i.e to drive eco
growth.
Instruments:
Treasury notes → short term bonds
Treasury bonds → long term bonds

Topic 6: Governments.
Why??
Governments intervene in the economy because markets do not function properly.

Market Failure → refers to the shortcomings of the market system of economic organisation to
achieve allocative efficiency in all situations.

The Australian Government intervenes in markets in order to achieve a:

-​ Reallocation of Resources - taxes, subsidies
-​ Redistribution of income
-​ Stabilisation of economy.

Links for next year

https://www.rba.gov.au/education/resources/digital-interactives/snapshot-comparison/