COMMERCE EXAM BLOCK 1

How does disequilibrium eventually return to equilibrium?

During disequilibrium, changes in level of economic activity will cause income, expenditure and output to fall. Eg. if leakages exceeds injections, economic activity will decrease --> unemployment will increase --> income decreases and therefore savings, taxation and spending on imports decreases too, lowering the leakages until they equal injections and thus re-establishing equilibrium at a lower level.

Why must the financial sector be regulated?

If the financial sector is not well regulated, consumers and businesses will lose trust and choose not to save or invest, leading to economic decline.

What does ASIC stand for and what is its purpose?

Australian Securities and Investment Commission is an independent Commonwealth government body responsible for the regulation of the financial market

Which acts does the ASIC operate under?

Corporations Act 2001 and National Consumer Credit Protection Act 2009

Corporations Act 2001

- Governs company management and operations such as how capital is raised and how shareholder relationships are handled and the roles of company directors/officers

- Protects shareholder rights

- Provides remedies for breaches of duty

- Mandates fair and transparent corporate conduct

National Consumer Credit Protection Act 2009

- Requires all organisations providing credit transactions to be licensed

- Ensures responsible lending practices (eg. provider must consider suitability and affordability)

- Provides financial relief

- Mandates full disclosure of terms and conditions of credit transactions

Main roles of ASIC

- Monitors financial services industry

- Monitors provision of financial services such as investment advice

- Provides consumer protection for financial services such as insurance, credit and supperannuation

Ways ASIC protects consumers

- Enforces credit and consumer protection laws

- Investigates complaints about potential breaches of law

- Seeks civil penalties, bans individuals from providing financial services, or prosecutes offenders

- Licenses financial institutions

- Educates consumers about their financial rights and responsibilities

- Ensures transparency in financial disclosures

Define the business cycle

A cycle of fluctuations in the general level of economic activity over time

What causes fluctuations in the business cycle?

- Changes in total spending

- External events such as crises or disasters

Features of contraction

- Decreased production (output)

- Decreased consumer spending

- Increased unemployment

- Decreased income/wages

- Decreased inflation

- Interest rates eventually decreased

Features of expansion

- Increased production (output)

- Increased consumer spending

- Decreased unemployment

- Increased income/wages

- Increased inflation

- Interest rate increases eventually

Cause of a boom

Surplus total spending

Cause of recession

Lack of total spending

Features of a boom

- Employment, income, and production/output are at their highest level

- High interest rates

- High inflation

Features of recession

- Employment, income, and production/output at lowest level

- Low inflation/interest rates

- Bankruptcy's everyday

- Businesses have unused resources and no incentive to purchase new machinery

Negative impacts of economic growth

- High inflation leads to high cost of living

- High interest rates (as money loses its value)

- Shortage of productive resources

- Strain on environment

Negative impacts of economic decline

- Living standards deteriorate due to decreased income and lack of G&S to satisfay needs and wants

- Deteriorating government budget due to decreased taxes and increased welfare payments

- Decreased consumer and business confidence --> lack of saving or investing, making it harder to achieve economic growth

Types of unemployment

- Cyclical

- Structural

- Seasonal

- Frictional

Why are prices always changing?

Markets, through the interaction between demand and supply, attempt to solve the problem of scarcity and efficient allocation of resources

Demand

The quantity of a product that consumers are willing to purchase for a particular price at a given point in time

Law of demand

If prices go up, demand goes down

If prices go down, demand goes up

Supply

The quantity of a product businesses are willing and able to offer for sale at a particular price at a given point in time

Law of supply

If prices go up, supply goes up

If prices go down, supply goes down

Price Mechanism

Refers to the way the forces of demand and supply interact to determine the price and quantity of a good or service

Market equilibrium

The point at which the demand and supply curves interest. ie. The point at which consumers and businesses agree on a price and exchange the good or service for money

What shift occurs in the demand curve when demand increases?

Demand curve shifts right; increases both price and quantity

What shift occurs in the demand curve when demand decreases?

Demand curve shifts left; decreases both price and quantity

Factors causing an increase in demand

- Increases in consumer income

- Change in consumer taste and preferences

- Population increase

- Substitute good becomes more expensive

- Complimentary good becomes cheaper

- Prices are expected to rise in the future

Factors causing a decrease in demand

- Decreases in consumer income

- Changes in consumer taste and preferences

- Population decrease

- Substitute good becomes cheaper

- Complimentary good becomes more expensive

- Prices are expected to decrease in the future

What shift occurs in the demand curve when supply increases?

Supply curve shifts right; quantity increases, price decreases

What shift occurs in the demand curve when supply decreases?

Supply curve shifts left; quantity decreases, price increases

Reasons for increase in supply

- Increased efficiency

- Fall in the cost of production

- Improved climatic conditions

- Increase in number of suppliers

Reasons for decrease in supply

- Decreased efficiency

- Rise in the cost of production

- Unfavourable climatic conditions

- Decrease in the number of suppliers

Define a market

A market exists in any situation where buyers and sellers come together to exchange goods and services.

Types of markets

- Retail

- Labour

- Financial

- Stock

Retail markets

where goods and services are sold directly to individual consumers for their own use

Labour market

Made up of the interrelations between buyers and sellers of labour where prospective employees wish to sell their labour or skills to employers in return for income, while the employers wish to buy or demand the skills or effort of suitable employees

Examples of labour market

- Sign in a shop or cafe window indicating job vacancies

- Advertisements for job vacancies in newspaper

- Online 'job boards' such as Seek

Financial market

Intermediaries between savers and borrowers in the economy. Eg. banks

Stock market

Where people buy and sell shares in a company

Share

Unit of ownership in a company

Why do people buy/sell shares?

- Companies sell shares to grow their business and get more money

- People buy shares to gain additional money (ie. if the company does well and grows, the shares become higher and can be resold for a larger amount of money)

ASX

Australian Stock Exchange --> has over 200 retailers listed including Woolworths, Wefarmers (owner of Coles), and the 4 big banks (ANZ, CBA, NAB, Westpac)

Trading practices of ATSI

Involved swapping/bartering one item for another

Trade routes ATSI

- Followed natural features such as rivers, chains of waterholes

- Criss-crossed the mainland

- Extended to Indonesia and Papua New Guinnea

Examples of goods traded between ATSI peoples

- Stones and shells (pearl, baler, trochus shells)

- Ochres

- Tools (stone axes, spears)

- Ceremonial items

- Food (fish, crab, dugong, dugong/turtle meat, yams, bird/turtle eggs)

What did ATSI people trade other than tangible goods?

- Stories

- Ideas

- Rituals

- Chants

- Ceremonies

- Traditions (by word of mouth)

- Lore

Reasons for government intervention in markets

Environmental degradation

Environmental degradation

Deterioration of the natural environment caused by things such as pollution or habitat destruction

How does government intervene

Imposes laws and regulations that restrict the factors of environmental damage. Eg. littering bans, Environmental Protection and Biodiversity Conservation Act 1999

Environmental Protection and Biodiversity Conservation Act 1999

- Main piece of legislation to protect the environment

- Aims to balance environmental protection with societal and economic goals (sustainable development)

Main aims of the Environmental Protection and Biodiversity Conservation Act 1999

- Protect the environment, especially in matters of national environmental significance

- Conserve Australian biodiversity

- Protect national and world heritage

- Promote ecologically sustainable development

Governments challenge in protecting the environment

Trade-off between the short-term exploitation of natural resources for economic gain or the long-term needs of both the society and economy

Previous government policies for carbon emissions

2012 --> carbon pricing (carbon tax)

2012 --> Direct Action Plan (awarding those with low emissions)

Types of businesses

- Online

- On-demand

- Small and large businesses

- Global businesses

- Offshore businesses

- Government-owned and operated businesses

- Not for profit businesses

Online businesses

Business which runs some or all of its business online using the internet

On-demand businesses

A business that provides or delivers a G/S to a customer immediately when they need it

Small and large businesses

- Micro (<5 employees)

- Small (5-19)

- Medium (20-199)

- Large (200 or more)

SMEs

Small to medium enterprises with less than 200 employees and/or less than $10 million turnover

Significance of SMEs in Australia

Makes up 98% of the businesses and provides employment to about 7 million people

Global business

Large company that has branches in many different countries (aka TNC)

Offshore businesses

Businesses that move parts of their operation to another country in order to take advantage of cheaper production costs in a developing country such as cheaper wages or less strict environmental regulations

- Under increasing pressure to ensure workers are not exploited

Government operated businesses

Government owned and operated businesses that provide essential community services such as health, education, roads and welfare (eg. schools, hospitals)

Not for profit businesses

Provide services to the community without earning a profit for its owners

- All profits earned from donations or running the business must go back into the community service the business is providing for the community

Factors influencing business decisions

- Technology

- Business cycle

- Globalisation

Influence of technology on business decisions

New technology allows businesses to work faster, more efficiently and more accurately, influencing them to invest in new robotics/automation technology.

- New technology such as e-conferencing, email and smartphones eliminates the distance between people, influencing businesses to take up opportunities to try remote and flexible work arrangements to keep/attract staff

Influence of business cycle on business decisions

Affects how businesses plan, spend or adjust during periods of booms or recessions

In a recession: businesses earn less profit --> cut costs by retrenching workers, reducing production and delaying expansion

In a boom: businesses earn more profit --> increase production, hire more workers, begin investing and expanding the business

Globalisation

The process by which the world is becoming increasingly interconnected as a result of increased trade and cultural exchange, thus resulting in reduced barriers to international investments and labour for businesses.

How does globalisation impact business decisions?

Globalisation encourages businesses to take advantage of the opportunity to globally source the cheapest and/or best quality materials and labour from around the world.

Positive implications of globalisation

- Can expand markets and reach a larger audience

- Can find the cheapest materials and supplies from around the world (global sourcing)

- Can access the cheapest or most skilled sources of labour in the world

Negative implications of globalisation

- Increased competition from all around the world

- Unemployment in some local businesses and industries that cannot compete with the cheaper imported goods

- Higher risk of exploitation of international labour, especially those that are outsourced from developing countries

Entrepreneur

A person willing to take risks and has the qualities required to turn an idea into a successful business

Qualities of entrepreneurs

- Creative

- Eye for opportunity

- Determined

- Thrives on the challenge of making their own successful business

Innovation

The process of improving or significantly contributing to an existing product or service

Invention

The development of something totally new that has never existed before

CSR

When businesses consider the needs of stakeholders, society and the environment when making economic and business decisions

Ethical decision-making

When businesses go beyond the minimum requirement of the law to consider the needs of society and the environment even when such decisions may not lead to immediate financial gain

Reasons businesses might act unethically

To save time or money that would otherwise be spent on safe, ethical production and earn profit quickly

Short-term costs of CSR

- Higher cost of production (paying fair wages, using eco-friendly materials)

- Slower production

- Lower immediate profits

Long-term benefits

- Good reputation

- Loyal customers and staff --> and thus stable/consistent revenue

Levi Strauss & Co

- 90% reduction in carbon emissions from its owned and operated facilities

- Has saved over 11.5 billion litres of water since 2011 through wastewater guidelines

- Enforces Supplier Code of Conduct --> prohibits forced/child labour and ensures fair and safe working conditions

Adidas

Aims to achieve:

- net-zero emissions by 2050

- 70% reduction in emissions from its own operations

- 43% reduction in emissions from external/indirect sources

Only works with suppliers who follow its Labour Rights Charter and Workplace Standards --> fair/safe labour

Ways of assessing performance of the economy

- Living standards (GDP per capita)

- Economic growth (real GDP)

- Income distribution

- Environmental sustainability

To measure aggregate demand

Private sector consumption expenditure + private sector investment expenditure + govt sector consumption expenditure + govt sector investment expenditure + expenditure on exports - expenditure on imports

Income distribution

Income distribution reflects how economic growth and resources are shared, affecting economic stability and demand

Types of income

- From labour

- From property

- From government

- In kind

Environmental sustainability

A way to measure whether Australia's economic performance is responsible and sustainable in the long-term

Sustainable growth

Measures the rate at which Australia's economy can grow its production of goods and services without jeopardising the living standards of future Australians

Fiscal policy

Involves altering the level of government spending and receipts to either slow or stimulate economic activity

Budget outcomes

- Budget deficit

- Budget surplus

- Balanced budget

Budget receipts

The government's incoming money that is used to fund government spending. Most common form is taxation

Types of budget receipts

Direct taxes, indirect texes, non-tax revenue

Direct taxes

Income tax imposed directly onto the income of individuals and companies

Examples of direct tax

- Personal income tax

- Capital Gains Tax

- Company tax

- Superannuation fund tax

Indirect taxes

Taxes levied on spending for goods and services

Examples of indirect taxes

- Excise duty

- Custom duties

- GST (Goods and Services Tax)

Non-tax revenue

Income made from activity such as assets sales, interest, student repayment of HECS debt and profits from government owned enterprises such as Australia post

What does government spending affect?

- Consumer incomes

- Level of demand & economic activity

- Inflation

- Trade

- Living standards

Where is government spending allocated?

- Social security & welfare (redistribution of income)

- Health

- Defence

- Education

- Transport and communications

- Housing and community ammenities

- Public debt interest

- Net payment to other governments