Unit 1 Economic agents practice 2023

economic agents

individuals and organisations that participate in the economy, and make economic decisions

economic agents role in private sector

* consumers or households
* businesses
* social enterprises
* not-for-profit organisations
* charities
* trade unions

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economic agents role in public sector

In the public sector, this includes:

* Local, state and federal governments
* government business enterprises (GBEs)

factor market / input market

where a business buys its factors of production

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(which are the resources used to produce the goods or services it sells. includes labor, capital, land, and entrepreneurial talent)

goods and services market

where consumers purchase the final product

example of factor/input market VS goods and services market

a furniture manufacturer acquires its labor, wood, leather, and other materials in the factor market, and sells its furniture to households in the goods and services market

private sector

The private sector relates to private ownership and control of resources, and the economic decisions made by the owners of these resources. Households and businesses account for the bulk of private sector activity.

public sector

the public sector relates to government ownership and control of resources, and the economic decisions made by the government and its agencies

key factors of the traditional economic theory (of consumers)

1. Rationality, self-interest and utility maximisation

(Consumers act in their own interests and will strive to make decisions that yield the greatest net benefits or maximum utility.)

 


2. Informed decision making

(Consumers have access to relevant and accurate information to make rational decisions. Armed with perfect information consumers can calculate and compare the costs and benefits of each choice, and rank these choices based on their relative net benefits.)

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3. Marginal benefits from consumption

(the law of diminishing marginal utility)

marginal utility

the extra satisfaction you gain from consuming an additional unit

law of diminishing marginal utility

states that each additional (or marginal) unit of a good or service that is consumed generates less utility (satisfaction) than the previous one. According to this theory, the second unit of something consumed provides less satisfaction (utility) than the first, and the third unit provides less than the second, and so on. Therefore, total utility grows less rapidly with each additional unit consumed.

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Think of the first cold drink you have on a hot day. The first drink returns great pleasure, then you have another and another and then maybe the 6th drink you have make you feel unwell.

assumptions of law of diminishing marginal utility

the quality of the successive units of goods should remain the same

consumption of goods should be continuous, any long gap in the consumption will alter the law

etc

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example for a pizza:

* The pieces of pizza being consumed are identical.
* The units are consumed quickly with few breaks in between.
* Units are not too big or too small.
* The consumer's taste is constant.
* There is no change in the price of the goods or of their substitutes.
* The unit can be measured.
* The consumer is making rational decisions about consumption.

how businesses can capitalise off law of diminishing marginal utility

example:

sales promotions run where they offer their customers a 50 per cent discount on the purchase of a good

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Given that consumers derive less utility from the second good, the consumer will only have the incentive to purchase more if the price is reduced. We are only willing to pay a price equal to or less than what our perceived value is.

behavioural economics 

behavioural economics combines psychology and economic theory to examine why people sometimes make irrational decisions. 

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Behavioural economists understand that humans are emotional, easily distracted by the modern world, and susceptible to outside influences.

**incentive**

an incentive encourages economic agents to make particular choices to minimise negative externalities. Incentives typically employ benefits or rewards to encourage the desired behaviour.

disincentive

a disincentive discourages economic agents from making specific decisions. A feature of disincentives is the use of costs or penalties to influence behaviour.

externality

externalities occur when producing or consuming a good causes an impact on third parties not directly related to the transaction. they can either be positive or negative. They can also occur from production or consumption.

positive externality

when consuming or producing a good provides a benefit to a third party.

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eg. walking to work reduces congestion

negative externality

when consuming or producing a good causes a cost to third party

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eg. airtravel causes more pollution

subsidy

Governments seek to encourage the consumption of goods and services that generate positive spillovers or externalities. They can pay a subsidy:

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a cash payment paid to either the consumer (consumption subsidy) or producer (production subsidy)

legislation example for positive externalities

1. January 2016 “No Jab No play” came into effect - **vaccination requirements in childcare.**


1. Mandatory covid vaccination legislation during 2021/22. For example, the Victorian Government pandemic orders used to say that most workers had to be vaccinated against COVID-19 coronavirus to work outside their home. Those laws finished on 24 June 2022. The law no longer says you must be vaccinated to work outside your home, except in certain industries, such as healthcare.

indirect tax on cigarettes

Over the past 10 years, the federal government has increased excise on tobacco by more than 300% (from approximately $0.35 to $1.12 per cigarette.

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The tobacco companies generally pass on any increases in excise taxes to consumers in the form of higher prices, effectively deterring consumption.

how can government use direct tax to influence greater labour force participation?

lowering the marginal tax rates that apply to people’s incomes.

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personal income taxes are essentially a tax on the wages and salaries people receive in return for contributing to the production process. Therefore, taxing income too heavily can stifle the incentive to work and/or to work hard.

**arguments in favour of a sugar tax**

* External costs of sugary drinks – externalities are a cause of market failure

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* Information failures – people often underestimate the long term costs to their own healthcare of eating high sugar foods and drinks

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* Sugar tax raises revenue – this might be ring-fenced for other projects such as increased funding for school and community sports facilities

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* Tax encourages producers to re-formulate drinks - i.e. make them healthier by reducing the sugar content. 

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* There is substantial evidence that this has happened with high sugar drinks.

**Arguments against the introduction of a sugar tax**

* Might be regressive on lower income families i.e. they face a higher burden from the tax

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* Other policies might be more effective in cutting consumption in the long run

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* People might simply switch to other sugary products

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* Risk of lost jobs in pubs and shops that rely heavily on drink and confectionery sales

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* Healthier alternatives are offered.

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* Traditional economic theory regarding consumers states that consumers are motivated by self interest, seek maximum utility and are armed with perfect information regarding consumption of any product. Because, most food products detail the composition of the food being sold, i.e sugar content, salt, carbohydrates etc. and in the market for drinks there are so many healthier alternatives that consumers can buy - is there really a market failure keeping this in mind? 

key factors of the traditional economic theory (of businesses)

seek profit maximisation in both the short and long term through by:

* **Maximising sales**
* **Minimise production costs**

how do businesses maximise sales?

* using strategies that seek to capture extra customers (e.g. through advertising or the development of new products through innovation

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* try to grow the firm’s share of the market in which it sells

how do businesses minimise production costs?

cut production costs — the cost of wages (for staff or labour resources), raw materials, equipment, transport, and utilities like power and water

what is a market?

A market is a place or situation where buyers and sellers of goods or services come together to exchange a good or service.

The rate of exchange

The rate of exchange is the price of the good or service that is being sold. That is the price buyers are happy to pay and sellers of the good or service are happy to accept.

The means of exchange

The means of exchange is what is used to pay for the good or service, cash, credit card, voucher etc.

Price signal

A price signal is a change in the price of goods or services which indicates that the supply or demand should be adjusted.

Market structure

Market structure is a term that is mainly used to describe the type of competition found in different markets.

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In Australia, there are 4 main market structures

pure or perfect competition

Example: victoria market

* many buyers and sellers


* strong competition
* consumers make the prices, and producers have no power
* easy entry for a producer

monopolistic

Example: retail, cafe, restaurant

* moderate amount of sellers
* competition is quite strong, and it’s important to differentiate yourself against others
* Producers have slightly more power in this market as can use advertising on less identical products and therefore charge higher prices
* moderate ease of entry

oligopoly

Example: supermarket, bank, oil company

* few number of sellers
* brand and product differentiation is important
* producers have a lot of power, they can exxercise market power by restrict supply or raising prices
* entry and exit is difficult because it costs a lot

pure or perfect monopoly

Example: Australia Post

* one seller (so there is no competition)
* product differentiation is not important
* producers have all the power, they set the price 
* it’s very hard to enter due to high entry costs to set up