Topic 2

The business cycle

the fluctuations in the level of economic activity, this can be due to either domestic or international factors.

What determines the level of economic activity?

the amount of goods and services produced in a given time period measured by GDP

Phases of the business cycle

- upswing (expansion): increasing economic activity (increase in GDP)

- boom (peaks)

- downswing (contraction): decreasing economic activity (decrease in GDP)

- trough

- recession: two consecutive quarters (six months) of negative economic growth.

Impacts of the business cycle on individuals

expansion:

lower unemployment

increased wage growth

higher inflation

increased quality of life

Contraction:

higher unemployment

lower wage growths

lower inflation

decreased quality of life

Impacts of the business cycle on businesses

Expansion:

increased production

increased investment

increased profits

Contraction:

decreased production

decreased investment

decreased profits

Impacts of the business cycle on the goverment

Expansion:

increased collection of company/ personal taxes

reduced spending on social welfare payments

Contraction:

decreased collection of company/ personal taxes

increased spending on social welfare payments

what is a business firm + e.g

it is an organisation involved in combining the factors of production to produce goods or services using entrepreneurial skills.
e.g woolies

What is an industry + e.g

an industry consists of those firms involved in making a similar range of items that usually compete with each other
e.g retail, finance

What are the three core questions every business must answer?

what to produce?
what quantities to produce?
how to produce?

how to businesses decide what to produce?

firms identify market demand and determine which goods + services to offer, consumer sovereignty

how to businesses decide what quantity to produce?

output levels to balance costs and revenues, MC = MR, marginal cost equal marginal revenue, profit maximising

how to businesses decide how to produce?

they choose between labour intensive or capital intensive methods, they factor in costs, technology available, and the nature of the product.

What do firms contribute to the economy?

economic growth, reduce unemployment, regional development, increase productive capacity

briefly elaborate on how firms contribute economic growth?

a healthy, private sector will generate a higher rate of economic growth and a stronger revenue base to fund the services provided by the government.

briefly elaborate on how firms reduce unemployment?

growing businesses employ more people

briefly elaborate on how firms contribute to regional developments?

food processing, tourism, advanced manufacturing, and the creative industries are significant employers in the regional economies.

briefly elaborate on how firms contribute to an increase in productive capacity?

outward shift in the production possibility frontier, growth in businesses result in a greater economic output and greater competitive pressures, leading to lower inflation and improved living standards.

Goals of the firms

maximising profits, growth, increasing market share, meeting shareholder expectations, Satisficing

How do firms maximise profits?

Firms aim to maximise the surplus of revenue over costs, the fundamental goal in economic theory, driving efficiency and innovation

How is profit measured by firms?

the difference between the firm’s total revenue and its total costs of production

how to find a firm’s total revenue

output sold multiplied by price

How do firms maximise growth?

Firms expand output, workforce, and market presence, often sacrificing short-term profit

for long-term scale and dominance.

Why might managers have maximising growth as a goal, and what short run conflict might there bere?

larger asset base should allow a business to achieve higher profits, and create higher salaries and prestige.
It can sometimes lead to a business failure

How do firms meet shareholder’s expectations

Listed companies are accountable to shareholders who expect dividends and

capital growth, influencing strategy and risk appetite.

why may conflicts arise form trying to meet shareholder expectations

if business do not meet the shareholders expectations for long term investments.

How can “shareholder activism” change things

investors use their voting power on boards to make the management of large firms more accountable, such as voting against company pay policy.

what does increasing market share mean?

Firms compete to capture a larger proportion of total industry sales, strengthening competitive position and pricing power.

How mights the goals of shareholders and managers differ

businesses may seek to increase its market share, while shareholders have the goal of profit maximisation

What is satisficing behaviour?

Rather than maximising, managers pursue 'good enough' outcomes, balancing profits,

growth, staff welfare and risk management.

What is productivity

The quantity of goods and services the economy can produce with given amount of inputs (such as capital and labour) per unit of time

the productivity equation

productivity = total output/ total input
an increase in productivity equals an increase in output

Productivity is different to production why?

productivity means resources are being used more efficiently, meaning we are able to produce more goods and service with our existing resources.

What is specialisation?

where the factors of production are used more intensely for a smaller number of production processes, improvements in the quality of resources through technology or improved combination of resources.

What is division of labour + e.g

when firms break down their production process into a number of sub processes, allowing labour to specialise in a particular part of the process
e.g assembly line approach

what is Location of industry + e.g

when a large number of firms within the same industry congregate in the same area to reduce production costs by sharing common infrastructure
e.g concentration of IT at Macquarie park

What is large sale production + e.g

when firms grow large and can use specialised capital equipment
e.g a large wine producer using specialised machine to bottle wines

types of specialisation

division of labour, location of industry, large- scale production

What is the law of diminishing returns

as increasing quantities of variable factors are added to the production process, total output will eventually decline

What are the benefits of productivity?

it is the key to improved living standards,
less wastage of our scarce resources, lower production costs and higher profits, a lower inflation rate, higher incomes, improve international competitiveness of our industries.

What is economies of scale?

economies of scale refers to the reduction in average costs (or cost per unit of output)
they are the ‘savings of size’

Internal economies of scale

reductions in the costs of production that occur as a result of an increase in the scale of operation of a business (advantages of growing)

What do firms reduce as their output increases

firms can reduce their per-unit costs of production as their output increases, largely due to start up costs

Equation for average cost

average cost = per unit production cost

Increasing production will lead to

long- average costs will fall as the firm becomes larger and increases production

increasing the levels of production….

creates internal economies of scale within a firm

As firms expands and produces more goods, average costs start to decline as the firm may be able to…

specialisation of labour
invest more in capital goods
buy raw materials in bulk
find a market for by products
research and development
raise finances for business expansion

Internal diseconomies of scale

are the disadvantages associated with a firm becoming too large

as a firm increases production

there will be an eventual rise in average costs

this rise in average costs in internal diseconomies in scale can be caused by

management can loose touch with day-day working
duplication and paper work
workplace relations
decrease in managerial and administrative efficiency (decision making becomes more complicated)

External economies of scale

are the benefits to a firm to outside sources, cost - saving advantages the firm has no control over

External economies of scale can be due to

growth of industry benefits firms within
government provision of services
large industry/firm may attract skilled labour
cheaper investment funds from a variety of sources

External Diseconomies of Scale

Disadvantages faced by a firm because of the growth of the industry in which the firm is operating. They are not the result of a firm changing its own scale of operations.

External Diseconomies of Scale can result in

additional costs to the firm

External economies of scale can include

Increased pollution

Transport bottlenecks = increased transport costs

Cost of raw materials rise due to increased demand from industry

Labour becomes scarce = decline in quality

Government regulation of industry

Rising rents

technology changes and ethical decision making impacts..

production methods
prices
employment
output and profits
types of products
globalisation
environment sustainability

how does technology changes and ethical decisions impact production methods?

Automation and robotics shift firms to capital-intensive production

how does technology changes and ethical decisions impact prices?

technology reduces unit costs, creating lower prices

how does technology changes and ethical decisions impact employment?

Tech creates new jobs but displaces routine roles, replacing jobs

how does technology changes and ethical decisions impact output and profits?

investment expands productive capacity, technology cuts costs and opens new revenue streams

how does technology changes and ethical decisions impact types of product?

Research and development creates entirely new product categories, increase in living standards

how does technology changes and ethical decisions impact globalisation?

technology enables global operations at low marginal cost

how does technology changes and ethical decisions impact environmental sustainablitity?

ethical and regulatory pressure drives green investment, no firm can escape it, regulations set by the government, ‘green washing’

what is investment

expenditure on capital goods, machinery, equipment, technology, and infrastructure, that expands a firm’s productive capacity, it is the primary driver of productivity growth

Consumers

All individuals in an economy who consume goods + services in order to satisfy their needs and wants

Consumer Soveriegnty

How the patter of consumer spending determines the pattern of production and resource allocation

what do consumers determine in a market economy?

what is produced and how much

Changing prices...

communicate consumer's preferences to firms

Controlling the economy

Consumers vote with their money, with high demand signalling to producers to make more, while low demand leads to reduced production. Price acting as a signal in the market. e.g Plants based foods --> traditional meat processors reduced output --> plant based ranges

Ways businesses reduce consumer soveriegnty

- marketing

- misleading/ deceptive conduct

- planned obsolescence

- Anti- competitive behaviour

Marketing in consumer soveriengty

Firm's spending on marketing is aimed at changing people's preferences and so altering their behaviour

Misleading/ deceptive conduct

Under Australian Consumer Law, it is illegal for a business to engage in conduct that misleads or deceives or is likely to mislead or deceive consumers or other businessess

Australian Consumer Law in misleading conduct

Competition and Consumer Act 2010

planned obsolescence

designing a product with an artificially limited useful life, so that it becomes obsolete after a certain period of time upon which it loses functioning or suddenly ceases to function, or might be perceived as unfashionable.

e.g printer cartridges, smartphones, fashion

Anti- competitive behaviour

Businesses that collude to maintain prices above those that would occur if they were actively competing for our business or design their products in a way that deliberately limits choice for consumers

e.g incompatible charge cords.

Spending

Consumer spending is the longest component of Australian GDP (55%), when households spend more, businesses produce more creating jobs and economic growth

Saving

Income not spent

e.g In Covid 19 saving rates spiked to 22%

Dissaving

occurs when spending exceeds income, common in retirement or periods of high financial stress.

equation for consumer spending

y=c+s,

y= disposable income after tex

c= consumption expenditure

s=savings

what will happen if income rises

it will result in a change in the levels of both consumption and savings,

what will a rise in savings or consumption

a rise in savings will being an equal reduction in consumption, and vice- versa

What is APC

Average propensity to consume. it is the proportion of an individuals income that is spent on consumption.

What is APS

Average propensity to save. it is the proportion of an individuals income that will be saved

higher- income trends

higher incomes tend to have a higher APS than those of a lower income

Lower- income trends

middle and low incomes earners often find it difficult to save because they need all of their income to meet their basic needs.

Equation to find APS

APS= total savings/ total income

Equation to find APC

APC= total consumption/ total income

calculating APS and APC

APS + APC =1

Share of total income spents : low income households

0.87 APC

Share of total income spents : Middle income households

0.74 APC

Share of total income spents : high income households

0.61 APC

pattern of total income spent

APC tends to fall as income rises. Lower income households must spend a higher proportion of income in necessities (food, rent, Utility) leaving little to save.

Factors influencing the decision to save or spend

- cultural factors, personality traits, specific future spending plans, expectations of the future, tax policies, availability of credit.

Two important factors influencing decisions to spend or save

Household age, household income

Income trend

s income rises, people tend to save a higher proportion of their income, as APS rises APS falls

consumers on lower incomes spend proportionally more of their disposable income, while higher incomes, do not need to spend as much on essential incomes.

The consumption Function

It is a graphical representation of the relationship between consumption and income for a consumer

The mathematical function for consumption function

y=0, a consumer still needs to spend money to live.

what is autonomous consumption

consumption spent unrelated to changes in income, y=0, money still spent.

what is MPC

marginal propensity to consume, is the proportion of an increase in an individual's income that will be consumed.

what is MPS

marginal propensity to save, is the proportion of an increase in an individual's income that will be saved.

finding MPC

change in consumption/ change in income