Year 10 Commerce – The Economy and Business Environment

Features of a CONTRACTION

Falling production; decreased consumer spending; falling wage rates; rising unemployment; falling inflation; interest rates eventually fall

Market

A situation where buyers and sellers come together to exchange goods and services

Retail market

The sale of goods and services by a business directly to the consumer (e.g. Woolworths, Kmart, online stores)

Labour market

The buying and selling of labour — employers (buyers) pay wages to employees (sellers)

Financial market

Intermediaries between savers (sellers of money) and borrowers (buyers of money); the price paid is interest

Stock market

A market where buyers (investors) and sellers (shareholders) exchange units of ownership (shares) in a company

Australian Stock Exchange (ASX)

The Australian stock market that lists only Australian shares; share prices rise and fall with company performance

Wage/Salary

The price paid by an employer for labour in the labour market

Online business

A business that operates entirely on the internet with no physical storefront (e.g. ASOS)

On-demand business

A business that provides goods or services immediately when requested, often via an app (e.g. Uber, Hello Fresh)

Small/Medium Enterprise (SME)

A business with fewer than 200 employees (e.g. a local accounting firm with 9 employees)

Large business

A business with 200 or more employees that operates on a significant scale (e.g. Myer)

Global/Transnational Corporation (TNC)

A large business that operates in multiple countries (e.g. KFC, IKEA)

Offshore business

A business that relocates some or all of its operations to another country, often to reduce costs

Government business

A business that is owned and operated by the government; NOT privately owned

Not-for-profit business

A business that does not aim to generate profit; any surplus is reinvested into its purpose

Main function of a market

Where buyers and sellers meet to exchange goods and services for money

What makes something a market?

As long as there is a buyer and a seller exchanging products, a market exists

Demand (in markets)

Represents buyers — whoever wants to purchase a good or service

Supply (in markets)

Represents sellers — whoever offers a good or service for sale

Which is NOT a privately owned model?

Government businesses — these are publicly owned and operated

Business cycle

The cyclical fluctuations in the general level of economic activity — periods of high and low economic activity that repeat over time

Expansion

A phase of the business cycle when there is economic growth — output, employment, spending and incomes are rising

Boom

The peak of the business cycle — the highest level of economic growth; characterised by full employment, high inflation and high interest rates

Contraction

A phase when the economy loses steam — output, consumer spending and employment are falling

Recession

A relatively mild contraction in economic activity — reduced spending, rising unemployment and slow economic growth

Depression

A severe contraction — many business failures, high sustained unemployment and sometimes falling prices

Trough

The lowest point of the business cycle, reached during a recession or depression

Economic growth

An increase in the national output (total production) of an economy

Features of a BOOM

Full employment; highest income and production; high wages; businesses at full capacity; high interest rates; sharply rising inflation

Features of a RECESSION

Lowest income and production; highest unemployment; falling/slow wages; lowest consumer demand; low interest rates; low inflation; frequent bankruptcies

What causes a recession?

A lack of spending — businesses cut production when goods aren't bought, leading to job losses, lower incomes and even less spending

Inflation

(1) A general increase in prices over time AND (2) a fall in the purchasing value (power) of money

Purchasing power

The amount of goods and services money can buy — inflation reduces purchasing power even if your income stays the same

Example of inflation at 10%

A handbag costs $100 at the start of the year and $110 at the end of the year — a 10% rise in price

Impact of contraction on unemployment

Unemployment RISES during a contraction

Impact of contraction on inflation

The rate of inflation may FALL during a contraction

Impact of expansion on interest rates

Interest rates eventually RISE during an expansion

Impact of expansion on wages

Wage rates generally RISE during an expansion

Which is NOT a feature of a contraction?

"Levels of unemployment falls" — unemployment RISES in a contraction, not falls

Which is NOT a feature of an expansion?

"Wage levels fall" — wages generally RISE during an expansion

What causes a boom to end?

When additional spending pushes prices up significantly, inflation becomes a major problem and slows continued growth

Circular flow of income

A model showing the connections between the 5 sectors of the economy — consumers, businesses, financial institutions, government and overseas — and the flow of money between them

Macroeconomics

The study of the economy as a whole

Interdependence

The idea that individuals and businesses rely on each other — businesses can't survive without consumers and consumers rely on businesses

Specialisation

When individuals or businesses develop expertise in a particular area and focus on producing that good or service

Leakage (in circular flow)

A withdrawal of money from the economy that reduces the national income (e.g. savings, taxation, imports)

Injection (in circular flow)

An introduction of money into the circular flow from outside households and businesses that increases economic activity (e.g. investment, government spending, exports)

Saving (S)

Putting money aside for later use — a LEAKAGE from the circular flow

Investment (I)

Borrowing money to expand/grow a business — an INJECTION into the circular flow

Taxation (T)

Money collected by government from individuals and businesses — a LEAKAGE from the circular flow

Government expenditure (G)

Government spending on infrastructure, welfare, education, health — an INJECTION into the circular flow

Exports (X)

Australian businesses selling goods/services overseas — an INJECTION into the circular flow

Imports (M)

Australians buying overseas goods/services — a LEAKAGE from the circular flow

Equilibrium (circular flow)

When total injections equal total leakages — the economy is neither growing nor contracting

Market failure

When the free market produces a result that is not in society's best interest (e.g. dangerous products, negative externalities)

Government intervention — ban

The government prohibits a product entirely (e.g. banning engineered stone containing >10% crystalline silica because it kills workers)

Government intervention — regulation/tax

Instead of banning, the government can impose regulations (e.g. safety standards) or a tax to raise the cost and reduce consumption of a harmful product

Negative externality

A cost imposed on a third party (not the buyer or seller) — e.g. silica dust from engineered stone harms workers who didn't choose to buy it

Price ceiling

A maximum price set by the government below the equilibrium price — aims to keep goods affordable

Effect of a price ceiling

Creates a shortage — at the low price, quantity demanded exceeds quantity supplied, leading to excess demand

Example of a price ceiling

The Australian government set a gas price ceiling of $12/gigajoule in December 2022

Argument FOR price ceilings

They keep essential goods affordable for low-income consumers and prevent exploitation during shortages

Argument AGAINST price ceilings

They cause shortages, reduce producer incentive to supply, can lead to black markets and reduce investment in the industry

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