Economics Test 2026

The Economic Problem

The fundemental challenge facing all societies, which is how to satisfy unlimited wants with limited resources. Because resources such as land, labour and capital are scarce (in short supply), people and societies must make choices about how to allocate them.

Needs

Essential goods/services for human survival.

Wants

Goods/wants that are unnecessary for survival but are human desires

Needs vs Wants

Needs are goods and services essential for survival, such as food, water, clothing and shelter. Wants are goods and services people desire but do not need to survive, such as designer bags, gaming consoles and luxury cars.

Three questions used to solve the economic problem

1. What to produce - making decisions about how resources should be allocated so that the right types and quantities of goods or services are produced.

2. How to produce - the best types of production methods to be used in making goods and services.

3. Who to produce for – how the good and services that are produced are shared between individuals.

Scarcity

The basic economic problem caused by limited resources and unlimited wants. It forces individuals, businesses and governments to make choices about how to allocate resources to satisfy their needs and wants.

Opportunity Cost

The lost alternative use that the economic resources could have been allocated to.

Opportunity Cost Example

A frozen dessert business choosing to produce icy poles over ice-cream. The opportunity cost is to forgo (give up) the production of and profits from the sale of ice-cream.

Trade-off

Giving up multiple alternatives when making a decision.

Trade-off Example

Trade-Off: Spending money on a new phone means giving upbuying new clothes, saving money, or going to a concert.

Opportunity Cost: The value of the best thing you gave up (e.g.,the concert).

Four factors of Production

1. Land: Includes any natural resource

2. Labor: The effort that humans contribute

3. Capital: Includes machinery, tools and buildings

4. Entrepreneurship: Combines land, labour and capital in new ways

Circular Flow Model

Households– The Australian population. They make decisions about spending, as well as supply or sell resources to the business sector (e.g. provide labour).

Businesses – All businesses in Australia. They buy resources from households to produce goods and services and provide households with income in return.

Material Living Standards

Material living standards focus on economic wellbeing e.g. income and access to goods and services.

Non-material living standards

Focus on quality of life factors such as happiness and the environment.

Material Living Standards Examples

1. Income per person

2. Level of consumption of goods and services per person

3. The purchasing power of incomes

Non-material Living Standards Examples

The quality of daily life:

1. Happiness

2. Freedom

3. Quality of Relationships

4. Mental and physical health

Factors that affect living standards

• Inflation: High inflation means that people are able to buy less with the same money as they could before, resulting in them having to sacrifice some of their wants, decreasing the level of consumption per person. This could also cause higher levels of stress and lower levels of happiness

• Interest Rates: An increase in interest rates discourages people from taking out loans and spending their money and encourages them to save. This could decrease their level of consumption per person and potentially cause them more stress as they have to rethink their spending.

Unemployment

Results when the economy is unable to generate enough jobs who are willing and able to work. According to the ABS ( Australian Bureau of Statistics), for a person to be unemployed, they must be over the age of 15, actively seeking work and not currently working.

Seasonal Unemployment

People are out of work at certain times of the year due to seasonal demand (e.g., tourism workers)

Structural Unemployment

There is a mismatch between the skills workers have and the skills employers need

Cyclical Unemployment

Due to changes in the economic cycle; when demand is low, workers are not in high demand

Frictional Unemployment

The time between a worker leaving one job and beginning the next

Long-term Unemployment

Unemployed for a long duration, despite having skills and seeking work

Unemployment has an impact on

Wages that are paid, level of consumer spending, economic growth, and standard of living

High unemployment levels are sign of poorly performing economy because:

Income tax revenue falls, government expenses rise, increased rates of crime, strain on families, economic activity decline in some geographical areas (e.g., regional towns) , sale of personal effects (items).

GDP

Gross Domestic Product. It measured by adding together the total amount of goods and services produced in a country during a year.

Explain how GDP is used to measure economic growth

Comparing GDP across different years is how economic growth is measured. Economic growth is an increase in the size of a country’s economy over time.

The link between GDP, employment and inflation

• GDP and employment: When GDP increases, businesses produce more goods and services, so they need more workers. This increases employment and reduces unemployment.

• GDP and inflation: When GDP grows too quickly, demand for goods and services may exceed supply, causing prices to rise and increasing inflation.

Define/Outline/Describe the meaning

• 1–2 marks per concept.

• Accurately state the meaning of a concept/term.

• If it is a two-mark question, you will require a more in-depth understanding — e.g. stating characteristics, providing an example.

Outline/Explain/Analyse Relationship

• 2–4 marks.

• This involves either:

1. Showing cause (x) and effect (y).

2. Explaining how x impacts y.

• What is x?

• Show the relationship between x and y.

• What is the outcome (how is y impacted by x)?

Describe/Explain the data

• Demonstrate understanding of trends in graphs/statistics.

• Your response will require you to:

1. Identify what the data is depicting.

2. Describe the trend (e.g. rise/fall/stable).

3. Refer to specific figures.

4. If there are multiple concepts being measured, comment on the relationship (e.g. when x increases, y decreases).

When being asked to explain the data, you need to provide a reason for a trend (e.g. a potential reason for the increase in inflation is lower unemployment levels).

Inflation

Inflation is a general increase in the level of prices throughout the economy.

How is inflation measured

The most commonly used measure of inflation is the Consumer Price Index (Or CPI).

Healthy Inflation Rate according to the Reserve Bank of Australia (RBA)

2-3%

Causes of Inflation

• The demand for goods and services in the economy exceeds the economy’s ability to produce them

• The rising price of input goods and services increases the price of final goods and services

• Unemployment increases

Effects of Inflation

• Unanticipated inflation decreases the purchasing power of consumers (the same amount of money buys less than it previously did).

• A high average rate of inflation is always accompanied by much uncertainty about the future inflation rate

• Greater levels of risk increase the value of the “option to wait,” which delays many consumption and investment decisions, and thereby slows economic growth.

Interest rates

An interest rate is the cost of borrowing money or the benefit gained through saving money.

Function of interest rates in the economy

• If inflation is high, the RBA usually raises interest rates to slow down spending (less incentive to borrow, more incentive to save)

• If the economy is slow, the RBA usually lowers interest rates to encourage borrowing and spending.

How Interest Rates Affect Saving and Borrowing

Globalisation

The increasing connection and interdependence of countries through trade, communication, transport, and technology.

Trade

The buying and selling of goods and services between people, businesses, or countries.

Imports

An import is a good or service that a country buys from another country.

Exports

An export is a good or service that a country sells to another country.

Why does trade occur?

• No country can make everything it needs. Therefore, trade gains access to goods that would otherwise not be available

• Trading allows countries to focus on what they do best. Eg. Australia specialises in livestock due to land availability and high safety standards, while China specialises in clothing due to low labour costs. By trading, both countries benefit from each other’s advantages.

• Lower costs Eg. If Australia had to make all its own clothing, the price of clothes would increase as labour costs are higher in Australia.

Benefits of trade

1. Countries can specialise in producing goods and services they’re best at.

2. Access to a wider range of products for consumers (e.g. electronics, fashion, food).

3. Larger markets for Australian businesses to sell to.

Challenges of Trade

• Over-reliance on one country (e.g. China) can be risky if relations change.

• Currency fluctuations affect the cost of imports and exports (e.g. if AUD drops, imports become more expensive).

• Global events (like wars or economic crises) can make trade unstable or more difficult.

What are Australia's major exports?

Iron ore, coal, natural gas, gold, agricultural products (e.g. beef and wheat)

What are Australia's major imports?

Cars, electronics, machinery, clothing, medicines

Who are Australia's major trading partners?

China, Japan, the United States, South Korea and India.

Supply

Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at different prices over a period of time.

Demand

The willingness and ability to buy a good/service at a particular price.

Law of Supply

As the price of a product rises, the quantity supplied also rises, assuming all other factors remain constant.

Law of Demand

As price increases, demand decreases (and vice versa), assuming all other factors remain constant.

How to make a supply/demand graph

Elements of a supply and demand graph

1. Title (what is the graph showing) – Supply and Demand of __________

2. X and Y axes. X axis is for Quantity (Q) and Y axis is for Price (P)

3. Make sure both axes are labelled accurately and specifically. E.g. Q ($/kg)

4. Supply curve and demand curve. Labelled as S1 and D1 respectively.

5. Equilibrium Price and Quantity labelled.

Relationship between supply, demand and price

Shortage

Demand is larger than Supply → upward pressure on price.

Surplus

Supply is larger than Demand → downward pressure on price.

Land

All natural resources used in the production of goods and services, such as water, forests and minerals.

Labour

The physical and mental effort of people used in the production of goods and services.

Capital

Human-made resources used to produce goods and services, such as machinery, tools and equipment.

Entrepreneurship

The ability to combine the other three factors of production, take risks and organise production to create goods and services.