HASS10 Economics

GDP per Capita

• dividing GDP/population.

• estimates average amount of wealth per person.

• better indicator

Economics

study of how individuals, businesses, govs and societies allocate scarce resources to satisfy needs and wants.

needs

• essential for survival.

• limited

  • Food

  • Water

  • Shelter

  • Clothing

wants

• not essential

• unlimited.

• improve quality of life.

• Vary from individuals, societies, age

• Change

• Can reoccur.

• May generate another want.

Economic Problem

• unlimited wants

• limited resources

• Therefore, people and societies must make choices abt how resources are used.

• fundamentally a problem of choice.

Factors of Production/ resources

1. Land- natural resources, land and everything that comes from it

2. Labour- work, physical- manual bricklayer, intellectual- mental, doctor

3. Capital- machinery/equipment used- oven

4. Enterprise - ability organise other factors, to maximise profit, efficiency

Law of Supply/ Law of Demand

Consumers aim to buy gs at lowest price, producers aim to sell at highest price

Law of Demand- price of gs decreases, demanded increases.

Law of Supply -the price of gs increases, quantity supplied increases.

Goods and Services

Goods- tangible items, cars

Services- actions that generally benefit consumer, doctors

Relative Scarcity

• there is not enough of a good, service or resource compared to demand.

• Occurs bc

  • Wants are unlimited.

  • Resources are limited.

• Greater scarcity= higher prices.

Opportunity Cost

• next best alternative given up when making a choice.

• potential benefits missed

Microeconomics

• studies individual consumers, households and businesses and how they make decisions abt using limited resources.

• focus on

  • Supply and demand

  • Pricing

  • Consumer behaviour

Macroeconomics

• studies economy as a whole, national and global performance. large-scale issues such as:

• Inflation

• Interest rates

• International trade

• Govs and central banks use info to develop policies that keep economy stable

Circular Flow of Income Model

• explains interactions between sectors

• how money and resources move through economy and maintain stability and growth.

Role of Households

Represent consumers.

• Own the factors of production: provide to firms

• Receive income in return.

• Spend on gs

Role of Firms

• Produce and sell goods and services.

• Pay:

  • Wages

  • Salaries

  • Rent

  • Interest

  • Dividends

Real flow

represents physical movement of:

• Factors of production from households to firms.

• GS from firms to households.

Monetary flow

represents the movement of money:

• Households receive income for providing factors of production, spend on gs

• Firms receive revenue from sales

Financial Sector

includes:

• Banks

• Superannuation funds

• Australian Securities Exchange (ASX)

helps with efficient allocation of resources

Households:

• Save part of their income in financial institutions.

Firms:

• Borrow money for investment.

Government Sector

• Collects taxes

• Provides public gs

  • Infrastructure

  • Education

  • Security

• Makes transfer payments

• Creates additional flows of money

Overseas sector

Exports

• GS sold by Aus businesses to overseas consumers.

• bring money in

Imports

• GS bought by Aus from overseas producers.

• money leave

affects:

• Exchange rates.

• Global economic connections.

Leakages, Injections and Equilibrium

• Leakages- remove money

  • Savings

  • Taxes

  • Imports

• Injections- add money

  • Investment

  • Government spending

  • Exports

• Equilibrium- leakages= injections

Business Cycle

• shows the rise and fall of real Gross Domestic Product over time.

  1. Expansion

  2. Peak

  3. Contraction

  4. Trough

• affect:

  • Employment

  • Consumer spending

  • Business investment

  • Wages

  • Inflation

Australia's Long-Term Economic Growth, ABS and Financial Year

• Aus productive capacity averaged- 2.5–3%

• Australian Bureau of Statistics measures Australia's GDP.

• generally reports GDP figures quarterly- every three months.

• 1 July to 30 June of the following year.

Expansion

• economy grows.

• Households spend more

• Businesses increase production to meet higher demand

• Unemployment decreases.

• Wages increase

• Consumer confidence high.

• usually longest phase

Peak

• highest point of economic activity before growth begins to slow.

  • operates close to maximum productive capacity.

  • Employment, spending high.

  • strong business profit

  • Inflationary pressures

• To control inflation, RBA may increase interest rates to reduce spending.

Contraction

• downswing towards trough

  • Households reduce spending.

  • Businesses experience lower sales, reduce production

  • Unemployment rises.

  • Wage growth and inflation slows.

Trough

• lowest point

  • Economic activity is at its weakest.

  • low spending

  • Business investment reduced.

  • Unemployment high.

• marks the beginning of economic recovery.

Economic boom

• economy grows at an unusually fast rate for an extended period.

  • Employment, income, spending, output increases.

• can cause excessive inflation

Recession

• when economic growth falls for two or more consecutive quarters (six months).

  • Household incomes fall.

  • Unemployment and business failures increases

Depression

• more severe

• two years or more.

  • economic activity falls

  • Very high unemployment.

  • Widespread business failures.

Economic Growth and Formula

• when country’s real GDP increases

• more GS produced over time.

GDP Current Year - GDP Previous Year/GDP Previous Year. ×100

Real GDP

• total market value of all final GS produced in economy after adjusting for inflation.

• more accurate

Advantages of economic Growth

• Raises national income.

• higher wages, consumer spending

• improved living standards

• Allows gov invest more in:

  • Infrastructure

  • Education

  • Healthcare

• Encourages business investment, tech innovation, productivity improvements.

Disadvantages of Economic Growth

Can

• pressure on natural resources.

• environmental degradation.

• increase income inequality

• urban congestion.

Inflation

• increase in general level of GS prices in economy over time.

• money purchasing power falls.

• same money buys less

• RBA considers low, stable inflation important- encourages consumers to spend

• target 2–3% per year.

Consumer Price Index

• Measures price changes of typically purchased GS basket

• thousands of items, 87 expenditure categories, 11 major groups:

  • Food

  • Housing

  • Transport

• items given diff weights according to spending importance

• published monthly

• RBA uses as important guide for monetary policy.

Demand-Pull Inflation

• demand for GS grows faster than economy's ability to produce them.

• Eg

  • Households- more disposable income, increase spending.

  • Businesses alr operating close to capacity, may raise prices bc high demand

Cost-Push Inflation

• costs of producing gs increase.

• Higher:

  • Wages

  • Fuel prices

  • Raw material costs

  • Electricity

• may respond by raising prices.

Frictional Unemployment

short-term

• Moving between jobs.

• Searching for first job.

• More likely during economic expansion/ peak - more job vacancies

Seasonal unemployment

• short-term

• when some industries experience changes in demand at particular times of year.

• Eg

  • Tourism

  • Agriculture

• Employment opportunities increase/ decrease at predictable times.

Technological unemployment

• when new:

  • Technology

  • Machinery

  • Automation

• replaces workers or reduces number of workers required

• can create new jobs

• Workers may need new skills

Structural unemployment

• when there is a mismatch between workers' skills, qualifications or location and jobs available.

• Eg: existing worker skills are no longer demanded.

• Can continue unless workers:

  • Retrain.

  • Relocate.

Cyclical unemployment

• Caused by changes in business cycle.

• economic downturn, trough, recession:

  • Demand falls.

  • Businesses reduce production.

  • Unemployment rises.

economic growth strengthens:

• Businesses increase production.

• Cyclical unemployment generally falls.

Long term unemployment

• longest

• ppl who remain unemployed for long periods.

• difficult to break out of.

• Barriers include:

  • Limited skills/ work experience.

  • Geographical isolation.

  • Behavioural factors.

• Can continue even during economic growth.

Underemployment

when person:

• overqualified for job or

• Works fewer hours than wanted.

• Eg: university qualified person working in retail.

• issue bc economy is not as productive, not maximising full potential of workers.

Living standards

level of material and non-material wellbeing, comfort, and access to GS experienced by individuals or populations in particular geographic area.

Material vs Non-material Living Standards

Material

• measured easily through:

  • Income per person.

  • Consumption

Non-Material

• Intangible aspects of human wellbeing and quality of life cannot be measured by income or consumption

• Eg

  • Working conditions.

  • Environment.

  • Freedom of speech.

Income

Money received for

• Labour.

• GS

• Investments.

Measured over a period

• can come from:

  • Wages.

  • Salaries.

  • Rent.

  • Investments.

  • Dividends.

  • Interest.

Disposable Income- money left after taxes taken away

Wealth

• value of all assets owned by individual.

  • House

  • Superannuation

  • Shares

  • Money in a bank account

Income vs Wealth

can have low income but high wealth.

• Eg: retired person- low income but wealth from a house and savings.

• young worker- high income, low wealth bc not enough time to build assets.

Factors Influencing Individuals income

Education, Skills

Experience

Occupation

Supply and Demand

Income and wealth inequality

• Higher-income households generally- faster income growth

• Taxes and gov payments help reduce inequality.

• Aus distribution- become less equal over long term, relatively modest

• Wealth distributed less equally, bc assets accumulate over a lifetime.

Gini coefficient

• measure of income equality.

• 0 to 1.

• Closer to 0 = more equal distributed.

• Higher number = greater inequality.

Taxation

• compulsory levies imposed by gov on individuals or entities.

• purpose- raise revenue for gov expenditure.

Income Tax

• tax placed on individual's personal income.

• Aus use progressive income tax system.

• Lower-income earners pay smaller proportion of income than higher

• less burden

Goods and Services Tax (GST)

• 10% tax on most GS consumed in Aus.

• paid to Australian Taxation Office (ATO).

Advantage

• Helps minimise tax avoidance.

Disadvantage

• Impacts low-income earners more- pay same amount of GST as high-income earners- greater proportion of their income.

Business/Company Tax

• Businesses pay tax on profits they earn.

• Companies are subject to federal tax rate of 25% on taxable income.

• if annual turnover over $50 million subject to higher rate of 30%.

Advantaged by inflation

• High-income earners: cope bc greater income and assets- values can increase

• Ppl w fixed-interest loans: value of debt-smaller proportion of income

• Importers: Aus prices rise- imported prices stable, cheaper, increasing their demand

Disadvantaged by inflation

• Low-income earners: larger proportion of income spent on essentials

• Ppl w low-interest savings accounts: IF interest lower than inflation rate.

• Exporters: higher prices make GS less internationally competitive.

Lorenz Curve

• graphically represents distribution of income and wealth within society.

• shows cumulative proportion of the population, ranked by income, against their cumulative share of income

• diagonal line of equality represents perfect equality:

• further Curve bows from the equality line, greater the inequality.

employed, unemployed People Outside the Labour Force

• Employed: ppl in a paid job for one hour or more per week.

• Unemployed: not in paid job but actively looking for work.

• Not labour force:not in paid job and not looking for work include:

  • Students

  • Retirees

Labour force, Participation rate, ABS market indicators

• Labour force = employed + unemployed

• Participation rate: percentage of the working-age population 15 years and over. in labour force.

• ABS collects data through Labour Force Survey, conducted monthly w 50,000 people.

Unemployment Rate and Total Unemployment

• Unemployment rate: allows comparisons-percentage of labour force that is unemployed.
  Number of unemployed/Labour force × 100

• Total unemployment: total number of people unemployed- shows size of the group affected

  • Aus rate: 4.5%

  • Youth rate: 10.8%- higher bc less experience and skills

Fiscal policy and its objectives

the use of government spending and taxation to influence economic activity. AusGov uses for sustained economic growth, low unemployment, stable prices, provision of public services. eg, gov can increase spending or reduce taxes to stimulate economy

Types of government budgets

• Balanced budget: Gov revenue equals gov expenditure.

• Deficit budget: Gov expenditure is greater than revenue. can stimulate demand during contraction bc spending creates jobs and encourages spending.

• Surplus budget: Gov revenue is greater than expenditure. can reduce gov debt and ease demand pressure

Expansionary vs contractionary fiscal policy

• Expansionary: Increases gov spending and reduces taxes to increase aggregate demand, economic growth and employment. gov plans for a budget deficit.

• Contractionary: Reduces gov spending and increases taxes to reduce aggregate demand, particularly when high inflationary pressures. gov plans for a budget surplus.

Monetary policy and who controls it in Australia

actions taken by a central bank to influence interest rates and financial conditions to affect economic activity, employment and inflation. responsibility of Reserve Bank of Australia

Cash rate target

official interest rate. When economic conditions are weak and inflation is low, RBA can lower it to encourage spending and investment. When high inflation and demand, RBA can increase it to reduce spending and inflation.

Effects of lower interest rates

Lower official interest rates can lower other interest rates. encourages household consumption and business investment bc borrowing becomes cheaper. Lower interest rates reduce incentive to save.

Effects of higher interest rates

Higher interest rates make borrowing more expensive and saving more attractive. reduces household consumption and business investment, lowering demand and helping to reduce inflation.

Supply and the Law of Supply

the amount of a good or service that producers are willing and able to offer to the market at a given price and time. Law of Supply states that price and quantity supplied have a positive relationship: when price rises, quantity supplied increases; when price falls, quantity supplied decreases.

Why does quantity supplied change with price, and what does the supply curve look like

Suppliers aim to maximise profits by increasing the quantity they offer when prices rise. At low prices, only the most efficient suppliers may make a profit, so supply is limited. The supply curve slopes upwards from left to right. A change in the product's own price causes movement along the curve.

What causes supply curves to shift

Any Non price factors. increase in supply shifts the curve right, meaning producers supply more at every price. decrease in supply shifts the curve left, meaning producers supply less at every price.

How do resource prices affect supply?

Resources include land, labour, capital and enterprise. If resource prices rise, production costs increase and supply decreases, shifting the curve left. If resource costs fall, such as when raw materials or labour become cheaper, supply increases and the curve shifts right. eg, flour becomes more expensive, a bakery may supply fewer cakes.

How does technology affect supply?

Improved technology occurs when a new production method lowers the cost of producing a good. This increases supply and shifts the supply curve right. eg, a pizza restaurant using an advanced oven that cooks pizzas faster and at a lower cost can supply more pizzas.

How do legislation and taxes affect supply?

Government legislation can increase business costs. eg, new anti-pollution laws may require businesses to spend more on compliance. A gov tax on a GS can also increase costs. These changes decrease supply and shift the supply curve left.

How do weather and seasonal factors affect supply?

Good weather can produce a good harvest, increasing agricultural supply and shifting the curve right. Bad weather or seasonal events that damage the environment can decrease supply and shift the curve left. eg, a massive flood destroying banana crops in decreases supply