Economics
2.1 Introduction to Markets
A market is a place or situation where buyers and sellers interact for purposes of trade or exchange.
Glossary
Consumer Expenditure: total spending on goods and services by the household/consumer sector.
Price: the sum of money paid for goods and services in a market
Price Mechanism: the system or process where price changes bring equality between supply and demand in the market.
Product Markets: market where households (consumers) purchase goods and services from firms/businesses. (Amazon, Woolworths)
Factor markets: markets where firms purchase the factors of production from households/consumers. (Engineers, Job advertisement, Raw materials, Real estate)
The main difference between the factor market and the product market is that the factor market is where the factors of production are traded, whilst the product market is where the outputs of production are traded. (pg36)
3.1 Introduction to Demand
Law of demand, the higher the price of a good or service, the lower quantity demanded in the market.
Factors Determining Demand
Factors that determine/influence demand can be broken into two groups. Price related and non-price related.
↪ A change in price is shown by a movement along the curve (expansion or contraction).
↪ A change in non-price factors is shown by a shift of the curve (increase or decrease).
At every price there is a greater quantity, at every quantity there is a greater price.
3.2 Introduction to Supply
Law of supply
: the quantity supplied of a good or service varies directly (positively) with the price of the good or service.
Supply: The quantity of a commodity that will be offered for sale in a market over a given time to a given price.
The Supply Curve
If the price changes, move along the curve.
(Seterns lakers) - assuming that everything stays the same, price is only changing.
Equilibrium
: a price with no tendency to change; a price high enough for sellers and low enough for buyers, so supply and demand are equal.
Factors Determining Supply
A supply curve can be interpreted in two ways.
Horizontally - how much (quantity/units) sellers are willing and able to sell at a given price.
Vertically - the minimum price of which suppliers will sell at a given quantity.
Producer surplus is the producers/sellers gain from trade.
Total producer surplus is the sum of the producer surplus of each seller in the market.
↪ Total producer surplus is shown graphically by the area above the supply curve and below the price.
4.1 Price elasticity of Demand
Elastic Demand
: the percentage change in quantity demanded exceeds the percentage change in price.
(plane tickets)
Price elasticity of demand: the responsiveness of quantity demanded to change in price.
Inelastic demand: the percentage change in quantity demanded is less than the percentage change in price. (medicine - no substitute), (electricity, household need)
↪ Gradient is smaller than the demand curve
Elastic coefficient
Elasticity of demand can be measured by finding the change in quantity demanded (Qd) by the proportional change in price (P).
⅀p = ∆Q/Q ∆P/P
Price elasticity: (Qd > 1)
Price inelasticity: (Qd < 1)
4.2 Factors affecting Price Elasticity of Demand
Most influential for price elasticity of demand.
Substitutes for example are relatively elastic.
Example: demand for different brands of ice cream, higher priced ice cream won't be bought by consumers as much as an alternative that sells for cheaper.
Complementary goods
Necessities
Consumer Priorities
Time
Addictive Goods
4.3 Other Elasticities
Glossary
Price Elasticity of Supply
: Changes in quantity of supplied to a change in price.
Cross Elasticity of Demand
: Whether these goods are likely to be substitutes of complements. This represents goods that are likely to be substitutes of complementary goods. (strawberries and cream)
Income of Elasticity of Demand
: Demand changes following an increase in household income. Measured by comparing the percentage change in quantity to the percentage change in income.
percentage change in quantity percentage change in income
By recognising the changes of a quantity supplied to a given price, like in demand, the supply of some products can be influenced easily by price changes.
Questions: pg 104
5.1 Market Failure
Glossary
Market
: Used by buyers and sellers to trade or exchange goods, services and information.
Physical Markets
: places where buyers and sellers meet in person to exchange goods and services.
Virtual Marketplaces
: When buyers and sellers exchange goods or services through the internet/web.
There are many different types of markets:
Labour markets: labour in exchange for money (wages and salaries)
Goods and services market: specific goods in exchange for money.
Financial/capital markets: Access to funds is exchanged for payments.
Stock markets: shares in public companies are traded.
Market economies rely on the effectiveness of the price mechanism to ensure optimal productivity. This means that a market that operates optimally will produce the most efficient solutions to the economic problem (Scarce resources, unlimited wants). This can be achieved by distributing resources with most productive use and producing the goods and services to best satisfy the wants of consumers, in the least costly way.
Efficiency — Getting the most from the inputs (or getting a lot for the efforts).
Effectiveness — Getting the expected results from the outputs (or doing the right things)
Question 4 to 8
5.2 Businesses and the Market
Markets provide information on how firms decide what and how much to produce in order to maximise profits. Each business decides the most cost-effective way and the greatest profit to produce.
By understanding the cost structure, decisions can be made with the knowledge of how each decision will affect costs and profit. Profit is the difference between the total cost of producing any output and the total revenue obtained from selling the output.
Profit = revenue - cost
The equilibrium position of the firm is the point of production where profit is maximised.
Total costs include all of the costs involved in producing a given volume of output including a normal profit.
A normal profit is the minimum return a business can accept/needed to maintain a business.
3, 4, 5, 6, 7, 8
5.3 Efficiency
By achieving optimal satisfaction of wants, necessities that the goods and services most valued by consumers are produced in the least costly ways.
There are three types of efficiency: allocative, productive or technical/dynamic efficiency.
Glossary
Allocative efficiency: Productive resources are used for maximum benefits for consumers.
Productivity: a measure of efficiency, the rate of output per unit of inputs.
Productive efficiency: to achieve maximum quantity output from a given quantity of productive resources.
Specialisation (Dynamic): the use of factors of production to perform specific production tasks
Increasing the amount of any one resource (e.g. Labour) will not necessarily result in an increase in production.
5.4 Productive efficiency
Resources are being used in the most efficient ways when a firm’s average costs are equal to its marginal costs, resulting in goods and services being produced at the lowest cost.
To minimise costs and maximise output from a given level of productive inputs (achieve productive efficiency) firms must gain maximum productivity.
Multifactor productivity = output all inputs
Supermarkets are the most common example of economies of scale. Since they buy goods in bulk, they avail discounts. Therefore, they enjoy the benefit of reduced average cost. In other words, it measures the amount of money that the business has to spend to produce each unit of output.
Benefits of Productive Efficiency
Higher wages: Enables firms to increase wages for workers
↪ Increases in support/stability
Lower prices: Firms can ‘pass on’ productivity improvements to consumers through reducing prices without reducing profits. This can be caused through cheaper production.
↪ Allowing more wants/needs are meant
↪ Better living standards
Higher profits: In response to an improvement in productivity, businesses can increase profits as it costs less to produce.
↪ Profits can be reinvested/distributed to business owners/shareholders or into the firm.
Stronger Economic Growth:
Productivity Growth is a main driver of higher living standards in the long run.
Allocative Efficiency
Socially optimal outcome, where and available resources are being used
Relates to, are we using our resources to produce the right things and the right quantity.
Greatest consumer satisfaction
Greatest welfare for society
This means that there is no way for a better option.
Only perfectly competitive markets operate in a way that delivers optimal allocative efficiency.
Distinguish between the three main different types of efficiency. (Exam question)
Dynamic Efficiency
The meaning of economic efficiency When we use the term economic efficiency, we generally mean that resources are used to produce particular goods and services that maximise society’s general wellbeing. It also implies that goods and services are produced at the minimum cost. When efficiency rises, more output can be gained from the same or smaller quantity of resources. Often, economists distinguish various types of efficiency such as allocative efficiency and technical efficiency.
The ability for an economy to respond to changing consumer demand by re-locating resources to new industries or production processes.
Allocative efficiency. Given the existence of a high level of consumer sovereignty or control in Australia’s economy, competing businesses seeking to maximise their profits will generally try to attract the ‘votes’ or money of buyers by producing exactly what they want. So in general, allocative efficiency means that resources will be allocated to those goods and services that consumers value most highly. Usually, we rely heavily on the operation of the market or price system to direct scarce resources where they are most wanted.
To do otherwise would lead to allocative inefficiency. However, there are some instances of where the free operation of the market or price system does not optimise the general satisfaction of society’s wants. This is called market failure. Here, for instance, we might think of markets where buyers or sellers lack sufficient information to make good decisions, or where competition between firms is weak and prices are high due to the existence of monopolies or oligopolies.
Technical efficiency. Technical efficiency is about businesses and managers using the most efficient production techniques or methods available when making goods and services. Generally, the technically most efficient methods mean minimising costs or the use of natural, labour and capital resources, to gain the highest possible output. For instance, if it were cheaper and more efficient to use robots to manufacture cars, then labour on the assembly line would quickly be replaced. Whether one resource such as machinery is cheaper and more efficient to use than another input like labour depends on its relative scarcity. This will be reflected in the relative level of prices for each resource and determined largely by market forces involving demand and supply.
As mentioned, greater efficiency in the use of resources helps to lift production and income and improve a nation’s living standards, especially its material wellbeing. There are several reasons for this:
• Increased efficiency leads to faster growth in real GDP and higher average incomes. When a nation’s allocative and technical efficiency grow strongly, more output is gained from the same or fewer resources. This boosts the country’s productive capacity (PPF) or potential rate of economic growth. However, only when real GDP rises at a faster rate than population, can there be an increase in average real incomes per person. As shown in figure 4.18, it is no coincidence that following the recent general slowdown in Australia’s productivity between 2012–13 and 2015–16, our real average disposable incomes per person fell by 3 per cent.
Annual percentage change in productivity and real disposable income The relationship between Australia’s productivity and real average disposable income per head Real net national disposable income per head (annual percentage change) Labour productivity (annual percentage change GDP per hour worked) Year figure 4.18 How slower labour productivity recently seems to have slowed Australia’s real average income per head.
• Increased efficiency leads to lower prices. Improvements in allocative and technical efficiency help to reduce production costs (more output from less inputs) for firms. This leads to lower more competitive prices and a slower inflation rate. It also helps to improve the purchasing power of family incomes and strengthen material living standards.
• Increased efficiency leads to more jobs and employment. Greater technical efficiency in particular helps to slow production costs, improve profitability and make Australian firms more competitive here and abroad. This leads to business expansion and, in the long term, the creation of new jobs and a reduction in unemployment.
• Increased efficiency leads to a stronger trade balance internationally. Improved efficiency allows firms to cut costs and lower the price at which they can profitably sell their product. Instead of just selling goods and services in the local market, Australian firms can grow their sales in export markets, boosting incomes.
• Increased efficiency can lead to better non-material living standards. Economies where there is strong economic efficiency usually have low levels of unemployment. This boosts non-material living standards by improving the health outcomes for those involved, slowing crime rates, reducing family breakups and financial stress, and expanding opportunities for cultural enrichment by international travel or attending sporting, live musical or theatrical performances. In addition, greater technical efficiency places a country in a better position to deal with environmental problems that can also potentially help to improve the wellbeing of current and future generations.
Problem: Industry super has stated that employees have missed out on a total of $5bn in super in 2018/2019. With almost 3 million workers short-changed, losing an average of $1,700.
So there needs to be a ‘significant improvement in unpaid super’
Evidence: “While most employers do the right thing, the Australian Taxation Office (ATO) estimates $3.4bn worth of super went unpaid in 2019-20,”
To conclude, if the problem is supers not being paid, then most employees will generally either retire at an older age or will have significantly less saving for retirement.
Dropped, more, a lot
Fall to
Clearly did not happen
Difference means more up
Sent the price
Buyers to bed, unhappy
Beefing up
Bad guys
Doggy deals
Wasn’t a great day for elon musk
Unprecedented
Market Structures pg130
Types:
Perfect competition: a theoretical market structure in which many buyers and sellers trade a homogenous product, there are no barriers to entering the market and all producers are price takers.
Monopolistic competition: the market situation in which a larger number of buyers and sellers are exchanging similar but not identical products.
Oligopoly: the market situation in which a small number of firms are selling similar but not identical products.
Duopoly: the market situation in which two firms are selling similar but not identical products.
Monopoly: the market situation in which one seller sells a product for which there is no close substitute, allowing it (the firm) to be the price setter.
Brand awareness
reputation/reliable
Consumer behaviour
preference /convenience
Large scale producers
Which means they benefit from economies of scales.
Maximise profitability
Lower prices for consumers = demand
Amalgamation: a combination of two or more companies into a new entity
Mergers
Chapter 7
“not clear whether Suncorp would be a stronger insurer without its banking unit, and it was unclear how any such benefits would be passed on to insurance customers.”
The deal will ultimately get the green light from regulators despite opposition from smaller banks and consumer advocates.
Suncorp maintained the view the deal was in the best interests of customers, shareholders and the community, and it would strengthen the nation’s banking and insurance industries. It also said merging its banking unit with a regional bank would not deliver the same benefits as the sale to ANZ.
Perspectives from the businesses, Suncorp and ANZ that this decision will ‘maintain the best interests of customers and shareholders in the community. “strengthen the nation’s banking and insurance industries.”
These guidelines discuss three types of merger — in each, the merger may involve
firms that are either actual or potential competitors:
horizontal mergers — involving actual or potential suppliers of substitutable goods or services
vertical mergers — involving firms operating or potentially operating at different
functional levels of the same vertical supply chain
conglomerate mergers — involving firms that interact or potentially interact across
several separate markets and supply goods or services that are in some way
related to each other, for example, products that are complementary in either
demand or supply
Each type of merger has the potential to affect competition in a different way and will
therefore be analysed differently.
7.3 Sources of Market Power
Amalgamation: the combination of two firms into a single business. Enhancing competitive strength.
Barriers to entry:
Horizontal integration: Control of on stage of production.
Vertical integration: Control of all stages of production and market distribution.
With increases in market concentration (due to amalgamation), changes in the market structure can occur.
A competitive market will generally lead firms to either allocative, productive or dynamic efficiency.
What shapes competition in Australia
Factors influencing Australia’s market concentration
Production concentration
Amount of firms in market
Barriers to entry
If imported from other countries it will influence Australia’s market.
In Australia, for a non-traded private economy, low barriers contribute more Gross value added compared with market barriers. The main factors influencing market concentration in Australia’s economy are natural monopolies, economies of scale and heavy regulation.
Seen in figure 1, low barriers produce $1000 billion of GVA to the market. More competitive firms are more efficient, the high contribution to the economy contributes more. Result of frequent efficiency. Comparing markets between low barriers and high barriers.
Advantages of market concentration:
Economic relationships: cause and affect, relevance to data and drawing on theory to evaluate.
High market share represents, market concentration, (dominated by few firms (4))
Interpreting the effects on competition: