Year 11 Economics Notes - Decision Making in Markets

Camberwell Grammar School - Year 11 Economics, 2025

Introduction

• This booklet serves as the primary notes for the subject.
• Students are expected to bring the workbook to each lesson and complete tasks as directed.
• The workbook will be checked by the teacher and should be kept up to date.
• Electronic copies are for reference, but work should be completed in hard copy format.
• READ: Indicates assigned reading from the textbook or articles.
• WATCH: Indicates a video to watch either in class or as homework.

Markets

• READ: Sections 2.1 + 2.2
  • Assumptions of a perfectly competitive market system.
  • The degree of market power in different markets (perfect competition, monopolistic competition, oligopoly, and monopoly) and its effect on prices, resource allocation, and living standards.
  • Strategies businesses use to increase profit, including price discrimination, multiple branding, or anti-competitive behavior as outlined in the Competition and Consumer Act 2010.
• WATCH: "Markets Link the World - A Price Is a Signal Wrapped up in an Incentive".

1a. Define Market

• A market is a place (physical or virtual) where buyers and sellers interact to exchange goods, services, or resources, often involving price negotiation.

1b. Define Market Power

• Market power is the ability of a firm to influence the price or output levels in a market due to limited competition.

1c. Define Market Structure

• Market structure refers to the characteristics of a market that determine the behavior and interaction of firms, including the number of sellers, product differentiation, and entry barriers.

2a. Price Maker vs. Price Taker

• A price maker is a firm that has control over the price of its product due to limited competition.
• A price taker must accept the market price; it has no control over pricing.
• Main Point of Difference: A price maker has complete market power, while a price taker has no market power.

2b. Preferred Market Structure for a Widget Seller

• Operating in a monopolistic or oligopolistic market would be preferable because it allows for greater pricing power, fewer competitors, and potentially higher profit margins.

3a. Barriers to Entry

• Barriers to entry are obstacles that prevent new firms from easily entering a market.
• Examples: High startup costs, government regulations, and brand loyalty (reputation).

3b. Homogeneous Goods

• Homogeneous goods are identical or very similar products with no differentiation.
• Examples: Wheat, sugar, or bottled water.

3c. Homogeneous Goods and Efficiency

• Homogeneous goods promote allocative efficiency because firms compete purely on price, ensuring resources are allocated to their most valued use.

3d. Perfect Knowledge

• Perfect knowledge means all consumers and producers have full information about prices, products, and production methods.
• Example of Imperfect Knowledge: Buying a used car without full knowledge of its condition.
• Implications: Buyers risk overpaying, while sellers may struggle to justify higher prices without sufficient transparency.

3e. Consumer Behavior in a Perfectly Competitive Market

• Consumers are expected to make rational decisions by seeking the lowest prices and purchasing products that maximize their utility.

3f. Business Behavior in a Perfectly Competitive Market

• Businesses are expected to accept the market price (price taker), produce efficiently (productive efficiency), and minimize costs to remain competitive.

3g. Perfectly Competitive Market and Allocative Efficiency

• Due to low barriers of entry, homogeneous products, and many buyers and sellers, firms must price their products at marginal cost, ensuring resources are allocated to maximize consumer satisfaction.

3h. Perfectly Competitive Market and Productive Efficiency

• Low barriers of entry encourage productive efficiency, as inefficient firms are pushed out, leaving only those that produce at the lowest cost.

3i. Perfectly Competitive Market and Dynamic Efficiency

• Intense competition drives firms to innovate and improve processes to stay competitive, enhancing dynamic efficiency.

Australian Aviation Market - Oligopoly

4a. Barriers to Entry in the Aviation Industry

• Barriers include high capital costs, regulatory requirements, and strong brand loyalty among established airlines, which restrict new competitors from entering the market.

4b. Advantages of Perfectly Competitive Markets

1. Efficient resource allocation (allocative and productive efficiency).
2. Lower prices for consumers due to intense competition.
3. Continuous innovation to improve efficiency and reduce costs.

4c. Monopolistic Competition

• Monopolistic competition is a market structure where many firms sell similar but slightly differentiated products, giving each some control over pricing.

4d. Product Differentiation in the Sneaker Industry

• Product differentiation is crucial for sneaker manufacturers as it allows firms to distinguish their products through design, branding, and marketing.
• This is often promoted via celebrity endorsements, unique designs, and performance features.

Market Structures Comparison

5. Comparison of Market Structures

6a. Anti-Competitive Behavior

• Anti-competitive behavior refers to actions by firms that reduce competition in a market.
• Examples: Collusion, price fixing, and predatory pricing.
• The Australian government discourages this through the Australian Competition and Consumer Commission (ACCC), which investigates and penalizes such practices to protect consumers and maintain fair competition.

6b. Price Fixing vs. Market Zoning

• Price fixing occurs when firms agree to set prices at a certain level, reducing competition.
• Market zoning involves firms dividing territories to avoid direct competition.
• Both practices are illegal as they manipulate market conditions to disadvantage consumers.
• Key Difference: Price fixing focuses on prices, while market zoning focuses on locational advantages for profit.

6c. Predatory Pricing vs. Price Leadership

• Predatory pricing is the practice of deliberately lowering prices below cost to drive competitors out of the market, intending to raise prices later.
• Price leadership occurs when one dominant firm sets prices and others follow.
• Predatory pricing are forms of price dumping, while price leadership is not inherently illegal but may reduce competition.

6d. ACCC and Company Mergers

• The ACCC may block mergers if they believe the merger would significantly reduce competition, potentially leading to higher prices, reduced innovation, or inferior services for consumers.

Demand and Supply

• READ: Sections 2.3, 2.4 & 2.5
• WATCH:
  • The Demand Curve
  • The Demand Curve Shifts (advanced)
  • The law of demand and the demand curve
  • The law of supply and the supply curve

7a. Law of Demand

• The law of demand states that, ceteris paribus, as the price of a good or service decreases, the quantity demanded increases, and as the price increases, the quantity demanded decreases. This inverse relationship (P and Qd) occurs because consumers are more willing and able to buy a product at lower prices.

7b. Expansion in Demand

• An expansion in demand occurs when the quantity demanded increases due to a decrease in the price of the good or service, assuming no change in other factors. This is shown as a movement down along the demand curve rather than a shift in the curve itself.

7c. Contraction in Demand

• A contraction in demand happens when the quantity demanded decreases due to an increase in the price of the good or service, holding all other factors constant. This results in a movement up along the demand curve, reflecting lower consumer willingness or ability to purchase at higher prices.

Demand Curve Example - Electricity

8a. Demand Curve Graph

• Accurately construct and fully label a graph showing the demand curve for electricity based on the table.

8b. Price Increase and Quantity Demanded

• If the price of electricity rises from $0.20 to $0.30 per kWh, the quantity of electricity demanded decreases from 25 million kWh to 15 million kWh per day. This represents a contraction in demand.

8c. Price Decrease and Quantity Demanded

• If the price of electricity falls from $0.20 to $0.10 per kWh, the quantity of electricity demanded increases from 25 million kWh to 35 million kWh per day. This represents an expansion in demand.

9a. Law of Supply

• The law of supply states that, as the price of a good or service increases, the quantity supplied increases, and as the price decreases, the quantity supplied decreases, ceteris paribus. This reflects a positive relationship between price and quantity supplied.

9b. Expansion in Supply

• An expansion in supply refers to a movement up along the supply curve due to an increase in the price of the good or service. Producers are more willing and able to supply a higher quantity at a higher price.

9c. Contraction in Supply

• A contraction in supply refers to a movement down along the supply curve due to a decrease in the price of the good or service. Producers reduce the quantity they are willing to supply at the lower price.

Supply and Demand Example - Electricity

10a. Supply and Demand Curve Graph

• Accurately construct and fully label a graph showing the demand curve and the supply curve for electricity based on the table.

10b. Price Decrease and Quantity Supplied

• When the price of electricity falls from $0.40 to $0.30 per kWh, the quantity supplied decreases from 35 million kWh to 25 million kWh. This is referred to as a contraction in supply.

10c. Price Increase and Quantity Supplied

• When the price of electricity increases from $0.20 to $0.30 per kWh, the quantity supplied increases from 15 million kWh to 25 million kWh. This is referred to as an expansion in supply.

Market Equilibrium and Shifts in Demand and Supply

• The effects of changes in demand and supply on equilibrium prices and quantities
• The effect on demand and the position of the demand curve by non-price factors, including changes in disposable income, the prices of substitutes and complements, tastes and preferences, interest rates, population and demographics, and consumer confidence
• The distinction between a movement along the demand curve and a shift of the demand curve
• The effect on supply and the position of the supply curve by non-price factors, including changes in the costs of production, technology, productivity, and climatic conditions and other disruptions
• The distinction between a movement along the supply curve and a shift of the supply curve

11a. Market Equilibrium

• Market equilibrium is the point where the quantity demanded equals the quantity supplied at a particular price.

11b. Market Shortage

• A market shortage occurs when the quantity demanded exceeds the quantity supplied at the current price. This usually happens when the price is set below the equilibrium level. Use a diagram to illustrate.

11c. Market Surplus

• A market surplus occurs when the quantity supplied exceeds the quantity demanded at the current price. This usually happens when the price is set above the equilibrium level. Use a diagram to illustrate.

12a. Disposable Income

• Disposable income is the amount of money a household has available for spending and saving after taxes have been paid.

12b. Substitutes

• Substitutes are goods that can be used in place of each other, such as tea and coffee. If the price of one rises, the demand for its substitute usually increases.

12c. Complements

• Complements are goods that are often used together, like printers and ink cartridges. If the price of one increases, the demand for the other usually decreases.

12d. Tastes and Preferences

• Tastes and preferences refer to the desires and interests of consumers that influence their purchasing behavior. Changes in trends or public opinion can shift demand.

12e. Consumer Confidence

• Consumer confidence is the degree of optimism consumers feel about their future financial situation. High confidence typically increases spending and demand.

13. Movement Along vs. Shift of the Demand Curve

• A movement along the demand curve occurs when the price of the good itself changes, leading to a change in quantity demanded. Illustrate with a diagram.
• A shift of the demand curve happens when a non-price factor (like income or preferences) changes, affecting demand at all price levels. Illustrate with a diagram.

14a. Costs of Production

• Costs of production are the expenses incurred by firms in producing goods or services, such as wages, rent, and materials. Higher costs typically reduce supply.

14b. Technology (as it relates to supply)

• Technology in supply refers to innovations that improve production efficiency. Better technology usually increases supply by reducing costs.

14c. Productivity

• Productivity (output per unit of input) measures how efficiently inputs are converted into outputs. Higher productivity increases supply as more goods can be produced with the same resources.

14d. Climatic Conditions (as it relates to supply)

• Climatic conditions refer to weather and environmental factors that affect the production of goods, especially in agriculture. Favorable conditions increase supply; adverse ones reduce it.

15. Movement Along vs. Shift of the Supply Curve

• A movement along the supply curve occurs due to a change in the good’s own price, altering the quantity supplied. Illustrate with a diagram.
• A shift of the supply curve happens when external factors (like technology or input costs) change, affecting supply at all prices. Illustrate with a diagram.

Effects of Various Factors on Market Equilibrium

16a. Increase in Disposable Income on Demand for Orange Juice

• Using a diagram, illustrate the effect of an increase in disposable income on the demand for orange juice. Ensure a supply curve is included in the diagram.

16b. Disequilibrium After Increase in Disposable Income

• After the shift from D1 to D2, this creates a shortage from Q1 to Q2 at P1, since Qd (Q2) is greater than Qs (Q1).

16c. Sellers' Reaction and Movements Along Curves

• Realizing the shortage, suppliers will increase prices to maximize profits. This will cause an expansion along the supply curve. This will result in a contraction along the demand curve as orange juice is now more expensive and consumers exit the market.

16d. New Market Equilibrium for Orange Juice

• This will result in a new equilibrium price at P2 Q3, where Quantity demanded equals quantity supplied at price point P2.

17a. Increase in the Price of Sugar on the Demand for Coffee

• Using a diagram, illustrate the effect of an increase in the price of sugar on the demand for coffee. Ensure a supply curve is included in the diagram.

17b. Disequilibrium After Increase in Sugar Price

• Due to sugar and coffee being complement goods, when the price of sugar increases, the demand for coffee will fall. This leads to the demand curve shifting to the left from D1 to D2. This creates a surplus at P1, where quantity demanded (Q2) is less than quantity supplied (Q1).

17c. Sellers' Reaction and Movements Along Curves

• Suppliers realize this surplus and would want to clear stock to maintain profits; they will decrease prices through a contraction along the supply curve. This results in an expansion along the demand curve as prices are now more attractive, until a new equilibrium is reached at P2 Q3.

17d. New Market Equilibrium for Coffee

• New equilibrium is reached at P2 Q3.

18a. Increase in Productivity on the Supply of Wooden Tables

• Using a diagram, illustrate the effect of an increase in productivity on the supply of wooden tables. Ensure a demand curve is included in the diagram.

18b. Disequilibrium After Increase in Productivity

• Increase in productivity increases the output per unit of inputs. This lowers the cost of production for firms and increases their willingness and ability to produce. S shifts from S1 to S2 at P1, creating a surplus between Q1 and Q2 (disequilibrium).

18c. Sellers' Reaction and Movements Along Curves

• Realizing the surplus, firms will lower prices to clear stock, resulting in a contraction along the supply curve. With lower prices, consumers will demand more wooden tables, thus causing an expansion along the demand curve until new equilibrium is reached at P2Q3.

18d. New Market Equilibrium for Wooden Tables

• New equilibrium is reached at P2Q3.

19a. Increase in Minimum Wage on the Supply of Houses

• Using a diagram, illustrate the effect of an increase in the minimum wage on the supply of houses. Ensure a demand curve is included in the diagram.

19b. Disequilibrium After Increase in Minimum Wage

• Increases in minimum wages increase the cost of production for firms, decreasing their willingness and ability to produce. This will shift the Supply curve from S1 to S2, creating a shortage between Q1 and Q2.

19c. Sellers' Reaction and Movements Along Curves

• Producers, realizing this, will push prices up to earn higher profits, resulting in an expansion along the supply curve. Consumers will bid up prices and cause a contraction along the demand curve as households exit the market due to higher prices. New equilibrium is reached at P2Q3.

19d. New Market Equilibrium for Houses

• New equilibrium is reached at P2Q3.

20. Increase in Interest Rates on the Market for Electric Cars

• Increase in interest rates increases the cost of borrowing. This will disincentivize consumers to borrow and spend, thus reducing demand from D1 to D2. This creates a surplus in the market between Q2 to Q1. Realizing this surplus, producers will lower prices to clear stock, thus resulting in a contraction along the supply curve. With lower prices, this increases the demand for electric cars shown by the expansion along the demand curve until new equilibrium is reached at P2Q3.

21. Severe Drought in Western Australia on the Market for Wheat

• Using a diagram to illustrate your response, describe the effect on the market for wheat of a severe drought in Western Australia.

Relative Prices

22a. Definition of Relative Prices

• Relative prices refer to the price of one good or service compared to another, usually expressed as a ratio or in terms of opportunity cost. It reflects how much of one item must be given up to obtain another.

22b. How Consumers Use Relative Prices

• Consumers use relative prices to make decisions about how to allocate their limited income. By comparing the prices of similar goods or services, they choose options that offer the best value or utility, adjusting their spending in response to changes in relative prices.

22c. How Businesses Use Relative Prices

• Businesses use relative prices to decide what to produce and how to allocate resources efficiently. When the relative price of a good rises (indicating higher potential profit), firms are incentivized to increase production of that good to maximize revenue and market competitiveness.
• For example:
  • An ↑ in the relative price of a Product B (e.g. coffee), sends price signals to suppliers that there is a general shortage or underproduction and that buyers are demanding Product B.
  • As a result, there is an ↑ in relative profits which encourage suppliers to reallocate their resources away from producing Product A (e.g. McChicken) and towards producing Product B
  • A ↓ in the relative price of Product B, sends price signals to suppliers that there is a general surplus or overproduction and buyers are no longer demanding Product B.
  • As a result, relative profits ↓ which causes suppliers to reallocate their resources from producing Product B.

23. Forecast Percentage Changes in Relative Prices (2024–25)

Examine the figure below, which compares forecast percentage changes in the relative prices expected for selected crops and livestock over 2024–25, and answer the questions that follow.

23a. Definition and Forecast Changes

• Define relative prices and describe the forecast changes in the relative market prices for most crops as opposed to lamb, and beef meat.

23b. Microeconomic Demand Factors

• Two likely microeconomic demand factors that may cause changes in relative prices in rural commodity markets are consumer preferences and household income levels.
• For example, if consumers shift towards organic produce, demand (and therefore prices) for organic rural goods may rise. Similarly, rising incomes may increase demand for premium agricultural goods, pushing their relative prices up compared to standard alternatives.

23c. Microeconomic Supply Factors

• Two likely supply factors include production costs and seasonal conditions.
• Higher input costs (e.g. fuel, fertilizer) reduce supply, driving prices up. Alternatively, favorable weather can increase yields, expanding supply and lowering relative prices in those markets.

23d. Effect on Relative Profitability

• In a market-driven economy like Australia’s, rising relative prices for certain rural commodities make those areas more profitable, incentivizing resource owners to shift their land, labor, and capital towards them. For example, if beef prices rise relative to wool, farmers may reallocate pasture and breeding stock from sheep to cattle to maximize profit.

23e. Resource Allocation

• Assuming perfect mobility of resources, I would allocate them to rural commodities with the highest relative prices, as these indicate higher demand and greater profitability. For example, if wheat prices rise relative to canola, I would shift resources (like land, machinery, and labor) into wheat production to take advantage of increased returns.

24a. Increase in the Price of Oranges on the Market for Apples

• An ↑ in the relative price of oranges, sends price signals to suppliers that there is a general shortage or underproduction and that buyers are demanding oranges. As a result, there is an ↑ in relative profits which encourage suppliers to reallocate their resources away from producing apples and towards producing oranges.

24b. Effect on Relative Price

• Referring to your answer in Q23a describe the effect on the relative price of oranges and apples.

24c. Resource Allocation

• With higher relative prices for oranges, resources may shift from apple production to orange production to chase higher profits. In a perfectly competitive market, where resources are mobile and producers are price takers, this reallocation occurs until relative profitability equalises across markets.

25a. Increase in the Price of iPhones on the Market for Apps

• An increase in the price of iPhones may lead to greater iPhone ownership, boosting demand for apps (a complementary good). This raises the relative price and profitability of app development, encouraging more programmers and tech firms to allocate resources towards creating and marketing apps.

25b. Increase in Wages Paid to Carpenters on the Market for Wooden Chairs

Elastic

• An increase in wages for carpenters raises the cost of production for wooden chairs, reducing supply and increasing their relative price. Assuming that the demand for wooden chairs is elastic, this makes wooden chairs less competitive, so resources (especially labour) may shift to alternative furniture products or industries with lower labour costs.

Inelastic

• An increase in wages for carpenters raises the cost of production for wooden chairs, reducing supply and increasing their relative price. Assuming that the demand for wooden chairs is inelastic, there will be higher relative profits to be made, so resources from alternative furniture products or industries will shift towards wooden chairs.