commerce

Commerce Yearly Notes

The Economic and Business Environment

Studies how people allocate scarce resources for production, distribution, and consumption, both individually and collectively.

Definitions
Opportunity cost	What you give up (the benefits of the next best alternative) when you make a choice.
Economic problem	Fundamental challenge of satisfying unlimited wants and needs with limited resources
Wants	Have a desire to possess something
Needs	Of necessity
Resources	A stock or supply of money, materials, staff and other assets that can be drawn on by a person or organisation in order to function effectively
Scarcity	Being in short supply: shortage
Leakages	Money leaving the economy
injections	Money entering the economy
Boom	Period of high economic growth
Expansion	Increasing economic growth
contraction	Declining economic growth
Recession	Two consecutive quarters of negative economic growth (6 months). Bit more milder compared to depression
Depression	Severe contraction in level of economic activity
Gross domestic product (GDP)	Total value of final goods and services produced in a country over a period of time. Measures economic growth in a country.

Nature of economy
5 sector model of the economy
Household sector	Made up of consumers that hold economic resources such as Land Labour Capital (assets) Enterprise (projects)
Firms sector	Referring to small business Sell resources in exchange for income Use resources of households to produce goods and services (production) Households then use there income to buy goods and services (consumptions)

Financial sector	Banks Credit unions They receive savings from households and firms
Government sector	Taxation: taxes collected when they earn an income or profit Government expenditure: money raised from tax to fund public goods and services
Overseas sector	Australia’s trade with other countries Imports Exports
Leakages	Savings Money put aside for future Taxation Government levy or revenue used for public spending Imports Goods or services purchased from overseas businesses
Injections	Investment Use of money to establish businesses Government expenditure Government spending on public goods and services Export Goods and services sold by local business overseas
Business cycle
Government intervention in a recession	Increase government spending Reduce taxes (gov) Reduce cash rate (RBA)
Inflation	Definition: Sustained increase in the general level of price over a period of time Cause: Economy in boom Cant produce more goods with limited capacity Prices increase to regulate consumer demand Makes money lose value *Measured: the Consumer Price Index (CPI)
Causes of inflation	Demand-pull inflation Too much demand Not enough supply Increase in consumer confidence Increase in business investment Increase in income Increase in export Cost-push inflation Increase cost of production Increase cost to consumers Increase in income paid to employees Increase in interest rates Increase in cost of raw materials Increase in unexpected costs
Consumer Price Index (CPI)	Current CPI is 7%
Government intervention for inflation	Increase cash rates
How to measure inflation

The Nature of Markets within the Economy

Price mechanism

Definition: Refers to the forces of demand and supply in determining the price and quantity of a good or service

Demand

Quantity of a good or service consumers are willing to purchase at a particular price given the point in time

Alway downward sloping

Law of demand:

Demand reflects an inverse relationship between Price and Quantity demanded
Price increase, demand decrease (vice versa)

Factors influencing demand curve:
1. Movement along the demand curve

Change in quantity demanded due to price change
If price of a good decreases there will be an expansion in demand and vice versa

2. Shift of the demand curve

Change in demand due to other factors
- Shift to left is decrease in demand
- Shift to right is increase in demand

Reason for increase/decrease in demand

Increase

Rise in consumer income
Change in taste and preferences
Increase in population size
Prices expected to rise later

Decrease

Fall in consumer income
Change in taste
Smaller population
Prices ex

Supply

Quantity of good or service that business offers a sale at a given price.

Supply curve is always upward sloping

Law of supply

As price increase, supply decreases and vice versa

Increase in supply:

Increase efficiency (new tech)
A fall in the cost of production (Cheap labour)
Improved climatic condition (increase rain, more crops)
Increase in number of suppliers (more business for more growth)

Decrease in supply:

Rise in cost of production (more expensive products)
Decreased efficiency
Unfavourable climatic condition (drought)
Decrease in number of suppliers

Market equilibrium

Point where demand and supply curve intersect

Point where buyers and sellers agree on a price and quantity

Markets

Anywhere a buyer and seller exchange goods and services. (Can be virtual or physical)

4 different types

Retail
Labour
Financial
Stock

Interactions within Markets
Types of businesses	Onlines On demand Small-medium enterprise Large business Global Transnational corporation/offshore Government Not for profit
Factors influencing business decisions	Technology Business cycle Globalisation
Entrepreneur and innovations	Entrepreneur: Person who sets out to build a successful business in a new field Innovation: Process of creating a new or significantly improved product, service or process
Corporate social responsibility	Businesses consider the interest of: stakeholders society environment while making economic and business decisions. (referred as the Triple bottom line)

Our Economy
Fiscal policy	Is a macroeconomic policy where the government uses its budget to influence economic conditions. It is also called budgetary policy, that is a government economic policy that involves altering the level of government expenditure (G) and government receipts (T). Expenditure = spending Receipts= taxation revenue (which is income for the government).
The budget	The Budget is usually presented each May. It will show the planned expenditure and revenue for the next financial year Yearly, the budget outcome changes due to changes in G and T which reflects the impact of two key factors: Changing economic conditions Changes in government policy This change in the budget outcome can indicate a change in government fiscal policy stance.
The fiscal stance	The stance of fiscal policy refers to the overall effect of the budget outcome on economic activity.
Taxes	Direct tax: Personal income tax Capital gain tax Medicare levy Withholding tax Company tax Fringe benefits tax Superannuation fund tax Petroleum resource rent tax Indirect tax: Excise duty Customs duty GST
Microeconomics	Microeconomics involves examining the operation of the smaller units that make up the whole economy. It involves government actions to assist industries or markets to improve their productivity and make them more competitive in order to improve overall outcomes for consumers. Some areas of microeconomics could include: Trade Labour market reforms/ Productivity Education Immigration Environmental Reform
Trade and trade liberalisation	There are 4 types of trade barriers that were traditionally used to protect local industries. The use of trade barriers were considered ‘protectionism’. Tariffs - taxes placed on imports Quotas - limits to the quantity of products imported Subsidies - incentives given to local producers to lower costs of production Embargoes - a trading ban (usually used on certain countries to encourage compliance) While these protections help local industries in the short term, it makes Australian products less competitive globally in the long term. Free Trade Agreements (FTA) with other nations are the main way in which trade barriers are removed. When a FTA is signed, participating countries agree to remove trade barriers to allow for easier flow of trade The removal of barriers is called Trade Liberalisation. Trade liberalisation has encouraged specialisation and competition, this means that countries are able to produce to their comparative advantage.
Productivity & Labour Market Reform	The Labour Market is the market in which wage levels, working conditions and other employment related factors are determined. Since the 1980s, governments have attempted to introduce reforms to deregulate (remove regulations) control over wages in order to lift labour efficiency The theory is – if wages are linked to efficiency, employees are likely to be more productive and employers can be more competitive with their products Wage increases would be sourced from improved profits This can often come at the expense of longer working hours
Education	Education is seen by governments around the world as a long term investment into their economy The theory is that, an educated population is essential to the prosperity and economic growth of a nation as education is the key to entering into many professions in the workforce It is investing in human capital

Performance of the Australian Economy
Assessing the economy	There are 4 main indicators: Standard of Living Economic Growth Income Distribution Environmental Sustainability Gini coefficient
Unemployment	Definition: Unemployed are those who do not have a paid job but who are actively looking for work. Types of unemployment: Cyclical unemployment: when the level of spending in the economy falls leading to reduced production and in turn results in reduced need for labour. Structural unemployment: occurs as a result of changes in the way goods and services are produced, i.e. change in production methods leading to a mismatch of skills. Seasonal unemployment: results from the termination of jobs at the same time each year due to the regular change in seasons. Frictional unemployment: when people are unemployed between finishing one job and starting another.
Government Economic Policy Tools	Macroeconomics is the branch of economics that involves the level of aggregate demand in the whole economy. Aggregate demand is the total demand for goods and services in an economy
Money policy	Th RBA sets cash rate, commercial banks set interest rates Main tool of Monetary Policy: changes in the Cash Rate Bank of the Government and Banks – does not accept money from individuals or businesses Adjusts CASH RATE to influence economic growth: * Increase rate to SLOW down an economy (contract) – encourages individuals and businesses to save their money and not take out loans * Decrease rate to RAISE activity of an economy (expand) – encourages individuals and businesses to spend their money and take out loans
Interest rates	Invest (Save) People with surplus funds usually invest with a financial institution and allow the institution to use the invested money for some return, an interest rate is the percentage that the institution must pay the people for the use of their funds. Borrow People in society who have a need to borrow funds do so from these same financial institutions, for these people interest rates are the rates at which they must pay back money to the institution that lent it to them Fixed: the rate of interest is set for the entire length of the loan. Variable: The interest rate of the loan moves up and down over the course of the loan.

Current issues in the economy

Global growth is forecast to remain well below its historical average over the next two years, as the lagged effects of monetary policy tightening continue to weigh on demand. The central forecast for growth in Australia’s major trading partners has been revised down, partly because China’s post-COVID-19 recovery has been weaker than expected (see Chapter 1: The International Environment).

Inflation in Australia is easing
Economic growth is expected to be weak in the period ahead
Consumption growth is forecast to remain subdued in the near term
The outlook for private investment has softened but remains positive
Public demand is expected to grow
Education and travel will drive growth in exports
The unemployment rate is forecast to increase as economic growth slows

Wages growth is expected to increase further

The outlook for China is uncertain

China's recovery from COVID-19 restrictions has created uncertainty for Australia's exports. Weakness in China's residential property demand may lead to a prolonged downturn in real estate investment and lower steel demand. However, if broad policy measures stimulate the property sector, it could boost commodity prices in anticipation of stronger steel demand.

Consumer confidence in China remains low, and economic uncertainty may lead households to prioritise saving over discretionary spending. If consumption growth stays low, it poses risks to Australia's exports, including education, tourism services, and consumer goods. Additionally, if China's overall growth rate remains below expectations, it could further impact Australia's exports due to its effect on economic growth in Australia's major trading partners in East Asia.

The outlook for household consumption is subject to competing forces

The uncertainty in domestic activity centres on household consumption. An upturn in wealth, driven by factors like housing turnover and improved credit access, could lead to stronger consumption growth than expected. Additionally, pandemic-induced savings could further boost spending, potentially lowering the household savings ratio. A stable job market could also contribute to higher-than-expected incomes and consumption, which would moderate inflationary pressures.

However, if real disposable income growth remains weak, particularly affecting lower-income households with limited savings, household consumption weakness may persist longer than predicted. While many households can handle higher interest rates without major spending changes, those with low savings and high debt may react more strongly. Elevated interest rates might also encourage more saving, affecting consumption patterns.

Inflation could be more persistent than expected

Underlying inflation may take longer than anticipated to return to the target range. Services inflation is expected to stay elevated, possibly remaining higher than forecast due to overseas trends. In a high inflation environment, firms find it easier to raise prices, and people are more sensitive to cost changes. Stable margins outside the mining sector could expand if demand remains strong. There might also be stronger links between wages and prices, especially if minimum and award wages increase significantly.

If productivity growth doesn't improve, it could make nominal wages more inflationary than expected. Current forecasts assume a return to pre-pandemic productivity levels, but actual growth has been stagnant since 2019, albeit disrupted by the pandemic.

Rent inflation might be more persistent and higher than projected due to rapid population growth in an already tight rental market. It will take time for supply to catch up. Higher rents may lead to an increase in people per dwelling, reversing the pandemic-driven trend of seeking more space. Conversely, further reductions in household size could strain the rental market, causing higher prices and lower vacancy rates.

Goods prices could decline significantly

The inflation forecasts assume goods prices remain high rather than declining in the coming years. Supply chain conditions have returned to pre-pandemic levels, leading to a decrease in goods inflation in most advanced economies. If there were significant and widespread declines in goods prices, it could have a more significant moderating effect on inflation than currently anticipated. This might happen if the collective tightening of monetary policy across multiple economies affects demand more than the individual impacts would suggest. As an example, if prices for consumer durables reversed one-third of the increases since the pandemic began, year-end inflation would be approximately ½ percentage point lower than the current forecast. This would place headline inflation around the midpoint of the target range in 2024, rather than above it.