Economics Study Yr 11

Economics Notes 2015
1.1. THE ECONOMIC PROBLEM AND THE ROLE OF CHOICES

the economic problem: trying to satisfy a society of unlimited wants ( of the individual or
community) with the limited resources available. Our wants are limited, resources to
satisfy our needs are scarce, because we cannot satisfy all of our wants we must choose,
choosing our heist presference first and leaving some wants unsatisfied.
UNDERSTANDING
WANTS
Humans are fundamentally greedy, whilst there are goods and services that we need
( means essential for human survival) there are some wants for goods and services that
we want to make our lives easier or for pleasure.
Wants can be the material desires of a community, wants derive utility (satisfaction) from the
consumption of goods. Some wants maybe classified as needs or non essential e.g.
holidays and extra food. Individual wants are the desire of each person. A persons desires
depends on on their ability to gain the good or service ( e.g. the level of their income)
poorer people suffer the most from the economic problem since they can satisfy less
wants. Collective wants are the wants of the community and are based on the preferences
of the community as a whole. They are usually provided by the government. The local
government provides local wants such as parks and libraries. The state provides for the wide
community hospitals and schools. Whilst the state government provides the nations wants
e.g. military.
Due to our unlimited wants we have to choose which ones will be satisfied, the most
pressing wants will be satisfied first e.g food over expensive clothes. Some wants are
recurrent and will occur again and again ( e.g. food) . Whilst some wants are complementary
and will follow after one want is satisfied ( such as getting petrol for your new car) . Our
wants change over time as as we age, change our income, advance technology and
fashion changes. E.g. now we need to have mobile phones .
THE
KEY ECONOMIC ISSUES
All economies must answer there questions
What to produce? due to our unlimited wants it must decide what wants it will
satisfy and what it will leave unsatisfied.
How much to produce? in order to maximize wants and the limited resources an
economy must choose an amount that will not leave wants unsatisfied or waste too
much resource due to over production.
How to produce? - an economy must decide how to allocate its resources and look
for the most efficient method of production that uses the least amount of an
economies resources so that the greatest amount of wants is satisfied.
How to distribute production? - economies must choose whether they want to
distribute the production more inequitable ( uneven) or equitable (even). Those with
higher incomes can afford to by more therefore receive a a higher share of the
production.
OPPORTUNITY
COSTS

In order to satisfy our wants we need to sacrifice an alternative want, the missed
opportunity is known as the opportunity cost. Opportunity costs apply to:
Individuals - an individual may choose a car over a holiday, the opportunity cost is
the holiday.
Business - a business must choose where it will allocate its resources, when it
chooses what to produce the business is given up the opportunity to produce other
goods.
Government - they have to choose which wants of the community it will satisfy for
example the building of a school may sacrifice the want of a new road.
1.2. THE PRODUCTION POSSIBILITY FRONTIER

Production possibility frontier: this is a graphical representation of all the possible
combinations of the production of two goods or services ( or two types of goods or services)
that the economy can produce at any given time.
When we make the PPF we assume that it is ceteris perabis , meaning that technology does
not advance, resources are at a fixed amount and all resources are used to their full
capacity ( e.g. all resources are fully employed) in .
SIMPLE PRODUCTION POSSIBILITY FRONTIER
The amount of production of each of the two products depends on how much of each is
desired. The points on the line shows when the economy is operating at full capacity if the
dot is producing at a point inside the curve it would be producing less than the maximum
out put and resources would not be fully employed. When society wants to produce more of
one product there is usually an opportunity cost involved.
NEW TECHNOLOGY
AND THE FRONTIER
Advancements in technology allows us to develop better methods of production, letting us

produce a higher amount of goods using the same amount of resources. E.g. the maximum
limit of producing foods maybe 200 now it can be 250. This would cause the PPF to move
out wards.
NEW
RESOURCES AND THE
FRONTIER
New resources such as a rise in immigration or the discovery of new resources. This would
allow us to produce more goods and push the PPF outwards.
UNEMPLOYMENT
AND THE FRONTIER
If resources are not fully employed the economy would be producing below or within the PPF
. This indicates an inefficient allocation of resources and not achieving the maximum amount
of of wants with the minimum opportunity costs thus producing an inefficient outcome.
THE
SHAPE OF THE PRODUCTION POSSIBILITY FRONTIER

When a PPF is a straight line we assume that the opportunity costs are constant.
However in most cases this is not true and sometimes when resources are moved there can
be a loss of productive capacity and vice versa. Thus increasing the oppostunity costs of

producing another item when resources are shifted, meaning that the PPF not becomes a
curve.
1.3
2.
THE FUTURE IMPLICATION OF CHOICES

Consumer goos and services: items that satisfy the immiedicate wants and needs of
the community.
Capital goods: items used for the production of other goods, that cannot be consumer
immediately
3.
An economy can choose whether they want to satisfy consumer demand immediately or
( consumer goods) or produce that will increase productive capacity in the future. In the
long run an economy that produces more capital goods wil; increase its productive capacity
and experience a higher level of growth in the future a country that produces at a higher
point on the frontier will satisfy more wants. A country that produces more capital goods
foregos wants of today to satisfy more wants in the future. E.g.
Inidivudal - you may forego the holiday you want in order to pay off the mortgage.
Paying the mortgage will ensure future financial security and give children an asset.
Business there is only a limited amount of land, labour, capital and entreprenuriel
skill there fore business need to schoose one area of business activity over another.
Business want to choose the area of business where they will gain the most success,
which involves predicting what business activity will be successful in the long run.
Whilst operating in area that are already successful maybe too late.
Governements - a government must choose whether or not they will choose to meet
immediate needs ( e.g. welfare and health care) or invest in capital goods ( e.g.
educations, infrastructure and research) . although more money in to consumer
goods means that there will be weaker infrastructure, and lower skill levels.
However satisfying more immediate wants makes them more popular.
1.4 THE
ECONOMIC FACTORS UNDERLYING CHOICES
Individual: factpprs such as their age, income, expectations, future plans and future
circumstance. It also depends on personality, some people are willing to take more risks
whilst other prefer secuirity. Indiciduals also have oto choose whether they will spend oor
save, this will depend on their age and whether they expect thir income to rise or fall. Plans
in education , work, family and retirement also play a role in economic decision making e.g.
the decision to further with further schooling means foregoing income for a few years.
The political also contribute to economic decisions by voting in elections, individuals try to
choose the party with the best policies to ensure a low unemployment, interest and inflation
rates.
Businesses: firms make decisions regarding prices, which depends theyre trying to sell to
a mass or niche market. Businesses also make decisionsconcerning production and
resources, business try to produce products of the highest quality at a minimum price.
Busineses normally op for the cheapest choice but may pay more to ensure reliability.
Business also consider ethical issues such as the environment ( e.g. usin recyclable paper) .
Buseineses need to decide how to manage industrial relations, such as choosing wage
levels, and whether or not they will encourage union representation.

Governement: the government tries to influences the economic decisions of individuals and
businesses. ( e.g. taxes on cigerrettes to discourage smoking) . they also make sure that
individuals and businesses are acting ethically by imposing penalties for those who break
the law and setting laws for businesses e/g/ businesses are nin the same industry are not
allowed to comtogether and set prices. The government also tries to encouragecertain
economic activity. E.g.health insurance, the government imposes a medicare levy surcharge
for higher income earners who dont take out private health insurance and a tax rebate for
middle and lower income earners.
2.1
THE PRODUCTION OF GOODS AND SERVICES
Factors of production: any resources that can be used in the production of goods and
services. The four main types are natural resources ( or land), capital, labout and enterprise.
Goods and services are the out put of the production process. Goods are tangible things
e.g. food and cars. Whilst services a intangible acts that give us benefit e.g.. medical help.
Factor of production = resource. A higher quality and quantity of the factors oof production
will mean a higher standard of living. Due to the linittem number of resources producers
have to desicde how to use each factor, this will depend the stress of environmentlal
damage and the standards of education.
NATURAL
RESOURCES
These are resources provided by nature e..g. cosoi, water or minerals. The reward derived
from the use of natural resources is known as rent.
LABOUR
This is physical and mental human effort. The amount of labour available depends on the
population size ( birth rates, death rates and immigration rates) . the quality and
availability is also influenced by the school leaving age, the retirement age and social
attitudes towards woman. Wages are the reward for labour this includes executive salaries,
commissions and fees for professional.
CAPITAL:
Capital is the produced means for production. This does not include financial assessts such
as money, shares, stocks and bonds. Capital includes, machinery, tools, factories and
computers. This also includes in frastricture like roads and railways.
A higher amount of capital can a higher earning capacity of an economy. Entrepreuneurs
burrow money ( use consumer savings) to pay for capital. So that by saving consumers are
putting money into capital goods. Thus the rewards for capital is interest. Interest is also
paid for burrowing.
ENTERPRISE
Enter prise involves coordinating and organisisn the factors iof production. This involves
making importantant decisions concerning the factors and assuming all risk of each
decision. Profit is the reward, this is the income that is earned on top of all the other
rewards.
Each of the resources used in the factors of production are scarces, this displays the
problem of scarcity.

-
There are limits to the amount that the land can produce of natural resources and
regulation when using the environment.
Limits in labout due to population, labut market and peoples willingness to work
Capital is limited by the sectors and the governments willingness to invest as well as
the amount of saving available for domestic o r overseas investment
Businesses will usually opt for the cheapest resourcces in order to produce the most amount
of goods at the cheapest price and maximise profit. Hence businesses choose
combinations of different reouces e.g. the methofd of production maybe more labout
intensive or more capital intensive
2.2 T HE
DISTRIBUTION AND EXCHANGE OF
GOODS
AND SERVICES.
GDP: The total market value of all final goods and services produced in an economy over a
period
Economies need to decide how they will distribute and exchange goods and services
produced by the economy. This is done by assigning an income to each individual
depending on their level of output. This income can then be used on goods and services.
The owners of the factors of production rewards depend on their income to deterimmine
the level of out put. Howeever the istribution of this income can change depending on
the value and quality of the resource. For example the rent of land in the city and highly
skilled entrepreuneurs involve a larger sum of money.
Unlike the other factprs of production not all individuals receive the same level of wages.
The level of wage is determined by the individuals skills, educational qualifications and
bargaining power. this way it enocourages individuals to work hard and encourage
innovation.
How ever we have an inequitable ( unequal) market, because people who are disabled, old
or sick are unable tosuppky little or no labour. This is where the government tries to help
and tax high income earners and give money to low income earners through social secuirity
payments.
Most of the time indivudals and businesses use money as a medium for exchanging goods
and services, as opposed to bartering ( the non cash exchange of goods) . New digital
alternatives such as bit coin are increasing in popularity.
2.4 AN
OVER VIEW OF THE ECONOMY
THE CIRCULAR FLOW OF INCOME
The five sector flow of income described the operation of an economy and the linages
between the main sectors of the economy.
Individuals - the individual is the owner of productive resources and the consumers of the
economy. They supply labour and enter prise ( inputs) which are used to create goods and
services as a rewar they revcieve, rent, wages, interest or profit. Which is then used on
locally produced goods, savings, tax or imports.

Businesses - this sector is concerned with the product ion of goods and services ( except
financial services) . businesses buy factors of production and use them to produce goods.
Businesses and individuals are interdependent, Businesses depend on indivudlas to
provide them with the resouces for the factors of production whilst indivudla rely on
businesses for goods and services and wages.
Financial instituitions - this sector is concerned with the burrowing and lending of money.
E.g. banks, Building societies, finance companies, credit unions, super annuation fund and
life insurance companies. They allow for investment and saving hence is also called the
capital market. They mobilise savings so that they can be used for investment
Leakages: this is items that are removed from the circular flow of income, thus decreasing
aggregate income and the level of economic activity (STI)
Leakage fall in expenditure of goods and services fall in demand of resources fall
in income for the owners of these resources. IN jections are used to prevent the
economy from collapsing.
Injection: money that in crease aggregate income and level of economic activity . ( GIX)
Leakages can be good as it provides us money for capital goods, thus allow us to
produce moregoods in the future
Investment = expenditure that is used to obtain benefits in the future.
It increases the circular flow of income
Demand for capital goods firms that produce capital goods demand more resources
more indivudals employed more demand for consumer goods and services.
Public sector
Governments: governements try to to satisfy the collective wants of a community. E.g.
roads and railways.
Taxation reduces the consumers money to spend on goods and services

Gov expenditure income for government employees and employees for private
businesses where the gov purchases goods and services or in welfare
International trade and Financial flows: this sector all the transactions the economy has
with the rest of the world which includes exports, imports and international money flows
( financial transactions such a s burrowing , lending and income payments between
Australia and the rest of the world).
Imports: goods and services produced overseas but sold in australia. This is a
leakage is because it is coming out of the Australian economy in to over seas
economies.
Exports: goods and services produced in Australia and sold over seas. This is an
injection because it is international money being in jected in to the Australian
economy.
Injections
The size of the economy decreases

The level of economic activity falls
Leakages
Increases the size of the australina

economy
Falling income
Falling out put
Falling employment opportunities
Increases level of economic activity

Rising income
Rising out put
Rising employment opportunities
Equilibrium
Equilibrium: when the sum of all the leakages is equal to the amount of injections
Disequilibrium is when there is an inequality in the amount of leakages and

injections. Howveer the economy eventually moves towards equilibrium.
o
When leakages are greater than injection: down turn in economic activity
falling incomes and rising unemployment. However with inidividals having
less money , they have less money to save, to pay tax and on on imports.
Thus the leakages and injections eventually become equal
o
When injections are greated tan leakages. Economic activity rises, rising
production and rising employment. This means eventually people will save
more, put more money on taxes and on imports, creating equilibrium again.
Thus, government can manipulate injections and leakages to offset any undesirable
savings and investment. It can stimulat e or dampen the economy.
3 HOW ECONOMIES DIFFER

3.1. THE
MARKET ECONOMY
Market: A network of buyers and sellers, that seek to exchange goods at a certain price.
Product Market: the market for goods and servicesit involves the interaction of demand
for and supply of yythe outputs andproduction.
Factor market: A market for any input into the production process, including natural
resoucees, labour capital and enterprise.
Consumer sovriegnty: Consumers , collectively through demand determine what is
produced and the quantity.
Compeition: The pressure on businesses in a markey economyto lower prices or improve
the quality of out put to increae their sales of goods and services to cusstomers
Market economy: all major economic decisions are made by individuals and private fir,s,
who are both motivated by self interest. Most of the economic resourcfees are owned by
the private sector and inididuals are allowed to seek their own wealth without government
intervention and the distruption of business activity.
Centraly planned economy: this is where the government owns all economiuc resources
and there is little allowance for government intervention in the economy. Individuals own

the factors of production whilst the government allocates resources. E.g. I the past Russia,
Eastern Europe and china
However no fully planned or market economy exists.
Characteristics
The market system
- in a free market economy inidivduals can but from a product market and a factor
market.
The price mechanism determine the price of goods and services.

The price mechanism is the interaction between the forces of supply and sdemand
to determine the price and quantity that they are produced at. Supply being
determined out put decisions.
E.g. its summer and there is llots of sun more people buy sunglasses the price of
sunglasses increases as consumers compete for limited stock businesses
encouragesd to make more supply
Changes in supply and demand in the product market also influences the suppky and
demand in the factor market. E.g. more demand for sunglasses more demand from
businesses for more resources e.g. businesses offer labourers higher wages to work
longer.
Private ownership:
Individuals can own factors fof production and use it to create their own wealth
Inidivudals can also sell or transfer assets under whatever conditions
Consumer sovriegnty:
Consumers decide what goods and services are produced by excising their freddom
to choose what they want to buy, thus businesses cater to the emand of the good/
service.
Freedom of enterprise:
Entrepreuners have the freedom to make their own profits, they can choose what
goods and services to produce and how they will produce .
Workers can choose where they work whether or not they want to/
Competition:
Competition is the force that allows the price mechanism to work effectivelu
It ensures that one seller or buyer influences the market price
In a pure free market economy businesses in the same industry compete against
each other e.g. Samsung and apple
Where there is less competition large businesses can charge higher prices
3.2. AUSTRALIA
A MARKET ECONOMY WITH A ROLE FOR GOVERNMENT
Mixed economy: an economic system where the decisions concerning production and
distribuition are made by a combination of market forces and government decisions.

Merit goods: goods and services that are not provided in suffie cient quantity by the
private secor because individuals do not place suffieicient value in them.
A mixed economy contains elements of both a planned and market economy, where
decisions concerning production and distribuitino are made by a combination of market
forces and government decisions.
Governments intervene because a free market doesnt always provide the most efficient
allocation of resources. There are 3 considerations:
The government provides collective goods and services such as parks, roads or
national defense. They provide which goods that are beneficial to the whole
community , impractical to charge on a daily basis
It is safer for the government to control essential goods and services, e.g. defense.
When markets operate freely they dont always act in favour of the consumer. The
government might provide laws that protects businesses from exploiting individuals
and provide regulations on the distribuitions of demerit goods and ensure safety
standards in a market.
The government will also intervene in the distruittion of output ( income) because in a free
market they will not always provide a fair distribuition. \
Social welfare payments - under the price mechanism, those who do not earn an
income ( e.g. pensioners, the chronically sick or unemployed) would be no income
earned. Thus the government overrides market forces by taxing high income earners
and distribuiting it to those who are earning no income through payments s uch as
age pesons or unemployment benefits,
Progressive income tax - this ensures that there is a more quitable share of out put.
Where who earn more pay a portionaly higher tax than those who earn less.
The government also invertevening throhgh macro economic ( counter cyclical) policies in
order to sooth the effectsof fluctuations in the business cycle. Governements also intervene
durin g major economic or financial problems e.g. the credit card crisis of 2008.
Why governements intervene in the market economy
Resource allocation
Income distribuition
Economiuc stability
Restrict the production of demerit

goods
Provide important things that
wouldnt be allocated
Create a fairer society and look after
people
Smooth out sharp fluctutations in the
economic cycle
Ensure stability in the economy and
the financial system
How the mixed economy aims to solve the economic problem:

In a mixed economy the government will intervene in serveral ways in modifying the
answers to the 4 important questions: what to producte, how much to produce, how to
produce and how will be shared.
What to produce: The goverment can be a producer, supply goods and services such as
schools and roads, e.g. ABC tv. It can also encourage some forms of production through
subsidies and tax incentives or limit or prohibit the production of certain goods and services
How Much to produce?: the government can limit the number of godoa and services
produced, e.g. it may reduce the number of taxi drivers in order to ensure long term
sustainability. The government encourages the production of merit goods e.g. education
subsidies also by granting subsidies and rimport restructions to improve the
competitivesness of Australian businesses.
How to produce? The government influences the cost of the factors of production and the
how the factors are used in the production process. E.g. industrial laws provide a frame
work for minimum wage levels and working conditions. As wellas through laws that place
safety rules, environmentak controls ad prohibitation of child labour so that businesses will
not act unethically in order to maximise profit.
How to distribute? - higher income earners pay more tax and resdistributed through
welfare, or the government may intervene in redistruition through imposing mimmum
wages.
3.3. Comparing economies
We compare the Australia with Asian economies becaue:
Australias trading relations with mainly Asian economies

Australias strong performance in the late 200s where australias fortunes are linked
to asias fortunes.
Rising living standards in asia and shift towards market oreiantated countries
Also aisia has a diverse group of economies ( from big economies such as a china to small
ones such as tonga)
The quality of life is usually measured by the by the HDI
HDI( human development index) : A measure of economic development, devised by the
united nations tthat takes in to account life expectancy at birth, adult literacy, and
educational levels.
Australia uis ranked second in the world not only because of its statistics but also
facourable conditions such as good climate, political freedom, and cultural diversity.
The differentce between economic growth and economic development
The Australian Economy vs The North Korean Economy
Types of Economy
HDI
Population
GDP
Rate of economic growth
Participation rate
Female
Australia
Mixed economy
0.933 (2nd)
23.13 million
$43,000 per capita
2.5%
64.7%
North Korea
Centrally planned ecomnomy
HDI (0.733) 156th
24.9 million
$1800 per capita
1.3%
78.1%
CONSUMERS IN THE MARKET ECONOMY

4.1 C ONSUMER SOVEREIGNTY
Consumer sovereignty is when the consumers determine whatever goods and services are
produced by the business. Which is one of he benefits of a market economy where
production is determined by the peoplees wants.
Consumers also determine how resources are allocated because when a product is
demeanded the most businesses will produce more of that product to increase profit. Thus,
also shift resources in to the forms of production used for that good, thus resource
allocation is determined by the consumer.
Consumer incomes also determine the production and demand for luxury goods, thus in
times where the economy is more prosporous demands for designer clothing in creases,
hence in times of economic downturn production will fall.
Aspects that reduce consumer sovereignty ( aka business sovereignty) :
Marketing - business do research in to the wants, desires, and fears of consumers,

in order to manipulate the behaviours of the consumer. This is done through either
mass marketings ( marketing to a large audience e.g. social media) or direct arketing,
( e.g. advertising in emails)
Misleading or deceptive conduct is when consumers are persuaded into buying a
product they dont really need e.g. weaight loss programs and investement
schemes.
Planned obcolence - this is when a business designs a product to particularly wear
out or become out of fashion by a certain date. E.g. car manufactures changing the
look of new cars so that old cars become undesirable even though they still function
well.
Anti competitive behaviour - this occurs in industries where there are few other
businesses and consumers limited in choice. E.g. a business may only make a
battery that is only c ompatible with their own devices or a low quality assistance
may be given where consumers have not many other competitirs,

4.2 DECISIONS
TO SPEND OR SAVE:
When consumers received an income and paid their tax they need to choose whether
they want to spend or svav, this is expressed in the following equation:
Y=C+S
Where
Y = disposable ( after tax) income
C = consumeption expenditure
S = savings
This means that:
An increasing consumption will reduce savings

An increase in savings will reduce consumption
A change in the leve; of income will change the levels opf consumption and savings
Average propensity to save: The proportion of total income that saved for future
consumption
The average propensity to consume: The proportion of total income that is spent on
consumption.
= APC
= APS
Those in a a higher per capita incomes tend to save more, but the relationship between
and income is weak economically.
Factor that influences whether to save or
spend
Cultural
Personality factors
Confirence and future expectations
Furture spending plans

Tax policies
Explanation
For example people from east Asian
back grouns tend to save more and
this generation tends to spend more
Some people are cautiiours a prefer to
save whilst some people can be easy
going want enjoy immediate benefits
If consumers have are worried about
their economic out look they will
spend less and save more. Whilst those
who expect a rise in income may
increase spending
Those saving up for a car may choose
to save now
Tax policies can make it more
Availability of credit
atrtractive to save e.g. super

annuation. Or spend e.g. medicare
incentives or tax aboloition
Fi people have a higher amount of
credit they are more likely to save less
knowing they have credit to depend on
I NCOME
When incomes rise people will save a larger proportion. ( ie as APS rises, APC falls)
consumers on lower incomes tend to spend a higher prroption of their income e.g. if you
earn $300 as opposed to $3000. . those with higher incomes have more money to pay off
debts and save for retirement. Consumption also slightly rises ,for example. If lower income
levels rely on the use of credit, in the event of an increase in income they can use more of
their income to pay of for their expenses.
The consumption function: a graphical representation of the relationship between
income and consumption for an individual or economy. It is usually up ward sloping with a
gradient less than one, and with a positive y intercept. This graph however is not a true
representation of consumer behaviour, because as an income rises the the marginal
propensity tends to rise and to consumer falls. Thus the function is less steep.
ADD GRAPH
This is in relation to every dollar earned:
The marginal propensity to consume: the proption of each extra dollar

earned that is spend onconsumption ( this is also the slope of the consumption
function)
Marginal propensity to save: the proportion of every extra dollar of earned
income saved.
There fore MPC+MPS = 1
A GE
The average propensity to save and consume changes with age and as incomes fluctuate.
F ro example if someone earns a high income now and expects a low income later their
average propensity to save will increase.
When epoepole are youn they earn low incomes thus, tend to consume most of their income
and even dissave( burrow). At a midldle age people consumer a small proportion of their
income and start saving for retirement. When people reach ritement they earn no income
and rely on savings or pension.
Add life cycle graph

4.3
FACTORS INFLUENCING INDIVIDUAL CONSUMER CHOICE
In expenditure deicisions consumers aim to maximise utility or welling

Utility: the satisfaction or pleasure hat indivudals derive from the consumption of goods
and services.
However consumer are limited in their abilitytoo maximise utilty because of the price of the
good and their level of income.
Indivdual demand: the demand of each consumer for a particular good or service.
Factor effecting consumer expenditure
Level of income
The price of the good or service itself
The price of a substitute and

complement goods
Consumer tastes and preferences
Advertising
Explanation
Those with a higher income have a greater
ability tomaximise utility.
Depending on their level of income
consumers will choose whether or not they
will pay the nominated price for the good or
service. However, with necities if the pruce
increase people will still demad for it. Whilst
an increase of price in luxury items will
reduce demand more significantly
Iif the price of a good rises the demand for
the substitute rises. If the price of a good
lowers then the demand for the complement
increases.
Some goods and services achieve a higher
level of utility than others. If you like cha
time more than smoothies you buy chatime.
Some goods reduce consumer satisfaction
e.g. going to a classical concert when you
hate classical music. And can be changed
with experiementation and learning. They
also change over time and because of
technological progress. Make consumers
demand the latest technology e.g. there are
double the number of internet sub scriber
than there was 5 years ago/
Advertising g can greatly increase the
demand for a product and comes in various
forms such as phone calls, bill boards and
sms. Advertising can lessen the response to
price increases as it builds customer loyalty.
A substitute: A good that a consumer chooses o buy in place of another good, such as
butter and margarine or tea and coffee.
A complement: A good a good that is used in conjunction with another good e,g, petrol for
a car.

4.4 SOURCES
OF CONSUMER INCOME
Consumer income mainly comes from the factors of production or insome cases from the
governemnet in the form of social welfare.
RETURNS
TO FATPRS OF PRODUCTION
Consumer income: the rewards to the owners of the factors of production. Consumers
receueve income from the sales of these factors of production.
Wage: this is the main source of income that comes in the form of wage or salary
payments. It can also include fringe payments, employer contribuitinos oto super
and workers compensation
Rent from land: rent from land that is e.g. a property investement
Interestt from capital: people with greater wealth have an ongoing income from
owning capital. Capital can be indirectly through superannuation and investement
funds or the ownership of shares.
Profit from entrepreneurial skills. If the business you own earns a profit it is
considered return for entrepreunorial skills.
SOCIAL
WELFARE :
Social welfare is also known as transfer payments because it is essentiall income collected
through taxation and then transferred from governements to consumers.. transfer payments
include:
Social welfare payments: payments made to increase the incomes of individuals or

families in need of assistance by the government. .e.g. unemployment benefits, family
allowances.
Assistance to the aged: people 65+ and retired.

Unemployment benefits: people seeking work but unable to find it.
Disability support payment: people who are not able to work because of personal
factors such as physical illness.
Family ppayments: for families with children.( depends on income levels)
Soial welfare allows a minimum safety nets for individuals to purchase basic necesiitties. In
times of economic down turn consumers might increase consumer demand and help
economic growth/.
CHAPTER 5 : BUSINESS IN THE MARKET ECONOMY

5.1 BUSINESS
FIRMS AND INDUSTRIES
Industry: the collection of firms involved in making a similar ramge of items that usually
compete with each other, such as financial service industry or the car industry.
Business firm: an organisation involved in using entrepreneurial skills to combine factors
of production to produce a good or service for sale.

Business firms are the major production units in out economy, thus their sizem behaviour
and performance influence our productive capacity.
5.2
PRODUCTION
DECISIONS
Niche markets: a segment of a mass market for a good or service that can be defined by
the tastes or characteristics or the target customer.
WHAT TO PRODUCE: ( factors that in fluences businesses decisions).
The skills and experiences- businesses are more successful when they have
experience in the industry and know the demands of consumers, nature of
production, how to maintain quality and have personal contacts
Consumer demand - there is a greater changce of experiencing rapic growth in
areas where there is a high consumer demand, e.g. the mining boom in which
investors gained instant fortunes. Or businesses might opt to a poorly run or under
valued sector, in order to consolidate the business and runit more effectively
Business opportunities: an indivudla might find opportunity through a region
demanding a business, family contacts or they may find a niche market.
Capital - access is a constraint and may require them to sacrifice asstes, thus may
choose a business with a lower start upo cost to minimise risk
Capital: the manufactured products used to produce goods and services commonly
described as the prodced means of production
Once the product is decided businesses will ocontinue to produce the product in or der
to expand and get to know the field well so that new opportunities open up.
HOW MUCH TO PRODUCE:
Based on the level of consumer demand businesses will decide what to produce/ Tthey
must make sure that they dont produce too much that that the goods will spoil or too little
that it will harm relationships with potential customers.
The pressure to produce a large quantity is affected by a businesses access to capital and
produce the extra goods efficiently businesses such as cafes are able to respond quicker.
How much to produce is harder to determine when the business is a start up. . They can try
to determine this by looking at past trends, however it is difficult to predict changes in
external conditions
HOW TO PRODUCE:
The production process involves combining resources ( aka inputs) in order to create
goods and services ( aka out puts) . this depends on the relatice effiency of the factors of
production. Whoch change over time and which combinations of factors are the most
efficient.
Natural resources
New resouces can be discovered and new

technology can in crease productivity
Natural resources can be dimished through
exploitation like deforestation
Investement in education can increase work
force productivity
An aging population and declining birth aret
will affect the people available for work
There is an increase in the economys
capital when there is an investment of goods
used in the production process
Capital will wear out over time, this is known
as depreciation
Innovators and risk takes will increase
favourable political and economic conditions
and provide more opportunities to make
profit
Economic down turn and political instability
can reduce the willingness of individual to
innovate and take riskjs
Labour
Capital
Enterprise
5.3 WHAT BUSINESS
CONTRIBUTES TO ECONOMY
The performance of businesses impact the economy, because business that have higher
growth produce more revenue to fun government services. For example the queends land
economy experienced more growth because businesses in the minin and resouces industry
had a greater demand and led to a sharp increase in prices. Thus experienced high
growth than other states.
bGorwing businesses also reduce unemployment. For example in Sydney there is a greater
amount of job gcreation because of the growing technology sector , however in smaller
cities there is higher unemployment
griwing businesses ekead to regionial development by increasing tourism and economic
developeement which can lead to improved roadsm transport, shops and more.
Production capacity - a business can cause an out warrd shift of the production possiblility
frontier and thus improve living standards.
Thus, because businesses great contribuition the government offers assesstance to
businesses through programs such as a information, cash payments, training and guidance
on over seas marketing.
Austrade:
The audtralian trade commission ( austrade) which is the federal govenrements
export and invvestement facilitation agence, provides advice to companies on
starting amd maintiant a strong prescence in over seas markets. One form of
asstance is the EMSG scheme which provide partial payments of businesses
expenses such as over seas representative, marketing visists, free samples, trade
fairs and marketing consutlatnts.
THE
GOALS OF A FIRM :
Profit motive refers to the process by which a business seeks to maximise profit by using
tlowest cost combination of resources and charging the highest possible price.
Also known as the motives of the entrepreuner/ s

Maximising profits
Meeting shareholders expactations
Increasing market share
Maximising growth
Sacrificing behaviour
The biggest motive is gaining the most

profut or the smallest possible loss.
Company directors aim to make decisions
atht best serve the interests of the
shareholders. Certain company directors are
incharge of certain share holders, thus
conflict between actions that maximise
share prices and dividends. Which can
hinder and firms value in the long run.
Share holders are interested in maximising
short term retruns.
Entrepreunorial function is split between
owners ( shareholders) and paid managers.
Shareholders risk their capital thus seek
maximum profit for this risk. Whilst
managers seek to increase sales in order to
increase salariers, power and prestiege.
Thuse entrepreuners must try to find a
compromise.
In the long run maximising growth can lead
to higher profits in the future and can gain
amangerial reqards such as higher salaries
and prestige. However incsome cases lead to
business failure. E.g. starbucks, is a really
successful coffee chain and hoped to bring
this success to Australia. Thus, to take out
proper research and didnt realise the strong
competitive nature of cafs in Australia thus
ended up closing most of its stores
This means that a business tries to achieve
an adequate level of attainment in each
area. E.g. a business will compromise
maximising profit to prevent new
competitors or government regulations.
They may also try to attain a positive social
and evironomental impact e.g. acting green.
CHAPTER 7: SUPPLY
Supply: the quantity of good or service that all firms, in a particular industry are able to
offer for sales at different price levels.
Market supply: the sum of the individual firm supplies, of individual producers at the
vairious price levels
5.5 EFFICIENCY AND PRODUCTION:

Productivity - refers to the quantity of goods and services the economy can produce with
a given amount of inputs such as capital and labour.
PRODUCTIVITY:
Businesses want to minimise costs there fore aim to be as efficient as possible in the
production process. Productivity refers to how much we can produce with a given amount
of resources per unit of time.
Productivity increase =
An increase in production per factor of production ( input) , per unit of time. firm makes
efficient uses of resources with its limited resources firms can now satisfy more wants with
the same level of resourcces
Production - the total amount of goods and services produced production is increased by
increasing the amount of resuorces or working with the same resources for a long period of
time. the concretor can concrete more when he works longer hours and increases
labourers.
Increase in productivity is when there has been an increase in what has been produced per
unit of labour per unit of time. e.g. double the work is done in the same amount of time
when double the labour is put in. Living standards ( our ability to satisfy our wants)
increase when we increase our level of productivity. In the long run, an economy who
improves in productivity is more likely to increase living standards in a country.
Producivitys impact on the standard of living:
Less wastage of scarce resources we can produce more with the given resources
Lower production costs and higher profits for the business firm
A lower inflation rate.: lower production costs means that firms do not need to
increase prices
Higher income:
Improved international competitiveness of our industries: - more productivity in the
Australian economy will lead to Australian goods becoming more competitive on local
and international markets.
SPECIALISATION OF PRODUCTIVITY:
Firms can increase productivity by using a factor of production more intensly.

Type
Division of Labour
( specialisation of labour)
Location of industry ( the

specialisation of natural
resources)
Large scale production
Definition
Breaking down labour in to
sub processes so that no
time is loss moving from one
process to another.
When a large number of
businesses congregate in the
same area to share
infrastructure and redusce
production costs
When business grow so
large they use highly
specialised capital
Example
A car assembly line
The Macquarie park

industrial area has a high
concentration of advanced
technology industries
V a large win produces uses
specialised label maker
7.1
FACTORS AFFECTING MARKET SUPPLY

Satisficing behaviour: the idea that firms will attempt to pursue a satisfactory leve; in all
goals ( profit maximisation, sales maximisation etc.) rather than maximising any single
goal
Factor
The price of the Goods itself
The price of other Goods and services
The state of technology
Changes in the cost of factors of production
The quan tity of goods and servoces

available
Explanation
If the price is too ow on a good then the
producer would not be able to produce . it is
also influenced by the expectations for the
fute price of the good/ service. If the
producer believes there will be a rise in
supply then, the supply will increase.
If a substitute good increased its prices and
decided to supply more goods, then it will
make more profut. Therefore firms, will be
more willing to supply the substitute good/
Advancements in technology have allowed
businesses to produce more with the lower
production costs, thus have allowed
businesses to supply more goods at a given
price. It also allows the firm to be more
flewible to demand.
A fa;l in the price of a fact or production
would result in a grater supply of a
particular good whilst a rise in a factpr will
make it more difficult for firms to supply that
good. Thus, goods and services that rely
heavily on a factor of production will change
with changes in the cost of production. E.g.
if the price of movies went up then sinemas
who buy the movies maybe forced to buy
less movies.
Goods that are scarce ( e/.g. a painting)
would be harder to supply than a good that

is high in abundance. E.g. the amount of
oilin an oil researve determines the amount
of oil that can be sold. Similar industries with
limited suppliers determines the quantity of
goods and services.
Internal economies of scale: The cost saving advantages that result from a firm
expanding its scale of operations> they occur when a firms level of out put is below the
technical optimum.
Average cost: the per unit cost of production, obtained by dividing the total cost pof
producing a certain level of output by the quantity produced.
INTERNLISED ECONOMIES OF SCALE
Total costs can be reduced when outpur increases, this is often the case for large firms
that require large out put. When businesses in crease their production to eeduce costs
this is known as totlal economies of scale. Thus whilst there is demand businesses will
continue to increase out put.
Internal economies of Scale
The cost saving advantages from expanding the scale of operation
The firm can break up the process and receive benefits of specialisation
Can invest in more capital

Can buy in buld, which reduces the per unit costs
Large companies find it easier to find a market for its by producte because it
produces more waste
A large firm in creases research and development to deveolope new production

texhnique and improve the skills of its employees.
Easier to expand.
However, there reaches a point where the costs of in creasing out put will cause the cost of
production to rise. Thus causing internal diseconomies of scale.
Internal diseconomies of scale
The causes of a diseconomies
Losing tousch with the day to day running of the business
May lead to a duplication and paper work

Management no longer know staff personally thus increase tensions between
employer and employee relationships, as the employee is unaware of the employees
issues and lead to mis understandings and disputes.
Internal diseconomies of scale: the cost saving disadvantages ( specifically, the

increase in marginal costs per a unit) faced by a firm expanding its scale of operations
beyond a certain point. The firms output level is above the technical optimum.
Technical optimum: The most efficient level of production for a firm/ At this point,
average costs of production are at their lowest possible levels.
Shows:
Increasing the level of output before nthe technical optimum will cause a fall in
the long term average costs
A firm increasing their output beyond the technical optimum will cause the cost of
production to rise
The technical optimum means that the average costs of production is at its lowest
possible level
LEARNING BY DOING:
By repreating the same process multiple times businesses can increase the level of perunit
production costs at each level of output. Thus causing a downward shift in the Long run
average costs.
EXTERNAL ECONOMIES AND DISECONOMIES:
External diseconomies of scale: are the advantages that accure to a firm because of
the growth pf the industry in which the firm is operating, and are not the result firm
changing its own scale of operations.
External economies of scale - the cost
saving that occurs because of outside
influences
The localisations of industries

businesses enjoying the cost
saving advantages of
operating in an area of high ly
skilled labour, plentiful supply
and a major consumer market
When an industry growts the
government might provide
extra help such as research
and development. E.g. t CSIRO
created a new disease
resistant wheat that helped
wheat farmers
External diseconomies - growth in the

industry or economy infwhich the firm is
operating - not the result of changing its
own level of operations
Factories and restrictions put in
place to decrease pollution as it
contributing to increased illness and
death. E.g. in china, radpid
industrialisation has lead to huge air
pollution problems andresulted in
closure and restrictions on factories
The growth of an industry in one

central area leads to eventual
transport bottle necks e.g. in Tokyo
because of rigin house prices in the
A growing, competitive and

more sophisticated capital
market will provide cheaper
investement funds.
city, people now live in out religion

and have to travel serveral hours to
work. ( labour feel more tired and
produce less)
The cost of raw material increases,

as the demand for it increases.
( especially when there is a limited
supply of that resource.
5.6
INVESTMENT , TECHNOLOGICAL CHANGE AND ETHICAL DECISIONS MAKING
Ethical decisions making: when business decisions about production methods,

employment and other matters are made taking into consideration the impacts on broader
society and the environement, and not simply to maximise profits for the firm.
PRODUCTION METHODS:
Technological changed production methods leading to lowers costs and increased

efficiency. However also a reduction of the work force and larger p[roduction runs
PRICES:
Search enines allow consumers to access world wide businesses, compare prices
As a result squeezed profit margins and forced firms to reduce costs to compete
with over seas firms
EMPLOYMENT:
Made previous jobs redundant

Competitive from over seas companies has lead to businesses to move over seas.
New job opportunities e.g. higher demand for employees who can computer program
Hiring women and epoepl from groups that have traditionally suffered
disadvanateg
OUT PUT AND PROFITS
Respond faster to market demand

Able to offer better quality products at lower prices
However businesses must be properaed to invest more in technology
Not all technology guaranteed to give benefits e.g. a business may invest in an new
technology and then find that a few years later it is out of date

TYPES OF PRODUCTS
New technologies can expand the range of goods thus businesses must
constantlyupdate their product and giving them a greater ability to customize
products to consumers wants
Ethical issues arise about the production of gooods that are made for profits such as
organic food that is only bought for health and taste benefits
GLOBALISATION
Made it possible for businesses to attract investment funds from all over the world
Access to more information that allows businesses to make more informaed
decisions
Businesses have more access to foreign markets therefore, thus allows
bsuesinesses to produce them in an economy with fewer regulations
This overseas labour normally involves low wages and dangersou work
environmemts
ENVIRONEMENTAL SUSTAINABILITY
A concept that involves minimising pollution and waste, preserving the natural
environment, and increasing the use of renewable energy
Influenced by consumer demand and regulations
Most companies are not adopting environementally friendly policies e.g. quantas
now provides passangers the option to fly carbon neutral
6 DEMAND
Demand: The quantity of a particular good or service that consumers are willing and able to
purchase at various price levels at a given point in time.
FACTORS THAT EFFECT MARKET DEMAND:
Consumers are more willing to buy goods at any price if iut is a necessity
The demand is likely to reuce if there is anincrease in the price of luxurygoods
THE PRICE OF OTHER GOODS AND SERVICES
Demand is effected wif there is an increase or decrease in a substitute

If the priuce of a completment rises then the demand for that good is likely to
decrease
EXPECTED FUTURE PRICES:
If the consumer expecta the price to rise in the future they will buy more now, thus
bring forward their demand
E.g. before the implementation of the goods and services tax ther e was a larger
demand in the homebuilding products\
CHANGES IN CONSUMER TASTES AND PREFERENCES
Changes in trends
Technological innovation and progress lead to consumers to damand new and
updated products
THE LEVEL OF INCOME:
Higher income means a greater ability to buy more products

Rising income increases the demand for luxury goods
Demand can be impacted by a change in income distribuition e.g. if higher
incomes were charged a lower proportion of tax then they would find an increase in
the demand of luxury goods
Consumer expectatsions about income
THE SIZE PF THE PPOPULATION AND ITS AGE DISTRUITION:
age distruition e.g. australia has an aging population thus there is a higher demand
for retirement
CETRIS PARIBUS ASSUMPTION

Ceteris paribus : an assumption used to in economics to isolate the relationship between
two economic variables. It is a latin phrase that means other thigs equal; or assuming that
nothing that nothing else changes.
Ceteris parabis allows us to isolate the relationship between particular variables. In

order to make the analysis simpler/
6.2 Movements along the demand curve

The demand schedule
Demand scheduale : a table showing the quantity of a good that will be demanded across
a range of prices
The table shows the relationship between the price and quantity demanded
The law of demanded: the quantity demaded by consumers falls as
\ when the price of the good falls, consumers would be more inclined to
priooduct andtehe product would be cheaper compared to other goods
services. Exceptions are luxury goods.
The demand curve
The demand curve slopes downward left to right. as the price increases
the demand decreases.
price rises
buy the
and

Movements along the demand curve
A change in the price of a good will lead to a change in the
quantity demanded thus, price changes cause
movements along the demand curve which are known as
expansion and contractions in demand.
Contraction of demanded: when an increase in the price of
good or service causes a decrease in quantity demanded. It
is shown by an upward movement along the demand
curve.
Expansion of demand : when a decrease in the price of the good or service causes an
increase in the quantity demanded. It is shown by a downward movement along the
demand curve.
Only a change in price causes expansion and contractions

6.3 Shifts of the demand curve
When we look at the movements in price, we assume it to be ceteris
parabis, however a change in one of the influencing factors will cause
a shift in the demand curve. Which is known as an increase or
decrease in demand.
Increase in demand: when the demand curve moves to the right . it means
that :
Consumers are willing and able to buy more of a product at

the same price.
Consumers are willing to buy a given quantity at a higher
price than befoire.
Decrease in demand a movement to the right . It means that:
consumers are willing and able to buy less of a of the

proiduct at each possible price.
Consumers are willing and able to buy a given quantity at a
lower price.
Factors that cause an icrease in demand
Prices of other goods and services:

rise in the price of substitute goods
consumers demand more goods,
fallin the price of complementary
goods
Factors that may cause an decrease in

demand
Basically the opposite
Prices of goods and services : the

fallin the price of a substitute goods,
rise in the price of complementary
goods.
Expected future prices : if consumers

expect the price to increase ( e.g. a
new tax)
Consumers tasts and preferences: a
particular good becomes more
fashionable more people want to
buy at the same price, New
technology
Consumer incomes: rise in the level
of income consumers can buy more
at the same price
A change in income distribuition :
Income increase for high income
earners may cause an increase in
luxury goods, improved customer
expectation would increase demand
The size and age og the population:
Expected future prices: Expected

decline in the price of a product
Consumer tastes and preferences _
products becoming less fashionable,
technological process causes a good
to superseded
Consumer incomes: a fall in the
general level of income, a change in
the income distribuition, ( crash in
share pricess = less money for
luxury goods) or deteriorating
consumer epectations about
economic prospects
The size and age distribuition of the
population : a decrease in the
population
6.3 Price elasticity od demand:

The price elasticity of demand : measure of the responsiveness or sensitivity of the quantity
demanded of a particular product to changes in it price.
As a figure the price elasticity of demand sows the percentage change in the quantity of a
good demanded resulting from a 1 percent increase in its price
Relatively elastic
Is the increase in the quantity demanded is

proportionately greater than the fall in price.
Then demand is very responsive to change
A less proportionate change in quantity
demanded
The proportionate change in quantity
demanded is the same as the proportionate
change in price
A strong response to change
A propotional response to a price chande
( total amount spent by consumers remains
unchanged)
Relatively inelastic
Unit elastic
Elastic demand
Unit elastic demand
Inelastic demand
A weak response to a price change
The importance of price elasticity

Businesses
To decide optimal price strategy

If it was relatively elastic they would know that lowering the price
would expand the volume of sales increase total revenue
If demand was relatively inelastic --. Increase reveue because the
reduction in slaes would be less than a price increase.

The
government
Determing the price of goods and services that it provides for the
community e.g public transport fares
To predict the effects of changes in the level of indirect taxesm
e.g. sales tax , excise duty on demerit goods.
Understating price elasticity can help determine the amount of
revenue theyll receive
E.g. charging taxes on tobacco, alcohol etc because they have a
relatively inelastic demand
Measuring price elasticity

Total outlay method : a way to calculate the
price elasticity of edemand by looking at the
effect of changes in price on the revenue
earned by the produced, If price and revenue
move in the same direction demand is inelastic;
if price and revenue move in the opposite
direction demand is elastic; and if revenue
remains unchanged in reponse to price change,
demand is unit elastic.
Total outlay is found by multiplying the price by
the quantity that would be demanded at that
pruce. The total outlay = thettotal revenue
sellers of the product would receive at that price.
If the out lay moves in the same direction it would be relatively inelastic.
Price elasticity and the slope of a demand curve

In the upper part of the demand curve ( where prices are high) demand will be relatively
elastic, whilst at low prices, demand will be relatively inelastic e.g. a decrease in price can
take the qyuantity from 10 tto20 , causing the total outlayto increase from 40 to 60. Whilst
if is was a change from $4 to $3 for a bigger quantity and demand rises from 70 to 80, the
total outlay will fall from $280 to $240 then it will be relatively inelastic.
Perfectky elastic demand

Perfectly elastic demand: When demand is perfectly elastic
demand an infinite ( unlimited) quantity at a certain price but
below.
This may occur in a perfectly competive market where there are
many buyers and sellers , all selling the same product. No seller
raise prices because then they would risk losing customers.
consumers will
nothing above or
would be able to
Perfectly inelastic demand:

Perfectly inelastic demand: where consuemrs are willing
to pay any price for a good to obtain a given quantity of a good
or service. It is shown by a vertical demand curve.
It can apply to some circumstances such as a person with a life
threatening disease who can only be treated using a particular
drug would be willing to pay any price.
6.5 Factors affecting elasticity of demand

Factor
Whether the good is a luxury
good or a necessity
Whether the good has any

close substitutes
The expenditure on the
product as a proportion of
income
The length of time

subsequent to a price change
Whether the good is habitforming (addictive) or not
7 SUPPLY
Explanation
Goods that are a nececisity and for daily life will
rexperience relatively inticity because even if there is a
change in price peple are still going to buy it. However if
the good is a luxury, if there is a change in price people are
not obliged to buy so they will experience relative
elasticity.
If the good has a close substitute, then there will it will
have high elasticity demand. Since there are so many close
close substitutes, people will opts for a different brand.
It also depends on how much the item costs. If a an
expensive luxury good increases by 10%, then it will
experience more elacitiy then a goods and services that
only take up a small percentage of someones income such
as a pen that increase by 10 %.
It takes time for people to adjust to a price change. For
example if the price increased, then it takes for time to
seek out alternatives or realise that the price has gone
down. Also it depeneds on the durability of the product, for
example if there is a price in creasein new cars, people may
not buy now but after a while people will buy the product
because they need a new car.
Goods and service such as ciggerettes and alcoholic
breverages , tend to have a relatively inelastic demand.
People just continue with the same habits.

7.1 factors effects market supply
The price of the good itself: the producers willing ness and ability to provide
the good influences the supply, e.g. if the supply was too low the producers
wouldnt be able to cover the costs of supply and not supply them . This is also
infleuenced by the suppliers expectations about the fyuyture price of a good or
service. E.g. if theyr believe there will be a rise in demand then they will supply
more. Vise versa.
The price of other goods and services: if the price of good X increased whilst
the price of good Y increased it would be more profitable to product good Y. the
production of good X would decrease
The state of technology: technology allows firms to produce more goods at a
given price. It also allows the firm to easily adjust supply to coincide with demand.
E.g. the motor vehicle industry.
Changes in the factors of production: a fall in the cost of the factors of
production would allow firms to produce more of a good. However if it rises it
becomes difficult form firms to maintain supply. Especially for those heavily relient
on the factor input. E.g. if Hollywood decided to increase the price of their movies,
small businesses might not be able to keep up and go out of business. Causing a
decrease in the market supply of movies.
The quantity of the good available : it limits supply. E.g. a rare painting or the
quantity of oil from oil researves. It is also effected by the number of suppliers. As
more suppliers enter , supply increases and vise versa. E.g. the supply of energy
drinks has increased with more suppliers
Climatic and seasonal influences: e.g. drought would cause agricultural
supplies to decrease.
7.2 Movements along the supply curve

Changes in price: movements along the supply curve
Assuming that all factors remain the same a supply schedule can be
created to show the relationship between the quantity supplied and the
price of the good / service.
The law of supply: as the price of a certain good rises , the quantity
supplied by producers will rise. Because
Firms can be more profitable

High prices for the good make it more profitable and attract more supplier which
will increase the quantity supplied.
The supply curve:

The typical supply curve slopes upwards from left to right. Assuming that all factors
remain the same any change in the price of a good will lead to a change in the quantity
supplied in the same direction.

Contraction of supply: when a decrease in the price of a good
or service causes a decrease in the quantity supplied and is
shown by a downward movement along the supply curve.
Expansion of supply: When an increase in the price of a good or
service cause an increase in the quantity supplied. It is shown
by an upward movement along the supply curve.
7.3 Shifts of the supply curve
Shifts are known as increase and decrease and brought on by external conditions on the
business firm, not price changes.
Increase in supply:
Increase in supply: a movement in the supply curve to the right.
An increase in supply means that firms are willing and able to

supply more of product at a given price level than before.
An increase in supply means that firms are willing to supply a
given quantity at a lower price than before. Originally they were
supplying 1Q at 1P , now they can cupply 1Q at a lower price.
Decreases in supply:
Decrease in supply: movement in the supply curve to the left.
Firms are willing and able to supply less of a good at each price level
Firms are only willing and able to supply a given quantity at a higher
price than before.
Factors that cause a shift in the supply curve

Increase
A falling the price of other goods->
production of another good becomes less
profitable
An improvement in technology
A fall in the cost of factors of production e.g.
labour and capital
Climatic conditions or seasonal changes
some climates moreuseful than others
Decrease
Rise in the price of a certain other goods
suppliers want to produce other goods and
services because it is more profitable
A certain technology no longer being
available
Rise in the cost of the factors of production
Decrease in available resources
Regulations restricting the sale of a good

because of health and safety risks e.g.
fireworks
Climatic conditions or seasonal change.
7.4 Price elasticity of supply
Price elasticity of supply: a measure of the responsicemness of a quantity supplied to a
change in price. It is calculated as a percentage of a change. It is calculated as a
perecentage change in the quantit supplied divided by the percentage change in price.
Relatively elastic: a rise in the quantity supplied is proportionately greater than the
increase in price.
Relatively inelastic: less than proportionate change in quantity supplied . e.g perishable
goods where only a certain amount is made , so a price in crease wouldnt make that much
of a change to supply
Unit elastic: the quantity supplied rises in the same proportion as a price in crease.
Price elasticity and the slope of the supply curve:
Perfectly elastic supply: where producers are willing
to supply an infinite quantity of a good or service at
a particular price but nothing at all at a price
below this. This is represented by a horizontal
supply curve. highly unlikely
Pperfectly inelastic supply: where producers are
willing to supply a given quantity of a good or service
regardless of price. This situation can be represented
by a verticak supply curve e.g. a house auction
7.5 factors effecting elasticity of supply
Factor
Time lag after
price change
The ability to
hold stock
Excess
capacity
explanation
In the time immediately after the supply would be perfectly inelastic.,
because producers have not yet increased their inputs as the producer
has to increase production with existing workers ad equiptment. .
Therefore the in the Short run whilst the elasticity of supply is meant
to increase in reality it is relatively inelastic. In the long run, the
producer would be able to increase input and facilitate greater
production for the price change.
Inventory: the total stock of goods and services held by a firm at a
particular point in time., which is inteneded for sales to consumers.
In times of down turn and when the price falls some goods maybe held
in inventory, the ability of the producer to hold stock, the more elastic the
supply ( they can supply faster ) . it also depends on the nature of the
product e.g. fresh fruit is hard to hold
Excess capacity exists when a firm is not using its existing resources to
their full capcity supply will be elastic when there is an excess capcity,

because they can quickly respond to a price increase
8. MARKET EQUILIBRIUM
8.1 the concept of the price mechanism
The concept o fthe market equilibrium focuses on how the price mechanism
determines the price equilibrium.
Price mechanism : the process by which the forces of supply and demand interact
to determine the market price at which goods and services are sold and quantity
produced.
Market Equilibrium: the situation where at a certain price level, the quantity
supplied and quantity demanded of a particular commodity are equal. There is no
excess supply or demand ( the market clears) and there is no tendency towards
change. It has the following factors:
Quantity demanded = quantity supplied

The Market clears
There is no tendancy to change
8.2 Establishing the market equilibrium

Excess demand: this is when the quantity demanded
exceeds the quantity supplied. Competition among
consumers for the low quantity means that
consumers will start bidding up the price. The rise in
will cause an expansion in supply and a contraction of
demand which will continue as long as there is
demand.
Excess supply: also known as a glut in the market is
when the quantity supplied exceeds the quantity
demanded. In order to remove excess supply sellers
will offer to sell at a lower price. The fall I price will lead
to an expansion of demand an contraction of supply
8.3 changes in the equilibrium
price
excess

The equilibrium can be changed by shifts in the demand or supply curves ( or
both) .
Equilbrium: this is achieved in an individual market when any customer who is
willing to pay the market price for a good or service is satisfied, and any producer
that offers their good s or services at market price is able to sell their produce. It
occurs when the quantity demanded is equal to the quantity supplied.
How an increase in demand can change the equilibrium
An increase in demand means that more of a good will be demanded at any

given price causing the demand curve to shift to the right
If price remained the same despite this shift the quantity demanded would
be more than the quantity supplied, causeing an expansion of supply and te
price equilibrium to increase
Increase in demand = increase in equilibrium quantity
A summary of other conditions that can change equilibrium
Decrease in demand will lower the equibrium price and quantity

An increase in supply lowers equilibrium price and raises equilibrium
quantity
A decrease in supply raises equilibrium price, and lowers equilibrium
quantity
8.4 The role of

market
the
The price mechanism is important in determining the answer to questions about

production, distribuition and exchange of goods and services in the economy.
The product market: the interaction of demand and supply of the outputs of
production i.e. goods and services.
The interaction of the supply the price and quantity that best satisifies the priuc
aand quantity wants with limited resources. The taste and predferences of
consumers is conveyed between consumers and producers in the economy
through relative price changes and without any central coordination or need to
obtain information from consumers. The price mechanism also determines the
price paid for the factors of production and the total amount of output that is
received by consuemrs.
Factor Market: A market for any input into the production process, including land,
labour, capital and enterprise.
The price mechanism is also said to ensure allocative efficiency.Which means
thatproduction continues to increase until the point where the value to consumers
of the last good produced is equal to the cost to producers.
Allocative efficiency: this refers to the economys ability to allocate resources to
satisify consumer wants
The rpcie mechanism is effective because :
Any consumer willing to pay the market price foor a good or service will be
satisfied
Any producer offering goods or services at the market price will be able to
sell al they produce
8.5 Governement intervention in the market place

When left to operate on its own the market can
produce undesirable goods and services e.g.
the market price or the equilibrium quantity
that results from the free interplay of goods
and services, may be too high or too low and
some goods and services may not be produces.
This is known as market failure as the price
mechanism fails to take into account the social
costs and benefits.
Market Failure: occurs when the price
mechanism may take in to account the private
benefits and costs of production to consumers
and producers , but, it fails to represent the indirect costs such as damage to the
environment.
The figure on the left shows societys supply curve ( the one that considers all
costs of production) which lies above the supply curve. The social cost equibrium
is above the private cost indicating that the price mechanism undervalues the
natural natural environment.
Price intervention
Sometimes the government may feel that the market
determines price is either too high or too low thus will
implement :
Price ceilings: a maximum price that can be charged for a
particular commodity( indicated below the equibrium) . IN
order to distribute money from sellers to buyers. E.g. bus fares
or recessionary cards.
Price floors: the minimum price that can be charged for a particular commodity.
( indicates above the price equilibrium) . in order to distribute money from buyers
to sellers. ( e.g. wages, the factors of productions that the
government wants businesses to invest more in )
If Price equilibrium is too high = price ceiling = eexcess
demand
Price equilibrium is too low = price floor = excess supply
However these methods are not as effective as they create
a disequilibrium.
Quantity intervention

The quantity of some goods services provided may be too high or too low,
because there is no consideration of the social costs and benefits ( externalities)
in the price mechanism. E.g. production may be too high producing a high
amount of pollution ( negative externalties) so the government will restrict
production through implementing taxes, laws e.g. pollution emission permits etc.
Similarly, the consumer may undervalue the social benefits ( positive
externalities) that come with some goods and services. E.g. museums, galleries,
transport. Thus, the government will encrouage consumers through subsidies.
Merit good: Goods that are not produced in sufficient quantity by the private sector
because private individuals do not place sufficient value on those goods i.e. they
involve positive externalities that are not fully enjoyed by the consumer. E.g.
education or health care.
Internalising the externality: making businesses pay for the social costs and beneits
of production e,g imposing taxes.
Public good: the goods that private firms are unwilling to supply as they are not
able to restrict usage and benefits to those willing to pay. Because of this,
governements should provide these goods.
Problem
Market price is too high
Government
action
Price Ceiling
Market price is too low

Market quantity is too high
( negative externality)
Price floor
Taxes
Market quantity is too low

( positive externality)
Market does not provide
goods or services
Subsidies
Governement
provides good or
service
Outcome
Reduces price quantity
shortage
Increases price quantity excess
Increases equilibrium
pricereduces equilibrium
quantity
Reduces equilibrium price,
increase equilibrium quantity
Governement must collect
taxation revenue to finance its
supply of a good.
8.6 Competition and market power

Purse/ perfect competition: when there is a large number of firms who have the
ability to pprices without losing their customers to competitors. No firm has market
power.

In most industries firms enjoy some degree of market power which results in a
higher equilibrium price ( an lower equilibrium quantity). The degree of market
competition is determined by the market structure.
Four main market structures
Pure competition
Monopolistic
competition
Ogliopoly
Monopoly
Theoretical model of perfect competition

Many small firms in the industry
A small number of large firms dominate the industry
Only one producer in the industry
Pure competition:
Firms operating under pure competition have the following market conditions:
Small buyers cannot effect market price ( e.g. arranging bulk buying
discounts)
Buyers and sellers know that the same product and prices are being
offered/ sold throughout the market
Buyers do not incur costs from moving to one supplier to another
There are no barriers for firms existing or entering the market
Sellers can sell as much of their product as they like
Firms are the price takers and must accept he market price as if they try to sell
above that price buyers can get the product else where cheaper. Firms would not
sell below market price because it would not be maximising profit. E.g. advertising
would be a waste of money
Monopoly
Almost the opposite of pure competition and shown through these conditions:
One firm selling the product and no market competition

There is no close substitutes
There are significant barriers to entry which prevents potential customers
from entering the market
The monopolist is the price setter as they do not have to worry about winning
customers from competitors. E.g. water supply
If the market was to be produced by a monopolist then the market competition
would increase and prices are likely to fall and out put increase. ( as the monopolist
woud restrict supply to maximise profit)
Monopolistic competition

Monpoistic competition: a form of imperfect compeitions characterised by the
following conditions:
A large number of relatively small firms

Firms engage in product differentiation
Price differentiation gives firms some degree of price setting power
Barriers for new frims e.g. brand loyalty
Product differentiation: when firms try to make their good or service look different
from competitors( such as through packaging or product image) to increase brand
loyalty and give the firm some degree of price setting power.
However, product differentiating does not give the firm the same price setting
power as monopolist. Thus, advertising plays an important role in luring
customers and maintaining existing ones. E.g. restruants and hair dressers.
Ogliopoly
Ogliopoly is a common market structure and a type of imperfect competition
characterised by the following:
There are only a few number of huge firms that share the market
Sell similar but differentiated products
Barriers that prevent entrybecause of the small number of firms
The few firms in the industry must carefully watch compeitiors especially in
regards to prices and out put polices. E.g. price cutting wars which can
dramatically reduce profits
Wool worths and coles

Qantas and virgin blue
The 4 big banks

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Economics Notes 2015

1.1. THE ECONOMIC PROBLEM AND THE ROLE OF CHOICES

KEY ECONOMIC ISSUES

All economies must answer there questions

Economics Notes 2015

1.2. THE PRODUCTION POSSIBILITY FRONTIER

SIMPLE PRODUCTION POSSIBILITY FRONTIER

AND THE FRONTIER

Advancements in technology allows us to develop better methods of production, letting us

RESOURCES AND THE

AND THE FRONTIER

SHAPE OF THE PRODUCTION POSSIBILITY FRONTIER

Economics Notes 2015

THE FUTURE IMPLICATION OF CHOICES

ECONOMIC FACTORS UNDERLYING CHOICES

Economics Notes 2015

THE PRODUCTION OF GOODS AND SERVICES

Economics Notes 2015

DISTRIBUTION AND EXCHANGE OF

OVER VIEW OF THE ECONOMY

THE CIRCULAR FLOW OF INCOME

Economics Notes 2015

Taxation reduces the consumers money to spend on goods and services

The size of the economy decreases

Increases the size of the australina

Economics Notes 2015

Increases level of economic activity

Disequilibrium is when there is an inequality in the amount of leakages and

3 HOW ECONOMIES DIFFER

Economics Notes 2015

The price mechanism determine the price of goods and services.

A MARKET ECONOMY WITH A ROLE FOR GOVERNMENT

Economics Notes 2015

Restrict the production of demerit

How the mixed economy aims to solve the economic problem:

Economics Notes 2015

Australias trading relations with mainly Asian economies

The differentce between economic growth and economic development

Economics Notes 2015

The Australian Economy vs The North Korean Economy

CONSUMERS IN THE MARKET ECONOMY

Marketing - business do research in to the wants, desires, and fears of consumers,

Economics Notes 2015

This means that:

An increasing consumption will reduce savings

Confirence and future expectations

Furture spending plans

Economics Notes 2015

atrtractive to save e.g. super

The marginal propensity to consume: the proption of each extra dollar

There fore MPC+MPS = 1

Economics Notes 2015

FACTORS INFLUENCING INDIVIDUAL CONSUMER CHOICE

In expenditure deicisions consumers aim to maximise utility or welling

The price of a substitute and

Consumer tastes and preferences

Economics Notes 2015