Economics 3/4 Revision

What are the major MICROECONOMIC demand side factors?
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Terms in this set (27)
What are the major MICROECONOMIC demand side factors?
-disposable incomes
-consumer confidence
-price of substitutes
-price of complements
-interest rates (discretionary income impacts)
-preferences / tastes
What are the major MICROECONOMIC supply side factors?
-climatic conditions
-costs of production
-technology
-productivity (changes to labour costs)
-changes to government laws (eg. indirect taxes, subsidies)
-changes in price of substitutes
Name the factors impacting the elasticity of supply.
1. The Durability of goods
2. LEVELS OF SPARE CAPACITY
3. The time period
Name the factors impacting the elasticity of demand.
1. The degree of NECESSITY
2. The availability of SUBSTITUTES
3. The time period
4. Proportion of Income
What are the 4 aims of Aggregate Supply Policies?
1. Avoid stagflation
2. Promote international competitiveness
3. Recover from supply side shocks
4. Expand our productive capacity
What are the 2021 current statistics relating to the macroeconomic goals and productivity? Are we achieving our goals? Are we likely to experience pressures?
SSEG (June): 9.6% annual growth rate as of June 2021 (sustainable growth; we are returning to production levels pre-COVID), quarterly growth rates for the past 4 quarters have been positive

Price Stability (September): 3.0% CPI headline inflation, 2.1% underlying inflation for June 2021 (therefore, the spike in general prices is largely as a result of one-off factors (petrol, housing prices), not likely to place pressure on ongoing inflationary pressures)
-We are not achieving out goal since we're not achieving 2-3% ON AVERAGE

Full Employment (August): 4.6% unemployment rate July 2021, but the size of the labour force shrank too and underemployment rates rose to 8.3%. Therefore, the unemployment rate fell because more individuals have given up on looking for work, less participation is negative for our goal. More spare capacity
-Although job advertisements had also risen since 2020

Productivity (output per unit of input): has fallen by -0.7% over the year to June; reasons include lack of technology and infrastructure spending + COVID crisis and lockdowns disrupt the production processes
What are the 3 main reasons for Australia's Current Account Surpluses?
1. Higher commodity prices (iron ore, coal) which increases Balance of Merchandise Trade

2. Less import spending due to border closures, less debits in the BOMT and Net Services accounts

3. Lower interest rates on Australia's foreign debt, meaning lower deficits in the Net Incomes account.
Define efficiency
Efficiency is achieved when the economy uses its scarce resources as productively as they can, as well as producing goods that satisfy the needs and wants of society (think allocative efficiency). Hence, reducing Opportunity Cost and waste.
Define the Market/Price Mechanism
The market mechanism states how, in a competitive market, changes in demand and supply determine the relative price of goods and services, and hence determine the allocation of land, labour and capital resources in the economy.
Difference between productivity and efficiency
The difference between productivity and efficiency is that productivity is a MEASURE of efficiency, measuring the level of output per unit of input (labour and/or capital). Whereas efficiency refers to the state of the economy where they are utilising their scarce resources to maximum productivity (output per unit of input), and meeting the needs and wants of society.
What are the three reasons for pursuing economic growth?1. LOWERING THE UNEMPLOYMENT RATE -If economic growth is strong, increases derived demand for labour, reducing unemployment rates and hence increasing living standards. 2. INCREASED ABILITY TO PROVIDE ESSENTIAL SERVICES -Economic growth leads to larger TAX BASE i.e greater income, company, GST taxes which increases government revenue. This gives the government more scope to spend money on public essential services which BOOST LIVING STANDARDS for society eg. schooling, hospitals, infrastructure. -Allows for greater help to the disadvantaged 3. GROWTH IN REAL INCOMES -Economic growth is associated with growth in REAL incomes, increasing access to more goods and services + benefits non-material living standardsWhat are the four consequences of not achieving full employment?1. FALL IN TAXATION REVENUE -Less government money to spend on essential services -More expenses on welfare and support -Bigger budget deficits, larger government debt, impacts on future generations and credit ratings 2. DECREASED LIVING STANDARDS -More people reliant on transfer incomes, reliant on welfare -Reduces material and non-material living standards 3. LOSS OF GDP; not working at productive capacity, idle resources, less economic growth -SHORT TERM: Valuable resources are not being utilised -LONG TERM: Prolonged unemployment leads to a LOSS OF SKILLS, creating more structural unemployment in the long term 4. GREATER INEQUALITY -More people reliant on transfer incomes rather than factor incomes -Greater gap between high and low income earners, making it hard for some citizens to afford a dignified standard of livingWhat are the five consequences of not achieving low inflation? (Name the three major ones)[1.] EROSION OF PURCHASING POWER -Inflation reduces the value of money, and when nominal wages don't grow at the same rate as inflation does (fixed incomes; unemployed), real wages fall -Decreased purchasing power, decreased material and non-material living standards -Bracket creep; being pushed into higher tax brackets as a result in a rise in nominal wages to match inflation reduces real incomes -Especially bad for low, fixed income earners who LACK BARGAINING POWER to demand higher wages 2. REDISTRIBUTIVE EFFECTS -Lower business confidence, decreased investment from productive areas that create wealth and jobs (eg. business capital) -Investment likely to be shifted towards areas that hold value when inflation increases such as gold and artworks (Speculative investments), which is not good for long term productive capacity + growth [3.] RESOURCE MISALLOCATION -Inflation undermines the price mechanism; if there's inflation all across the economy, it makes it harder for businesses to know where to shift their resources -Businesses don't know if the price signal increases are because of DEMAND or INFLATION -Can lead to undesirable misallocations 4. SAVINGS AND INVESTMENT -High inflation encourage people to SPEND NOW rather than save, because they know money will not be worth as much in the future -Reductions in savings reduces the amount of money available for investment in the future [5.] INTERNATIONAL COMPETITIVENESS -Australian inflation growing faster than trading partners hurts international competitiveness, as our products become more expensive -Less demand for exports, decreased AD, decreased GDP -Can lead to increased unemployment as derived demand for labour decreases, lower levels of national incomeDefine and compare automatic and discretionary stabilisers.What is this year's estimated budget deficit figure (2021-22), compared to last year's budget deficit (2020-21)?This years: estimated -$106.6 BILLION Last years: -$161 BILLIONMacroeconomic demand factors increasing AD, full employment and demand pull inflation in 2021-Rising consumer and business confidence -Higher house prices -Higher commodity pricesMacroeconomic demand factors decreasing AD, full employment and demand pull inflation in 2021-Higher AUD (early 2021) -Slow wage growth in disposable incomesMacroeconomic supply factors increasing growth, full employment and demand pull inflation in 2021-Slow wage growth -Rising participation rates -Higher business confidence -Higher overseas growthMacroeconomic supply factors decreasing growth, full employment and demand pull inflation in 2021-Higher oil prices -Weak productivity growth; rise in RULC -Supply chain disruptions (through barriers and lack of migration)Factors impacting competitiveness in a market1. Barriers to entry and exit (eg. licenses, set-up costs?) 2. Degree of homogeneity of products 3. Level of informationExplain the market failure of asymmetric information (remember: 3 main points)Asymmetric information occurs in an unregulated market when one party of a transaction has more knowledge of a product than the other. Eg. second-hand cars 1. False advertising of products, leading to: 2. Adverse selection; where the uninformed party would adversely purchase faulty products that they normally wouldn't purchase. This leads to OVERALLOCATION OF RESOURCES to faulty products. And in the long term, consumers become skeptical of the products in the market, harming good, reputable producers (think second-hand cars) 3. Moral hazard; when economic agents adjust their behaviour to one that is LESS EFFICIENT from society's point of view, reducing technical efficiency via. producers needing to raise prices (think car insurance)Define Aggregate SupplyThe total volume of goods and services available for sale in the economyState three strengths and weaknesses of monetary policyStrengths: -Short implementation lag and the RBA's ability to quickly intervene in the face of economic change (flexibility), for example how the RBA met up two times to change the target cash rate two times in March -No political bias, so the RBA will work with the best interests of society in mind -No budget is limiting their ability to implement changes Weaknesses: -Relies entirely on consumer and business transactions to have its intended effects; in our current setting where consumer confidence is relatively low, more individuals/companies are choosing to deleverage and pay off their debt rather than increase consumption/investment spending, negatively affecting the effectiveness of the cash flow channel -Inability to target particular sectors of the economy or structural unemployment -Given the cash rate is at a historical low at 0.1%, the impact of conventional monetary policy is limited -Long impact lagWhat is an indication of monetary policy being effective in 2021-22?The rising house prices; the highly expansionary 0.1% cash rate likely increased loan borrowings through the Savings and Investment Channel, leading to more demand for housing.State the key Aggregate Supply side policies (working to boost the QUALITY AND/OR QUANTITY OF RESOURCES) and contemporary examples for each.1. Welfare Reforms -2020 Job Compliance Framework, a program which tightens eligibility for welfare where working-age welfare recipients have a mutual obligation to quality, including tasks like going to job interviews. There's a demerit and strike system, and financial penalties apply when recipients don't comply with the requirements 2. Tax Reforms -Accelerated Depreciation Allowance, immediately depreciate any new asset purchases to inflate expenses and hence reduce the taxable bracket of the business -Company taxes reduced to 25% for businesses with annual turnover of less than $50 million 2. Subsidies for companies -Grants and support for farmers during droughts -Education subsidies (which consist of education AS policies like JobTrainer) -Childcare subsidies 2021, expenses for a second child and subsequent children can be subsidised for up to 95% by the government -Bad subsidies involve protectionist subsidies 3. Infrastructure spending -Melbourne Inland Rail Intermodal Terminal, $2 billion designed to increase efficiency of the freight industry 4. Research and Development Grants -Restructuring grants so that the higher proportion of total annual expenditure made on R&D, the greater the rates of R&D support 5. Education Policies -Extension of JobTrainer in 2021 (around $500 million) to provide for extra low-cost or free vocational training courses for skills in high demand eg. aged care, hospitality, and subsidising 50% wages of apprenticeships 6. Immigration (lackthereof after COVID-19) -Greater skills shortages -Temporary Skills Shortage Visa 7. Trade LiberalisationState three strengths and weaknesses of AS policies as a whole.Strengths: -Works to achieve all three macroeconomic goals at once, unlike monetary/budgetary which compromise goal of price stability -Can focus on particular sectors of the economy in order to achieve greater economic performance, eg. subsidies for farmers during droughts, skills shortages via education policies like JobTrainer, company tax cuts targeting small-medium sized businesses -AS policies can solve structural unemployment problems that AD policies can't, via. education policies like JobTrainer for skills shortages Weaknesses: -Long implementation (particularly if it hurts equity like welfare reforms) AND impact lags (takes several years for some policies to have its intended effects, and can cause short term inconveniences like infrastructure spending) -Transitional costs and more structural unemployment in the short term as businesses change to more efficient practices eg. trade liberalisation -Some AS policies may hurt long term growth and efficiency i.e protectionist subsidiesState the injections and leakages in the circular flow model, and state the flowsInjections: transactions that are injected into the economy to boost AD and economic activity -Government expenditure -Private Investment Spending -Exports Leakages: transactions that are leaked from the economy which reduces economic activity -Savings -Imports -Taxes Flow 1: Supply of land, labour and capital resources from the household sector to the business sector Flow 2: Incomes to the household sector Flow 3: Aggregate Demand through C + I + G + (X - M) spending Flow 4: Production of goods and services, GDP