In a market economy , actions by consumers, through their spending and buying, sends powerful messages to business firms about the types and the quantity of goods and services they should be producing. In a mixed market economy business firms reduce the power of consumer sovereignty by 1. Marketing and advertising 2. Misleading information 3. Designing products to wear out or out date quickly 4. Entering into secret agreements and to compete with each other Spend or save There are only 2 things income can be used for; it can either be spent of saved.
Income which is represented by (Y) is equal to consumption (C), plus savings (S). As a general rule people on high income have a greater likely hood to save more of their income than those people with low income. Low income earners are likely to spend most of their income. The word propensity means likelihood and in economies we use this word to discuss spending and saving habits. * Cultural Factors: For example in some East Asian economies some East Asian economies people tend to save more of their income then people in other industrialized economies , and previous generations tended to save more than people today.
Personality Factor: Some people are more cautious and prefer to have savings in case of any future need, while others would rather enjoy the immediate benefits their money can bring. * Expectations of the future: People who expect their income to rise in the future are less likely to worry about saving now * Any specific future spending plan: Individuals might save more if they are planning a major expense in the future, such as a holiday or purchasing a car * Tax policies: The tax system can influence an individual’s patterns of consumption Income * As income rise most consumers will be in a position to increase their savings.
As income rise people do not need as much of their income to satisfy basic needs. * The property to save is greater amongst high income earners and drops off drastically amongst low income earners. For example: pensioners and the unemployed would find it impossible t o meet basic needs and cover any desired savings. * Marginal Propensity to consume (MAC) is the proportion of each extra dollar of earned income that is spent on consumption * Marginal propensity to save (MSP) is the proportion of each extra dollar of earned income that is not spent but saved for future consumption MAC + MSP = 1
Age: Age also plays a role in savings and consumption patterns. An individual’s income stream and propensity to save are not constant throughout their life. Household Income What are the types of income? Wages and salaries * Wages are paid to labor for human effort * A salary is quoted per annum, whereas wages are quoted hourly * Gross wages Economics – the Labor Market By Fishkill * Include workers compensation * Include employers contribution to superannuation * Include benefits e. . Company car, expenses, allowance Rent * Income paid to land lords who own property and who allow others to own their reporter Interest * Income earned by households for lending money of financial capital’ Commissions * Income earned by householders that is a percentage of sales turnovers e. G. Salespeople Fees * Income paid to householders who are professional people and highly skilled and trained Royal ties * Income paid to householders who own original pieces of work.
Often they are creative and artistic e. G. Plays, songs, novels and poems Profits and dividends * Income paid to householders who own a business after all cost and expense are deducted * If the business is a company, dividends are paid to the shareholders of hat company * Dividends means divided profit Transfer Payments * Social security benefits are paid by the federal government to those who are in need because they do not earn an income e. G. Employment benefits Sources of Household income * other 5% * Government Benefits 9% * Property Income 10% * Business profits and capital investments 17% * Wages and salary 59% Social Welfare * Social welfare payments are payments made to increase the incomes of individuals of families in need of assistance by the government. For example, unemployment benefits and family allowance. Business in the market Economy Business in Australia, plays an important role in providing employment, providing income, allocating factors of production and provide the goods and services that consumers demand.
Businesses also provide taxation revenue to governments who allocate and distribute this income throughout the economy. * A business is an individual entity, they may be sole traders or parts of a large TNT (trans national corporation), employing thousands of people. Business produce goods or services and are very dynamic (consumer demand and competition) Business production Decisions -What are business production decisions? What to produce? -How much to produce? -How to produce? Many factors influence this decision such as: * The skills and experience of the business owner * Consumer demand * Niche markets where there are business opportunities * The amount of capital required to set up the business How much to produce? * The business must estimate the level of consumer demand and sales * Too much production can lead to loss of stock and too little production can mean a producer is unable to meet the customer’s demands * This decision is really about a business response time I. E. How quickly they are able to meet orders How to reduce? The business must decide how to combine the factors of production into creating outputs * Firms must choose the most efficient combination of land, labor, capital and enterprise Business as a source of economic growth * The growth of an economy is based on the growth of individual businesses * Businesses success or failure determines whether an economy will be in a boom or recession * Successful businesses decrease unemployment rates * Businesses contribute to the growth of cities and regional area * Business growth leads to an improved standard of living for citizens * Governments offer uncial incentives to business growth as they realism the links between businesses and the economy Industry: is the collection of firms involved in making a similar range of items that usually compete with each other, such as the financial services industry or the car industry Niche Market: is a segment of a mass market for a greater service can be defined by the specific tastes or characteristics of the target customers Capital: Are the manufactured products used to produce goods and services commonly described as the ‘produced means of production What business contributes to the economy?
A healthy, growing private sector will generate a higher rate of economic growth and a stronger revenue base to fund the services provided by governments * Global demand for minerals and resources has fuelled large price increases for Australian reports such as coal, iron ore, nickel, zinc and copper, and ensured that these resource rich states economies sustain faster growth rates than those of other states. Topic 3 Markets A market is a situation where buyers and seller interact with each other so exchange can take place. Prices are determined so that markets clear. When a market clears here is no wastage and theoretically there is no shortage. Demand What is demand? * The quantity of a particular good which customers are willing to buy at a particular price What is effective demand? The situation where consumers have the desire to purchase a good or service and have the capacity to pay for it Determinants of an individual demand * Prices of other goods * Income levels * Tastes, preferences and fashions What is the law of demand? * The law of demand states that as a price rises the quantity demanded falls and as price falls the quantity demanded rises * Therefore, there is an Inverse Relationship between price and quantity demanded * Fluctuations in prices cause Expansions and contractions in demand What is a demand Schedule? * The demand schedule show the amounts of a particular good which will be demanded at various prices Movements along the demand curve * Any change in the price of a good will lead to a change in the quantity demanded in the opposite direction to the price change.
What we get as a result of price changes is movement along the demand curve, which we refer to as expansions and contractions in demand * Only price changes for the good itself will lead to events along the existing demand curve by way of expansions and contractions in demand Causes of shifts in the demand curve * Changes in the prices of substitutes * Changes in the price of complements * Income changes * Changes in tastes and fashions * Increase in population * Changes in age distribution * Changes in income distribution * Changes in consumer expectations * Changes in technological progress Factors that may cause an increase or decrease in demand Factors that may cause an increase in demand -Prices of other goods and services * A rise in substitute goods will cause consumers to demand more shoes while a all in the price off complementary good may increase demand -Expected future prices * Consumer spending is influenced by their expectations about future price trends -Consumer tastes and preferences * If a particular type of shoe becomes more fashionable, more consumers would want to buy these shoes at the same price. Also new technological make increase the demands for other products -Consumer Income * A rise in the level of income would mean that consumers can afford to buy more shoes at the same price than they could before. Also a change in income distribution is favorable to higher income earners.
Improved consumer expectations about true income and employment would increase demand -The size and age of the population * An increase in the size of the population will increase the demand, while a Factors that may cause a decrease in demand * A fall in the price of substitute goods * A rise in price of complementary goods -Expected future prices * An expected decline in the price of the product in the future -Consumer tastes and preferences * A product becoming less fashionable * Technological progress that causes a good to be superseded -Consumer incomes * A fall in the general level of income * A change in income distribution less favorable to demand * Determining nonuser expectations about future economic prospects -The size and age distribution of the population * A decrease in the overall size of the population, and a change in its age distribution Elasticity of Demand What is elasticity? * Responsiveness or sensitivity of the quantity demanded of a particular product to changes in its price.
Elastic demand * When there is a large change in price which causes a large change in the quantity demanded, this product would have an elastic demand Inelastic demand * When there is a large change in price which causes a smaller change in the quantity demanded What determines demand elasticity? Substitutes * Complements * Necessities * Importance in the budget of the item Substitutes * If a good has one or more close substitutes, then it will have an Elastic demand e. G. Colgate toothpaste * A good which doesn’t have substitutes will therefore have an inelastic demand * For example an increase in the price of bread will cause only a small change in demand because there is no close substitute * For example, an increase in the price of bread will cause only a small change in demand because there is no close sub statute Complements * There is a relatively inelastic demand curve for small goods with large implements e. G. People with cars will have an inelastic demand for petrol Necessities * If a good or service is considered a necessity then the elasticity of demand will become more inelastic as price rises Importance in the budget * An expensive item in the household budget will be more elastic as price rises than smaller inconsequential items (e. G. Clothing vs.. Newspapers) Measuring price elasticity of demand looks at how much revenue is collected by a business when prices are changed over time. Law of Supply * The law of supply states that if the prices rise, products manufactured by producers will also rise. Alternatively as the price of a good drops the quantity of supply will fall. When there are price changes to a particular good, change in supply are referred to as contractions and expansions Expansion and contractions in supply * Construction of supply is when a decrease in the price of a good or service causes a decrease in quantity supplied.
It is shown by a downward movement along the supply curve * An expansion of supply is when an increase in the price off good or service causes an increase in quantity supplied. It is shown by an upward movement along the supply curve. Market Equilibrium The concept of market equilibrium How a market economy determines how much a good or service is produced and at what price it is sold Two assumptions -We have pure competition in the market place -There is no government intervention * Pure competition means that no participant in the market has the power to influence market outcomes directly, such as by settling prices * Price mechanism determines the equilibrium in the market.
The price mechanism is the interplay of the forces of supply and demand * Market equilibrium is the situation where, at a certain price level, the quantity supplied and the quantity demanded of a particular modify are equal The role of the market * The price mechanism attempts to solve the economic problem in product markets for goods and services * The information of demand and supply determines a price and quantity that best satisfies individual wants with the limited resources available to firms, giving a solution to the economic problem facing all economies * Producers will only produce those goods and services for which there is consumer demand in other words, where consumers are willing and able to buy the product at a certain price. Producers allocate resources in this way because there is a higher opportunity cost in producing other goods when the price of the product rises. The question of the quantity of goods and services produced and old is also determined through the interaction of supply and demand * Demand and supply forces in factor market, determine the price paid for the factors of production and thus the share of total output that is received by individuals * It is said that the market mechanism also ensures allocation efficiency in the economy Allocation efficiency * Refers to the economy’s ability to allocate resources to satisfy consumer wants Government intervention in the market place Problem I Government action I Outcome I Market price too high I Price ceiling I Reduces price, quantity shortage (disequilibrium) I Market price too low I Price floor Increases price, quantity Perfect Competition Large number of sellers Identical product Easy entry/exit Market Structure No Market Power (vegetable/fruit market) Monopoly single seller unique product Impossible entry Oligopoly Monopolistic competition Large number of sellers differentiation Product easy entry/exit Small amount of market power (motels, restaurants) Small number of sellers. Identical or differentiated difficult entry.
Large amount of raked powers (oil companies, airlines) Complete market power (water supply) Pure Competition: * A theoretical model of perfect competition -buyers do not incur any costs for moving from one supplier to another -there are no barriers to new firms entering or existing firms leaving the market Monopoly: only one firm selling the product and there is no market competition at all * only one producer in the industry * the product sold has no close substitutes * There are no significant barriers to entry and this effectively prevents any potential competitors from entering the market Monopolistic Competition: Many small firms in the industry, is a form of important competition and is characterized by -there are a large number of relatively small firms -the products sold in the market are similar but not identical * The firms engage in product differentiation (they package and present their products so that they appear different from those of their competition) -The fact that the products are differentiated, gives firms some degree of price setting power -There are some small barriers to entry for new firms entering the market, including the fact that existing firms have loyal customers who, through product differentiation, consider that their rim supplies the best products (that is referred to as brand loyalty) Oligopoly: * A small number of large firms dominate the industry -there are only a few relatively large firms, each of which has a significant share of the market -they sell similar but differentiated products there are only a few firms in the industry I. E. Airlines, supermarkets, banking newspaper Topic 4: Labor Markets Labor is a derived demand * Derived for the good and services which labor produces Economic activity * Demand for labor is also determined by the level of economic activity Downswings decrease demand for labor * Upswings increase demand for labor
Productivity * Increased total productivity raises the demand for productive workers * Decreased total productivity decreases the demand for workers, but can also mean no change in employment due to labor hoarding Structural Adjustment * Government restructuring of industries can lead to changes in the demand for workers in some businesses The productivity of labor * The productivity of labor can be defined as the output per unit of labor per unit of time * Labor productivity = total output/ labor output What is important? * People 15 plus who did not have a Job but were actively seeking work or * People waiting to start a new Job or * People being called back from a Job they have been stood down from What are the types of unemployment? * Cyclical * Seasonal * Structural * Frictional (old age) (lack of skills) * Hard core (disabilities) (addictions) (physically mental) * Hidden Seasonal unemployment * Occurs at regular times of the year according to the demand for labor shearers, fruit pickers, tourism, industry employees, school leavers Frictional unemployment * e. G. Unemployment of a temporary nature, occurring while individuals are in the process of changing Jobs Structural unemployment Occurs where the people seeking employment are not qualified or suited for the jobs available * This leads to the need for refraining, government education programs and planning Cyclical unemployment * Occurs due to fluctuations in the business cycle * A fall in the level of economic activity will result in some unemployment which usually lasts for long periods of time Hidden Unemployment * People who are discouraged from actively looking for work and therefore are not included in the unemployment statistics Labor market Outcomes * Wages and salaries are the major source of income for Australian households *
The other main source of income includes b) Capital investment c) Government pensions or allowance d) Property income * Average weekly earnings are a good indicator of whether workers income are rising or falling * Yet they do not take into account changes in the inflation rate * Real wages levels are a measure of the purchasing power of money and are a good indication of whether wages are keeping pace with inflation Differences on wage outcomes
