Economics Exam

Section A:
- Law of Demand and Supply:
As the price increases, the quantity supplied increases
As the price decreases, the quantity supplied decreases

- The difference between a movement along and a shift of the demand curve:
A movement along the curve occurs when there is a change in the price of the good
or service being analysed. A movement along the demand curve to the left (a
contraction) is caused by an increase in the price of the good or service being
analysed. A movement along the demand curve to the right (an expansion) is caused
by a decrease in the price. A shift of the entire demand curve will occur when one of
the other factors of demand (i.e. not price) have changed, resulting in either an
increase or decrease in the quantity demanded at any given price.
Movement along the demand curve Shift of the demand curve

- The difference between a movement along and a shift of the supply curve:
A movement along the supply curve occurs when the product's price changes and
this causes the quantity supplied to change. A movement along the supply curve to
the left (a contraction) is caused by a decrease in the price of the good or service
being analysed. A movement along the supply curve to the right (an expansion) is
caused by an increase in the price. A shift of the entire supply curve will occur when
one of the other factors of supply have changed (i.e. not price), and, therefore, at
any given price there is either an increase or decrease in the quantity supplied.
Movement along the demand curve Shift of the demand curve

- Aggregate demand: Total expenditure on Australian made goods and services.

- Aggregate supply: The total value of goods and services available for sale in an
economy in a given time frame.
 - Inflation: The RBA's inflation target is to contain the increase in 'consumer price
inflation ' to 2-3% on average over the course of the economic cycle.

- Balance on Merchandise Trade: Part of the Current Account of the BOP that is made
up of merchandise export receipts (credits) minus merchandise import payments
(debits), such as the sale or purchase of manufactured goods.
- Current account deficit (CAD): When total payments (or debits) in the Current
Account of the BOP exceed total receipts (or credits). Often expressed as a
percentage of GDP, such as 3.5% for the financial year ended 30 June 2009.

Section B:
- Elasticity of demand and supply:
Price elasticity The responsiveness of quantity demanded to changes in price.
of demand
Price elasticity The responsiveness of quantity supplied to changes in price.
of supply
High elasticity The product will have a high PED if the absolute value is greater than 1.
In this situation, the percentage change in quantity demanded will be
greater than the percentage change in price. This will mean that if a
supplier lowers their price they are likely to attract a bigger percentage
increase in demand.
Medium In some cases, the percentage change in quantity demanded and price
elasticity may be equal. This is called unit elasticity because the elasticity value
will be exactly 1.
Low elasticity The product will have a low PED if the value is less than 1. In this
situation, the percentage change in quantity demanded will be less
than the percentage change in price. This will mean that if the supplier
lowers their price they are likely to attract a smaller percentage
increase in the quantity demanded.

- Efficiency:
Allocative A type of efficiency measured by how well resources are being
efficiency allocated in the economy. The most efficient allocation of resources
occurs when living standards and welfare are maximised and it is not
possible to further increase living standards by changing the way
resources are allocated.
Technical When it is not possible to increase output without increasing inputs
efficiency (resources). Therefore, the most technically efficient point of
production occurs where productivity is at a maximum and where
average costs are at a minimum.
Dynamic How quickly an economy can reallocate resources to achieve allocative
efficiency efficiency.
Inter-temporal How well resources are allocated over different time periods.
efficiency

- Government intervention/failure
Government Governments can use their legislative powers to reduce the current
regulations consumption of common access resources and thereby help to
promote sustainable development.
Indirect Indirect taxes are designed to alter the structure of relative prices in all
taxation markets and this alters incentives for producers and consumers and
therefore promotes behaviour that is more efficient.
Subsidies The government providing local producers with financial or other
forms of assistance. Often considered a form of 'protection'.
Price controls Governments are often tempted to interfere with the free operation of
the market by implementing price controls. This might include a price
ceiling, where the sellers of the goods or services are banned from
raising their prices above a certain level.

- Economic growth:
 The government's goal for strong and sustainable economic growth is to achieve the
highest growth rate possible, consistent with strong employment growth, but
without running into unacceptable inflationary, external or environmental pressures.
 In Australia, the gross domestic product (GDP) is used to measure the amount of
production taking place in the economy and it is defined as the final market value of
all goods and services produced in Australia over a given period.
 All governments pursue economic growth as it is the primary means by which
nations can maintain and/or improve living standards over time.
 Economic growth is also pursued because of its positive relationship between
employment growth and its ability to reduce rates of unemployment and generate
incomes for households.
 Economic growth is also pursued because it increases the ability of governments to
provide essential services, such as infrastructure and welfare.
 The government pursues a relatively strong rate of economic growth of
approximately 3 - 3.5% per annum to ensure that it exceeds productivity growth and
caters for an increasing population such that real GDP per capita and living standards
increase over time.
 Interest rates are primarily considered a demand factor affecting growth. When
interest rates increase, this should lead to a reduction in AD and economic growth.
 When real disposable income increases, it means that after-tax income has
increased in real terms, providing the household sector with increased spending
power. This is likely to result in an increase in C, boosting AD and leading to an
increase in real GDP or economic growth.
 The exchange rate is the value of the Australian dollar when compared to another
currency, or a basket of currencies. If the value of the Aussie dollar increases, the
demand side effects on economic growth are negative because those exporters in
Australia that are 'price takers' will receive less income for any given volume of
exports and those exporters that are not price takers will find that the price
competitiveness of their good or service in international markets will decrease. In
addition, import competing businesses in Australia will now face stronger price
competition from importers.
 Consumer confidence refers to consumers' perception of their economic well being
in the future. High confidence usually occurs when the economy is strong (following
 the economic cycle) but will tend to promote economic growth via its effect on C, I
and AD.
 An increase in the rates of economic growth experienced by Australia's major trading
partners (e.g. Chinese growth) is likely to have a favourable impact on Australian
rates of growth. There is likely to be an increase in the demand for Australian
exports and Australians should demand more import competing goods (due to
higher inflation abroad). In addition, strong growth overseas will tend to improve
consumer and business confidence as well as encourage greater foreign investment.
 Increasing the quality of Australia's factors of production, such as the skills possessed
by human capital (e.g. labour), the output potential of physical capital (e.g.
machinery), or the fertility of land (e.g. farms), ultimately helps to raise productivity
or efficiency and boost economic growth.
 Increasing the quantity of our key resources (such as increasing the labour supply) is
one of the major factors accounting for economic growth.
 Productivity is defined as output over inputs (outputs/inputs) or total output per unit
of input. An increase in productivity should increase economic growth over time
because any volume of output can be produced with fewer resources, thereby
enabling businesses to experience lower average costs of production, helping to
contain inflation and stimulate C, I and (X-M), boosting AD and economic growth.

- Employment:
 Employment is a key component of economic activity and provides the impetus for
growth in the economy and improvements in living standards.
 To be classified as 'employed' by the ABS, one needs to be over 15 years of age, not
in the defence forces, and working more than one hour per week in return for some
form of measurable remuneration (such as wages).
 Full employment is generally regarded as that level of unemployment that exists
when the government's economic growth objective is achieved and where cyclical
unemployment is non-existent.
 The government's full employment objective involves the achievement of 'the
maximum sustainable rate of reduction in unemployment by lifting the pace at
which economic growth can be maintained without running into inflationary and
external pressures.'
 The full employment objective will typically involve the attainment of an
unemployment rate of approximately 5%. The Non Accelerating Inflation Rate of
Unemployment (NAIRU) is the lowest rate of unemployment that is achievable
before inflation begins to accelerate. The current NAIRU is approximately 5%.
 The Phillips curve depicts the relatively short-run relationship or trade-off that
sometimes exists between inflation and unemployment.
 The 'natural rate of unemployment,' is the rate of unemployment that exists when
economic growth is relatively strong (in the order of 3-4% per annum) and cyclical
unemployment is non-existent.
 The natural rate of unemployment will encompass structural, seasonal, frictional and
hard core unemployment, but cyclical unemployment will be zero.
 To be classified as unemployed, a person must be over 15 and actively looking for
work.
 The labour force comprises all those people aged 15 and over who are willing and
able to work. It includes the employed and the unemployed.
 The participation rate is defined as the percentage of the total 'working age'
population (over 15) that is a member of the labour force.
 The unemployment rate represents the percentage of the labour force that is
unemployed.
 A decrease in the unemployment rate is likely to induce a rise in the participation
rate.
 'Discouraged job seekers' or the 'hidden unemployed' are those who are excluded
from unemployment statistics because they have become discouraged about their
job prospects and are not actively seeking employment.
 The underemployed are those individuals that are classified as employed, but who
are at least partly unemployed in the sense that they would prefer to be working
more hours than they are currently working.
 The underutilisation rate is calculated by adding the unemployed to the
underemployed and dividing by the size of the labour force. It represents the
proportion of the total labour force that is 'underutilised.'
 An increase in the participation rate is likely to cause a short-term increase in
unemployment but can help to reduce unemployment in the long run via the effects
on the productivity and price of labour.
 A decrease in the unemployment rate is likely to induce a rise in the participation
rate as people become encouraged to re-enter the labour market.
 A lack of AD will cause cyclical unemployment and is generally associated with
economic downturns which are part of the business cycle.
 Structural unemployment is caused by a mismatch between the skills set of the
unemployed and the skills that are needed in the economy and is caused by factors
such as the implementation of new capital and technology, changes in tastes and
fashions, outsourcing, business restructuring and government microeconomic
reforms.
 The pursuit of full employment also helps to avoid the real economic losses
associated with unemployment in terms of lost production or output.
 Higher unemployment rates will have a negative impact on the government's budget
which means that the government will have less money to fund the provision of a
host of government provided goods and services that support Australian living
standards.
 High rates of unemployment will tend to increase income inequality and increase the
incidence of poverty.

- Inflation:
 Inflation refers to a sustained increase in the general or average level of prices over
time.
 The RBA's inflation target is to contain the increase in 'consumer price inflation ' to 2-
3% on average over the course of the economic cycle.
 Low rates of inflation are tolerated because they allow for necessary reductions in the
real wage, account for quality changes and avoid the costs of reducing it to lower
levels.
 Deflation is the opposite of inflation and refers to a sustained decrease in the general
or average price level, which means that prices on average are falling.
 The consumer price index (CPI) is the best and most reliable indicator of 'consumer
price inflation'.
 Index numbers are used by statisticians to provide a meaningful way to record
movements in the price or value of items that are quite diverse in nature.
 There are several ways of reporting inflation rates, including quarterly rates of
inflation, annualised rates of inflation or the annual rate of inflation.
 Inflation will erode purchasing power, distort the allocation of resources, cause a loss
in international competitiveness, damage confidence levels, lead to a wage-price
spiral, cause interest rates to rise and have negative implications for governments.
 All countries seek to control inflation rates because it is recognised that high inflation
has real negative consequences for their economies, resulting in a reduction in the
rates of economic growth, less than full employment, declining incomes and the
deterioration of material living standards.
 Demand factors affecting inflation (demand inflation) include any factor that can exert
pressure on aggregate demand in the economy.
 Supply factors affecting inflation (cost inflation) include any factor that can exert
pressure on aggregate prices in the economy via changes in the costs of production or
restrictions to aggregate supply levels.
 Growth in disposable incomes helps to boost C and AD, creating additional demand
inflationary pressures.

- Terms of trade: A ratio of Australian exports prices to import prices.

- TOT and living standards: Given the growth in national income that stems from a
higher TOT, we should expect that a higher TOT will help to achieve the domestic
goals of strong economic growth and full employment. Assuming that any growth in
the TOT is primarily driven by growth in the prices received for exports, it will lead to
growth in export incomes which then flows through consumption, investment, AD
and real GDP. This should raise the demand for labour, boost employment growth
and contribute to downward pressure on the unemployment rate. This can all lead
to improved material and non-material living standards.