Economics

• Free market


  Does not always achieve desirable economic and social outcomes
• Government intervention


  • To achieve a better allocation of resources
  • A more equitable distribution of income
  • Greater economic stability
• Public goods


  • Difficult to prevent anyone from using, regardless of whether they pay for its use
  • Non-excludable
  • Attract free riders (someone who benefits without paying)
  • Non-rival - one person's enjoyment does not diminish others' enjoyment
• Merit goods


  • Not produced in sufficient quantity by the private sector because private individuals do not place sufficient value on those goods
  • Have benefits to the community that go beyond the individual who enjoys them directly (positive externalities)
• Merit goods


  • Education
  • Health care
• Natural monopoly


  A market structure in which goods can only be efficiently provided by one supplier, usually because an enormous investment in infrastructure is required
• Natural monopolies


  • Rail networks
  • Water and electricity distribution networks
• Inequality


  • Tends to widen over time as wealth generates more wealth and income
  • Can become entrenched as children from low-income families have less access to resources and opportunities
• Absolute poverty


  Measures the number of people that fall below a specific poverty line figure
• Relative poverty


  Refers to those whose standards of living is substantially lower than the average for the economy as a whole (defined as 50% of median household disposable income) and who does not have access to the average standard of living enjoyed by the majority of people
• Disadvantaged groups susceptible to inequality and poverty

  • Young people
  • The elderly
  • The disabled
  • The unemployed
  • Migrants from NESB
  • Aboriginals and Torres Strait Islanders
  • Sole parents
  • People who lack formal education
• Welfare state


  A comprehensive system of welfare benefits funded from progressive taxation
• Welfare state benefits


  • The aged pension
  • Unemployment benefits
  • Free access to health care
  • Subsidised access to other government services such as transport and housing
• Externalities


  The unintended (positive or negative) effects of private firms on the community which are not reflected in the market price
• Negative externalities


  The spill-over effects that production and other economic activities have on the environment
• Tragedy of the commons


  Overexploitation of a resource that is not owned by anyone
• Climate change


  A typical example of a negative externality - individuals, businesses and farmers do not pay for the long-term cost imposed by energy use - greenhouse gases and climate change
• Market failure


  The price mechanism only takes account of private benefits and costs of production to consumers and producers - it does not take account of wider social costs and benefits borne by all of society
• Marginal Private Benefit (Demand)


  • Quantity
  • Price
  • Private Cost (Supply curve 1)
  • Social Cost (actual cost) (Supply curve 2)
• To benefit society, the negative externality needs to be reduced in quantity and the price needs to be increased to better represent the actual social costs of the externality
• Imperfect competition


  Only a small numbers of firms will survive in a free market, which may create a market structure where there is imperfect competition
• Abuse of market power

  Firms could restrict output or raise prices to consumers
• Role of government


  • Maintain stable and sustainable economic growth
  • Reduce the impact of a recession and downswing
  • Prolong an upswing and a boom period
• Public sector


  The parts of the economy that are owned or controlled by the government
• Size of the public sector

  • Can be measured by public sector outlays (spending) as a percentage of GDP
  • Public sector employment as a percentage of total employment
• Australian Government Spending to GDP increases (payments) in response to downturns
• Employment levels in the public sector peaked in 1985 at 31.9% - since then they have fallen as many government businesses were privatised and governments now contract out many of their activities to the private sector
• Economic functions of the Australian Government

  • Reallocation of resources
  • Redistribution of income
  • Stabilisation of economic activity
• Reallocation of resources


  The government changes the pattern of production in the economy by directing resources towards the production of some goods and services that it considers desirable, and away from others that it consider less desirable
• Taxation


  The government can influence the price of goods and services, and thus influence consumer demand, through taxes and other charges levied on producers
• Direct tax


  Taxes paid by individuals or firms on whom the tax is levied such as income tax and company tax
• Indirect tax


  A tax that is levied on one group but is passed on to final consumers, such as the Goods and Services Tax and a carbon tax
• Tobacco excise (tax) increases


  • Increases the cost of production reducing supply
  • Consumers face higher prices
  • Demand for tobacco contracts as consumers shift to other goods and services
• The government can reallocate resources away from certain sectors by increasing taxation, which increases the costs for both firms and individuals, discouraging production and consumer demand
• The government can reallocate resources towards a sector by cutting taxes, which would encourage production due to lower production costs and also consumer demand due to lower prices
• If a firm increases advertising


  Their demand curve shifts right
• Demand curve shifting right

  Increases the equilibrium price and quantity
• Marginal utility


  The additional utility (satisfaction) gained from the consumption of an additional product
• If you add up marginal utility for each unit you get total utility
• Australia had a carbon tax of $23 per tonne between 2012-13 – this was imposed on the top 300 emitters in Australia