Y E A R 1 1 e c o n o m i c s 2 0 2 3 Tim Riley M. Ec Dip. Ed © 2022 Tim Riley Publications Pty Ltd DEDICATION In loving memory of Lola Marie Martin (1919-2012) and Penny Riley (1922-2014) who were our Mothers and women of exceptional character © 2022 Tim Riley Publications Pty Ltd Except as permitted under the Australian Copyright Act no part of this publication may be reproduced, transmitted, stored in a retrieval system, or translated into any human or computer language in any form by any means, electronic, mechanical, magnetic, optical, chemical, manual or otherwise, without the expressed written permission of Tim Riley. The Copyright Act permits a maximum of one chapter or 10% of this book, whichever is the greater, to be copied by any educational institution for educational purposes, provided that the educational institution or the body that administers it, has given remuneration notice to the Copyright Agency Limited (CAL) under the Copyright Act. Details of CAL copyright licences may be obtained by contacting the Copyright Agency Limited directly at: Copyright Agency Limited: Level 12, 66 Goulburn Street, Sydney NSW 2000 Tel: (02) 9394 7600 Website: www.copyright.com.au Email: [email protected] No part of this publication may be reproduced, transmitted, stored in a retrieval system, or translated into any human or computer language in any form by any means, electronic, mechanical, magnetic, optical, chemical, manual or otherwise, without the expressed written permission of Tim Riley. Published November 2022 by Tim Riley Publications Pty Ltd ABN 30 063 689 412 PO Box 455 Dee Why 2099 Tel: (02) 9972 2059 Fax: (02) 9972 0059 website: www.timriley.com.au Email: [email protected] All Rights Reserved Cataloguing in Publication Data: Riley, Tim Year 11 Economics 2023 Includes index For senior secondary school students ISBN 978 0 6455228 3 9 1. Economics. - microeconomic theory. I. Title II. Title: Year 11 economics 2023 330 © 2022 Tim Riley Publications Pty Ltd Design and production by Sally Goodfellow Printed by Ligare Pty Ltd, Riverwood, NSW. CONTENTS TOPIC 1: INTRODUCTION TO ECONOMICS Chapter 1: The Economic Problem 3 • e Economic Problem 4 • Opportunity Cost and Production Possibility Curves 8 • Economic Factors Underlying Decision Making 14 Chapter 2: The Operation of an Economy 21 • Production, Distribution and Exchange 21 • Resources, Income, Employment and the Quality of Life 24 • e Circular Flow of Income Model 29 Chapter 3: Economies: Their Similarities and Differences 39 • Types of Economic Systems 39 • A Comparative Study of Australia and Indonesia 44 TOPIC 2: CONSUMERS AND BUSINESS Chapter 4: The Role of Consumers in the Economy 63 • Patterns of Consumer Spending and Saving 63 • Factors Inuencing Individual Consumer Choice 68 • Sources of Income 70 Chapter 5: The Role of Business in the Economy 77 • Denition of a Firm and an Industry and the Goals of the Firm 77 • Cost and Revenue eory 83 • Productivity and the Law of Diminishing Returns 85 • Economies of Scale 89 • e Impact of Investment, Technological Change & Ethical Decision Making on the Firm 93 TOPIC 3: MARKETS Chapter 6: Markets: Demand and Supply 105 • e Role of the Market 105 • e eory of Demand and the Price Elasticity of Demand 107 • e eory of Supply and the Price Elasticity of Supply 122 Chapter 7: Market Equilibrium and Government Intervention 137 • Market Equilibrium 137 • Government Intervention in Markets 140 • Market Structures 144 TOPIC 4: LABOUR MARKETS Chapter 8: The Demand and Supply of Labour 153 • e Demand and Supply of Labour 154 • e Australian Labourforce 160 Chapter 9: Labour Market Outcomes and Institutions 173 • Dierences in Incomes from Work 173 • Labour Market Trends 180 • Labour Market Institutions 184 • e Federal Government and the Current Industrial Relations Framework 187 • e Fair Work Act 2009 188 TOPIC 5: FINANCIAL MARKETS Chapter 10: Financial Markets in Australia 199 • Types and Role of Financial Markets 199 • e Role and Function of the Share Market 203 • e Regulation of the Australian Financial System 211 • Borrowers and Lenders inthe Australian Financial System 213 Chapter 11: Interest Rate Determination 223 • e Functions of Money and Financial Innovation 223 • e Role of the Reserve Bank of Australia 224 • e Term Structure of Interest Rates 226 • e Cash Market and the Cash Rate 228 TOPIC 6: GOVERNMENT AND THE ECONOMY Chapter 12: Government Intervention in the Economy 243 • Limitations in the Operation of the Free Market 243 • e Structure and Functions of the ree Levels of Government 250 • e Size of the Public Sector 253 Chapter 13: The Role of Government 261 • Economic Functions of the Australian Government 261 • e Federal Budget 270 • Constraints and Inuences on Government Policies in Australia 273 Glossary and Index 281 • Glossary 281 • Index 294 AUSTRALIAN WEBSITE ADDRESSES Australian Bureau of Statistics (ABS) www.abs.gov.au Australian Chamber ofCommerce and Industry (ACCI) www.acci.asn.au Australian Competition and Consumer Commission (ACCC) www.accc.gov.au Australian Council of Trade Unions (ACTU) www.actu.org.au Australian Prudential Regulation Authority (APRA) www.apra.gov.au Australian Securities and Investments Commission (ASIC) www.asic.gov.au Australian Securities Exchange (ASX) www.asx.com.au Business Council of Australia (BCA) www.bca.com.au Department of Climate Change, Energy, the Environment and Water www.dcceew.gov.au Department of Education www.education.gov.au Department of Education, Skills and Employment www.dese.gov.au Department of Foreign Aairs and Trade www.dfat.gov.au Department of Planning, Industry and Environment www.environment.nsw.gov.au Department of Treasury www.treasury.gov.au Fair Work Commission (FWC) www.fwc.gov.au Fair Work Ombudsman (FWO) www.fwo.gov.au Foreign Investment Review Board (FIRB) www.rb.gov.au NSW Education Standards Authority (NESA) www.educationstandards.nsw.edu.au Productivity Commission (PC) www.pc.gov.au Reserve Bank of Australia (RBA) www.rba.gov.au PRELIMINARY COURSE OUTCOMES e Preliminary Course is essentially microeconomic in nature, focusing on aspects of the economic behaviour of consumers, business and governments. Much of this behaviour is inuenced by the operation of markets. Two key markets, the labour market and the nancial market, are examined in detail. e Preliminary Course provides an essential foundation for the HSC Course in economics. Students should achieve the following knowledge and skills outcomes in the Preliminary Course: Outcomes (ese are denoted as Preliminary Course Outcomes P1 to P12) P1 Demonstrates an understanding ofeconomic terms, conceptsand relationships; P2 Explains the economic role of individuals, rms and the government in an economy; P3 Describes, explains and evaluates the role and operation of markets; P4 Compares and contrasts aspects of dierent economies; P5 Analyses the relationship between individuals, firms, institutions and government in the Australian economy; P6 Explains the role of government in the Australian economy; P7 Identies the nature and causes of economic problems and issues for individuals, rms and governments; P8 Applies appropriate terminology, concepts and theories in economic contexts; P9 Selects and organises information from a variety of sources for relevance and reliability; P10 Communicates economic information, ideas and issues in appropriate forms; P11 Applies mathematical concepts in economic contexts; and P12 Works independently and in groups to achieve appropriate goals in set time lines. In working and studying to achieve these Preliminary Course Outcomes students are expected to: • ‘Learn to’ examine economic issues and apply economic skills in the content of the course for each of the six Preliminary Course topics. • ‘Learn about’ the specic content in each of the Preliminary Course topics. 1 INTRODUCTION TO ECONOMICS TOPIC FOCUS This topic focuses on why individuals, businesses and governments need to make choices about the use of resources when engaging in economic decision making. The decisions made over resource use determine the nature of an economic system and lead to a variety or diversity of economic systems in the world such as free enterprise market economies, newly industrialised economies, planned economies, transition economies (from planned to market economies), emerging and developing economies. Students should learn to examine the following economic issues and apply the following economic skills in Topic 1 of the Preliminary course: ECONOMIC ISSUES • Identify the opportunity costs involved in economic decisions made by individuals, businesses and governments at local, state and national levels; • Examine the ways that the economic problem affects individuals with different levels of income; • Examine the implications of unemployment and technological change using production possibility frontiers; and • Compare and contrast the ways that different economies deal with specic problems or issues. ECONOMIC SKILLS • Construct and interpret production possibility frontiers; E • Distinguish between equilibrium and disequilibrium situations in the circular ow of income model; • Explain how an economy might return to an equilibrium situation from a disequilibrium situation; N • Identify bias in media items on economic issues affecting the local, state and national economies; • Identify key features of an economy through analysis of a variety of information types and sources; and • Work effectively in groups to investigate aspects of economics and economies. O Economics is the study of how scarce resources are allocated to satisfy the unlimited needs and wants of society. Economics is a social science because it applies a scientic method in analysing human behaviour in relation to C economic decision making. The economic problem arises in society because the resources of land, labour, capital and enterprise arescarce in relation to society’s needs and wants. As a result of this scarcity of resources, choices have to be made about how these scarce resources are allocated in the production of goods and services to satisfy I society’s needs and wants. P The major economic decisions made by society are what to produce, how much to produce, howto produce and to whom to distribute production and income. The two main types of economic system that have evolved to solve O the economic problem include the market economy and the planned economy. Other types of economic systems include newly industrialised and mixed market economies. Australia and Indonesia provide a contrast in types of economic systems and levels of economic development. Australia is a mixed market economy classied as highly developed, whilst Indonesia is also a mixed market T economy but with a lower level of economic development than Australia. © Tim Riley Publications Pty Ltd Year 11 Economics 2023 2 Chapter 1: The Economic Problem 3 • e Nature of Economics 3 • e Economic Problem 4 • Opportunity Cost and Production Possibility Curves 8 • Economic Factors Underlying Decision Making 14 Chapter 2: The Operation of an Economy 21 • Production, Distribution and Exchange 21 • Resources and the Provision of Income 24 • e Provision of Employment and the Quality of Life 26 • e Circular Flow of Income Model 29 Chapter 3: Economies: Their Similarities and Differences 39 • Types of Economic Systems 39 • A Comparative Study of Australia and Indonesia 44 Year 11 Economics 2023 © Tim Riley Publications Pty Ltd © Tim Riley Publications Pty Ltd Chapter 1: Introduction to Economics 3 CHAPTER 1 The Economic Problem THE NATURE OF ECONOMICS Economics is referred to as a social science because it studies human behaviour. It is a science because it applies a scientic method in developing and testing theories to analyse economic issues and problems. Economics can be dened as the study of the production, distribution and exchange of goods and services in an economic system. It involves the study of the problem of scarcity of resources in relation to human needs and wants. Economics is the science which studies human behaviour as a relationship between unlimited ends (needs and wants) and scarce means (resources) which have alternative uses. e needs and wants of people are referred to as ‘ends’, whilst the ‘means’ refer to the resources used to produce the goods and services which satisfy these ends. e actual word ‘economics’ is derived from the Greek word ‘oikonomia’ which means ‘management of the house’. e satisfactionof people’s needs and wants involves the principle of opportunity cost which means that the use of resources always involves an opportunity foregone in using the resources for some other activity or purpose. An economy refers to the way in which the various groups in society (such as consumers, producers or rms and governments) are organised to solve the economic problem. Australia has a market system of economic organisation. Its economy consists of factor markets where factor inputs or resources such as land, labour, capital and enterprise are bought and sold; and product markets where nal goods and services are bought and sold, such as the retail and wholesale goods markets. Economic analysis involves a particular methodology called hypothesising and the testing of economic hypotheses by using empirical data. Economic methodology involves the following three steps: 1. Model building to simplify complex real world behaviour and relationships. is is known as economic hypothesising or the development of economic theories and models; 2. Making assumptions about human behaviour such as self interest and rational behaviour; and 3. Using mathematics and the statistical analysis of data to make inferences and draw conclusions about economic behaviour. is is known as the empirical testing of economic hypotheses. e process of economic methodology is illustrated in Figure 1.1. Logical reasoning and mathematical techniques are used to devise and test economic models. If the model’s predictions are supported by empirical testing the model is said to be valid. But if the model’s predictions are not supported by empirical testing then economists have to modify their assumptionsand re-specify their models. Economics has two broad branches of theory and research: microeconomics deals with individual economic behaviour and the operation of markets; and macroeconomics is the study of aggregate economic behaviour or activity in the economy as a whole. Other specialised areas of economics include the following: • Development economics, which deals with the problems faced by developing or emerging countries; • Welfare economics, which deals with the analysis of the distribution of income and wealth; • Industry economics, which studies the behaviour of rms and consumers in various types of markets, industries and market structures such as competition and monopoly; • Labour economics, which deals with the operation of the labour market; and • e history of economic thought, which studies the development of economic analysis over time. Economic analysis is largely concerned with positive economics which attempts to explain why certain economic behaviour occurs. is involves modelling, empirical testing, drawing inferences and using the results to make policy recommendations to households, rms and governments. Normative economics is concerned with improving economic performance by analysing the welfare or distributional impact of economic policies or the outcomes of economicbehaviour on individuals and society. © Tim Riley Publications Pty Ltd Year 11 Economics 2023 4 Chapter 1: Introduction to Economics © Tim Riley Publications Pty Ltd Figure 1.1 The Process of Economic Methodology Devise an Economic Model and Make Re-dene the Assumptions and Assumptions about Behaviour Specication of the Model Draw Inferences and Make Predictions According to the Model Test Predictions of the Model Using Real Facts Do Not Support the Theory World Economic Data/Statistics Facts Support the Theory Make Policy Recommendations THE ECONOMIC PROBLEM e economic problem arises because the supply of resources (i.e. land, labour, capital and enterprise) is limited or nite in relation to the demand or wants of individuals. Wants are the desires of individuals, communities and countries for goods and services that will satisfy these desires. For example, wants could include food and water to satisfy hunger and thirst, or cars and housing to satisfy the demand for transport and shelter. Basic wants such as food and water, which are essential for life or survival are referred to in economics as needs. Luxury wants are the desires for goods and services that assist in raising living standards such as cars and televisions, but they are not considered to be essential for life. Wants and Needs Wants are dened as human desires for goods and services which satisfy the demand for items such as food, clothing and shelter. Wants can be classied in economics according to their nature: • Basic wants are needs that all individuals must satisfy to some degree to survive, such as food, water, clothing and shelter. Without these basic wants being satised, individuals might not survive in their environment, or at the very least, experience a very low standard of living, or live in poverty. • Recurring wants are those wants that must be continually satised, or satised at regular intervals, such as food, water, clothing and shelter so that people can physically survive. • Substitute wants are those wants that are interchangeable, such as a consumer wanting to buy a second hand car instead of a new car because it is within the consumer’s budget or level of income. • Luxury wants are the desires for goods and services which satisfy needs in excess of basic goods and services needed for survival, such as the desire for holidays, computers, entertainment and cars. • Complementary wants refer to those wants which are derived from other wants such as cars and petrol, knives and forks, computers and printers. ese goods are all complementary in use. • Individual wants are the wants of each person according to their preferences and income, such as the types of food, clothing and shelter they prefer and can aord to buy with their money income. • Collective wants are the wants demanded by a community or a group of people such as health care, education, roads, defence, transport, police, ambulance, emergency and re brigade services. Year 11 Economics 2023 © Tim Riley Publications Pty Ltd