Notes On All Topics
Notes On All Topics
Notes On All Topics
Labour The mental and physical effort that people devote Wage, Salary,
to producing goods and services e.g. doctors. Commission
1. Individuals are all the people in an economy earning an income, and spending it on goods
and services; they are the owners of productive resources.
a. Individual receive income from firms for their input. This income is taxed. Then an
individual can either spend it or save it. If it is spent the good or service, is either
domestically or internationally made.
2. Businesses are all the firms engaged in the provision of a good or service. It concerns all
their activities such as the purchase of FOP’s and resultant use.
a. Pay individuals for input, and receive money for goods and services from them.
3. Financial Institutions are all those institutions engaged in the borrowing and lending of
money, such as banks, insurance companies, superannuation companies etc.
a. Enable investment and saving within an economy, through taking deposits (savings)
and loaning them to businesses. This is known as the mobilization of funds
4. Governments are all the levels of controlling bodies in an economy.
a. Satisfies collective wants, through taxation of income and gov’t expenditure.
5. International Flows consist of all the transactions an economy undertakes with the rest of
the world.
a. Imports are goods and services that are produced overseas but bought by Australia
b. Exports are goods and services produced by Australia, but sold to other countries
Injections are those flows of money that increase aggregate income and the general economic level of
economy activity:
● Investment → Current expenditure that is made in order to obtain benefits for the future. Increases
demand for capital goods, stimulating production by firms leading to rising production and
employment, and overall income levels in the economy
● Expenditure → When the government spends revenue on collective goods and services, income is
received by government employees, and employees of private businesses from which it purchases
goods. Government may also make transfer payments such as pension, and unemployment benefits.
● Exports → Money paid for a good or service is funneled from another economy into the Australian
economy, increasing the flow of money.
Leakages are those items that remove money from the circular flow of income, decreasing aggregate
income and the general level of economic activity
● Taxation → Reduces the amount of money available for consumers to purchase goods or services.
Similarly for businesses this reduces the amount of money available for the purchase of resources.
● Imports → The money paid for a good or service is funneled from Australia into the other economy
where the good or service was produced
● Saving → Consumption is deferred to a later point of time reducing money spent on goods or services.
This enables investment within an economy, and increases the productive capacity and stock of
productive resources of an economy.
Equilibrium is when total injections are equivalent to total leakages; when all the money leaving the
circular flow is equal to the money entering.
Disequilibrium occurs when total injections are imbalanced with total leakages
● Total Leakages > Total Injections
○ Economic activity slows down along with income, production and employment.
Consumers will have less income to be spent, taxed and saved. Therefore the
economy will tend back to equilibrium, but with a lower level of income in the
circular flow.
● Toal Leakages < Total Injections
○ Economic activity rises along with income, production and employment. More
income will be spent and taxed. Thus equilibrium will be restored.
The government has a significant role on the circular flow of income, as through their macroeconomic
and microeconomics policies they can stimulate or dampen the economy in relation to leakages and
injections of the circular-flow.
● The factor market is where the FOP’s are bought and sold
● The goods market is where goods and services are bought and sold
● The interaction between these two markets provides income within an economy, with the
government redistributing the flow of money between the two.
Some other areas of differences:
➔ Private ownership of property: Individuals can own, buy and sell FOP’s to derive income and
wealth.
➔ Consumer sovereignty: Consumers collectively through market demand decide what is
produced in an economy and how much is produced, through exercising their freedom of
choice
➔ Freedom of enterprise: “Free enterprise refers to business activities that are not regulated by
the government but are defined by a set of legal rules such as property rights, contracts, and
competitive bidding.”
➔ Competition: is the pressure on firms in a market to lower prices or improve the quantity or
quality of output to increase sales of G&S, as caused by other firms or factors.
Role of the government in the market economy
● Resource allocation:
○ Provision of essential goods and services that the private sector is not willing to
produce, or otherwise can not be entrusted with
○ Restrict production of harmful goods
○ Allocative efficiency refers to the economy’s ability to allocate resources to satisfy
consumer wants
● Income distribution:
○ Create a more equitable society and take care of citizens
● Economic stability:
○ Smooth out the sharp fluctuations in the business cycle
○ Ensure stability in the economy and the financial system
Intervention in the key economic concerns
● What to produce: The government influences what is produced through either encouraging
the production of a good through tools such as subsidies, tax incentives or discouraging a
certain product through taxation, and laws. The government can also provide collective goods.
● How much to produce: Likewise the government can affect the quantity of a good or service
produced through similar methods (tax, policy, subsidies, restrictions etc.) For example the
government can encourage producers to compete through protectionist trade policies
● How to produce: The cost of the FOP’s and how they are used in the production process, can
be changed through laws i.e. minimum wage, environmental protection acts.
● How to distribute production: A government through their respective policies will change
the total share of production each individual receives, hence making it more equitable or the
converse; they regularly intervene with price mechanism and the factor market. For example
in Australia a progressive tax system is used.
Other things to consider (See Chapter 3.3 in The Market Economy)
● Comparison of Australia against other OECD countries
● Global Financial Crisis
● Trade relationships with Asian Economies
● Living standards and quality of life in this region
● Distribution of income
● Environmental Sustainability
● Level of employment
● The role of the government
Topic 2: Consumers and Business
The role of Consumers in the economy (Chapter 4)
● Consumer sovereignty; as said earlier consumers through their collective demand
(consumption patterns) ultimately determine what is produced by profit driven firms
● If there is high demand relative to supply, the price will rise and producers will notice that
higher profits can be made from such goods. Resultantly they will shift their production to
that good
● Consumer income → types of production that occurs → economic activity
Erosion of consumer sovereignty
1. Marketing exerts a power influence over the spending patterns of consumers, to alter the
behaviour of consumers, in satisfying their wants and needs.
2. Misleading or deceptive conduct occurs when consumers are deceived through dishonest
claims about a product, manipulative marketing etc.
3. Planned obsolescence: Goods that are designed to break after a certain period of time
4. Anti-competitive behaviour; Firms that operate in markets, in which there are few other
firms may diminish the ability of consumers to “choose what they really want”. Consider the
banking sector.
Decision to spend or save
In general an individual may either spend or save (deferred consumption) their income. Hence the
following Y = C + S can be made; where Y is disposable income, C is consumption and S is savings.
● Average propensity to consume is the total proportion of income spent on consumption and
is calculated as AP C = CY
● Likewise average propensity to save is the total proportion of income saved and is similarly
calculated as: AP S = YS
A variety of factors may influence the above decision including cultural factors, personality factors,
confidence, future expectations, income, age, tax policies and availability of credit etc.
● Marginal propensity to consume is the proportion of each extra dollar earned that is
ΔC
consumed and is calculated as M P C = ΔY
● Marginal propensity to save is the proportion of
each extra dollar that is saved and is calculated as
ΔS
M P S = ΔY
● As each extra dollar must either be saved or spent
the following M P C + M P S = 1 can also be made
We can also apply the following principles to a whole
economy, however there are some exceptions.
Life cycle theory of consumption
● Age plays the greatest role in savings and
consumption patterns, as our income stream and
propensity to consume or save are dynamic.
● Observe the beside diagram and consider how and why income varies with age.
Factors influencing individual consumer choice
There are endless ways an individual may spend their income, however economists assume that an
individual will attempt to maximise the utility of each purchase they make. However we find that
this is sometimes constraint by the market and products its creates, and the price at which they are
sold. These are the primary factors that affect the above:
1. The level of income; as an individual earns a greater income they tend to spend more, as the
concept of utility may change for each person. Consider an investment banker vs a retiree.
2. The price of a good or service itself; consumers must decide if they are willing to pay the
nominated price for an item, if it is a necessity this may bear a greater influence in
comparison to that of a want
3. The price of a substitute and complement goods;
a. A substitute good is a good consumers may choose to use in place of another good,
they are considered as having a similar function
b. A complementary good is one that is used in conjunct with another.
4. Consumer tastes and preferences; An individual will choose to purchase a good or service
that provides the highest level of personal satisfaction or utility. These preferences are
dynamic.
5. Advertising; the individual consumer choice is altered by advertising which can make the
demand for goods and services less responsive to price increases, through building consumer
loyalty and can even remove price sensitivity.
Consumption and Saving expressed as a function
The Consumption function
● The consumption expresses consumption in terms of autonomous consumption (not related to
changed level of income e.g. rent, insurance) and induced consumption (related to direct
changes in the level of income e.g. electronics, cars etc.)
● Is calculated as C = C 0 + cY where C 0 is autonomous consumption, c is MPC, Y is
disposable income and C is total consumption
The Saving function
● The saving functions expresses saving as the sum of autonomous saving (not related to
changed level of income) and induced saving (related to direct changes in the level of income)
● Is calculated as S = − C 0 + sY where − C 0 is autonomous dissaving, s is MPS, Y is
disposable income and S is total saving.
Example calculation
● Both are calculated in a similar manner so here is an
example for the consumption function which can also be
applied to other calculations
1. Case 1 (Graph is given, and function must be determined)
a. Autonomous consumption is 200, as at 0 income
200 is still expended
ΔC
b. Finding the MPC, which is ΔY ; the most suitable
points to choose is when income is generally 0 as it
makes the calculation quicker, however for
demonstration we will choose when income is 400,
and 350.
c. M P C = 350−300
400−300 = 0.2
d. Plug these values into the consumption function,
which yields C = 200 + 0.2Y
2. Case 2 (Function is given and must be graphed)
a. Draw a 45 degree line (try doing this with the value
found in 1d and working in the opposite direction to
graph the line)
b. Determine autonomous consumption or saving, this is where the function intercepts
the y axis
c. Input random values for disposable income, and calculate the output value
d. Graph few values, and draw a straight line through them
Sources of consumer income
● Returns to FOP’s
○ Wage from labour (earned income): is the main source of income for consumer and
includes salaries, and wage payments given for input into the PP. It also includes
other non-wage income such as superannuation contributions and fringe benefits.
○ Rent from land (unearned): consumers may own a property, that provides rent.
○ Interest from capital (unearned): Bonds, shares, superannuation and other
investments provide interest as a return on a FOP.
○ Profit from entrepreneurial skills: Individuals involved in the operation of a
business receive profit as a return for their entrepreneurial skill.
● Social Welfare
○ Assistance to the aged; retired individuals
○ Family payments; families with children, who have a low income
○ Disability support payment; not able to work due to physical or mental disability
○ Unemployment benefits; those seeking work but unable to get.
The technical optimum (output Y) is the most efficient level of production for a firm:
● Any movement along the curve towards the technical optimum (X→ Y or Z→ Y) is an
internal economy of scale, resulting in a lower per-unit cost of production.
● Any movement along the curve away from the technical optimum (Y→ X or Y→ Z) is known
as an internal diseconomy of scale.
An external economies/diseconomies of scale can be represented on the following LRAC.
The technical optimum on the LRAC curve is shifting upwards or downwards:
● A downward movement of the LRAC curve ( LRAC 1 → LRAC 2 ) represents an external
economies of scale
● An upwards movement of the LRAC curve ( LRAC 1 → LRAC 3 ) represents an external
diseconomies of scale.
Returns to Scale refers to the relationship between a change in input and a change in output:
● Increasing returns to scale occurs when the increase in output is greater than the increase in
input.
● Constant returns to scale occurs when the change in output is equal to the change in input
● Decreasing returns to scale occurs when the change in output is less than the change in
input.
Topic 3: Markets
The role of the market:
A market is a situation in which buyers and sellers are in contact for the purpose of exchanging. They
do not have to be a physical place, as exchange can occur over the telephone or on electronic markets.
Product markets refer to where and how final goods or services are bought and sold.
Factor markets refer to markets where the factors of production are bought and sold.
These exchanges are represented in:
Derived demand is the demand for productive resources, which is derived from the demand for final
goods and services or output e.g. if demand for computers increase, demand for metals will increase.
Relative price refers to the opportunity cost in consumption or production. They reflect the relative
opportunity cost of selecting one alternative relative to another alternative.
Demand (Chapter 6)
If an individual demands something, they:
● Want it
● Can afford it
● Have made a definite plan to buy it
The Law of Demand states that with all other factors being equal, an increase in the price of a good
or service increases, consumer demand for that good or service will decrease and vice versa. This is
due to the:
● Substitution effect: As the opportunity cost of a good rises, the incentive to switch to a
substitute becomes stronger
● Income effect: As prices rise, a larger proportion of income is used, resulting in less demand.
A giffen good is an exception to the law of demand, as it is a product that is consumed more as the
price rises.
Individual demand is the demand for a product by an individual in a market.
Market demand is the sum of all individual demands for certain products in a market.
On the demand curve:
A movement along the demand curve occurs when there is a
change in the price of the good itself. If the price increases,
there will be a contraction of demand, and if the price lower,
there will be an expansion of demand.
When there is a change in a factor other than the price of the
product itself, the demand curve shifts left (decrease) or right
(increase).
There will be a shift (increase/decrease) in the demand curve if:
● The price of a substitute changes: If the price of a substitute falls, demand will decrease as
consumers would move towards cheaper substitutes for that product. If it rises, demand will
increase as the original product would be cheaper.
● The price of a complement changes: Complements are usually purchased together, so if the
price of a complement increases, demand increases and vice versa.
● Expected future price changes: If the price is expected to rise, current demand will increase.
If price is expected to fall, current demand will decrease as people will wait, then increase
when the price eventually falls.
● Income changes: If income rises, demand increases due to more disposable income. If
income falls, demand will decrease as people will have less disposable income to spend.
● Income distribution changes: For example, if the income is distributed towards higher
income earners, demand for luxury goods will rise.
● Expected future income changes: It is uncertain what will happen if expected income
increases. However, if income is expected to fall, people will increase their APS and MPS,
hence leading to a decrease in demand
● Population decreases: There will be less
individual demand, leading to a lower market
demand.
● Age distribution: For example, a growth in
younger people will lead to more demand for
toys.
When there is an increase in demand, the curve shifts from D1 to D2 . Now at the same price, the
quantity demanded increases from Q1 to Q2 . When there is a decrease in demand, the curve shifts
from D1 to D3 . At the same price, the quantity demanded has decreased from Q1 to Q3 .
Aggregate demand (AD) refers to the total demand for goods and services within an economy. It is
comprised of Consumption (C), Investment (I), Government expenditure (G) and Exports (X) minus
Imports (M). An increase in AD will lead to an increased demand of output from firms. This forces
firms to increase their output and improve efficiency. This will lead to an increase in economic
activity. A decrease in AD forces firms to decrease price and therefore output so that they can still
gain sales revenue. This will lead to a decrease in economic activity.
Price elasticity of demand:
Elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a
change in its price when all other influences on buying plans remain the same. Elasticity (E) is a
%ΔQd
number calculated by the formula: E = %ΔP , where %ΔQd is the percentage change in quantity
demanded and %ΔP is the percentage change in price.
Price Elastic There is a strong response to a change in price. The percentage change in quantity
E>1 demanded is larger than the percentage change in price.
Unit Elastic There is a proportional response to a change in price. The percentage change in
E=1 quantity demanded is the same as the percentage change in price.
Price Inelastic There is a weak response to a change in price. The percentage change in quantity
E<1 demanded is less than the percentage change in price.
Perfectly elastic demand refers to demand in which consumers will demand an infinite quantity at a
certain price, but nothing at a price above this. No such situation exists in real life. E=∞
Perfectly inelastic demand refers to demand where consumers are willing to pay
any price in order to obtain a given quantity of a good. This can apply in some
situations such as a life saving drug. E=0
Firms need to know the elasticity of demand of their product. This is as:
● If demand is elastic, decreasing price will lead to much more sales, and
much greater revenue.
● If demand is inelastic, increasing price will increase revenue as the extra earning per unit
would cover the small amount of lost demand.
Governments need to know the price elasticity of demand:
● When pricing public/merit goods (these goods will be discussed in topic 6)
● To know the effect of a change in the level of indirect taxes
● So they can calculate the impact on revenue from the introduction of an
indirect tax
In the long run, price elasticity of demand is higher than in the short run.
The elasticity of demand can also be calculated using the total outlay method by
looking at the effect of a change in price on the revenue of a product.
Unit elastic demand When there is a price change but no change in revenue:
P rice ↑ or ↓ and Revenue-
Unemployment
● A key aspect of the labour market is the level of unemployment, as individuals who are
unemployed represent an unused resources; as such policy-makers often try to reduce
unemployment to the greatest extent possible
● In any economy the amount of individuals unemployed can be calculated with some degree of
certainty (see The Australian Workforce above)
However there is more than one type of unemployment, as each individual’s reason for being
unemployed differs;
❖ Cyclical unemployment is caused by fluctuations in the business cycle, and changes in
aggregate demand
❖ Structural unemployment occurs when there is a mismatch between the skills supplied
(especially those of the unemployed) and demanded within a labour market.
❖ Long term unemployment is when an individual has been unemployed for a period of 12
months or more
❖ Seasonal unemployment is due to jobs which are by nature, only viable for certain periods of
time (ski-resort employee, or tour-guide as an example)
❖ Frictional unemployment occurs when individuals are in between jobs, and references
‘frictions’ such as taking job interviews, searching for opportunities etc.
❖ Hard core unemployment references those individuals unemployed as a result of a personal
characteristics; such as a mental or physical disability.
❖ Hidden unemployment speaks to those unemployed individuals whom are not counted in
official statistics (this is especially important during prolonged periods of economic
downswing)
❖ Underemployment is when individuals are employed but want to work more hours.
NAIRU and the Phillips Curve (Optional read)
What is the Phillips Curve?
● It is an economic concept stating that inflation and unemployment have an inverse
relationship (however it is not always true, as seen by periods of STAGFLATION)
● The belief that any fiscal stimulus package would increase aggregate demand and cause
effects such as an increase in labour demand, employment and wage rates was the basis for
this theory.
● If inflation went up,
unemployment would go
down and the converse
● Hence many governments
implemented fiscal and
monetary policies aimed at
either expanding or
contracting the economy, to
achieve their target inflation
rate.
● However these policies failed,
when during the 1970’s there
was a period of high
unemployment and high inflation (STAGFLATION), directly contradicting this theory.
● Economists discovered that because workers and consumers can change their expectations
about inflation and unemployment, this relationship could only hold in the short run
● So when a central banks seeks to increase inflation in order to reduce unemployment it may
cause an initial shift along the SRPC (Short Run Phillips Curve), but as expectations about
inflation will change the SRPC will move outwards.
● So if expectations can adapt, then the LRPC (Long Run Phillips Curve) is where
unemployment will be after market expectations have worked themselves out (the natural rate
of unemployment). And monetary policy simply raises or lowers the inflation rate after the
market has worked itself out.
● This all goes to say that in the long run there is no well defined relationship between
unemployment and inflation
What is NAIRU?
● The Non Accelerating Inflationary Rate of Unemployment is the specific level of
unemployment that does not cause inflation to rise.
● Economy performs poorly → Businesses cannot increase prices due to a lack of consumer
demand → Price of product falls → Less people employed → Unemployment goes up →
Inflation goes down
● Economy performs well → Businesses raise prices to match demand → More goods bought
and sold → Inflationary pressures → More individuals employed → Unemployment goes
down → Inflation goes up
● Think of it as the tipping point between unemployment and rising or falling prices.
● This crucial moment is represented at point (A), as when an economy tries to reduce
unemployment past that point, inflation rises.
What is the natural rate of unemployment?
● The natural rate of unemployment is the minimum unemployment rate resulting from real or
voluntary economic forces. It reflects the number of people whom are unemployed due to the
structure of the labour market; such as frictional and structural unemployment. It does not
include those whom are unemployed due to fluctuation in economic activity.
● Hence full employment occurs when cyclical employment is zero; as the natural movement of
labour deems that at any time irrespective of economic growth, employment will persist due
to other factors.
The movement away from full-time work
There are in general, the following types of employment in Australia
Full-time employees
They work at least 38 hours per week, on a predefined basis.
Hours of work are defined by an agreement between their employer, additionally they may also be
set by an award or registered agreement.
They are entitled to following types of leave: long service, parental, bereavement, annual, personal,
sick, and carer’s.
Part time employees
are similar to full time employees but less than 38 hours per week on average
they work on a pro rata (proportional) basis and are paid by how many hours they work.
Casual
Employed on an hourly basis
Lacking entitlements received by other kinds of employment.
Compensated through loading in addition to their hourly rate.
They work on an irregular basis in order to meet business demands and have: no expectation of
ongoing work, no obligation to accept work offers, no sick or annual leave pay, no obligation to
provide notice of ending of employment unless specified by an award, agreement or contract.
Fixed term and contract
Employers can employ individuals under contract, if a certain task needs to be performed, or if the
contract is time based.
Have the same entitlements as permanent staff, but on a pro rata basis.
Apprentices and trainees
Employees working towards gaining a national qualification
Payment is set by an award or registered agreement.
Parties involved their contract include the registered training provider, the employer and the
employee.
Commission and piece rate
Performance based employment type.
The employer may compensate good performance through the distribution of a commission or piece
rate. However this may only be given if an awards stipulates that such compensation is applicable, or
if a set agreement allows for it.
Volunteer and Unpaid work
The provision of services and products, without financial compensation.
Over the past decade, the structure of employment in the Australian labour market has changed
significantly:
● Shift away from full-time employees to part time and casual employees
● Growing use of arrangements of contractors, outsourcing and
subcontracting arrangements; creates greater efficiencies in production
process
● Casualization of the workforce;
○ Advantages: Flexibility for employers to increase and reduce
staff, avoid paying non-wage costs, flexibility for employees etc.
○ Disadvantages: Erosion of job security, difficulty for employees to plan for the future
and carry out financial transactions (home loan), less staff loyalty etc.
The Changing Australian Labour Market (Chapter 11)
An outline of the labour market
The relationship between employers (demand) and employees (supply) is a crucial part of how the
economy functions. Employers want labour costs to be kept as low as possible, whereas employees
want the highest wage as it is their largest source of income
It is this relation that is known as industrial relations which can further be defined as “the laws,
institutions and processes established to manage the relationship between employers and employees; it
determines wages and conflict resolution within the workplace”
Australia has a unique industrial relation system. Over the past century our system has moved away
from a traditionalist structure to guarantee fair outcomes for both the employer and employee. As a
result, there are many special laws, policies and institutions that operate within the labour market, and
moreover negotiate things such as wages, contracts and industrial disputes etc.
Because of this the Australian labour market is far from a perfectly competitive market, as
market-operations are significantly impacted by institutional forces that seek to improve labour
market outcomes
The role of trade unions is simply to represent the interests of its members by negotiating
improvements in their wages and working conditions.
● Occupational unions are formed with members who possess a similar occupational skill/s
● Industry-based unions include members in a particular industry
● Enterprise-based unions represent the workings of one specific enterprise
● General unions cover a broad range of workers with different skills, across different industries
Note that in recent decades union membership has declined significantly, due to microeconomic
reform, specifically the decentralisation of the labour market.
How do unions influence wage outcomes for its members?
By coordinating the bargaining power of all its members (employees), unions have a greater collective
bargaining power in negotiations.
● Representing employee interests; unions provide
a collective voice for their members when
attempting to promote change (improving safety
standards, work environment etc
● Exercising their bargaining power in
negotiations with employers; when employees
join together and go on strike, their collective
bargaining power will have a substantial
influence (variable input of labour is being
unproductive), as they can negotiate a wage price above equilibrium.
○ At this point (see beside diagram) although the wage will be higher, there will also be
an oversupply, meaning there will be less employment.
● Restricting the supply of labour; unions can impose restrictions on the supply of labour
through imposing both macro and micro restrictions. They will essence say that they will not
work, unless their demands are met
○ In this case labour supply is outright shifted to the left, with the wage rate similarly
being pushed up, as well as the quantity employed also being lessened.
The role of employer associations
Employer associations were formed in direct opposition to unions, however they are not as well
coordinated as their members also compete with each other. In general employer associations do not
deal with unions, as employers prefer to deal with them themselves. Their main roles are:
● Represent and promote the interests of their members through lobbying the government on
industrial relations policies.
● Manage industrial relations issues by representing their members at industrial tribunals and
settling industrial disputes
● Provide advice, training and direct assistance to employers.
● Assist members in negotiating wage agreements (sometimes)
Through lobbying the government for protection from foreign competition, for tax exemptions,
industry assistance etc. employer associations are able to secure a larger share of the domestic
market for its members.
Australia’s current industrial relations framework
The Australian industrial relations system has slowly evolved from one of central wage
determinations, to one that allows for greater variations and flexibility in the way work arrangements
are made. The current systems is governed by the Fair Work Act 2009, which replaced the Workplace
Relations Act 1996.
The current system has established three main streams in the labour market that ascertains the pay and
conditions of employment — industrial awards, collective agreements and individual employment
contracts
This system is overseen by the Fair Work Commission which is a government agency that regulates
industrial relations in Australia. Its functions include:
dealing with unfair dismissal claims dealing with anti-bullying claims dealing with general protections and unlawful termination claims
setting the national minimum wage and minimum wages in modern awards making, reviewing and varying modern awards
assisting the bargaining process for enterprise agreements approving, varying and terminating enterprise agreements
making orders to stop or suspend industrial action dealing with disputes brought to the Commission under the dispute resolution procedures
of modern awards and enterprise agreements determining applications for right of entry permits
National employment standards (NES) — Australian employees must receive these ten guarantees
under the NES from employers if they are employed (may vary for casuals). These provisions are:
As said earlier there are three main ways of wage determination in the Australian industrial relations
system, they are:
● Industrial awards (Modern awards) establish the minimum wage and working conditions
for employees. They set the absolute minimum wage and
working conditions for a type of employment with
respect to a work or industry sector. They often extend
the basic guarantees outlined the NES, to be more
industry specific. All the other types of wage
determination in both the formal and informal system,
must provide conditions in excess of the relevant modern
award.
● Enterprise agreements are negotiated between
employers and employees, and are the most common
method of wage determination; were introduced when
the labour market became decentralised. They must
provide conditions in excess of a relevant industrial
award and are subject to the “Better Off Overall Test”, and are usually negotiated between a
union and employee. They are also known as enterprise bargaining agreements, and were
previously called collective agreements.
○ Single-enterprise are made between a single employer (or two or more single interest
employers) and employees employed at the time
the agreement is made, and who will be covered
by the agreement. Single interest employers are
employers that are in a joint venture or common
enterprise or are related corporations.
○ Multi-enterprise are created by two or more
employers as well as the employees of those
different enterprises. These agreements differ
from single enterprise agreements in that the
employers do not need to prove that they have a
single interest in the bargaining process
○ Greenfields are made between an employer and
their employees before the business has started
and before anyone has been employed. Made through an employer and an employee
association
● Common law contracts is at its most basic level, an employment relationship between an
employer and an employee is a civil contract where the employee agrees to perform work for
the employer in exchange for monetary or other payment. They are part of the informal
system and are also known as “individual unregistered agreements”, as they are specific to
one person or enterprise. They also must provide conditions in excess of a modern award.
Individuals Individuals borrow money for personal Individuals who hold wealth and do not
use. They borrow for short term wish to spend can: Invest it in assets,
purposes e.g. travel, education, credit shares and interest bearing deposits.
cards and also borrow in the long term When they place money in deposits, they
e.g. mortgages. are lending money.
Businesses Businesses do the most borrowing. If a business has a strong cash flow and
They need access to funds for good profits with no immediate plan for
expansion, investment and expansion, they may deposit funds into
development. ADI’s, especially when interest rates are
high.
Governments Governments may need to borrow When governments are in surplus, they
funds to increase economic activity or can: Pay off outstanding debt or maintain
fund a rise in debt or government positive financial balances by lending
expenditure. money through the financial sector.
International Other countries may need to borrow International lenders provide funds for
from Australia to meet their goals and domestic borrowers. Australia relies quite
obligations. heavily on international savings to fund
domestic consumption and investment.
Stabilisation of AD:
Monetary Policy
As stated earlier, an interest rate is the price of money. The two types of rates are the:
● Borrowing rate: Rate of interest offered by financial institutions if you put money with them
● Lending rate: Rate of interest charged by financial institutions if you use their money
Financial institutions work in the following way:
Inflation is the rate of increase for goods and services over time. It is measured by the Australian
Bureau of Statistics (ABS). Its measurement is the CPI.
The RBA conducts monetary policy, works to maintain a strong financial system and issues the
nation's currency.
Monetary involves setting the interest the interest rate on the overnight money market. Other
interest rates in the economy are influenced by these, so monetary policy affects the behaviour of
borrowers and lenders.
The RBA derives its powers from the RBA Act 1959, which sets the goals of the:
● Economic prosperity and welfare for the people of Australia
● Maintenance of full employment
● Stability of the currency
The RBA has found that maintaining an average inflation rate of 2-3% on average per annum over the
business cycle will allow them to achieve their goals.
The RBA meets 11 times a year on the first tuesday of every month except January. At the meeting
they can either decide to:
● Decrease the cash rate (loosening stance)
● Increase the cash rate (tightening stance)
● Leave the cash rate (neutral stance)
OMO’s can
occur in
three ways:
There are three ways in which a government can use its surplus;
● Pay debt incurred with the private sector: Debts accumulated from past borrowings are
repaid, reducing future debt obligations. This is the most preferred method of using a budget
surplus. It involves the purchase of old government securities previously sold to the private
sector. Debt interest will be reduced.
● Finance future expenditure or fund tax cuts: Governments can accumulate surplus and use
it to fund future expenditure. It can also be used to fund tax cuts, or be spent on productive
assets e.g. infrastructure.
● Repay overseas debt: This would occur if the RBA used its foreign currency reserves on
behalf of the Aus government, and debited the equivalent amount of AUD from the
governments account with the RBA. The advantage of this is that it reduces net external or
foreign debt owed by the Australian government. This reduces interest payable overseas and
the size of the net primary income deficit, and increases Australia’s external stability.
The three ways in which a government can finance a deficit to meet its spending commitments are to
borrow funds from the:
● Private sector: By selling commonwealth government securities in domestic financial
markets. This is known as bond or debt financing. It requires the government to pay the
money back in the future with interest. The advantages are: The government is certain that
they can fully service the debt, there is no change in the money supply, and there is no
increase in net foreign debt. However the disadvantages a re: Accumulation of public debt, a
rise in interest rates due to crowding out of private investment (interest rate offered must be
competitive), rise in the exchange rate.
● RBA: The government instructs the RBA to print money to cover the shortfall in budget
revenue. This is known as monetary financing. The government sells securities to the RBA
which they must buy. This has not occurred since 1982. The advantages are: no change in
interest rates, no accumulation of public debt. The disadvantages are: An increase in the
money supply, risk of rising inflation, reduction in confidence.
● Overseas financial markets: The RBA sells new government securities in return for foreign
currency. They hold the foreign currency and credits the AUD equivalent of the loan to the
governments account. The advantages are: No increase in domestic interest rates. The
disadvantages are: The accumulation of foreign debt, adding to the current account deficit.
Influences on government policies in Australia
Government policies are influenced by:
● Political parties: Political parties form governments. Economic reform must be supported by
the government in power, meaning that it must be approved by Cabinet.
● Businesses: Successful and growing businesses are crucial for a nation’s prosperity
● Unions: They represent the interests of employees
● Environmental groups: They advocate for environmental protection
● Welfare agencies: They represent the most disadvantaged people in society
● The media: They determine which issues will receive coverage
● Other interest groups: People with concerns, interest or expertise relating to specific issues
work together towards common ends.
● International: Markets have become increasingly interrelated and interdependent in the
current global economy, as a result other economies have the potential to affect Australia’s
economy so it is important Australian policy stance takes this into consideration.
Statistics (2019):
● Cash rate: 1%
● Inflation: 1.6%
● Consumption is 57% of total AD
● Economic Growth: 1.4%
● Wage growth: 2.3%
● Unemployment rate: 5.2%
● Underemployment rate: 8.4%
● Employment Growth: 2.6%
● Participation Rate: 66.1%
● Budget has been in deficit since the GFC 2008, until
● 2019/20 FY Budget Surplus Projection: $7.1 Billion
● Government debt at: $361 Billion
● Government Expenditure at: $501 Billion
● Government Revenue at: $514 Billion
● Income tax: 45% of government revenue
● Company tax: 20% of government revenue
● Health: 16% of government expenditure
● Social security is 36% of government expenditure
● Education: 7% of government expenditure
● Current account : $5.85 billion surplus
● GDP: 1432.20 billion US dollars (2018)
● Business investment as a share of nominal GDP: 12%
● Consumer sentiment index: fell 4.1% from august to 95.5 in september
● Household saving rate: 2.30%