1
Q
Relative Scarcity
A
The basic economic problem is that people have unlimited wants but limited resources.
2
Q
Trade Off
A
The exchange of one thing for another
3
Q
Perfect Market
A
A market structure characterised by many buyers and sellers, homogeneous products, no barriers to entry/exit, and perfect information
4
Q
The Law of Demand
A
States that as the price of a good or service increases, the quantity demanded decreases. The opposite is also true.
5
Q
Non-Price Demand Factors
A
Change in Price of Substitutes
Change in Interest Rates
Change in Disposable Income
Effect of Successful Advertising
6
Q
The Law of Supply
A
States that as the price of a good or service increases, the quantity supplied increases. The opposite is also true
7
Q
Non-Price Supply Factors
A
Change in the Cost of Production
Technological Change
Productivity Change
Climatic Conditions
Increase in Number of Suppliers
8
Q
Price Elasticity of Demand (PED):
A
The responsiveness of quantity demanded to a change in price.
9
Q
High PED (elastic):
A
Quantity demanded changes significantly with price
10
Q
Low PED (inelastic):
A
Quantity demanded changes little with price
11
Q
Factors influencing PED
A
Availability of substitutes
Necessity vs luxury
Proportion of income
Time since price change
12
Q
Factors influencing PES
A
Time to produce
Spare capacity
Durability of goods
Availability of resources
13
Q
Price Elasticity of Supply (PES):
A
The responsiveness of quantity supplied to a change in price
14
Q
High PES (elastic):
A
Quantity supplied changes significantly with price
15
Q
Low PES (inelastic):
A
Quantity supplied changes little with price
16
Q
Market Failure
A
When the free market fails to allocate resources efficiently or in a way that maximises national living standards.
17
Q
Government Intervention
A
When the government takes action to correct market failure and improve the allocation of resources.
18
Q
Government Failure
A
When government intervention in a market causes a less efficient allocation of resources than the market outcome.
19
Q
Public Good
A
A good that is non-rivalrous (one person’s use doesn’t reduce availability for others) and non-excludable (people cannot be excluded from using it).
20
Q
Common Access Resource
A
Natural resources that are non-excludable but rivalrous, making them vulnerable to overuse or depletion (e.g. fish stocks, forests)
21
Q
Free Rider Problem
A
Occurs when individuals benefit from a good or service without contributing to its cost, often associated with public goods
22
Q
Positive Externality
A
A benefit from an economic activity that is received by third parties, not reflected in the market price (e.g. education, vaccination).
23
Q
Negative Externality
A
A cost from an economic activity that is imposed on third parties, not reflected in the market price (e.g. pollution, second-hand smoke).
24
Q
Indirect Tax
A
A tax placed on the sale of goods or services, collected by sellers and passed on to the consumer (e.g. GST, excise on fuel).
25
Inflation
A sustained increase in the general level of prices over a period of time
26
Goal of Low Inflation:
The goal of low inflation refers to an increase in the average price of all goods and services produced in an economy over a period of time at a rate of 2-3%.
27
Trimmed Mean:
Trimmed Mean refers to the average rate of inflation after ‘trimming’ away the items with the largest price changes (positive or negative). It is the weight average of the middle 70% of items.
28
Weighted Medium:
Weighted Medium refers to the inflation rate of the item at the middle of the price changes in the CPI basket (the 50th percentage by weight)
29
Disinflation
Disinflation refers to prices still increasing but at a reduced rate. (E.g. inflation was 4% and is now 3%)
30
Deflation
Deflation refers to prices decreasing over time. A negative rate of inflation
31
Demand Inflation:
Demand inflation refers to when excessive levels of aggregate demand creates widespread shortages and put upward pressure on prices.
32
Cost Inflation:
Cost inflation is aggregate supply-side inflation and refers to when businesses pass on increases in cost of production to consumers through higher prices.
33
Headline Inflation:
Simply the raw inflation rate measure by changes in CPI
34
Underlying Inflation:
Removes the impacts of volatile price changes to gain a more accurate indication of how inflation would impact the average person
35
If inflation is too high (Factors)
It erodes purchasing power
Value of assets for wealthy individuals' will rise
Unemployment decreases
Living standards decrease
36
If inflation is too low (Factors)
Businesses see weak inflation as slow growth in profits and are less incentivised to prooduce. Therefore its likely to lead to higher unemployment, lower production and drop living standards.
Living standards decrease
Unemployment increases
37
Inflation Formula
Inflation = (price[year 2] - price[year 1]) / price[year 1]
38
Inflation range
June 2023
June 2025
June 2023: 6.0%
June 2025: 2.1%
39
Economic growth:
An increase in the real value of goods and services
40
The Goal of Strong and Sustainable Economic Growth:
The goal of strong and sustainable economic growth refers to the increase in the real value of all goods and services produced in a country in a certain time frame without causing inflationary, environmental or external pressures. This is found by the RBA to be at a 3-3.5% per year.
41
Aggregate Demand:
Aggregate demand (AD) refers to the total spending by a nation on goods and services over a period of time. This is calculated by AD = Consumption + Investment + G1overnment DtD + G2overnment Invest + (eXports - iMports)
42
Factors of Aggregate Demand:
Disposable Income
Consumer & Business Confidence
Inflation
43
Aggregate Supply:
Aggregate supply (AS) refers to the total number of goods and services that can and are willing to be produced in a nation over a given time period
44
Factors of Aggregate Supply:
Technological change (productivity)
Cost of Production
Climate Conditions
45
Economic growth (Formula)
Economic growth = (GDP New - GDP Old) / Old GDP
46
Economic Growth range
June 2023:
June 2025:
June 2023: 2.1%
June 2025: 1.8%
47
The Goal of Full Employment (NAIRU):
The goal of full employment refers to the lowest rate of unemployment that does not create unacceptable inflationary or external pressures. This is considered to be 4.25%.
48
Employed:
Refers to a person aged 15 or older who worked at least 1 hour in the survey week.
49
Unemployed:
Refers to a person aged 15 or older who is actively seeking employment
50
Underemployed:
Refers to a person who is employed but is working less hours than they’d prefer.
51
Hidden Unemployment:
Refers to people who are not counted as unemployed (Are not actively looking for work) but would accept employment if offered.
52
Long-term Unemployment:
Refers to being considered unemployed for over 12 months
53
Frictional Unemployment:
Refers to unemployment occurring during the transition between jobs.
54
(Formula) Participation Rate
Participation Rate = Labour Force / Working-age Population
55
(Formula) Unemployment Rate
Unemployment Rate = Unemployed / Labour Force
56
(Formula) Underutilisation Rate
Underutilisation Rate = Unemployment Rate + Underemployment Rate
57
Unemployment rate range
June 2023
june 2025
June 2023: 3.5%
june 2025: 4.3%
58
International Competitiveness
Refers to how well Australian producers can use resources relatively efficiently to compete against overseas producers, both in local and international markets, without government intervention.
59
Pros to International Competitiveness
Increased access to resources
Lower prices
Increased competition and efficiency
60
Comparative Advantage
When a country can produce a good or service at a lower opportunity cost than another country
61
Economies of Scale
Refers to when a firm spreads its fixed costs (cost of production per unit) across all units produced, enabling the firm to lower prices
62
Free trade involves removing barriers like:
Tariffs (taxes on imports)
Quotas (restrictions on import volumes)
Subsidies to local industries
63
The balance of payments account (BOP)
Refers to a record of the monetary value of different types of financial transactions between Australia and the rest of the world.
64
Balance of Goods and Services
Is a subaccount of the BOP and is the net total of goods and services
65
BOP Credit
BOP Credit = Money coming in
66
BOP Debit
BOP Debit = Money going out
67
Net Goods
Difference between export credits for goods (wool, minerals, manufactured items) MINUS import debits for goods (oil, electronic equipment, machinery
68
Net Services
Service credits (tourism, education, transportation, royalties) MINUS service debits (paid to other countries)
69
Net Primary Income
Income credits received (wages, salaries, interest, dividends) MINUS income debits paid out (interest, rent, profit remittances)
70
Net Secondary Income
Secondary income credits (pensions, gifts) MINUS secondary income debits (gifts, foreign aid) (One-way transactions with nothing exchanged in return
71
Domestic Economic Impact on Current Account
Strong spending → Higher imports → Weaker CAB
Weak spending → Lower imports → Stronger CAB
72
Overseas Economic Conditions on Current Account
Strong overseas growth → Higher exports → Stronger CAB
Weak overseas growth → Lower exports → Weaker CAB
73
Supply-side Impact on Current Acount
Higher costs → Less competitive → Weaker CAB
Lower costs → More competitive → Stronger CAB
74
National Savings-Investment Gap on Current Account
If savings < investment → Must borrow → Weaker CAB
If savings > investment → Can lend → Stronger CAB
75
Net Foreign Debt (NFD)
refers to the difference in value between Australia’s debt liabilities minus foreign debt liabilities owed to Australia which are both required to be paid back
76
Net Foreign Equity (NFE)
refers to the difference between Australian assets owned by foreigners and Australian ownership of foreign assets
77
Official Debt
Official Debt = Government / Public Debt
78
Non-Official Debt
Non-Official Debt = Individuals and Firms
79
Factors of NFD
Lack of domestic savings
budget deficits
Opportunities for foreign investors
Sound economic, political and social climate
Lower value for the Australian dollar
80
AAA Vs AA Credit Rating
AAA - Indicates extremely strong capacity to repay debt and to lower interest rates
AA - Still strong, but slightly higher risk and higher interest rates
81
Net International Investment Position (NIIP)
Refers to the difference between the value of assets owned by foreign nations and the value of foreign assets owned by Australians (Liability V.s Equity)
82
Capital Deepening
An increase in the quantity or quality of workers will improve labour productivity and boost economic growth.
83
Terms of Trade
Measures the ratio of the average price for exports against the average price for imports, amount of imports that can be purchased with a unit of exports
84
Favourable vs Unfavourable TOT
More favourable: Export prices rise faster (or fall less) than import prices
Can purchase more imports with the given exports
Less favourable: Export prices rise more slowly (or fall more quickly) than import prices
Can purchase fewer imports with the given exports
85
Price Competition Mechanism
Refers to a process where local producers face pressure to lower their prices or improve efficiency due to the availability of cheaper or competitively priced imported goods in the domestic market.
86
External stability
Refers to achieving a sustainable current account, manageable foreign debt, and a stable exchange rate.
87
Monetary Policy:
Is an AD management strategy used by the RBA to manipulate the cash rate and control the interest rates in accordance with its charter.
88
Key Responsibilities of RBA
Implementing Monetary Policy
Issuing Currency
Banker to the Federal Government
Banker to commercial banks
89
The Reserve Bank Board Charter:
The stability of the currency of Australia
The maintenance of full employment in Australia
The economic prosperity and welfare of the people of Australia
90
Conventional Monetary Policy
Refers to the RBA manipulating the target cash rate in the overnight money market to influence interest rates in the economy to change the level of aggregate demand.
91
Short-Term Money Market
Where banks borrow and lend money overnight
Cash rate target implemented here
Crucial link between RBA actions and the broader economy
92
What does the Policy Interest Rate Corridor mean and do
Sets boundaries for interest rates in STMM (Cash Market)
Ceiling rate: the highest rate RBA charges banks
Floor rate: the lowest rate the RBA pays on deposits
The cash rate target sits between these rates
93
Open Market Operations (OMO)
RBA's tool to maintain the cash rate close to the target
Buying bonds: increases cash supply, lowers rates
Selling bonds: decreases cash supply, raises rates
Operates within the policy interest rate corridor
94
Interest Rates on Consumers & Firms
Lower rates: cheaper borrowing, less incentive to save
Higher rates: expensive borrowing, more incentive to save
Lower rates: more investment projects become viable
Higher rates: some investments become less profitable
95
Transmission channels
Transmission channels are channels through which changes in monetary policy affect the broader economy.
96
The 5 Transmission channels
*Saving and investment (cost of credit)
*Cash flow of households and firms
*Wealth/asset price effect
*Availability of credit
*Exchange rate
97
Saving and investment scenario (Transmission Channel)
Cash Rate Increases -> Loans become more expensive -> AD decreases
Cash Rate Decreases -> Loans become less expensive -> AD increases
98
Cash flow of households and firms (Transmission Channel)
(Loans)
Cash rate increases -> Loans cost more to service -> AD slows
Cash rate decreases -> Loans cost less to service -> AD Increase
99
Cash flow of households and firms (Transmission Channel)
(Savings)
Cash rate decreases -> Investments earn lower returns -> AD decreases
Cash rate increases -> investments earn higher returns -> AD increases
.
100
Wealth/asset price effect (Transmission Channel)
Cash rate increases -> assets become more expensive to finance -> value of assets falls -> AD decreases
Cash rate decreases -> assets become less expensive to finance -> value of assets rises -> AD increases
101
Availability of credit
Cash rate decreases -> risk to banks to approve loans lower -> Increased consumption and spending -> AD increases
Cash rate increases -> Risk to banks to approve loans increases -> decreased consumption and spending -> AD decreases
102
Exchange rate (Transmission Channel)
Cash rate increases -> ROI in Australia increases relative to OS -> increases demand for AUD -> AD decreases (X down . M up )
Cash rate decreases -> ROI in Australia decreases relative to OS -> Increases supply of AUD -> AD increases (X up . M down)
*ROI is Return on Investment
** OS is overseas
103
Basis Points V.s Percent
100 basis points for 1 per cent
104
Countercyclical
Countercyclical monetary policy means the RBA adjusts policy settings in the opposite direction to the economic cycle
105
Conventional Policy
Refers to the RBA adjusting the target cash rate to influence interest rates across the economy
106
Unconventional Policy
Involves non-interest-rate tools used by the central bank when the cash rate is near zero and traditional methods are less effective
107
RBA Monetary Stances
Expansionary (accommodative)
Contractionary (restrictive)
Neutral
108
RBA Goal
The RBA’s goals are to influence spending, investment, and borrowing to help achieve the government’s key economic goals of low inflation, sustainable economic growth, and full employment.
109
Expansionary (accommodative) Stance
What: Lowering the cash rate
Goal: Stimulate the economy
Rate: Lowering from 3.5% to 1%
110
Contractionary (restrictive) Stance
What: Raising cash rate
Goal: Slow economy and inflation
Rate: Raising from 3.5% to 5%
111
Neutral Stance
What: Keep cash rate at ‘right’ level
Goal: Maintain the economy
Rate: Around 3.5%
112
Deciding Stance
The RBA assesses indicators such as Inflation rates, economic growth, unemployment levels, consumer and business confidence and international economic conditions.
113
Bonds
Bonds, or government securities, are like stocks which are sold or bought by the RBA to either reduce the supply of cash in the markets to target inflation
114
Discretionary Income
Discretionary Income is the money left over after spending money on bills, taxes and all other essentials like food (most likely this in terms of monetary policy)
115
Disposable Income
Money left over after taxes
116
Strengths of Monetary Policy
Flexible
Independent from Government
Effective at Controlling Inflation
Broad Impact Across the Economy
117
Weaknesses of Monetary Policy
Blunt
Time Lags
Dependent on Confidence and Willingness to Spend
Exchange Rate Volatility
118
Budgetary (Fiscal) Policy
An aggregate demand (AD) strategy directed by the Treasurer involving changes to government receipts (revenue) and outlays (expenditure) to achieve macroeconomic goals and improve living standards
119
Receipts (Revenues)
Money from direct taxes (income tax, company tax), indirect taxes (excise, tariffs), and non-tax revenue
120
Outlays (Expenditure)
Government spending on public goods (defence, health, education), G1 (consumption), G2 (investment), and transfer payments (welfare, subsidies)
121
G1 =
G1 = government current consumption spending.
122
G2 =
G2 = government investment spending
123
Transfer Payments =
Transfer Payments = welfare, subsidies
124
MYEFO =
Mid-Year Economic and Fiscal Outlook, updated budget forecast (December).
125
Changes in receipts/outlays affect AD through
Income tax → Consumption (C).
Welfare → Consumption (C), Gov’t consumption (G1).
Company tax → Investment (I).
Infrastructure → Government investment (G2).
Export grants → Net exports (X).
126
Policy aims of Fiscal Policy
reduce unemployment, boost growth, ease cost of living pressures, and raise wellbeing.
127
Direct Taxation (≈70% of receipts):
Personal income tax, company tax, capital gains tax, Medicare levy, FBT, PRRT.
128
Indirect Taxation:
GST, excise on alcohol/tobacco/fuel, luxury car tax.
129
Non-Tax Revenue (≈7%):
Profits from GBEs (e.g., AusPost).
Asset sales (privatisation).
HECS repayments, royalties, Future Fund interest, property rentals.
130
Progressive Tax:
Higher income → higher % of tax (reduces inequality).
131
Regressive Tax:
Lower income groups pay higher % (e.g., GST → increases inequality).
132
Proportional Tax:
Proportional Tax: Same % regardless of income (neutral effect).
133
Areas of Government Expenture
Social security & welfare (~36%).
Health (~16%).
Defence (~6%).
Education (~7%).
Industry subsidies (mining, manufacturing).
Transport/communications (infrastructure).
134
Current Spending (G1) Includes
Wages/salaries, operating expenses, goods & services (≈90% of spending).
135
Capital Spending (G2) Includes
Infrastructure, equipment, long-term investments (~10%).
136
Transfer Payments
Welfare benefits and subsidies (≈35% of outlays) – not counted in G1/G2 as individuals spend it
137
Public Debt Interest
Payments on borrowings from deficits
138
Budget Outcome Types:
Balanced budget
Deficit
Surplus
Balanced budget – revenue = expenditure.
Deficit – expenditure > revenue.
Surplus – revenue > expenditure.
139
How to Financing a Deficit
Selling bonds to the RBA and private investors
Selling assets like land
140
Problems with Persistent Deficits (Budget)
Loss of credit rating.
Higher interest repayments reduce the ability to fund services.
Increased debt burden on future generations
141
Uses of Surplus (Budget)
Pay off debt.
Save with RBA.
Invest in sovereign wealth funds (special savings).
142
Headline cash outcome
total receipts – total outlays
143
Underlying cash outcome
headline minus one-off/volatile items (most common).
144
Automatic Stabilisers (Cyclical)
built into the system
145
Examples of Automatic Stabilisers (Cyclical)
Tax receipts fall in a downturn (less company/personal tax, GST).
Welfare outlays rise automatically (e.g. JobSeeker).
Cause deficits in downturns, surpluses in booms without deliberate action
146
Discretionary Stabilisers (Structural)
deliberate government choices:
147
Examples Discretionary Stabilisers (Structural)
Tax cuts or increases.
Spending increases (infrastructure, welfare, subsidies).
Used when automatic stabilisers aren’t strong enough.
148
Aggregate Supply-Side Policies:
Measures to reduce costs of production and/or improve supply conditions for firms, enabling non-inflationary growth.
149
Productivity
Output produced per unit of input
150
Productive/technical efficiency
Maximum output at lowest cost
151
Dynamic efficiency
Speed of adapting to changes in market conditions.
152
Intertemporal efficiency
Balancing resource use between present and future.
153
Factors Affecting AS
Education & training
Immigration
Business tax cuts
New technology
R&D grants and subsidies
Infrastructure
154
Trade Liberalisation
An aggregate supply policy used by the Australian government over the last 50 years, involving the reduction of trade barriers (tariffs, quotas, subsidies) that protect local industries from import competition
155
Structural Unemployment
job losses caused by industry restructuring due to stronger competition.
156
Market-based environmental policies
government interventions that use incentives (taxes, subsidies, permits) to influence firms/households to reduce emissions, improve sustainability, and correct market failure
157
Carbon tax
a fee/levy on carbon-emitting activities; internalises negative externalities by increasing production costs of high-emission goods, discouraging consumption, and generating revenue for green programs
158
Emissions Trading Scheme (ETS / cap-and-trade)
government sets a cap on emissions, issues tradable permits; firms can buy/sell permits, creating flexibility and market-driven pollution pricing.
159
Subsidies
positive financial incentives for environmentally friendly practices (e.g., renewable energy, green tech). Reduce costs of sustainable alternatives, but risk market distortions.
160
Carbon offsets (ACCUs)
credits earned by firms that reduce/remove CO₂, creating voluntary markets for emissions reductions
