Decision making in markets - Wiley making in markets ... the level of business competition or rivalry is strong with hundreds of sellers of a ... Competition is usually more intense

c02DecisionMakingInMarkets 34 22 September 2016 7:33 PM

Decision making in markets

TOPIC 2

Australia has a market-based capitalist economy, or economic system. A nation’s economy is simply an insti-tution or organisation designed to coordinate the production and distribution of goods, services and incomes. In this system, most key economic decisions are made by the price or market system that involves buyers (consumers) and sellers (producers), rather than by government direction or planning. In this system, there is consumer sovereignty. Additionally, most businesses such as shops, farms, mines, factories and banks are privately owned, rather than owned by the government or state. In other words, we also have private enterprise or a capitalist economy.

Under market capitalism, rising or falling prices in thousands of markets, both in Australia and over-seas, provide price signals or instructions to the owners of resources. Based on these signals, the pro�t-seeking private owners of resources can make three key economic decisions (i.e. decide what and how much to produce, how to produce and for whom to produce). The information is designed to help them maxi-mise their pro�ts and incomes. But before we get ahead of ourselves, we need to have a clearer picture in our minds about what markets looks like and how they operate. Essentially, this is the main focus of topic 2.

Originally, markets usually took place in a particular location where buyers and sellers would meet face to face and negotiate prices through a process of offer and counteroffer. This fruit market is very typical of this type of market. However, increasingly, markets are conducted online and may not involve direct contact between buyers and sellers.

2.1 The meaning and nature of markets in AustraliaThere are literally thousands of individual markets scattered across the country. For instance, there are markets for property, beauty products, labour, shares, music, cars, money capital, education, health, international cur-rencies or foreign exchange, �sh, aviation, telecommunications, education, vegetables, sport and many more. Given the importance of the market in most countries like Australia, a closer examination is a necessity.

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UNCORRECTED PAGE , rising or falling prices in thousands of markets, both in Australia and over

PAGE , rising or falling prices in thousands of markets, both in Australia and over or instructions to the owners of resources. Based on these signals, the

PAGE or instructions to the owners of resources. Based on these signals, the vate owners of resources can make three key economic decisions (i.e. decide

PAGE vate owners of resources can make three key economic decisions (i.e. decide

for whom to produce

PAGE for whom to produce). The information is designed to help them maxi

PAGE ). The information is designed to help them maxi

mise their pro�ts and incomes. But before we get ahead of ourselves, we need to have a clearer picture in

PAGE mise their pro�ts and incomes. But before we get ahead of ourselves, we need to have a clearer picture in

PAGE minds about what markets looks like and how they operate. Essentially, this is the main focus of topic 2.

PAGE minds about what markets looks like and how they operate. Essentially, this is the main focus of topic 2.

PAGE PROOFS

PROOFSeconomy

PROOFSeconomy is simply an insti

PROOFS is simply an insti

tution or organisation designed to coordinate the production and distribution of goods, services and incomes.

PROOFStution or organisation designed to coordinate the production and distribution of goods, services and incomes.

market system

PROOFSmarket system that involves buyers

PROOFS that involves buyers

(consumers) and sellers (producers), rather than by government direction or planning. In this system, there

PROOFS(consumers) and sellers (producers), rather than by government direction or planning. In this system, there

. Additionally, most businesses such as shops, farms, mines, factories and banks are

PROOFS. Additionally, most businesses such as shops, farms, mines, factories and banks are

privately owned, rather than owned by the government or state. In other words, we also have

PROOFS

privately owned, rather than owned by the government or state. In other words, we also have

, rising or falling prices in thousands of markets, both in Australia and overPROOFS

, rising or falling prices in thousands of markets, both in Australia and over

TOPIC 2 Decision making in markets 35


What exactly is a market?A market is simply an institution or organisation where buyers (who create a demand for the item) and sellers (who control the production or supply of the item) of a particular good or service negotiate an agreeable price. Often this process involves some haggling or bargaining with offer and counteroffer. This is because buyers want to purchase at the lowest price and sellers want to receive the highest price. However, despite these common features of all markets, there are some differences. For example: • There are open or free markets, as well as black markets (e.g. for illegal production like non-prescription drugs). • Some markets can involve face-to-face contact between consumers and producers at a particular location

(e.g. the Queen Victoria Market in Melbourne). Increasingly, however, due to the rapid growth of the internet and improvements in telecommunications, individuals participating in a market may never see each other, may live in different countries and may even use different currencies.

• In some markets, the level of business competition or rivalry is strong with hundreds of sellers of a single product (i.e. pure competition), while in others it is very weak with only one seller (i.e. pure monopoly).

Market structure and other features of marketsMarket structure is a term that is mainly used to describe the type of competition found in different markets. As shown in �gure 2.1, there are four main types of market structure found in Australia, each with unique features:1. Pure competition. At one extreme, some markets are characterised by pure competition. Here, there is

strong rivalry between perhaps hundreds of �rms selling an identical product. Individual producers are unable to set their own prices and have little or no market power and so are called price takers. This is common in the markets for agricultural commodities like beef, wheat and apples.

2. Pure monopoly. At the other extreme to pure competition, there are markets involving pure monopolies. Here a single �rm controls the output of an industry. These �rms have much market power and are able to set or in�uence prices. They are called price makers and might include the markets for some utilities like water, the only general store in a small town or perhaps even your school canteen!

Weaker competition(much market power)

Stronger competition(little market power)

• Many buyers and sellers in the industry (perhaps hundreds)• Strong competition• Firms are ‘price takers’ with little market power to set their prices• No brand names, since the product is identical• Perfect knowledge of market conditions exists• Ease of entry and exit by new firms because there are few barriers like high start-up costs or government regulation• Good examples: some primary products or rural commodities, the share market and property market

Purecompetition

• A moderate number of sellers in the industry (perhaps 30 or 40), each selling similar but not identical products to satisfy the same type of want• Quite strong competition• Product or brand name differentiation is important, as is advertising (e.g. style, design, colour, service and image)• Quite good knowledge of market conditions• Moderate ease of entry and exit by new firms because there are few barriers or restrictions• Good examples: clothing manufacturers, retail trade, furniture, and restaurants

Monopolisticcompetition

• Relatively few (usually up to 8 or 10) but large sellers control the industry, with some potential for collusion and abuse of market power. Sellers often watch their rivals when setting prices.• Brand and product differentiation are quite important ways of selling, using advertising and the development of a certain image• Fairly difficult entry and exit for firms due to high start-up costs and the barriers operated by already well-established companies• Good examples: supermarkets, banks and oil companies

Oligopoly

• One seller controls the output of the industry• Weak competition exists since there are no rival sellers• Product differentiation is unimportant• Entry for new firms is difficult due to high start-up costs and other barriers• The firm is a ‘price maker’ and has a lot of market power given there are no close substitutes or rivals to undercut prices• Good examples: water companies, electricity transmission and the NBN

Puremonopoly

MARKET STRUCTURES

FIGURE 2.1 The four types of market structure re�ect the level of competition and other features

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• No brand names,

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• No brand names, since the product

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since the product is identical

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is identical• Perfect knowledge

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• Perfect knowledge of market

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of market conditions exists

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conditions exists• Ease of entry and

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• Ease of entry and exit by new firms

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exit by new firms because there are

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because there are few barriers likeUNCORRECTED

few barriers like high start-up costsUNCORRECTED

high start-up costs or governmentUNCORRECTED

or governmentUNCORRECTED • A moderate number

UNCORRECTED • A moderate number of sellers in the

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UNCORRECTED industry (perhaps 30 or 40), each

UNCORRECTED 30 or 40), each selling similar but

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selling similar but not identical

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not identical products to satisfy

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products to satisfy the same type of

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the same type of want

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want• Quite strong

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• Quite strong competition

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competition

competition

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UNCORRECTED PAGE At the other extreme to pure competition, there are markets involving

PAGE At the other extreme to pure competition, there are markets involving Here a single �rm controls the output of an industry. These �rms have much market power and are able to

PAGE Here a single �rm controls the output of an industry. These �rms have much market power and are able to and might include the markets for some utilities like

PAGE and might include the markets for some utilities like

water, the only general store in a small town or perhaps even your school canteen!

PAGE water, the only general store in a small town or perhaps even your school canteen!

PAGE MARKET STRUCTURESPAGE MARKET STRUCTURESPAGE P

ROOFSproduct (i.e. pure competition), while in others it is very weak with only one seller (i.e. pure monopoly).

PROOFSproduct (i.e. pure competition), while in others it is very weak with only one seller (i.e. pure monopoly).

is a term that is mainly used to describe the type of competition found in different markets.

PROOFSis a term that is mainly used to describe the type of competition found in different markets.

main types of market structure found in Australia, each with unique

PROOFSmain types of market structure found in Australia, each with unique

pure competition

PROOFSpure competition. Here, there is

PROOFS. Here, there is

strong rivalry between perhaps hundreds of �rms selling an identical product. Individual producers are

PROOFSstrong rivalry between perhaps hundreds of �rms selling an identical product. Individual producers are

and so are called

PROOFS

and so are called price takers

PROOFS

price takerscommon in the markets for agricultural commodities like beef, wheat and apples.PROOFS

common in the markets for agricultural commodities like beef, wheat and apples. At the other extreme to pure competition, there are markets involving PROOFS

At the other extreme to pure competition, there are markets involving

36 Economics Down Under 1


3. Monopolistic competition. Monopolistic competition involves quite a few �rms, perhaps 40 or even more, operating in a single industry. However, each �rm uses its unique brand name and different product features to sell its items. An example might be the clothing industry or restaurants.

4. Oligopoly. An oligopoly exists where several large �rms control the output of an industry. Here, selling often depends on brand names and there is the potential for producers to collude in an attempt to limit com-petition and �x prices (although this is illegal under the Australian Competition and Consumer Act, 2010). However, of these four types of market structure, many economists argue that perfect or pure competition is

the ideal. As we shall soon see in more detail, this is because strong competition can result in lower prices, better quality goods and superior service for consumers; greater ef�ciency in using or allocating our scarce resources; higher levels of production and national output (GDP); and generally better material living standards.

Assumptions or preconditions needed for pure competition in a marketGiven that purely competitive market is often seen as a good thing, the question is ‘what are the preconditions that must be met for this type of market to exist’? • Strong competition. There should be strong or pure competition between sellers and buyers in the market,

as is found among fruit and vegetable producers. Also, on the producers’ side, no individual supplier should be in a position to actually �x prices and all producers must sell identical products without product differences. With perfect competition, �rms are simply price takers in the market. Of course, in the real world, pure competition does not always exist because of powerful monopolies (i.e. one �rm more or less controls an industry — for example, Australia Post or Melbourne Water), oligopolies (e.g. cardboard pack-aging, oil, banking, supermarkets, aviation and power companies) and monopolistic competition.

• Ease of entry. There is limited competition in monopoly or oligopoly-type markets because there are barriers to entry that restrict the setting up of new competing businesses. A common reason for this is that existing �rms are large and well established. New businesses would �nd start-up costs expensive. In addition, in some industries, other barriers exist like government red tape, safety requirements, licensing and paper work. By contrast, it is generally cheaper and easier for new �rms to gain entry into purely com-petitive markets.

• No product differentiation (homogenous product). Competition is usually more intense when producers are selling identical products not distinguished by brand names, advertising, product appearance or special packaging. That is, the market is for a ‘homogeneous’ product. Hence, pure competition is more likely to exist in the wheat or wool markets than in the market for designer clothes, petrol or cars.

• Consumer sovereignty exists. Consumer sovereignty is where the particular types of goods and services produced closely re�ect what consumers purchase, rather than this decision being made through government regulation or controls.

• Absence of government controls and restrictions. The price system generally works best when there are no government regulations or restrictions affecting prices or limiting competition in an industry. To be com-petitive, markets must usually be free or deregulated.

• Good or perfect knowledge of the market. Clearly, the price system can work properly only when both buyers and sellers are fully informed and knowledgeable about current trends in market prices, and the features of the products involved. This is because price signals coming from the market are used to transmit the decisions of consumers to sellers who then produce or supply those goods and services that are wanted. A lack of good information by consumers results in poor decisions being made and resources being misallocated.

• Firms try to maximise their pro�ts. It is assumed that business decisions are mainly motivated by self-interest and a desire to maximise pro�ts and incomes. Hence, in purely competitive markets, the owners of resources should shift their resources from one use to another, in order to re�ect changing prices and for-tunes in different industries and changes in consumer demand. This requires that there be no major barriers to the entry or exit of �rms into or out of an industry. In addition, resources need to be mobile so they can be redirected to areas of highest pro�tability.

• Consumers behave rationally. In a purely competitive market, it is believed that buyers will behave in an �nancially rational way to promote their own self-interest, by being attracted by low prices for �nished products and discouraged by high prices. In Australia, it is fairly obvious that most of our markets fail to fully satisfy all these preconditions required

for pure competition to exist. However, perhaps the best examples of almost pure competition in Australia are the markets for fruit, vegetables and some rural products, shares and property. However, pure competition does not exist in markets involving steel, chemical, banking and �nance, petroleum, shipping and transport, groceries, cardboard packaging, glass, postal and water supply. Here, monopolies and oligopolies are more common. Even the general store in isolated small country towns or your own school canteen, can face little competition in their respective markets.

UNCORRECTED oduct differentiation (homogenous product).

UNCORRECTED oduct differentiation (homogenous product).are selling identical products not distinguished by brand names, advertising, product appearance or special

UNCORRECTED are selling identical products not distinguished by brand names, advertising, product appearance or special packaging. That is, the market is for a ‘homogeneous’ product. Hence, pure competition is more likely to

UNCORRECTED packaging. That is, the market is for a ‘homogeneous’ product. Hence, pure competition is more likely to exist in the wheat or wool markets than in the market for designer clothes, petrol or cars.

UNCORRECTED exist in the wheat or wool markets than in the market for designer clothes, petrol or cars.

Consumer sovereignty

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produced closely re�ect what consumers purchase, rather than this decision being made through government

UNCORRECTED produced closely re�ect what consumers purchase, rather than this decision being made through government

vernment controls and restrictions.

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no government regulations or restrictions affecting prices or limiting competition in an industry. To be com

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no government regulations or restrictions affecting prices or limiting competition in an industry. To be competitive, markets must usually be

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petitive, markets must usually be Good or perfect kno

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Good or perfect knowledge of the market.

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wledge of the market. both buyers and sellers are fully informed and knowledgeable about current trends in market prices, and

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both buyers and sellers are fully informed and knowledgeable about current trends in market prices, and the features of the products involved. This is because

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the features of the products involved. This is because transmit the decisions of consumers to sellers who then produce or supply those goods and services that are

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transmit the decisions of consumers to sellers who then produce or supply those goods and services that are

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wanted. A lack of good information by consumers results in poor decisions being made and resources being

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wanted. A lack of good information by consumers results in poor decisions being made and resources being misallocated.

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misallocated. Firms try to maximise their pr

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Firms try to maximise their prself-interest and a desire to maximise pro�ts and incomes. Hence, in purely competitive markets, the owners

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self-interest and a desire to maximise pro�ts and incomes. Hence, in purely competitive markets, the owners of resources should shift their resources from one use to another, in order to re�ect changing prices and forUNCORRECTED

of resources should shift their resources from one use to another, in order to re�ect changing prices and fortunes in different industries and changes in consumer demand. This requires that there be no major barriers UNCORRECTED

tunes in different industries and changes in consumer demand. This requires that there be no major barriers

PAGE aging, oil, banking, supermarkets, aviation and power companies) and

PAGE aging, oil, banking, supermarkets, aviation and power companies) and There is limited competition in monopoly or oligopoly-type markets because there are

PAGE There is limited competition in monopoly or oligopoly-type markets because there are that restrict the setting up of new competing businesses. A common reason for this is

PAGE that restrict the setting up of new competing businesses. A common reason for this is that existing �rms are large and well established. New businesses would �nd start-up costs expensive.

PAGE that existing �rms are large and well established. New businesses would �nd start-up costs expensive. In addition, in some industries, other barriers exist like government red tape, safety requirements, licensing

PAGE In addition, in some industries, other barriers exist like government red tape, safety requirements, licensing and paper work. By contrast, it is generally cheaper and easier for new �rms to gain entry into purely com

PAGE and paper work. By contrast, it is generally cheaper and easier for new �rms to gain entry into purely com

oduct differentiation (homogenous product).PAGE oduct differentiation (homogenous product). Competition is usually more intense when producers PAGE

Competition is usually more intense when producers are selling identical products not distinguished by brand names, advertising, product appearance or special PAGE

are selling identical products not distinguished by brand names, advertising, product appearance or special

PROOFS is often seen as a good thing, the question is ‘what are the preconditions

PROOFS is often seen as a good thing, the question is ‘what are the preconditions

There should be strong or pure competition between sellers and buyers in the market,

PROOFSThere should be strong or pure competition between sellers and buyers in the market,

as is found among fruit and vegetable producers. Also, on the producers’ side, no individual supplier

PROOFSas is found among fruit and vegetable producers. Also, on the producers’ side, no individual supplier

identical

PROOFSidentical products without product

PROOFS products without product identical products without product identical

PROOFSidentical products without product identical

in the market. Of course, in the real

PROOFS in the market. Of course, in the real monopolies

PROOFSmonopolies (i.e. one �rm more or less

PROOFS (i.e. one �rm more or less

controls an industry — for example, Australia Post or Melbourne Water), PROOFS

controls an industry — for example, Australia Post or Melbourne Water), oligopoliesPROOFS

oligopoliesmonopolistic competitionPROOFS

monopolistic competitionThere is limited competition in monopoly or oligopoly-type markets because there are PROOFS

There is limited competition in monopoly or oligopoly-type markets because there are



Coles supermarkets advertise to say that their retail prices are going down, down, down so the consumer supposedly gets a better deal as a result of competition between supermarkets. However, some people believe that Coles have also used their market power to put enormous pressure on their suppliers and local producers, including farmers, paying them lower prices. If this is the case, it may lead to lower pro�ts for producers and thus, eventually, business closures for some supermarket suppliers.

The effects of market structure and market powerMarket structure has many important impacts for all Australians. For example, the level of market power or competition between business rivals can have the following effects: • Competition means higher ef�ciency in allocating resources. Where competition is weak among �rms

selling in a market, there is often less need to use resources ef�ciently or keep production costs low in order to survive. By contrast, when there is strong rivalry, businesses are usually lean and are forced to cut their costs and organise production as ef�ciently as possible. An exception to this general rule is when having a monopoly operating in a single market allows for mass production. Here, some variable costs per unit of output produced can be lower and spread over higher production volumes. Bigger �rms can achieve higher ef�ciency and gain economies of large-scale production.

• Competition results in lower prices and greater purchasing power of incomes. When there are mon-opolies and competition is weak in various markets, often prices are higher since there is little rivalry between businesses. In addition, �rms in an oligopoly-type market are sometimes tempted to collude and use anti-competitive behaviour. This restricts competition, pushes up prices and rips off customers. In turn, higher prices reduce the purchasing power of our incomes and lower our material living stan-dards. In reverse, when there is strong competition between �rms battling to survive by improving ef�ciency, consumers usually enjoy lower prices and improved purchasing power.

• Competition means better quality goods and services. Strong competition in a market usually means that to survive, sellers are forced to ensure that the quality of their goods is equal to or better than those offered by competitors. By contrast, when there are monopolies and oligopolies, customers have little or no choice of products. They must purchase whatever is available and even put up with poor service and reduced consumer satisfaction. However, there may be an exception in a situation where a large monopoly producer uses its size and �nancial strength to put money into product research and development (R&D) that would otherwise be beyond the reach of small �rms. In this case, customers may bene�t from weaker competition.

UNCORRECTED Coles supermarkets advertise to say that their retail prices are going down, down, down so the consumer supposedly

UNCORRECTED Coles supermarkets advertise to say that their retail prices are going down, down, down so the consumer supposedly gets a better deal as a result of competition between supermarkets. However, some people believe that Coles have also

UNCORRECTED gets a better deal as a result of competition between supermarkets. However, some people believe that Coles have also used their market power to put enormous pressure on their suppliers and local producers, including farmers, paying them

UNCORRECTED used their market power to put enormous pressure on their suppliers and local producers, including farmers, paying them lower prices. If this is the case, it may lead to lower pro�ts for producers and thus, eventually, business closures for some

UNCORRECTED lower prices. If this is the case, it may lead to lower pro�ts for producers and thus, eventually, business closures for some

The effects of market structure and market power

UNCORRECTED The effects of market structure and market power

has many important impacts for all Australians. For example, the level of market power or

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has many important impacts for all Australians. For example, the level of market power or competition between business rivals can have the following effects:

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competition between business rivals can have the following effects:means higher ef�ciency in allocating resources.

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means higher ef�ciency in allocating resources. selling in a market, there is often less need to use resources ef�ciently or keep production costs low in order

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selling in a market, there is often less need to use resources ef�ciently or keep production costs low in order to survive. By contrast, when there is strong rivalry, businesses are usually lean and are forced to cut their

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to survive. By contrast, when there is strong rivalry, businesses are usually lean and are forced to cut their costs and organise production as ef�ciently as possible. An exception to this general rule is when having a

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costs and organise production as ef�ciently as possible. An exception to this general rule is when having a monopoly operating in a single market allows for mass production. Here, some variable costs per unit of

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monopoly operating in a single market allows for mass production. Here, some variable costs per unit of

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output produced can be lower and spread over higher production volumes. Bigger �rms can achieve higher

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output produced can be lower and spread over higher production volumes. Bigger �rms can achieve higheref�ciency and gain

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ef�ciency and gain Competition r

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Competition results in lower prices and greater purchasing power of incomes.

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esults in lower prices and greater purchasing power of incomes.

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opolies and competition is weak in various markets, often prices are higher since there is little rivalry UNCORRECTED

opolies and competition is weak in various markets, often prices are higher since there is little rivalry between businesses. In addition, �rms in an oligopoly-type market are sometimes tempted to collude UNCORRECTED

between businesses. In addition, �rms in an oligopoly-type market are sometimes tempted to collude

PAGE

PAGE

PAGE

Coles supermarkets advertise to say that their retail prices are going down, down, down so the consumer supposedly PAGE

Coles supermarkets advertise to say that their retail prices are going down, down, down so the consumer supposedly gets a better deal as a result of competition between supermarkets. However, some people believe that Coles have also PAGE

gets a better deal as a result of competition between supermarkets. However, some people believe that Coles have also

PROOFS

PROOFS



• Competition means greater output of particular goods and services. When competition is weak (and especially when there are monopolies and collusion among oligopoly-type �rms with market power), the total supply of goods and services is lower than otherwise. By contrast, strong competition or rivalry in a market (where �rms battle to cut costs and be more ef�cient in their use of resources than their competitors) usually leads to a higher levels of GDP and hence less unemployment of resources.

• Competition improves international competitiveness of local �rms. Given that weak competition often leads to lower ef�ciency and higher prices, it is easy to see how this would undermine the international competitiveness of local �rms selling their products both here and overseas. In turn, this would tend to decrease Australia’s exports and, as a result, reduce our levels of national production and income.

• Competition often lifts material wellbeing and living standards. If weak competition and market power lead to lower ef�ciency, higher prices, inferior international competitiveness, reduced levels of national pro-duction (GDP) and incomes, and hence economic wellbeing, it is likely that strong competition should help raise our average material living standards.

Weblinks The weblinks in these activities are available in this topic’s student resources tab.

• Market structures• Introduction to market structure• Market structures explained

CHECK YOUR UNDERSTANDING

1 What is meant by a market? Give three important examples of markets found in your town or city.2 Explain what is meant by the term market structure or market power. 3 Identify and outline the main features of each of the following types of market structure:

a Pure competitionb Monopolistic competitionc Oligopolyd Pure monopoly.

4 Identify and outline three important effects of each of the following types of market structure: a Pure competitionb Pure monopoly.

APPLIED ECONOMIC EXERCISES

Apply your understanding of this subtopic by accessing and completing the Applied economic exercise(s).

• School-assessed tasks > Applied economic exercises > Question 1

2.2 The big picture — the role of markets in our economy as a way of making key economic decisionsAustralia has a contemporary market-based capitalist economy or economic system. Among other things, this means that most important economic decisions are made through the free or unregulated interaction of indi-vidual buyers and sellers of goods and services in thousands of markets, 24/7 (rather than generally relying on government regulation as still occurs in a few countries like North Korea).

There are three key economic decisions or questions that are largely answered through the operation of our market-based economy:1. The ‘what and how much to produce’ question. The market is used to make most decisions about the

speci�c types and quantities of each good (for example, chocolate bars, tourist accommodation, butter, guns) or service (e.g. education, health, �nancial, entertainment) that are to be produced. The general rule is that only pro�table things are made — unpro�table production is abandoned

2. The ‘how to produce’ question. The market helps to make decisions about the speci�c production methods to be used by a business (e.g. the combinations of labour and capital equipment) in order to make each particular good or service. Generally, businesses use the most ef�cient, lowest cost and most pro�table methods to produce goods and services.

3. The ‘for whom to produce’ question. The market helps to make decisions about how the nation’s goods, services and incomes that have been produced, will be shared or divided between members of society. Here, people’s incomes and their purchasing power largely depend on the value of their economic contribution, as valued by the market.

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UNCORRECTED APPLIED ECONOMIC EXERCISES

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UNCORRECTED Apply your understanding of this subtopic by accessing and completing the Applied economic exercise(s).

School-assessed tasks

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School-assessed tasks >

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> Applied economic exercises

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Applied economic exercises

2.2 The big picture — the role of markets in our

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2.2 The big picture — the role of markets in our economy as a way of making key economic decisions

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economy as a way of making key economic decisions

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Australia has a contemporary

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Australia has a contemporary means that most important

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means that most important vidual buyers and sellers of goods and services in thousands of markets, 24/7 (rather than generally relying on

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vidual buyers and sellers of goods and services in thousands of markets, 24/7 (rather than generally relying on government regulation as still occurs in a few countries like North Korea).

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government regulation as still occurs in a few countries like North Korea). There are UNCORRECTED

There are market-based economyUNCORRECTED

market-based economy

PAGE ? Give three important examples of markets found in your town or city.

PAGE ? Give three important examples of markets found in your town or city.market power

PAGE market power.

PAGE .

of each of the following types of

PAGE of each of the following types of

of each of the following types of market structure: PAGE

of each of the following types of market structure:

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

? Give three important examples of markets found in your town or city.PROOFS

? Give three important examples of markets found in your town or city.



In order to get a grasp of the big idea, �gure 2.2 seeks to step through how the market system operates to make these key economic decisions.

Step 2 Together, consumers or buyers (demand) and producers or sellers (supply) negotiate the equilibriummarket price of each good or service, similar to what occurs in an auction. This establishes relative prices — theprice level of one good or service compared with that of another. However, when the non-price conditions affectingbuyers (i.e. demand) and/or non-price conditions affecting sellers (i.e. supply) change in the market so there iseither a market glut or a market shortage, this causes the equilibrium market price to either rise or fall, thus creatingprice signals. These signals provide information or instructions to the owners of resources, helping them to make keyeconomic decisions guided by self-interest and their desire to maximise pro�ts.

Step 1 Because of scarcity, people cannot have all the goods and services they would like. This forces them to choosebetween satisfying competing wants. In a market-based economy, these choices or decisions are made through theoperation of the price system (also called the market mechanism) that involves the forces demand and supply.

Step 3 Pro�t-seeking owners of natural, capital and labour resources watch these price signals and use them tohelp make key decisions about how they should allocate resources. The signals help them to select the type andquantity of particular goods or services to produce (‘What and how much to produce?’). They also help them todecide the cheapest, lowest cost and most pro�table production methods (‘How to produce?’), as well asdeciding how the goods, services and incomes should be shared or distributed (‘For whom to produce?’).• If there is a rise in the market price for a particular good or service, relative to the price of other items, the production of this product usually becomes relatively more pro�table, thus attracting more resources into this type of production (assuming that �rms’ production costs or the prices paid for resources have not changed, especially in an upwards direction). In turn, higher pro�ts lead to higher levels of production and income for those in this industry.• If there is a fall in the �nal equilibrium market price of a particular good or service, relative to that for producing other items (assuming there is no change in �rms’ production costs or prices paid for resources, especially not downwards), the production of this item becomes relatively less pro�table. This tends to repel resources and cut production, along with the incomes of those connected with this industry.

FIGURE 2.2 How Australia’s price or market system makes key economic decisions and allocates resources

With this general background in mind, we are ready to drill deeper into our study of microeconomics. Microeconomics looks at how the smaller units like consumers, producers or �rms, an individual market, and an industry making up our overall economy behave; what motivates their choices and what are the effects of their decisions. So our study of microeconomics will involve a closer look at areas like the following: • buyers and the law of demand • sellers and the law of supply • market equilibrium • changes in market equilibrium due to non-price conditions of demand and supply affecting decisions • the allocation of resources.

Some of our analysis will involve the use of demand–supply diagrams. These are a type of tool used to represent a particular market, and allow is to visually illustrate the effects of changes in the way buyers and sellers behave.


• The market economy• What is market economy?


1 Given the problem of scarcity, what are the three main economic questions or decisions that must be answered in any economy?

2 Outline the three main steps whereby Australia’s market-based system operates to allocate resources between competing or alternative uses.



• School-assessed tasks > Applied economic exercises > Question 2

UNCORRECTED With this general background in mind, we are ready to drill deeper into our study of microeconomics.

UNCORRECTED With this general background in mind, we are ready to drill deeper into our study of microeconomics. Microeconomics looks at how the smaller units like consumers, producers or �rms, an individual market, and

UNCORRECTED Microeconomics looks at how the smaller units like consumers, producers or �rms, an individual market, and an industry making up our overall economy behave; what motivates their choices and what are the effects of

UNCORRECTED an industry making up our overall economy behave; what motivates their choices and what are the effects of

So our study of microeconomics will involve a closer look at areas like the following:

UNCORRECTED So our study of microeconomics will involve a closer look at areas like the following:

in market equilibrium due to non-price conditions of demand and supply affecting decisions

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in market equilibrium due to non-price conditions of demand and supply affecting decisions

Some of our analysis will involve the use of demand–supply diagrams. These are a type of tool used to represent

UNCORRECTED

Some of our analysis will involve the use of demand–supply diagrams. These are a type of tool used to represent a particular market, and allow is to visually illustrate the effects of changes in the way buyers and sellers behave.

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a particular market, and allow is to visually illustrate the effects of changes in the way buyers and sellers behave.

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The weblinks in these activities are available in this topic’s student resources tab.

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The market economy

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The market economyWhat is market economy?

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What is market economy?

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PAGE

PAGE of a particular good or service,

PAGE of a particular good or service, relative

PAGE relative producing other items (assuming there is no change in �rms’ production costs or prices paid for resources,

PAGE producing other items (assuming there is no change in �rms’ production costs or prices paid for resources,relatively less pro�table

PAGE relatively less pro�table

resources and cut production, along with the incomes of those connected with this industry.

PAGE resources and cut production, along with the incomes of those connected with this industry.

How Australia’s price or market system makes key economic decisions and allocates resourcesPAGE How Australia’s price or market system makes key economic decisions and allocates resources

With this general background in mind, we are ready to drill deeper into our study of microeconomics. PAGE

With this general background in mind, we are ready to drill deeper into our study of microeconomics.

PROOFS

PROOFS

PROOFS and use them to

PROOFS and use them to

about how they should allocate resources. The signals help them to select the type and

PROOFS about how they should allocate resources. The signals help them to select the type and

quantity of particular goods or services to produce (‘What and how much to produce?’). They also help them to

PROOFSquantity of particular goods or services to produce (‘What and how much to produce?’). They also help them todecide the cheapest, lowest cost and most pro�table production methods (‘How to produce?’), as well as

PROOFSdecide the cheapest, lowest cost and most pro�table production methods (‘How to produce?’), as well asdeciding how the goods, services and incomes should be shared or distributed (‘For whom to produce?’).

PROOFSdeciding how the goods, services and incomes should be shared or distributed (‘For whom to produce?’).

to the price of other items, the

PROOFS to the price of other items, the

, thus attracting more resources into

PROOFS, thus attracting more resources into

this type of production (assuming that �rms’ production costs or the prices paid for resources have not

PROOFS

this type of production (assuming that �rms’ production costs or the prices paid for resources have not changed, especially in an upwards direction). In turn, higher pro�ts lead to higher levels of production andPROOFS

changed, especially in an upwards direction). In turn, higher pro�ts lead to higher levels of production and

relativePROOFS

relative



2.3 Looking at how buyers and sellers behave in the market using demand–supply diagramsAnother way to look at how a competitive market makes decisions and allocates resources is through the use of demand–supply diagrams. Each diagram represents a market for a single good (e.g. sunglasses) or a speci�c ser-vice (e.g. live entertainment). These diagrams or graphs are especially useful when analysing the impact of price and non-price factors or conditions affecting buyers (i.e. demanders) and sellers (i.e. suppliers), on market prices.

In Australia’s market economy, demand and supply help determine prices that, in turn, signal to owners of resources how those productive inputs should be used.

No doubt you are keen see what these diagrams look like. First, however, let’s look at the in�uences affecting buyers and sellers in the market place.

The law of demand and the demand line — how buyers behave in a marketBuyers or consumers are a really important group in any market. Demand in a market occurs when buyers use their income to purchase a particular quantity of a good or service. They demand or want to purchase various goods and services. This group might include consumers like you or me, businesses or even governments. Perhaps the most important thing to notice is that buyers in a market are more willing to purchase a good or service at a lower price, rather than at a higher price. The price of a product is an important factor affecting how much consumers are prepared to buy. This observation is expressed in the law of demand.

The law of demand (how changes in price cause a movement along the demand line)The law of demand simply states that the quantity of a particular good or service that buyers are prepared to purchase varies inversely (in the opposite direction) with the change in price. Hence: • As the price increases, there is a contraction in the quantity demanded, causing a movement upwards along

the demand line. • As the price decreases, there is an expansion in the quantity demanded, causing a movement downwards

along the demand line.It is hardly surprising that consumers or buyers behave like this, causing the quantity demanded to contract

or expand with a rise or fall in price. For example, demand contracts as the price rises because the good or ser-vice becomes less affordable for most of us and thus fewer people have the necessary money or desire to spend in this way. By contrast, as the price decreases, demand expands because it is more affordable and tempting for more people.

UNCORRECTED

UNCORRECTED

UNCORRECTED In Australia’s market economy, demand and supply help determine prices that, in turn, signal to owners of resources how

UNCORRECTED In Australia’s market economy, demand and supply help determine prices that, in turn, signal to owners of resources how

No doubt you are keen see what these diagrams look like. First, however, let’s look at the in�uences affecting

UNCORRECTED No doubt you are keen see what these diagrams look like. First, however, let’s look at the in�uences affecting

buyers and sellers in the market place.

UNCORRECTED buyers and sellers in the market place.

The law of demand and the demand line — how buyers behave

UNCORRECTED

The law of demand and the demand line — how buyers behave in a market

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in a market or consumers are a really important group in any market.

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or consumers are a really important group in any market. their income to purchase a particular quantity of a good or service. They

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their income to purchase a particular quantity of a good or service. They goods and services. This group might include consumers like you or me, businesses or even governments.

UNCORRECTED

goods and services. This group might include consumers like you or me, businesses or even governments. Perhaps the most important thing to notice is that buyers in a market are more willing to purchase a good or

UNCORRECTED

Perhaps the most important thing to notice is that buyers in a market are more willing to purchase a good or service at a lower price, rather than at a higher price. The

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service at a lower price, rather than at a higher price. The how much consumers are prepared to buy. This observation is expressed in the

UNCORRECTED

how much consumers are prepared to buy. This observation is expressed in the

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ThUNCORRECTED

he law of demand (how changes in price cause a movement along the UNCORRECTED

e law of demand (how changes in price cause a movement along the

PAGE

PAGE PROOFS

PROOFS



So what would a demand line (representing how consumers respond to price) look like if plotted on a graph where price is located on the vertical axis and quantity on the horizontal axis?

Imagine there was a competitive market for bananas. Using hypothetical data from the table, �gure 2.3 graphically illustrates the relationship that exists between the quantity of bananas demanded and the price. For now, we will assume that the change in the price is the only factor affecting the quantity demanded. In other words, all other non-price factors remain constant.

Price per kg of

bananas

D1 = Original quantityof bananas demandedeach year (’000 kg)

$1 5

$2 4

$3 3

$4 2

$5 1Quantity of bananas demanded each year (’000 kg)

The demand line for bananas

10

Pri

ce p

er k

g ($

)1

2

3

4

5

2 3

Expansion B

AContraction

4 5

D1

6

FIGURE 2.3 The demand line showing the law of demand for bananas where the quantity demanded varies inversely with price

Notice that when we plot the quantity demanded at each possible price on a graph (see �gure 2.3), the resulting demand line drops down and to the right. It thus has a negative slope and visually illustrates the law of demand. • A move downward along the demand line from point A to point B is called, an expansion in demand. This

movement is only caused by a fall in price. In this situation, demand expands from 2000 kg per year at the price of $4 per kg (point A) to 4000 kg at the lower price of $2 per kg (point B).

• In reverse, a move upwards along the demand line from point B to point A is called a contraction in demand and is caused only by a rise in the price of bananas. In this case, demand contracts from 4000 kg per year at a price of $2 per kg (point B) to only 2000 kg per year at a higher price of $4 per kg (point A).

Here it is really important that students understand that these movements along the demand line (called an expansion or contraction in the quantity demanded) are caused solely by a change in price. As mentioned previ-ously, we have assumed that all other non-price factors have remained constant. We will look at these other con-ditions shortly. It is also worth pointing out that just for simplicity the demand line for bananas has been drawn as a straight line, even though in the real world it would usually be a concave curve (called a demand curve).

While our example here has been the demand for bananas, the same sort of buyer behaviour could be expected for any other good (such as grapes, hot dogs, soft drinks, mobiles, wheat or iron ore) or service (such as �nancial, medical, ski instructor, gardening or entertainment) in a fairly competitive market.

The law of supply and the supply line — how sellers behave in a marketSellers or producers are also a really important group in any market. They supply or sell goods and services, and this group might include both small and large businesses. Perhaps the most important thing to notice is that sellers in a market are more willing to supply a good or service at a higher price, rather than at a lower price. The price of a product affects how much businesses are prepared to sell. This observation is expressed in the law of supply. Again for now, we will assume that the change in the price is the only factor affecting the quantity supplied and that non-price in�uences are constant.

The law of supply (how changes in price cause a movement along the supply line)The law of supply simply states that the quantity of a particular good or service that businesses are prepared to supply varies directly (in the same direction) with a change in its price. Hence: • As the price increases, there is an expansion in the quantity supplied causing a movement upwards along

the supply line. • As the price decreases, there is a contraction in the quantity supplied causing a movement downwards

along the supply line.

UNCORRECTED price of $4 per kg (point A) to 4000 kg at the lower price of $2 per kg (point B).

UNCORRECTED price of $4 per kg (point A) to 4000 kg at the lower price of $2 per kg (point B).a move upwards along the demand line

UNCORRECTED a move upwards along the demand line from point B to point A is called a

UNCORRECTED from point B to point A is called a rise in the price of bananas

UNCORRECTED rise in the price of bananas. In this case, demand

UNCORRECTED . In this case, demand

at a price of $2 per kg (point B) to only 2000 kg per year at a higher price of $4 per kg (point A).

UNCORRECTED at a price of $2 per kg (point B) to only 2000 kg per year at a higher price of $4 per kg (point A).

Here it is really important that students understand that these movements

UNCORRECTED Here it is really important that students understand that these movements

quantity demanded

UNCORRECTED quantity demanded) are caused solely by a change in

UNCORRECTED ) are caused solely by a change in

ously, we have assumed that all other

UNCORRECTED ously, we have assumed that all other non-price factors

UNCORRECTED non-price factors

UNCORRECTED

ditions shortly. It is also worth pointing out that just for simplicity the demand line for bananas has been drawn

UNCORRECTED

ditions shortly. It is also worth pointing out that just for simplicity the demand line for bananas has been drawn as a straight line, even though in the real world it would usually be a concave curve (called a demand curve).

UNCORRECTED

as a straight line, even though in the real world it would usually be a concave curve (called a demand curve). While our example here has been the demand for bananas, the same sort of buyer behaviour could be

UNCORRECTED

While our example here has been the demand for bananas, the same sort of buyer behaviour could be expected for any other good (such as grapes, hot dogs, soft drinks, mobiles, wheat or iron ore) or service (such

UNCORRECTED

expected for any other good (such as grapes, hot dogs, soft drinks, mobiles, wheat or iron ore) or service (such as �nancial, medical, ski instructor, gardening or entertainment) in a fairly competitive market.

UNCORRECTED

as �nancial, medical, ski instructor, gardening or entertainment) in a fairly competitive market.

The law of supply and the supply line — how sellers

UNCORRECTED

The law of supply and the supply line — how sellers behave in a market

UNCORRECTED

behave in a market

UNCORRECTED

Sellers

UNCORRECTED

Sellers

UNCORRECTED

or producers are also a really important group in any market. They

UNCORRECTED

or producers are also a really important group in any market. They and this group might include both small and large businesses. Perhaps the most important thing to notice is UNCORRECTED

and this group might include both small and large businesses. Perhaps the most important thing to notice is UNCORRECTED

that sellers in a market are more willing to supply a good or service at a higher price, rather than at a lower UNCORRECTED

that sellers in a market are more willing to supply a good or service at a higher price, rather than at a lower

PAGE Notice that when we plot the quantity demanded at each possible price on a graph (see �gure 2.3), the

PAGE Notice that when we plot the quantity demanded at each possible price on a graph (see �gure 2.3), the

drops down and to the right. It thus has a negative slope and visually illustrates the

PAGE drops down and to the right. It thus has a negative slope and visually illustrates the

from point A to point B is called, an

PAGE from point A to point B is called, an

In this situation, demand PAGE In this situation, demand

price of $4 per kg (point A) to 4000 kg at the lower price of $2 per kg (point B).PAGE

price of $4 per kg (point A) to 4000 kg at the lower price of $2 per kg (point B).

PROOFS

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PROOFS

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PROOFS

PROOFSQuantity of bananas demanded each year (’000 kg)

PROOFSQuantity of bananas demanded each year (’000 kg)

4 5

PROOFS4 5

D

PROOFSD1

PROOFS1

The demand line showing the law of demand for bananas where the quantity demanded varies inversely PROOFS

The demand line showing the law of demand for bananas where the quantity demanded varies inversely



It is hardly surprising that businesses or suppliers behave like this where the quantity supplied contracts or expands with a decrease or an increase in price. This is because it becomes less pro�table for producers to sell their product or service at a low price, rather than selling it at a high price.

So what would a supply line (representing how sellers respond to price) look like if plotted on a graph where price is located on the vertical axis and quantity on the horizontal axis?

Again, imagine there was a competitive market for bananas. Using hypothetical data from the table, �gure 2.4 graphically illustrates the relationship that exists between the quantity of bananas supplied and the price, remembering that we have assumed that all other non-price factors that might also in�uence supply are held constant.

Expansion

Contraction

1 2

Quantity of bananas supplied each year (’000 kg)

The supply line for bananas

Pri

ce p

er k

g ($

)

3 4 5 6

1

2

3

4

5

A

B

S1

Price per kg of

bananas

S1 = Original quantityof bananas suppliedeach year (’000 kg)

$1 1

$2 2

$3 3

$4 4

$5 5 0

FIGURE 2.4 The supply line showing the law of supply for bananas where the quantity supplied varies directly with price

Notice that when we plot the quantity supplied at each possible price on a graph (see �gure 2.4), the resulting supply line slopes up and to the right. It thus has a positive slope and visually illustrates the law of supply. • A move upward along the supply line from point A to point B is called an expansion in supply and is only

caused by a rise in price. Looking at this line, the quantity supplied expands from 2000 kg per year at the price of $2 per kg (point A) to 4000 kg at the higher price of $4 per kg (point B).

• In reverse, a move downwards along the supply line from point B to point A is called a contraction in supply and is caused only by a fall in the price of bananas. In this case, supply contracts from 4000 kg per year at a price of $4 per kg (point B) to only 2000 kg per year at the low price of $2 per kg (point A).Again it is really important that you understand that these movements along the supply line (either called

an expansion or contraction in the quantity supplied) are caused solely by a change in price. Again we have assumed that all other possible non-price factors that might in�uence supply have been held constant. We will look at these non-price factors shortly. In addition, it is also worth pointing out that just for simplicity the supply line for bananas has been drawn as a straight line, even though in the real world this would be a con-cave curve (called a supply curve).

While the example we have used here has involved the supply for bananas, the same sort of seller behaviour could be expected for any other good (such as grapes, hot dogs, soft drinks, sun cream or deodorant) or service (such as �nancial, health, education, gardening or entertainment) in a fairly competitive market.

Determining the market equilibrium priceAs we have seen, buyers prefer to purchase at a relatively low price, while suppliers prefer to sell at a relatively high price. This apparent con�ict of interest or disagreement is resolved by negotiation and haggling — offer and counteroffer — and the operation of a competitive market. Indeed, there is only one price on which both buyers and sellers agree and are reasonably satis�ed. This is called the equilibrium market price. At equilibrium, the quantity demanded exactly equals the quantity supplied.

As seen in �gure 2.5 and the accompanying table, apart from the equilibrium price of $3 per kg of bananas, there is no alternate market price where this compromise can occur. Only at this price is both the quantity demanded and the quantity supplied exactly equal — both demand and supply are equal to 3000 kg per year. At equilibrium, both buyers and sellers are happy with the deal and the market is cleared so there is neither a shortage nor a surplus.

UNCORRECTED Notice that when we plot the quantity supplied at each possible price on a graph (see �gure 2.4), the

UNCORRECTED Notice that when we plot the quantity supplied at each possible price on a graph (see �gure 2.4), the slopes up and to the right. It thus has a positive slope and visually illustrates the

UNCORRECTED slopes up and to the right. It thus has a positive slope and visually illustrates the

ve upward along the supply line

UNCORRECTED ve upward along the supply line from point A to point B is called an

UNCORRECTED from point A to point B is called an

Looking at this line, the quantity supplied

UNCORRECTED Looking at this line, the quantity supplied

price of $2 per kg (point A) to 4000 kg at the higher price of $4 per kg (point B).

UNCORRECTED price of $2 per kg (point A) to 4000 kg at the higher price of $4 per kg (point B).

a move downwards along the supply line

UNCORRECTED a move downwards along the supply line

and is caused only by a

UNCORRECTED and is caused only by a fall in the price of bananas

UNCORRECTED fall in the price of bananas

4000 kg per year at a price of $4 per kg (point B) to only 2000 kg per year at the low price of $2 per kg

UNCORRECTED

4000 kg per year at a price of $4 per kg (point B) to only 2000 kg per year at the low price of $2 per kg

Again it is really important that you understand that these movements

UNCORRECTED

Again it is really important that you understand that these movements contraction

UNCORRECTED

contraction in the

UNCORRECTED

in the assumed that all other possible

UNCORRECTED

assumed that all other possible

UNCORRECTED

look at these non-price factors shortly. In addition, it is also worth pointing out that just for simplicity the

UNCORRECTED

look at these non-price factors shortly. In addition, it is also worth pointing out that just for simplicity the supply line for bananas has been drawn as a straight line, even though in the real world this would be a con

UNCORRECTED

supply line for bananas has been drawn as a straight line, even though in the real world this would be a concave curve (called a supply curve).

UNCORRECTED

cave curve (called a supply curve). While the example we have used here has involved the supply for bananas, the same sort of seller behaviour

UNCORRECTED

While the example we have used here has involved the supply for bananas, the same sort of seller behaviour

UNCORRECTED

could be expected for any other good (such as grapes, hot dogs, soft drinks, sun cream or deodorant) or service

UNCORRECTED

could be expected for any other good (such as grapes, hot dogs, soft drinks, sun cream or deodorant) or service (such as �nancial, health, education, gardening or entertainment) in a fairly competitive market.UNCORRECTED

(such as �nancial, health, education, gardening or entertainment) in a fairly competitive market.

PAGE

PAGE 1 2

PAGE 1 2

Quantity of bananas supplied each year (’000 kg)

PAGE Quantity of bananas supplied each year (’000 kg)

PAGE The supply line showing the law of supply for bananas where the quantity supplied varies directly

PAGE The supply line showing the law of supply for bananas where the quantity supplied varies directly

Notice that when we plot the quantity supplied at each possible price on a graph (see �gure 2.4), the PAGE Notice that when we plot the quantity supplied at each possible price on a graph (see �gure 2.4), the

slopes up and to the right. It thus has a positive slope and visually illustrates the PAGE

slopes up and to the right. It thus has a positive slope and visually illustrates the

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PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

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PROOFSContraction

PROOFSContraction

3 4 5PROOFS

3 4 5PROOFS

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1

1

Pri

ce p

er k

g ($

)

2

3

4

5

2

Quantity of bananas demanded and supplied each year (’000 kg)

S1 D1

Qe

At prices above Pe,there is a glut (i.e. S > D)

D = S

How demand and supply create equilibrium in the marketfor bananas

3 4 5 6

Pe

Price per kg of

bananas

D1 = Originalquantity ofbananas

demandedeach year(’000 kg)

S1 = Originalquantity ofbananassuppliedeach year(’000 kg)

$1 5

$2 4

$3 3

$4 2

$5 1

1

2

3

4

5

At prices below Pethere is a shortage (i.e. D > S)

E(equilibrium)

0

FIGURE 2.5 A demand–supply graph showing how the free operation of market forces determines the equilibrium price of bananas

The process of actually reaching market equilibrium in a free and competitive market is a simple one: • Prices below the equilibrium. At a very low price for bananas of, say, $2 per kg, equilibrium cannot occur

simply because 4000 kg per year are demanded yet only 2000 kg are supplied. An exceedingly low price like this creates a market shortage of 2000 kg, making buyers very unhappy when they go away empty handed. In order for this shortage to be solved, the price of bananas needs to rise. As the price moves upwards, there is a contraction along the demand line for bananas, as well as an expansion along the supply line (the laws of demand and supply apply here) until this shortage disappears and the market reaches the equilibrium point where the quantity demanded and supplied are exactly equal.

• Prices above the equilibrium. Equilibrium is also not possible at high price of, say, $4 per kg of bananas. The problem here is a market surplus or glut of 2000 kg. This arises due to a demand of only 2000 kg, compared with the supply of 4000 kg at that price. Sellers would be most unhappy because they have unsold stock that would perish. In a free and competitive market, this problem would soon disappear as the market price falls. A lower price would mean that the demand for bananas would expand and supply would con-tract. This would restore equilibrium where the quantities demanded and supplied were again exactly equal.In our analysis so far, we have seen that market forces involving demand and supply determine the actual

equilibrium price for bananas. However, the same sort of explanation would also apply to the equilibrium price paid for any type of good or service in a competitive market. All competitive markets basically operate in the same way.

Changes in the equilibrium price caused by changes in non-price factors or conditionsLooking around us, we notice that the prices of most goods and services, including bananas, are always changing up and down from week to week and day to day. This is the result of changes in the level of demand and level of supply for each good or service, as both buyers and/or sellers react to changing circumstances or non-price conditions that also affect their economic decisions and the quantity they are prepared to buy or sell at any given price. • Changes in non-price demand-side conditions can cause buyers to purchase a greater or smaller quan-

tity of a particular good or service at all possible prices. This will either shift the position or location of the whole demand line to the right of the original line (showing an increase in the quantity demanded at all possible prices), or to the left (showing a decrease in the quantity demanded at all possible prices).

• Changes in non-price supply-side conditions can cause sellers to produce a greater or smaller quantity of a particular good or service at all possible prices. This will either shift the position of the whole supply line to the right of the original line (showing an increase in the quantity supplied at all possible prices), or to the left (showing a decrease in the quantity supplied at all possible prices). By altering the position of the demand line and/or the position of the supply line, changes in the non-price

conditions of demand or supply will bring about a change in relative prices (i.e. the price level of one particular good or service relative to that of another). This also has a knock-on effect and alters the relative pro�ts of producing a particular good or service. A higher equilibrium price that makes it relatively more pro�table will normally attract more resources to be allocated to the production of this product, while a fall in the equilibrium price will usually cause fewer resources to be allocated to the production of this item. In so doing, it causes scarce resources to be reallocated among competing uses by their pro�t-seeking owners.

UNCORRECTED stock that would perish. In a free and competitive market, this problem would soon disappear as the market

UNCORRECTED stock that would perish. In a free and competitive market, this problem would soon disappear as the market price falls. A lower price would mean that the demand for bananas would

UNCORRECTED price falls. A lower price would mean that the demand for bananas would . This would restore equilibrium where the quantities demanded and supplied were again exactly equal.

UNCORRECTED . This would restore equilibrium where the quantities demanded and supplied were again exactly equal.

In our analysis so far, we have seen that market forces involving demand and supply determine the actual

UNCORRECTED In our analysis so far, we have seen that market forces involving demand and supply determine the actual

for bananas. However, the same sort of explanation would also apply to the equilibrium

UNCORRECTED for bananas. However, the same sort of explanation would also apply to the equilibrium

paid for any type of good or service in a competitive market. All competitive markets basically operate

UNCORRECTED paid for any type of good or service in a competitive market. All competitive markets basically operate

Changes in the equilibrium price caused by changes in

UNCORRECTED

Changes in the equilibrium price caused by changes in non-price factors or conditions

UNCORRECTED

non-price factors or conditionsLooking around us, we notice that the prices of most goods and services, including bananas, are always

UNCORRECTED

Looking around us, we notice that the prices of most goods and services, including bananas, are always changing up and down from week to week and day to day. This is the result of changes in the level of demand

UNCORRECTED

changing up and down from week to week and day to day. This is the result of changes in the level of demand and level of supply for each good or service, as both buyers and/or sellers react to changing circumstances or

UNCORRECTED

and level of supply for each good or service, as both buyers and/or sellers react to changing circumstances or non-price conditions

UNCORRECTED

non-price conditions that also affect their economic decisions and the quantity they are prepared to buy or sell

UNCORRECTED

that also affect their economic decisions and the quantity they are prepared to buy or sell at any given price.

UNCORRECTED

at any given price.

UNCORRECTED

Changes in non-price demand-side conditions

UNCORRECTED

Changes in non-price demand-side conditionstity of a particular good or service at all possible prices. This will either shift the position or location of UNCORRECTED

tity of a particular good or service at all possible prices. This will either shift the position or location of UNCORRECTED

the whole demand line to the right of the original line (showing an UNCORRECTED

the whole demand line to the right of the original line (showing an

PAGE handed. In order for this shortage to be solved, the price of bananas needs to rise. As the price moves

PAGE handed. In order for this shortage to be solved, the price of bananas needs to rise. As the price moves along the demand line for bananas, as well as an

PAGE along the demand line for bananas, as well as an line (the laws of demand and supply apply here) until this shortage disappears and the market reaches the

PAGE line (the laws of demand and supply apply here) until this shortage disappears and the market reaches the equilibrium point where the quantity demanded and supplied are exactly equal.

PAGE equilibrium point where the quantity demanded and supplied are exactly equal.

Equilibrium is also not possible at high price of, say, $4 per kg of bananas.

PAGE Equilibrium is also not possible at high price of, say, $4 per kg of bananas.

of 2000 kg. This arises due to a demand of only 2000 kg,

PAGE of 2000 kg. This arises due to a demand of only 2000 kg,

compared with the supply of 4000 kg at that price. Sellers would be most unhappy because they have unsold PAGE compared with the supply of 4000 kg at that price. Sellers would be most unhappy because they have unsold stock that would perish. In a free and competitive market, this problem would soon disappear as the market PAGE

stock that would perish. In a free and competitive market, this problem would soon disappear as the market

PROOFS

PROOFS

PROOFSQuantity of bananas demanded and supplied each year (’000 kg)

PROOFSQuantity of bananas demanded and supplied each year (’000 kg)

6

PROOFS6

A demand–supply graph showing how the free operation of market forces determines the equilibrium

PROOFSA demand–supply graph showing how the free operation of market forces determines the equilibrium

The process of actually reaching market equilibrium in a free and competitive market is a simple one:

PROOFSThe process of actually reaching market equilibrium in a free and competitive market is a simple one:

At a very low price for bananas of, say, $2 per kg, equilibrium cannot occur

PROOFSAt a very low price for bananas of, say, $2 per kg, equilibrium cannot occur

simply because 4000 kg per year are demanded yet only 2000 kg are supplied. An exceedingly low price

PROOFS

simply because 4000 kg per year are demanded yet only 2000 kg are supplied. An exceedingly low price of 2000 kg, making buyers very unhappy when they go away empty PROOFS

of 2000 kg, making buyers very unhappy when they go away empty handed. In order for this shortage to be solved, the price of bananas needs to rise. As the price moves PROOFS

handed. In order for this shortage to be solved, the price of bananas needs to rise. As the price moves



Changes in non-price conditions shift the whole demand line Figure 2.6 reveals that there are a number of common non-price conditions of demand or factors that might either increase or decrease the quantity of a particular good or service that buyers are prepared to demand at a given price. On a demand–supply diagram, these factors or conditions shift the whole demand line for a good or service to the right or to the left of the original line.

0

20

Non-price conditions can increase thequantity demanded at a given price(shifting the whole line from D1 to D2).

5

This diagram shows an increase in thequantity demanded (D1 to D2) at a priceof $20, from 10 units to 15 units.

10 15

Quantity

D1 D2

Pri

ce/u

nit

0

20

Non-price conditions can decrease thequantity demanded at a given price(shifting the whole line from D1 to D0).

5

This diagram shows a decrease in thequantity demanded (D1 to D0) at a priceof $20, from 10 units to 5 units.

10

Quantity

D0 D1

Pri

ce/u

nit

A rise in disposable income (income available for spending after receiving welfare and paying income tax) usually increases the quantity of a good or service demanded at a given price.

A fall in disposable income. A fall in disposable income usually decreases the quantity of a good or service demanded at a given price.

An increase in population size. Generally, a rise in population, perhaps due to immigration or higher birth rates, will increase the quantity of most goods or services demanded at a given price.

A decrease in population size. Generally, a decline in population, perhaps due to the ageing of the population, might decrease the quantity of some goods or services demanded at a given price (e.g. pop music).

More fashionable and trendy. Over time, some goods and services become more fashionable, perhaps as a result of new technology and slick advertising (e.g. the latest iPhone). This increases the quantity of most goods or services demanded at a given price.

Less fashionable. Over time, some goods and services become less fashionable. The quantity demanded by consumers at a given price declines (e.g. DVD players).

A drop in interest rates paid on borrowed credit. Some people and businesses need to borrow credit from banks and pay interest rates, in order to purchase expensive goods or services. When interest rates are lower and borrowing is cheaper, the quantity of most goods or services demanded at a given price increases (e.g. a house, car or electrical appliances, and holidays).

Higher interest rates paid on borrowed credit. Generally, higher interest rates will lower the quantity of most goods or services demanded at a given price.

A substitute become dearer. Substitutes are a particular good or service that can be easily replaced by another (e.g. margarine is a substitute for butter and cotton for wool) so the price of one affects the demand for the other. For instance, when the price of margarine becomes dearer, the demand for butter is likely to increase.

A substitute become cheaper. When the price of a substitute product like cotton becomes cheaper, the demand at any given price for the other product like wool decreases, as people switch between products.

A complementary good or service becomes cheaper. Complementary goods and services are those used or bought at the same time as another item (e.g. cars and fuel). Hence, when the price of one complement falls, the demand for the other complementary good is likely to rise (e.g. a fall in petrol prices leads to a rise in the demand for larger 4WD vehicles).

A complementary good or service becomes dearer. When the price of one complementary good or service rises, there is usually a decrease in the demand for the other complementary product (e.g. the price of coffee rises and the demand for sugar decreases) at a given price.

Higher levels of consumer or business confidence. Con�dence levels relate to how households and businesses feel about their future economic situations. For instance, when households are feeling more con�dent or optimistic, they often purchase a greater quantity of some types of goods and services at a given price (e.g. luxury cars and holidays).

Lower levels of consumer or business confidence. Consumer or business pessimism about the future is often re�ected in a decrease in the demand for some types of goods (e.g. appliances and beauty products) or services (e.g. entertainment and restaurants) at any given price.

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED rates, will increase the quantity of most goods or services

UNCORRECTED rates, will increase the quantity of most goods or services

Over time, some goods

UNCORRECTED Over time, some goods

and services become more fashionable, perhaps as a

UNCORRECTED and services become more fashionable, perhaps as a result of new technology and slick advertising (e.g. the

UNCORRECTED result of new technology and slick advertising (e.g. the latest iPhone). This increases the quantity of most goods

UNCORRECTED latest iPhone). This increases the quantity of most goods or services demanded at a given price.

UNCORRECTED or services demanded at a given price.

A drop in interest rates paid on borrowed credit.

UNCORRECTED

A drop in interest rates paid on borrowed credit.people and businesses need to borrow credit from banks

UNCORRECTED

people and businesses need to borrow credit from banks and pay interest rates, in order to purchase expensive

UNCORRECTED

and pay interest rates, in order to purchase expensive goods or services. When interest rates are lower and

UNCORRECTED

goods or services. When interest rates are lower and borrowing is cheaper, the quantity of most goods or

UNCORRECTED

borrowing is cheaper, the quantity of most goods or services demanded at a given price increases (e.g. a

UNCORRECTED

services demanded at a given price increases (e.g. a house, car or electrical appliances, and holidays).

UNCORRECTED

house, car or electrical appliances, and holidays).

A substitute become dearer.

UNCORRECTED

A substitute become dearer.

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

good or service that can be easily replaced by another

UNCORRECTED

good or service that can be easily replaced by another (e.g. margarine is a substitute for butter and cotton for

UNCORRECTED

(e.g. margarine is a substitute for butter and cotton for wool) so the price of one affects the demand for the other.

UNCORRECTED

wool) so the price of one affects the demand for the other. For instance, when the price of margarine becomes dearer,

UNCORRECTED

For instance, when the price of margarine becomes dearer, the demand for butter is likely to increase.UNCORRECTED

the demand for butter is likely to increase.

A complementary good or service becomes cheaper.UNCORRECTED

A complementary good or service becomes cheaper.

PAGE

PAGE

PAGE

PAGE A fall in disposable income.

PAGE A fall in disposable income.income usually decreases the quantity of a good or

PAGE income usually decreases the quantity of a good or service demanded at a given price.

PAGE service demanded at a given price.

rates, will increase the quantity of most goods or services PAGE rates, will increase the quantity of most goods or services

A decrease in population size.

PAGE A decrease in population size.in population, perhaps due to the ageing of the PAGE in population, perhaps due to the ageing of the population, might decrease the quantity of some goods PAGE population, might decrease the quantity of some goods or services demanded at a given price (e.g. pop music).PAGE

or services demanded at a given price (e.g. pop music).

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFSThis diagram shows a decrease in the

PROOFSThis diagram shows a decrease in thequantity demanded (D

PROOFS

quantity demanded (Dof $20, from 10 units to 5 units.PROOFS

of $20, from 10 units to 5 units.

10

PROOFS10

Quantity

PROOFSQuantity

D

PROOFSD1

PROOFS1

PROOFS

PROOFS

A fall in disposable income.PROOFS

A fall in disposable income.



The onset of summer or winter. In summer, the demand for some products at a given price increases (e.g. ice cream, surfboards and air conditioners). Furthermore, the onset of winter might see a rise in the demand for other types of goods or services at a given price (e.g. snow skis, cough medicine, doctors, electric blankets, footballs and woollen jumpers).

The onset of summer or winter. The onset of winter might see a decrease in the demand for some goods or services at a given price (e.g. air conditioners). Additionally in summer, the demand for other goods and services at a given price might decrease (e.g. beach towels and insect repellent).

New government policies. Sometimes, new government policies can lead to a rise in the demand for particular goods or services. For instance, a rise in government transport spending might bring about an increase in the demand for building and road making materials. Sometimes, too, the government uses cash subsidies or payments to encourage households to increase their demand for socially bene�cial items (e.g. solar panels and rainwater tanks).

New government policies. Sometimes, new government policies can lead to a decrease in the demand for a socially harmful good or service at a given price (e.g. laws making it illegal for young people to purchase alcohol.

FIGURE 2.6 Non-price microeconomic conditions that cause the quantity of a good or service to demanded at a given price to increase or decrease, shifting the position of the whole demand line

The effect of non-price factors that increase the quantity demanded (D1 to D2)

When non-price conditions of demand strengthen, increasing the quantity of a particular good or service that buyers are willing to purchase at any given price, the whole demand line for the market will shift horizontally outwards and to the right of the original line (D1 to D2).

Let us return to the example of the banana market as shown in �gure 2.7. When the demand for bananas at a given price increased due to new stronger conditions (perhaps due to more consumers wanting a healthy snack, an increase in disposable income, population growth or successful advertising by banana growers), this shifted the position of the whole demand line to the right of the original line, from D1 to D2. As a result there was a rise in the equilibrium price of bananas from $3 (at P1) to $3.50 a kg (at P2). This rise in the equilibrium price was necessary to clear the market shortage (see the triangular area shaded red, where the quantity demanded exceeds the quantity supplied) that otherwise would exist if the price had remained at $3. As the price rose towards $3.50, demand contracted while supply expanded (the normal operation of the laws of demand and supply) until the new higher equilibrium price (P2) was reached where demand again equalled supply. Notice also that there was a rise in the equilibrium quantity from 4000 (at Q1) to 4500 kg a year (at Q0). These new equilibria will continue to prevail in the market, unless non-price conditions of demand again change.

Price per kg

D1 = Original quantity of bananas demanded

each year (’000 kg)

D2 = New increased quantity of bananas

demanded each year (’000 kg)

D0 = New decreased quantity of bananas

demanded each year (’000 kg)

S1 = Original quantity of bananas supplied each year (’000 kg)

$0

$1 5 6 4 1

$2 4 5 3 2

$3 3 4 2 3

$4 2 3 1 4

$5 1 2 5

1

Pri

ce p

er k

g ($

)

1

2

3

4

5

2 3Q0 Q2

D0 D1

D2

S1

E2E1

E0


How changes in non-price conditions of demand can causethe equilibrium market price to rise or fall

4 5 6

P2P1

P0

Q10

FIGURE 2.7 How changes in non-price conditions of demand can increase or decrease the quantity demanded at any given price, shifting the whole demand line and causing the equilibrium market price to rise or fall

UNCORRECTED expanded

UNCORRECTED expanded ) was reached where demand again equalled supply. Notice

UNCORRECTED ) was reached where demand again equalled supply. Notice also that there was a rise in the equilibrium quantity from 4000 (at Q

UNCORRECTED also that there was a rise in the equilibrium quantity from 4000 (at Qequilibria will continue to prevail in the market, unless non-price conditions of demand again change.

UNCORRECTED equilibria will continue to prevail in the market, unless non-price conditions of demand again change.

UNCORRECTED

UNCORRECTED 2

UNCORRECTED 2 =

UNCORRECTED = New increased

UNCORRECTED New increased

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED


UNCORRECTED


quantity of bananas

UNCORRECTED quantity of bananas

demanded each year

UNCORRECTED

demanded each year

4

UNCORRECTED

4

3

UNCORRECTED

3

2

UNCORRECTED

2

PAGE Let us return to the example of the banana market as shown in �gure 2.7. When the demand for bananas at a

PAGE Let us return to the example of the banana market as shown in �gure 2.7. When the demand for bananas at a due to new stronger conditions (perhaps due to more consumers wanting a healthy snack,

PAGE due to new stronger conditions (perhaps due to more consumers wanting a healthy snack, an increase in disposable income, population growth or successful advertising by banana growers), this shifted

PAGE an increase in disposable income, population growth or successful advertising by banana growers), this shifted the position of the whole demand line to the right of the original line, from D

PAGE the position of the whole demand line to the right of the original line, from D

) to $3.50 a kg (at P

PAGE ) to $3.50 a kg (at P2

PAGE 2). This rise in the equilibrium price

PAGE ). This rise in the equilibrium price

(see the triangular area shaded red, where the quantity demanded

PAGE (see the triangular area shaded red, where the quantity demanded

exceeds the quantity supplied) that otherwise would exist if the price had remained at $3. As the price rose PAGE exceeds the quantity supplied) that otherwise would exist if the price had remained at $3. As the price rose

(the normal operation of the laws of demand and PAGE

(the normal operation of the laws of demand and

PROOFS

PROOFS

PROOFS

PROOFS

PROOFSNon-price microeconomic conditions that cause the quantity of a good or service to demanded at a

PROOFSNon-price microeconomic conditions that cause the quantity of a good or service to demanded at a

PROOFS

PROOFS

PROOFS, increasing the quantity of a particular good or service that

PROOFS, increasing the quantity of a particular good or service that

buyers are willing to purchase at any given price, the whole demand line for the market will shift

PROOFSbuyers are willing to purchase at any given price, the whole demand line for the market will shift horizontally

PROOFShorizontally

Let us return to the example of the banana market as shown in �gure 2.7. When the demand for bananas at a PROOFS

Let us return to the example of the banana market as shown in �gure 2.7. When the demand for bananas at a



The effect of non-price factors that decrease the quantity demanded (D1 to D0)

When the non-price conditions of demand weaken, decreasing the quantity of a particular good or service that buyers are willing to purchase at any given price, the whole demand line for the market will shift horizontally and to the left of the original line (D1 to D0).

Returning to the banana market and �gure 2.7, when the demand decreased due to new weaker conditions (per-haps due to the onset of winter, advertising by pineapple growers, a drop in income, or poorer quality fruit), this shifted the position of the whole demand line from D1 to D0. As a result there was a fall in the equilibrium price of bananas from $3 (at P1) to just $2.50 a kg (at P0). This fall in the equilibrium price was necessary to clear the market glut or surplus (see the triangular area shaded green, where the quantity supplied exceeds the quan-tity demanded) that would otherwise exist if the price had remained at $3. As the price dropped towards $2.50, demand expanded while supply contracted (the normal operation of the laws of demand and supply) until the new lower equilibrium price (P0) was reached where the quantity demanded again equalled the quantity sup-plied. Notice also that there was a fall in the equilibrium quantity from 4000 kg (at Q1) to 3500 kg a year (at Q0). These new equilibria will prevail in the market, unless of course non-price conditions of demand again change.

Changes in non-price conditions shift the whole supply line In the same way as buyers react to changing circumstances, sellers also respond to variations in non-price factors or conditions of supply. These might either increase or decrease the quantity of a particular good or service that sellers are prepared to supply at a given price. On a demand–supply diagram, these non-price con-ditions shift the whole supply line to the right or to the left of the original line. Figure 2.8 shows that there are a number of common non-price supply-side conditions.

0

20

Non-price conditions can increase thequantity supplied at a given price(shifting the whole line from S1 to S2).

5 10

This diagram shows an increase in thequantity supplied (S1 to S2) at a priceof $20, from 10 units to 15 units.

15

Quantity

S2S1

Pri

ce/u

nit

0

20

Non-price conditions can decrease thequantity supplied at a given price(shifting the whole line from S1 to S0).

5 10

This diagram shows a decrease in thequantity supplied (S1 to S0) at a priceof $20, from 10 units to 5 units.

15

Quantity

S0 S1

Pri

ce/u

nit

Resources used by businesses become cheaper. Businesses need to purchase natural, labour and capital resources in order to make goods and services. These represent production costs. When costs are cheaper, this makes production more favourable and pro�table for businesses. It often causes �rms to increase their quantity of a good or service supplied at any given price.

Resources used by businesses become dearer. When production costs become dearer for businesses, this is less favourable and pro�table for �rms, causing them to decrease their quantity supplied at any given price.

Increased efficiency. The use of improved technology like automated warehouses, robotics on an assembly line and online trading in an industry, often lifts ef�ciency, cutting unit production costs. This usually makes �rms more willing and able to increase their supply at any given price.

Decreased efficiency. A drop in the ef�ciency of workers in an industry, or in the productivity of other resources used, will often lead to higher business costs. This is likely to decrease the supply of a particular good or service at any given price.

More favourable climatic conditions. Climatic conditions affect farmers supplying crops. Favourable weather conditions means that more output per hectare can be produced, at lower unit costs. This increases the quantity of some rural commodities supplied (e.g. wheat, beef, barley, fruit and vegetables) at any given price.

Unfavourable climatic conditions. Severe weather events, such as cyclones, �oods and drought, tend to reduce ef�ciency and the supply of some fruit, vegetables and other crops. Floods can also hamper mining extraction operations and destroy infrastructure needed to transport minerals to terminals. This can decrease the quantity supplied at a given price.

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

5 10

UNCORRECTED

5 10

This diagram shows an increase in the

UNCORRECTED

This diagram shows an increase in thequantity supplied (S

UNCORRECTED

quantity supplied (Sof $20, from 10 units to 15 units.

UNCORRECTED

of $20, from 10 units to 15 units.

Quantity

UNCORRECTED

Quantity

S

UNCORRECTED S

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED 2

UNCORRECTED 2

UNCORRECTED

UNCORRECTED

Resources used by businesses become cheaper

UNCORRECTED

Resources used by businesses become cheaperBusinesses need to purchase natural, labour and capital

UNCORRECTED

Businesses need to purchase natural, labour and capital resources in order to make goods and services. These

UNCORRECTED

resources in order to make goods and services. These represent production costs. When costs are cheaper,

UNCORRECTED

represent production costs. When costs are cheaper, this makes production more favourable and pro�table for

UNCORRECTED

this makes production more favourable and pro�table for businesses. It often causes �rms to increase their quantity UNCORRECTED

businesses. It often causes �rms to increase their quantity of a good or service supplied at any given price.UNCORRECTED

of a good or service supplied at any given price.

PAGE ditions shift the whole supply line to the right or to the left of the original line. Figure 2.8 shows that there are

PAGE ditions shift the whole supply line to the right or to the left of the original line. Figure 2.8 shows that there are

PAGE Non-price conditions can

PAGE Non-price conditions can

PROOFStity demanded) that would otherwise exist if the price had remained at $3. As the price dropped towards $2.50,

PROOFStity demanded) that would otherwise exist if the price had remained at $3. As the price dropped towards $2.50,

(the normal operation of the laws of demand and supply) until the

PROOFS(the normal operation of the laws of demand and supply) until the ) was reached where the quantity demanded again equalled the quantity sup

PROOFS) was reached where the quantity demanded again equalled the quantity sup) to 3500 kg a year (at Q

PROOFS) to 3500 kg a year (at QThese new equilibria will prevail in the market, unless of course non-price conditions of demand again change.

PROOFSThese new equilibria will prevail in the market, unless of course non-price conditions of demand again change.

anges in non-price conditions shift the whole supply line

PROOFSanges in non-price conditions shift the whole supply line

In the same way as buyers react to changing circumstances, sellers also respond to variations in

PROOFSIn the same way as buyers react to changing circumstances, sellers also respond to variations in

. These might either increase or decrease the quantity of a particular good or

PROOFS. These might either increase or decrease the quantity of a particular good or

. On a demand–supply diagram, these non-price conPROOFS

. On a demand–supply diagram, these non-price conditions shift the whole supply line to the right or to the left of the original line. Figure 2.8 shows that there are PROOFS

ditions shift the whole supply line to the right or to the left of the original line. Figure 2.8 shows that there are



Rises in business profitability and lower bankruptcy rates. If bankruptcy rates in an industry fall, or especially if pro�tability rises, there is likely to be an increase in the quantity of a good or service supplied at any given price.

Falls in business profitability and higher bankruptcy rates. When the number of bankruptcies rises and business pro�tability falls in an industry, there is likely to be a decrease in the supply of a good or service.

An increase in government assistance to business and lower tax rates. Governments provide �nancial assistance to businesses operating in some manufacturing industries, along with funding for private schools and hospitals. This helps to cover some costs and makes �rms more pro�table, thereby increasing the supply of these goods or services at a given price. Additionally, lower taxes may encourage more supply.

A decrease in government assistance to business and higher tax rates. When governments raise taxes on particular products sold or increase the rate of company tax, or decide to reduce cash subsidies paid to a producer, these measures can decrease the supply of a particular good or service at a given price by making it less pro�table or attractive.

FIGURE 2.8 Non-price microeconomic conditions that cause the quantity of a good or service to supplied at a given price to increase or decrease, shifting the position of the whole supply line

The effect of non-price factors that increase the quantity supplied (S1 to S2)

When these non-price conditions of supply strengthen or become more favourable, there is an increase in supply or the quantity of a particular good or service that sellers are willing to produce at a given price. The whole supply line for the market will shift outwards horizontally and to the right of the original line (S1 to S2).

Again using our example of the banana market, this is illustrated in �gure 2.9. When the supply of bananas increased due to new more favourable conditions (perhaps re�ecting the effects of ideal growing conditions for farmers, or lower costs and better pro�ts), this shifted the position of the whole supply line horizontally outwards and to the right from S1 to S2. As a result, there was a fall in the equilibrium price of bananas from $3 (at P1) to just $2.50 a kg (at P2). This fall in the equilibrium price was necessary to clear the market glut or surplus (see the triangular area shaded green, where the quantity supplied exceeds the quantity demanded) that otherwise would exist if the price had remained at $3. As the price fell towards $2.50, supply contracted and demand expanded (the normal operation of the laws of demand and supply), until the market came to rest at the lower equilibrium price (P2). In addition, the equilibrium quantity rose from 3000 kg (at Q1) to 3500 kg a year (at Q2). These new equilibria will continue to exist unless non-price conditions of supply again change.

Price per kg

S1 = Original quantity of bananas supplied

per year (’000 kg)

S2 = new increased quantity of bananas

supplied per year (’000 kg)

S0 = new decreased quantity of bananas

supplied per year (’000 kg)

D1 = Original quantity of bananas demanded per year

(in ’000 kg)

$0

$1 1 2 0 5

$2 2 3 1 4

$3 3 4 2 3

$4 4 5 3 2

$5 5 6 4 1

1

0.5

1

1.5

2

2.5

Pri

ce p

er k

g ($

)

3

3.5

4

4.5

5

How changes in non-price conditions of supply can causethe equilibrium market price to rise or fall

2


Q1

S2S1

S0

E0

E1

E2

D1

43 5 6

P0

P1

P2

Q0 Q20

FIGURE 2.9 How changes in non-price conditions of supply can increase or decrease the quantity supplied at a given price, shifting the whole supply line and causing the equilibrium market price to rise or fall

UNCORRECTED ). These new equilibria will continue to exist unless non-price conditions of supply again change.

UNCORRECTED ). These new equilibria will continue to exist unless non-price conditions of supply again change.

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED new increased

UNCORRECTED new increased

quantity of bananas

UNCORRECTED quantity of bananas

supplied per year

UNCORRECTED supplied per year

(’000 kg)

UNCORRECTED (’000 kg)

5

UNCORRECTED

5

UNCORRECTED

Pri

ce p

er k

g ($

)UNCORRECTED

Pri

ce p

er k

g ($

)

4.5

UNCORRECTED

4.5

5

UNCORRECTED

5

UNCORRECTED

UNCORRECTED

PUNCORRECTED

P0UNCORRECTED

0

PAGE for farmers, or lower costs and better pro�ts), this shifted the position of the whole supply line horizontally

PAGE for farmers, or lower costs and better pro�ts), this shifted the position of the whole supply line horizontally . As a result, there was a fall in the equilibrium price of bananas from

PAGE . As a result, there was a fall in the equilibrium price of bananas from ). This fall in the equilibrium price was necessary to clear the

PAGE ). This fall in the equilibrium price was necessary to clear the or surplus (see the triangular area shaded green, where the quantity supplied exceeds the quantity demanded)

PAGE or surplus (see the triangular area shaded green, where the quantity supplied exceeds the quantity demanded) that otherwise would exist if the price had remained at $3. As the price fell towards $2.50, supply

PAGE that otherwise would exist if the price had remained at $3. As the price fell towards $2.50, supply

laws of demand and supply

PAGE laws of demand and supplyequilibrium quantityPAGE equilibrium quantity

). These new equilibria will continue to exist unless non-price conditions of supply again change.PAGE

). These new equilibria will continue to exist unless non-price conditions of supply again change.

PROOFS

PROOFS

PROOFS

PROOFS, there is an increase in

PROOFS, there is an increase in

supply or the quantity of a particular good or service that sellers are willing to produce at a given price. The

PROOFSsupply or the quantity of a particular good or service that sellers are willing to produce at a given price. The

of the original line (S

PROOFS of the original line (S1

PROOFS1 to S

PROOFS to S

Again using our example of the banana market, this is illustrated in �gure 2.9. When the supply of bananas

PROOFSAgain using our example of the banana market, this is illustrated in �gure 2.9. When the supply of bananas

due to new more favourable conditions (perhaps re�ecting the effects of ideal growing conditions PROOFS

due to new more favourable conditions (perhaps re�ecting the effects of ideal growing conditions for farmers, or lower costs and better pro�ts), this shifted the position of the whole supply line horizontally PROOFS

for farmers, or lower costs and better pro�ts), this shifted the position of the whole supply line horizontally . As a result, there was a fall in the equilibrium price of bananas from PROOFS

. As a result, there was a fall in the equilibrium price of bananas from



The effect of non-price factors that decrease the quantity supplied (S1 to S0)

When these non-price conditions of supply weaken or become less favourable, this decreases the quantity of a particular good or service that sellers are willing to produce at any given price. This causes the whole supply line for the market to shift inwards horizontally and to the left of the original line (S1 to S0).

Let us return yet again to the example of the banana market shown in �gure 2.9. When the supply of bananas decreased due to new less favourable conditions (perhaps re�ecting the effects of severe drought, the effect of a cyclone or higher production costs for farmers), this shifted the position of the whole supply line from S1 to S0. As a result, there was a rise in the equilibrium price of bananas from $3 (at P1) to $3.50 a kg (at P0). This rise in price was necessary to clear the market shortage (see the triangular area shaded red, where the quantity demanded exceeds the quantity supplied) that otherwise would exist if the price had remained at $3. As the price rose towards $3.50, supply expanded and demand contracted (the oper-ation of the laws of demand and supply), until the market came to rest at the higher equilibrium price (P0). In addition, the equilibrium quantity fell from 3000 kg (at Q1) to 2500 kg a year (at Q0). These new equi-libria will continue to exist unless conditions of supply again change.

Review: how changes in relative market prices help to allocate Australia’s resourcesIt is worth �nishing off this section about the operation of the price system by again making the connection between a change in the relative price of one good or service against another, and how this affects the econ-omic decisions affecting Australia’s allocation of scarce resources between alternative uses.

Market forces involve the operation of demand by buyers and supply by sellers. Together, these forces determine the relative market price as an indicator of the relative scarcity of each good or service, such as bananas or bottled water. In a competitive market, strong demand and/or limited supply would cause the product to be scarcer and this would be re�ected in a higher price in the market.

You may recall that all economies face the basic economic problem of relative scarcity. Because not all wants can be satis�ed, we must make choices and answer three important economic questions: • ‘What’ type and quantity of goods and services should be produced? • ‘How’ should these goods and services be produced? • ‘For whom’ should these goods and services be produced?

UNCORRECTED

UNCORRECTED PAGE between alternative uses.

PAGE between alternative uses.

PAGE PROOFS

contracted

PROOFScontracted (the oper

PROOFS(the oper

equilibrium price

PROOFSequilibrium price (P

PROOFS (P). These new equi

PROOFS). These new equi

Review: how changes in relative market prices help

PROOFSReview: how changes in relative market prices help

It is worth �nishing off this section about the operation of the price system by again making the connection

PROOFS

It is worth �nishing off this section about the operation of the price system by again making the connection of one good or service against another, and how this affects the PROOFS

of one good or service against another, and how this affects the PROOFS

between alternative uses.PROOFS

between alternative uses.



As we previously pointed out, in Australia’s market-based capitalist system, pro�t-seeking owners of resources rely mainly on the operation of the price or market system to guide their decisions and allocate resources between various types of goods and services. Here market forces involving demand and supply operate to determine the relative price, at equilibrium, of one good or service against another. Over a period of time, the relative prices of each good or service changes due to new non-price conditions affecting the level of demand and/or level of supply. In turn, changes in relative prices cause price signals. These affect the relative pro�tability of each area of production.

The ‘what and how much to produce’ questionOnly some wants can be satis�ed, so owners of resources naturally opt to satisfy those that are relatively most pro�table or wanted. • A relatively higher market price. Imagine that the equilibrium market price of ice cream increased rela-

tive to that for yogurt due to an increase in consumer demand for ice cream at all possible prices (perhaps re�ecting the operation of non-price factors like successful advertising, population growth or a rise in dispo-sable income) while the demand for yogurt fell (perhaps due to a non-price condition like a health scare). Here, it is quite likely that ice cream would become relatively more pro�table than yogurt (assuming no other changes occurred). Higher pro�ts in ice cream would then attract extra resources into this area of pro-duction, perhaps pulling resources out of yogurt.

• A relatively lower market price. Alternatively, what would happen if the equilibrium market price of ice cream fell, perhaps because there was an increase in the supply of ice cream at all possible prices (perhaps due to lower costs such as milk or transport) relative to its demand? In this case, it is likely that ice cream producers would face relatively lower pro�ts against those for yogurt. This would tend to repel resources from ice cream production while encouraging more to move into yogurt. In deciding what to produce — whether it be ice cream or yogurt, rice or wheat, cars or computers, or childcare

or education — the market can usually provide the price signals or information to help owners of resources make the right production decisions that give consumers the types of goods and services they most want.

One weakness of this system, or market failure, is that there are situations where socially undesirable yet pro�table goods and services (e.g. illegal drugs, pollution, guns and prostitution) may be overproduced, while low priced, socially desirable goods and services (e.g. affordable health care, education and housing) are underproduced. In these instances, there is a strong case for government intervention in or regulation of some markets using taxes to discourage, or government subsidies to encourage, some types of production.

The ‘how to produce’ questionIn order to maximise pro�ts, private owners of resources usually seek to minimise their production costs and maximise ef�ciency.

So, for example, if it is cheaper to produce a pair of jeans using mostly labour resources rather than capital equipment like laser-operated machines, then this would normally be the preferred method of manufacture. Again, the market system involving demand and supply would provide the necessary price information as to which production method was the cheapest to use. One possible reason why labour might be cheaper in this case could be that its supply is high relative to demand. This would cause wage costs (the market price of labour) to be relatively lower (against the cost or market price of machinery).

Sometimes, however, the cheap production methods used by �rms could risk the wellbeing, health and safety of workers and the general community. For instance, some �rms may want to cut their costs by having dangerous working conditions or releasing pollution, because these methods are relatively cheaper. Again, there may be a justi�cation for having some government regulation of production methods (e.g. occupational health and safety standards) in cases where the market fails to make good decisions.

The ‘for whom to produce’ questionThe matter of how goods, services and incomes should be shared or divided is also largely answered by the operation of market forces involving demand and supply.

Individuals who earn higher incomes by selling their scarcer resources can purchase more goods and ser-vices than those on lower incomes. For instance, high wages and incomes are earned by skilled surgeons, suc-cessful entrepreneurs, and well-known pop stars and sportspersons, who can sell scarce resources where there is a shortage and their supply is low relative to demand. By contrast, those with lesser skills or no reputation will usually earn lower wages and income, and be unable to purchase as many goods and services. Again the market allocates scarce resources between alternative uses.

One problem of the free market system answering the question about how to distribute incomes and goods is that there can be extreme income inequality and poverty, lowering average living standards. Again, when the market fails to produce fair or equitable outcomes, the government may choose to narrow the income gap between the rich and poor using heavier progressive taxes on the rich, the payment of welfare bene�ts to the neediest and the provision of free or cheap community services.

UNCORRECTED markets using taxes to discourage, or government subsidies to encourage, some types of production.

UNCORRECTED markets using taxes to discourage, or government subsidies to encourage, some types of production.

In order to maximise pro�ts, private owners of resources usually seek to minimise their production costs and

UNCORRECTED In order to maximise pro�ts, private owners of resources usually seek to minimise their production costs and

So, for example, if it is cheaper to produce a pair of jeans using mostly labour resources rather than capital

UNCORRECTED So, for example, if it is cheaper to produce a pair of jeans using mostly labour resources rather than capital

equipment like laser-operated machines, then this would normally be the preferred method of manufacture.

UNCORRECTED equipment like laser-operated machines, then this would normally be the preferred method of manufacture. Again, the market system involving demand and supply would provide the necessary price information as to

UNCORRECTED

Again, the market system involving demand and supply would provide the necessary price information as to which production method was the cheapest to use. One possible reason why labour might be cheaper in this

UNCORRECTED

which production method was the cheapest to use. One possible reason why labour might be cheaper in this case could be that its supply is high relative to demand. This would cause wage costs (the market price of

UNCORRECTED

case could be that its supply is high relative to demand. This would cause wage costs (the market price of labour) to be relatively lower (against the cost or market price of machinery).

UNCORRECTED

labour) to be relatively lower (against the cost or market price of machinery). Sometimes, however, the cheap production methods used by �rms could risk the wellbeing, health and

UNCORRECTED

Sometimes, however, the cheap production methods used by �rms could risk the wellbeing, health and safety of workers and the general community. For instance, some �rms may want to cut their costs by having

UNCORRECTED

safety of workers and the general community. For instance, some �rms may want to cut their costs by having dangerous working conditions or releasing pollution, because these methods are relatively cheaper. Again,

UNCORRECTED

dangerous working conditions or releasing pollution, because these methods are relatively cheaper. Again, there may be a justi�cation for having some government regulation of production methods (e.g. occupational

UNCORRECTED

there may be a justi�cation for having some government regulation of production methods (e.g. occupational health and safety standards) in cases where the

UNCORRECTED

health and safety standards) in cases where the

e ‘for whom to produce’ questionUNCORRECTED

e ‘for whom to produce’ questionUNCORRECTED

The matter of how goods, services and incomes should be shared or divided is also largely answered by the UNCORRECTED

The matter of how goods, services and incomes should be shared or divided is also largely answered by the

PAGE In deciding what to produce — whether it be ice cream or yogurt, rice or wheat, cars or computers, or childcare

PAGE In deciding what to produce — whether it be ice cream or yogurt, rice or wheat, cars or computers, or childcare or education — the market can usually provide the price signals or information to help owners of resources make

PAGE or education — the market can usually provide the price signals or information to help owners of resources make the right production decisions that give consumers the types of goods and services they most want.

PAGE the right production decisions that give consumers the types of goods and services they most want.

, is that there are situations where socially undesirable yet

PAGE , is that there are situations where socially undesirable yet

pro�table goods and services (e.g. illegal drugs, pollution, guns and prostitution) may be overproduced, while

PAGE pro�table goods and services (e.g. illegal drugs, pollution, guns and prostitution) may be overproduced, while low priced, socially desirable goods and services (e.g. affordable health care, education and housing) are

PAGE low priced, socially desirable goods and services (e.g. affordable health care, education and housing) are underproduced. In these instances, there is a strong case for government intervention in or regulation of some PAGE underproduced. In these instances, there is a strong case for government intervention in or regulation of some markets using taxes to discourage, or government subsidies to encourage, some types of production.PAGE

markets using taxes to discourage, or government subsidies to encourage, some types of production.

PROOFStive to that for yogurt due to an increase in consumer demand for ice cream at all possible prices (perhaps

PROOFStive to that for yogurt due to an increase in consumer demand for ice cream at all possible prices (perhaps re�ecting the operation of non-price factors like successful advertising, population growth or a rise in dispo

PROOFSre�ecting the operation of non-price factors like successful advertising, population growth or a rise in dispo-

PROOFS-sable income) while the demand for yogurt fell (perhaps due to a non-price condition like a health scare).

PROOFSsable income) while the demand for yogurt fell (perhaps due to a non-price condition like a health scare). Here, it is quite likely that ice cream would become relatively more pro�table than yogurt (assuming no

PROOFSHere, it is quite likely that ice cream would become relatively more pro�table than yogurt (assuming no other changes occurred). Higher pro�ts in ice cream would then attract extra resources into this area of pro

PROOFSother changes occurred). Higher pro�ts in ice cream would then attract extra resources into this area of pro

Alternatively, what would happen if the equilibrium

PROOFS Alternatively, what would happen if the equilibrium market price of ice

PROOFSmarket price of ice

, perhaps because there was an increase in the supply of ice cream at all possible prices (perhaps

PROOFS, perhaps because there was an increase in the supply of ice cream at all possible prices (perhaps

due to lower costs such as milk or transport) relative to its demand? In this case, it is likely that ice cream

PROOFSdue to lower costs such as milk or transport) relative to its demand? In this case, it is likely that ice cream producers would face relatively lower pro�ts against those for yogurt. This would tend to repel resources

PROOFS

producers would face relatively lower pro�ts against those for yogurt. This would tend to repel resources

In deciding what to produce — whether it be ice cream or yogurt, rice or wheat, cars or computers, or childcare PROOFS

In deciding what to produce — whether it be ice cream or yogurt, rice or wheat, cars or computers, or childcare




• Market prologue• Demand• Change in demand vs change in quantity

demanded• Supply• Market equilibrium• Demand and supply explained• Demand and supply explained 2• Shifting demand and supply

• What do prices ‘know’ that you don’t?• Law of demand• Demand and supply• Basic concepts of supply and demand• Demand and supply (EconMovies 4: Indiana Jones)• Price signals • Markets link the world• The power of the market (featuring Milton Friedman)• Fruit shop economics


1 What are demand– supply diagrams? 2 What is meant by demand? Explain the law of demand. 3 What is meant by supply? Explain the law of supply. 4 What is the equilibrium price and how is it determined in a competitive market? 5 What are the main non-price conditions of demand? Diagrammatically show how an increase or decrease

in the quantity demanded at any given price can affect a demand–supply diagram. 6 What are non-price conditions of supply? Diagrammatically show how an increase or decrease in the

quantity supplied at any given price can affect a demand–supply diagram. 7 When non-price conditions of demand and/or supply change, the price of one good or service

in the market either rises or falls relative to the price of another. Explain how this change in relative prices affects what particular types of goods or services are produced and how resources are allocated.



• School-assessed tasks > Applied economic exercises > Questions 3, 4, 5 and 6

2.4 Background for a case study of a particular marketThe market is a living, exciting and rapidly changing institution that operates around the clock. It is of enor-mous importance to our daily lives. As we know, Australia basically has a market-based economy (with a limited amount of government guidance in some areas).

The current VCE Economics study design covering 2017–21 requires you to select one or more of the following contemporary markets for a case study that illustrates their operation as a decision maker: • agricultural markets such as wool, wheat and beef • other commodity markets such as minerals and energy • community markets • the �nance market • the share market • the labour market • the property/housing market • online markets • the health market.

It is also intended that this research should allow you to connect theory and appropriate models to different markets in the Australian and global economies. This section provides a general outline of each market, along with some questions to guide your internet research outside of this text. However, a detailed outline of how you might approach this case study research is supplied as one of the activities in section 2.5.

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Applied economic exercises

UNCORRECTED Applied economic exercises

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2.4 Background for a case study of a particular

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2.4 Background for a case study of a particular

The market is a living, exciting and rapidly changing institution that operates around the clock. It is of enor

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The market is a living, exciting and rapidly changing institution that operates around the clock. It is of enormous importance to our daily lives. As we know, Australia basically has a

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mous importance to our daily lives. As we know, Australia basically has a limited amount of government guidance in some areas).

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limited amount of government guidance in some areas). The current VCE

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The current VCE following contemporary markets for a case study that illustrates their operation as a decision maker:

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following contemporary markets for a case study that illustrates their operation as a decision maker:•UNCORRECTED

• agricultural UNCORRECTED

agricultural •UNCORRECTED

• other UNCORRECTED

other

PAGE

PAGE

PAGE ? Diagrammatically show how an increase or decrease in the

PAGE ? Diagrammatically show how an increase or decrease in the quantity supplied at any given price can affect a demand–supply diagram.

PAGE quantity supplied at any given price can affect a demand–supply diagram. When non-price conditions of demand and/or supply change, the price of one good or service

PAGE When non-price conditions of demand and/or supply change, the price of one good or servicein the market either rises or falls relative to the price of another. Explain

PAGE in the market either rises or falls relative to the price of another. Explain relative prices affects what particular types of goods or services are produced and how resources

PAGE relative prices affects what particular types of goods or services are produced and how resources

PROOFS

PROOFS

PROOFS and how is it determined in a competitive market?

PROOFS and how is it determined in a competitive market?

? Diagrammatically show how an increase or decrease

PROOFS

? Diagrammatically show how an increase or decrease in the quantity demanded at any given price can affect a demand–supply diagram. PROOFS

in the quantity demanded at any given price can affect a demand–supply diagram. ? Diagrammatically show how an increase or decrease in the PROOFS

? Diagrammatically show how an increase or decrease in the



Agricultural or rural commodity marketsNatureAustralian farmers sell their wheat, barley, wool, canola, beef, lamb, eggs, fruits and vegetables to whole-salers and retailers in rural or agricultural commodity markets both here and overseas. The price negotiated by buyers and sellers will re�ect the relative scarcity of each rural commodity. Sometimes inter-national selling is done by representative organisations. Again, the prices of agricultural commodities are determined at market equilibrium by the interaction of sellers (S) and buyers (D). The prices of agricul-tural commodities change to re�ect new non-price conditions of demand and supply. Especially on the supply side, conditions can change as a result of both favourable and less favourable growing conditions (e.g. droughts and severe weather events).

Conditions of demand and especially supply can affect the market price of agricultural commodities. For example, severe weather events like cyclones and droughts can decrease supply and cause a rise in prices.

Structure for your case study research into a selected agricultural commodity marketYou might like to use the following questions to guide your research into a selected agricultural commodity market. • What are the general features of your selected agricultural commodity market? What type of market struc-

ture is common in this industry? • Who are the demanders, buyers or consumers of the selected agricultural commodity and what factors affect

their decisions? How have non-price demand conditions changed recently? Try to illustrate these hypothet-ically, using a D–S diagram showing the before and after effects on market demand, and the equilibrium price and quantity.

• Who are the suppliers or sellers of agricultural commodities and what affects their decisions? How have non-price supply conditions changed recently? Try to illustrate these hypothetically, using a D–S diagram showing the before and after effects on market supply, and the equilibrium price and quantity.

• Because of changes in demand and supply conditions, relative market prices have moved up or down. Use internet research to locate and copy a price graph for your selected commodity over recent years, and then describe the changes in market prices in both the short and long term.

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Conditions of demand and especially supply can affect the market price of agricultural commodities. For example, severe

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Conditions of demand and especially supply can affect the market price of agricultural commodities. For example, severe weather events like cyclones and droughts can decrease supply and cause a rise in prices.

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weather events like cyclones and droughts can decrease supply and cause a rise in prices.

ructure for your case study research into a selected agricultural

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ructure for your case study research into a selected agricultural commodity market

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commodity marketYou might like to use the following questions to guide your research into a selected agricultural commodity UNCORRECTED

You might like to use the following questions to guide your research into a selected agricultural commodity market. UNCORRECTED

market.

PAGE PROOFS

PROOFS



• What are the likely effects of changes in the relative market price of your selected agricultural com-modity on the economic decisions (including resource allocation) made by Australian and international producers?By way of an example, �gure 2.10 below uses six graphs to show price changes to 2016 in a selection of

agricultural commodity markets (usually measured in US$). You might like to start your agricultural com-modity research by following the weblinks in this topic’s student resources tab.

Weblinks These weblinks are available in this topic’s student resources tab.

• Australian Bureau of Agricultural and Resource Economics (ABARES)• YQ Matrix graphs

Graph 1 — Australian wool prices 2012–16 (in A$ and US$) and the number of bales of wool supplied

Australian eastern market indicator wool price, weekly

c/kg clean

EMI*

*Note: EMI = Easter market price indicator.

EMI (USD)

Bales offered(right axis)

300

600

900

1200

1500

’000 bales

10

20

30

40

50

Jan

20

16

Aug

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Aug

20

12

Mar

20

15

Sep

20

14

Apr

20

14

Nov

20

13

May

20

13

Dec

20

12

Graph 2 — Recent changes in world wheat prices

US$/t

US no. 2 hard redwinter, fob Gulf

Jan

20

16

Dec

20

15

Nov

20

15

Oct

20

15

Sep

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Aug

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Jun

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May

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Apr

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Mar

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240

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270World wheat indicator price, March 2015 to January 2016

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EMI = Easter market price indicator.

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EMI = Easter market price indicator.

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World wheat indicator price, March 2015 to January 2016

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PROOFSGraph 1 — Australian wool prices 2012–16 (in A$ and US$) and the number of bales of wool supplied

PROOFSGraph 1 — Australian wool prices 2012–16 (in A$ and US$) and the number of bales of wool supplied

PROOFS

PROOFS

PROOFS

PROOFS

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PROOFS

PROOFS

PROOFS

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PROOFS

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40PROOFS

40

50

PROOFS50

PROOFS

PROOFS



Graph 3 — Changes in Australian beef meat prices

Weighted average saleyard price of cattle, nominal and real

c/kg

f ABARES forecast. z ABARES projection.

2015–16c/kg

Nominal

Real (right axis)

19

75

–76

19

80

–81

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–86

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100

200

300

400

500

600

700

800

Graph 4 — Changes in world dairy product prices

World dairy price projections

2015–16US$/t

z ABARES projection.

CheeseSkim milk powderWhole milk powderButter

1000

2000

3000

4000

5000

6000

20

02

–03

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05

–06

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Graph 5 — Changes in Australian seafood prices

Average prices of key Australian species

2015–16$/kg

s ABARES estimate.

Abalone Rock lobsterPrawnsTuna Salmonids

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50

60

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04

–05

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–07

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Source: Savage & Hobsbawn 2015

FIGURE 2.10 Price changes for a selection of agricultural commodity prices (actual and forecast) (continued)

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ABARES projection.

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ABARES projection.

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FIGURE 2.10 (continued)

Graph 6 — How volume, price and value of selected agricultural commodities are expected to change in 2016–17

Major Australian agricultural commodity exports

Price a

Value

ValueVolume

2016–17

2015–16f2016–17f

$b

Mutton

Skim milkpowder

Rock lobster

Cheese

Canola

Cotton

Live feeder/slaughter cattle

Lamb

Barley

Sugar

Wine

Wool

Wheat

Beef and veal–4%

–1%

7%

0%

7%

0%

–3%

9%

22%

13%

1%

3%

6%

–11%

–9%

2%

1%

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4%

0%

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4%

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8%

2%

3%

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5%

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5%

1%

11%

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5%

–3%

3%

8%

0%

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10%

$8.78b$9.17b

$5.57b$5.60b

$3.67b$3.44b

$2.22b$2.21b

$1.88b$1.77b

$1.88b$1.87b

$1.57b$1.61b

$1.50b$1.37b

$1.44b$1.18b

$1.42b$1.25b

$0.89b$0.89b

$0.82b$0.79b

$0.61b$0.58b

$0.61b$0.69b

a Wheat, sugar, barley, cotton, canola and cheese are world indicator prices in US$. Beef and veal, lamb andmutton are saleyard prices in A$. All other commodities are export unit returns in A$.f ABARES forecast.

2 4 6 8 10

Source: Graphs copied from ABARES 2016, Agricultural commodities, vol. 6, no. 1, March 2016, in ascending order from graph 1: pp. 114, 30, 104, 135, 156, 21.

Mineral commodity marketsNatureNon-rural commodity markets involve the selling and buying of raw materials and energy at a nego-tiated price that will re�ect their relative scarcity. Firms producing or supplying commodities, sell to other �rms who need these materials for making �nished products that are sold to customers or buyers. Important internationally traded raw materials include oil, gold, iron, zinc, nickel, timber, diamonds and natural gas. With great emphasis on mining, it is hardly surprising that the value of Australia’s exports is greatly affected by trends in commodity prices. Indeed, the A$ is often referred to as a commodity-driven currency.

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2016–17

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2016–17

a

UNCORRECTED

a Wheat, sugar, barley, cotton, canola and cheese are world indicator prices in US$. Beef and veal, lamb and

UNCORRECTED

Wheat, sugar, barley, cotton, canola and cheese are world indicator prices in US$. Beef and veal, lamb andmutton are saleyard prices in A$. All other commodities are export unit returns in A$.

UNCORRECTED

mutton are saleyard prices in A$. All other commodities are export unit returns in A$.f

UNCORRECTED

f ABARES forecast.

UNCORRECTED

ABARES forecast.

2 4 6 8 10

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2 4 6 8 10

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Source:UNCORRECTED

Source:pp. 114, 30, 104, 135, 156, 21.UNCORRECTED

pp. 114, 30, 104, 135, 156, 21.

PAGE Live feeder/

PAGE Live feeder/slaughter cattle

PAGE slaughter cattle

PAGE

PAGE

PAGE PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

Live feeder/PROOFS

Live feeder/

LambPROOFS

Lamb

Barley

PROOFSBarley

7%

PROOFS7%

0%

PROOFS0%

4%

PROOFS4%

0%

PROOFS0%

–4%PROOFS

–4%

1%

PROOFS1%

11%

PROOFS11%

PROOFS

PROOFS



Market forces and conditions of demand and supply determine the relative prices of various mineral commodities like silver and gold, aluminium, lead and zinc. Market prices rise when demand exceeds supply and falls when supply exceeds demand. One really important condition affecting demand, and hence the price of a metal, is the global level of economic activity; while a condition of supply could be the discovery and opening up of new mines.

Structure for your case study research into a selected mineral or energy commodity marketYou might like to use the following questions to guide your research into a selected mineral commodity market. • What are the general features of your selected mineral commodity market? What type of market structure is

common in this market or industry? • Who are the demanders, buyers or consumers of the selected mineral commodity and what factors affect

their decisions? How have non-price demand conditions changed recently? Try to illustrate these hypothet-ically, using a D–S diagram showing the before and after effects on market demand, and the equilibrium price and quantity.

• Who are the suppliers or sellers of mineral commodities and what affects their decisions? How have non-price supply conditions changed recently? Try to illustrate these hypothetically, using a D–S diagram showing the before and after effects on market supply, and the equilibrium price and quantity.

• Because of changes in non-price demand and supply conditions, relative market prices of mineral commodities have moved up or down. Use internet research to locate and copy a price graph for your selected commodity over recent years, and then describe the changes in market prices in both the short and long term.

• What are the likely effects of changes in the relative market price of your selected mineral commodity on the economic decisions (including resource allocation) made by Australian and international producers?By way of examples, �gure 2.11 includes four graphs to show recent price changes in markets for a selec-

tion of mineral and energy commodities over the years to 2016.They include mineral commodities such as bulk minerals (used for manufacturing metal products, expressed in US$ per tonne), crude oil (liquid pet-roleum that comes out of the ground before being re�ned and is commonly used to fuel cars and aeroplanes and the like, usually expressed in US$ per barrel) and gold (US$ per ounce).

Notice the spectacular fall in oil prices and mineral commodity prices between 2013 and 2016. You can follow the weblinks in this topic’s student resources tab to research these and other price graphs.


• Energy Information Administration• InfoMine.com• International Energy Agency• OPEC

• RBA Chart Pack — mineral commodities• World Gold Council• YQ Matrix graphs

UNCORRECTED , buyers or consumers of the selected mineral commodity and what factors affect

UNCORRECTED , buyers or consumers of the selected mineral commodity and what factors affect demand conditions

UNCORRECTED demand conditions changed recently? Try to illustrate these hypothet

UNCORRECTED changed recently? Try to illustrate these hypothet

before

UNCORRECTED before and

UNCORRECTED and after

UNCORRECTED after

or sellers of mineral commodities and what affects their decisions? How have non-

UNCORRECTED or sellers of mineral commodities and what affects their decisions? How have non-

changed recently? Try to illustrate these hypothetically, using a

UNCORRECTED changed recently? Try to illustrate these hypothetically, using a

effects on market supply, and the equilibrium price and quantity.

UNCORRECTED

effects on market supply, and the equilibrium price and quantity.

UNCORRECTED

Because of changes in non-price demand and supply conditions, relati

UNCORRECTED

Because of changes in non-price demand and supply conditions, relaticommodities have moved up or down. Use internet research to locate and copy a

UNCORRECTED

commodities have moved up or down. Use internet research to locate and copy a selected commodity over recent years, and then describe the

UNCORRECTED

selected commodity over recent years, and then describe the

are the likely

UNCORRECTED

are the likely effects of changes in the relative market price

UNCORRECTED

effects of changes in the relative market priceon the economic decisions (including resource allocation) made by Australian and international

UNCORRECTED

on the economic decisions (including resource allocation) made by Australian and international producers?

UNCORRECTED

producers?By way of examples, �gure 2.11 includes four graphs to show recent price changes in markets for a selec

UNCORRECTED

By way of examples, �gure 2.11 includes four graphs to show recent price changes in markets for a selec

UNCORRECTED

tion of mineral and energy commodities over the years to 2016.

UNCORRECTED

tion of mineral and energy commodities over the years to 2016.bulk minerals (used for manufacturing metal products, expressed in US$ per tonne), crude oil (liquid petUNCORRECTED

bulk minerals (used for manufacturing metal products, expressed in US$ per tonne), crude oil (liquid petroleum that comes out of the ground before being re�ned and is commonly used to fuel cars and aeroplanes UNCORRECTED

roleum that comes out of the ground before being re�ned and is commonly used to fuel cars and aeroplanes and the like, usually expressed in US$ per barrel) and gold (US$ per ounce).UNCORRECTED

and the like, usually expressed in US$ per barrel) and gold (US$ per ounce).

PAGE ructure for your case study research into a selected mineral or energy

PAGE ructure for your case study research into a selected mineral or energy

You might like to use the following questions to guide your research into a selected mineral commodity

PAGE You might like to use the following questions to guide your research into a selected mineral commodity

of your selected mineral commodity market? What type of PAGE of your selected mineral commodity market? What type of

PROOFS

PROOFS

PROOFSMarket forces and conditions of demand and supply determine the relative prices of various mineral commodities like

PROOFSMarket forces and conditions of demand and supply determine the relative prices of various mineral commodities like silver and gold, aluminium, lead and zinc. Market prices rise when demand exceeds supply and falls when supply exceeds

PROOFSsilver and gold, aluminium, lead and zinc. Market prices rise when demand exceeds supply and falls when supply exceeds demand. One really important condition affecting demand, and hence the price of a metal, is the global level of economic

PROOFS

demand. One really important condition affecting demand, and hence the price of a metal, is the global level of economic



Graph 1 — Changes in bulk mineral commodity prices (US$ per tonne)

Bulk commodity pricesFree on board basis

Iron ore(LHS)

20142012 201630

75

120

165

US$/tThermal coal

(LHS)

20142012 2016

Average Australianexport price

Coking coal(RHS)

20142012 201650

150

250

350

US$/t

Spot price*

*Iron ore �nes, Newcastle thermal coal and premium hard coking coal

Sources: ABS; Bloomberg; IHS; RBA

Source: RBA Chart Pack, June 2016.

Graph 2 — Changes in crude oil commodity prices (US$ per barrel)

May 222000

0

20

40

60

80

100

120

140

Crude oil price 51.64 USD/bbl9 June 2016

Cru

de o

il pr

ice

(US

D/b

bl)

160

May 12005

May 32010

May 12015

Source: InvestmentMine, http://www.infomine.com/investment/metal-prices/crude-oil/all.

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PAGE Sources:

PAGE Graph 2 — Changes in crude oil commodity prices (US$ per barrel)

PAGE Graph 2 — Changes in crude oil commodity prices (US$ per barrel)

Crude oil price PAGE Crude oil price 51.64 USD/bblPAGE 51.64 USD/bbl9 June 2016PAGE

9 June 2016

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS2012 2016

PROOFS2012 201620142012 20162014

PROOFS20142012 20162014

50

PROOFS50

150

PROOFS150

ABS; Bloomberg; IHS; RBAPROOFS

ABS; Bloomberg; IHS; RBA



Graph 3 — How crude oil prices (US$ per barrel) react to a variety of geopolitical and economic events

Source: U.S. Energy Information Administration, Thomson Reuters.Updated: quarterly | Last Updated: 30 June 2016

1: US spare capacity exhausted2: Arab Oil Embargo3: Iranian Revolution4: Iran–Iraq War5: Saudis abandon swing producer role6: Iraq invades Kuwait7: Asian �nancial crisis

8: OPEC cuts production targets 1.7 mmbpd (million barrels per day) 9: 9–11 attacks10: Low spare capacity11: Global �nancial collapse12: OPEC cuts production targets 4.2 mmbpd

Crude oil prices and key geopolitical and economic eventsPrice per barrel (real 2010 dollars)

Imported re�ner acquisition cost of crude oil WTI crude oil price

1970 1975 1980 1985 1990 1995 2000 2005 2010 20150

25

50

75

100

125

150

12

11

10

9

8

765

4

3

21

Source: US Energy Information Administration website, https://www.eia.gov/�nance/markets/spot_prices.cfm.

Graph 4 — Changes in the gold price (US$ per ounce)

Jan 21990

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

Gold price1266.75 USD/ozt

10 Jun 2016

Gol

d pr

ice

(US

D/o

zt)

Jan 11995

Jan 12000

Jan 12005

Jan 12010

Jan 12015

FIGURE 2.11 Price changes for a selection of mineral commodity prices (actual and forecast)

Source: InvestmentMine, http://www.infomine.com/investment/metal-prices/gold/all.

UNCORRECTED US Energy Information Administration website, https://www.eia.gov/�nance/markets/spot_prices.cfm.

UNCORRECTED US Energy Information Administration website, https://www.eia.gov/�nance/markets/spot_prices.cfm.

Graph 4 — Changes in the gold price (US$ per ounce)

UNCORRECTED Graph 4 — Changes in the gold price (US$ per ounce)

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UNCORRECTED PAGE U.S. Energy Information Administration, Thomson Reuters.

PAGE U.S. Energy Information Administration, Thomson Reuters.Updated: quarterly | Last Updated: 30 June 2016

PAGE Updated: quarterly | Last Updated: 30 June 2016

8: OPEC cuts production targets 1.7 mmbpd

PAGE 8: OPEC cuts production targets 1.7 mmbpd (million barrels per day)

PAGE (million barrels per day) 9: 9–11 attacks

PAGE 9: 9–11 attacks10: Low spare capacity

PAGE 10: Low spare capacity11: Global �nancial collapse

PAGE 11: Global �nancial collapse12: OPEC cuts production targets 4.2 mmbpdPAGE 12: OPEC cuts production targets 4.2 mmbpd

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

U.S. Energy Information Administration, Thomson Reuters.PROOFS

U.S. Energy Information Administration, Thomson Reuters.Updated: quarterly | Last Updated: 30 June 2016PROOFS

Updated: quarterly | Last Updated: 30 June 2016

WTI crude oil pricePROOFS

WTI crude oil price

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

PROOFS1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

PROOFS

PROOFS



Community markets NatureCommunity markets involve the selling and buying of edible products (e.g. cheeses, breads, cakes, vegetables, chutneys, jams and sweets) and home crafts (e.g. jewellery, leather goods, pottery, art, plants, clothing), along with plants, antiques and collectables. These markets typically occur in suburbs like Fitzroy or Kingsbury Drive in Melbourne, in cities like Geelong and Ballarat, and in small towns like Torquay. Sometimes they run infrequently like once a month, or perhaps every week. Usually sellers produce on a small scale and their products are often unique. This can make them an attraction for buyers and, as is usually the case, prices re�ect conditions of demand and supply.

Your case study of a community market might involve research and even an excursion to one of these markets. Here you may have an opportunity to chat with sellers and buyers. To �nd out what markets are run-ning, follow the White Hat Guide to Sunday Markets weblink in this topic’s student resources tab.


• White Hat Guide to Sunday Markets

Structure for your case study research into a selected community marketYou might like to use the following questions to guide your research into a selected community market. • What are the general features of your selected community market? What type of market structure is common

in this area? • Who are the demanders, buyers or consumers of the selected goods and services, and what factors affect

their decisions? How have non-price demand conditions changed recently? Try to illustrate their effects hypothetically, using a D–S diagram showing the before and after impacts on market demand, and the equi-librium price and quantity.

• Who are the suppliers or sellers of the selected goods and services, and what affects their decisions? How have non-price supply conditions changed recently? Try to illustrate these hypothetically, using a D–S diagram showing the before and after effects on market supply, and the equilibrium price and quantity.

• As a result of recent changes in demand and supply conditions, try to describe some of the trends in market prices for your selected goods and services.

• What are the likely effects of changes in the relative market price paid for your selected goods and services in the community market on the economic decisions (including resource allocation) made by producers or the owners of resources?

The stock market

Prices of shares in the stock market are nowadays displayed electronically, and can change unexpectedly up or down due to changes in the conditions of demand for and or supply of shares. In turn, price changes affect the economic decisions of investors and the allocation of resources.

UNCORRECTED effects on market supply, and the equilibrium price and quantity.

UNCORRECTED effects on market supply, and the equilibrium price and quantity.

UNCORRECTED As a result of recent changes in demand and supply conditions, try to describe some of the

UNCORRECTED As a result of recent changes in demand and supply conditions, try to describe some of the prices for your selected goods and services.

UNCORRECTED prices for your selected goods and services.effects of changes in the relative market price

UNCORRECTED effects of changes in the relative market price

in the community market on the economic decisions (including resource allocation) made by producers or

UNCORRECTED in the community market on the economic decisions (including resource allocation) made by producers or

UNCORRECTED

The stock market

UNCORRECTED

The stock market

UNCORRECTED PAGE , buyers or consumers of the selected goods and services, and what factors affect

PAGE , buyers or consumers of the selected goods and services, and what factors affect changed recently? Try to illustrate their effects

PAGE changed recently? Try to illustrate their effects and

PAGE and after

PAGE after impacts on market demand, and the equi

PAGE impacts on market demand, and the equiafter impacts on market demand, and the equiafter

PAGE after impacts on market demand, and the equiafter

or sellers of the selected goods and services, and what affects their decisions? How

PAGE or sellers of the selected goods and services, and what affects their decisions? How

changed recently? Try to illustrate these hypothetically, using a PAGE changed recently? Try to illustrate these hypothetically, using a

effects on market supply, and the equilibrium price and quantity.PAGE

effects on market supply, and the equilibrium price and quantity.As a result of recent changes in demand and supply conditions, try to describe some of the PAGE

As a result of recent changes in demand and supply conditions, try to describe some of the

PROOFS

PROOFS

PROOFSructure for your case study research into a selected community market

PROOFSructure for your case study research into a selected community market

You might like to use the following questions to guide your research into a selected community market.

PROOFSYou might like to use the following questions to guide your research into a selected community market.

of your selected community market? What type of PROOFS

of your selected community market? What type of market structurePROOFS

market structure

, buyers or consumers of the selected goods and services, and what factors affect PROOFS

, buyers or consumers of the selected goods and services, and what factors affect



NatureThe stock market allows shares (a part ownership of a business) in companies listed on the Australian Stock Exchange to be bought and sold at a price that re�ects relative scarcity and the ever-changing non-price conditions of demand and supply for each stock. Often, speculative buyers will try to purchase shares at a low price and then resell them at a higher price later, in the hope of making a pro�t or capital gain. Sometimes shares are simply seen as an income-earning investment where shareholders receive dividends or a proportion of the pro�ts made by the company. When companies are �oated or �rst listed on the stock exchange, they issue or sell shares to raise �nance for their business expansion. Later, however, these shares change hands, depending on whether the original buyers want to keep them or sell them. On occasion, volatile changes in the conditions of demand and supply by investors can cause share prices to change dramatically.

Structure for the case study research into the stock marketYou might like to use the following questions to guide your research into the stock market. • What are the general features of the stock market or Australian Securities Exchange (ASX)? What is the

type of market structure and level of competition in the ASX or stock market? • Who are the demanders or buyers of company stock, shares and equities that are listed on the ASX, and

what factors affect their decisions (either focus on one listed company or cover shares in general)? Try to illustrate hypothetically the recent effect of factors using a D–S diagram to show the before and after situ-ations on market demand, and the equilibrium price and quantity.

• Who are the suppliers or sellers of company stock, shares and equities listed on the ASX, and what affects their decisions (either focus on one company or cover shares in general)? Try to illustrate hypothetically the recent effect of these factors, using a D–S diagram to show the before and after situations on market supply, and the equilibrium price and quantity.

• Because of changes in demand and supply conditions, share prices have moved up or down. Use internet research to locate and copy a price graph for your selected company or for shares generally, and then describe the changes in market prices in both the short and long term (see price trends more generally using the ASX 200 or S&P 500, or take the price of a particular company’s share and study that).

• What are the likely effects of changes in share prices (perhaps for different company shares or relative to the attractiveness of other investments like housing, both here and overseas) on the economic decisions (including resource allocation) made by investors?By way of example, �gure 2.12 includes two graphs. One shows how the share price has changed

for various types of companies in different sectors of industry. The other shows general trends in local share prices against those overseas. After peaks in Australian and international share prices during 2003–04, 2007–08 and 2014–15, prices generally dipped, especially following the global �nancial crisis (GFC) and ensuing slowdown. This in�icted much pain on investors, especially retirees. Despite some recovery in share prices after each of these falls, uncertainty remains, re�ecting overseas and local concerns.

You can research these and other share price graphs by following the weblinks in this topic’s student resources tab.


• RBA Chart Pack — share prices• ASX home page• ASX School’s Share Market Game• Department of Agriculture, Fisheries and Forestry• National Council of Wool Selling Brokers of Australia• AUSTRADE• Food and Agricultural Organization of the United Nations

UNCORRECTED effects of changes in share prices

UNCORRECTED effects of changes in share prices the attractiveness of other investments like housing, both here and overseas) on the economic decisions

UNCORRECTED the attractiveness of other investments like housing, both here and overseas) on the economic decisions (including resource allocation) made by investors?

UNCORRECTED (including resource allocation) made by investors?By way of example, �gure 2.12 includes two graphs. One shows how the share price has changed

UNCORRECTED By way of example, �gure 2.12 includes two graphs. One shows how the share price has changed

for various types of companies in different sectors of industry. The other shows general trends in local

UNCORRECTED for various types of companies in different sectors of industry. The other shows general trends in local share prices against those overseas. After

UNCORRECTED share prices against those overseas. After peaks in Australian and international share prices during

UNCORRECTED peaks in Australian and international share prices during

2003–04, 2007–08 and 2014–15, prices generally dipped, especially following the global �nancial

UNCORRECTED 2003–04, 2007–08 and 2014–15, prices generally dipped, especially following the global �nancial crisis (GFC) and ensuing slowdown. This in�icted much pain on investors, especially retirees. Despite

UNCORRECTED crisis (GFC) and ensuing slowdown. This in�icted much pain on investors, especially retirees. Despite some recovery in share prices after each of these falls, uncertainty remains, re�ecting overseas and local

UNCORRECTED

some recovery in share prices after each of these falls, uncertainty remains, re�ecting overseas and local

You can research these and other share price graphs by following the weblinks in this topic’s student

UNCORRECTED

You can research these and other share price graphs by following the weblinks in this topic’s student

UNCORRECTED

Weblinks

UNCORRECTED


UNCORRECTED

These weblinks are available in this topic’s student resources tab.

RBA Chart Pack — share prices

UNCORRECTED

RBA Chart Pack — share pricesASX home pageUNCORRECTED

ASX home pageASX School’s Share Market GameUNCORRECTED

ASX School’s Share Market GameDepartment of Agriculture, Fisheries and ForestryUNCORRECTED

Department of Agriculture, Fisheries and ForestryUNCORRECTED

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PAGE after

Because of changes in demand and supply conditions, share prices ha

PAGE Because of changes in demand and supply conditions, share prices have moved up or down. Use

PAGE ve moved up or down. Use for your selected company or for shares generally,

PAGE for your selected company or for shares generally,

in market prices in both the short and long term (see price trends

PAGE in market prices in both the short and long term (see price trends

more generally using the ASX 200 or S&P 500, or take the price of a particular company’s share and

PAGE more generally using the ASX 200 or S&P 500, or take the price of a particular company’s share and

(perhaps for different company shares or relative to PAGE (perhaps for different company shares or relative to

the attractiveness of other investments like housing, both here and overseas) on the economic decisions PAGE

the attractiveness of other investments like housing, both here and overseas) on the economic decisions

PROOFS of the stock market or Australian Securities Exchange (ASX)? What is the

PROOFS of the stock market or Australian Securities Exchange (ASX)? What is the

or buyers of company stock, shares and equities that are listed on the ASX, and

PROOFS or buyers of company stock, shares and equities that are listed on the ASX, and

what factors affect their decisions (either focus on one listed company or cover shares in general)? Try to

PROOFSwhat factors affect their decisions (either focus on one listed company or cover shares in general)? Try to

before

PROOFSbefore and

PROOFS and after

PROOFSafter

or sellers of company stock, shares and equities listed on the ASX, and what affects

PROOFS or sellers of company stock, shares and equities listed on the ASX, and what affects

their decisions (either focus on one company or cover shares in general)? Try to illustrate hypothetically the PROOFS

their decisions (either focus on one company or cover shares in general)? Try to illustrate hypothetically the after PROOFS

after situations on market supply, PROOFS

situations on market supply,



Graph 1 — Trends in Australian share prices by company category

20122008200420001996 201660

100

200

300

400

500600Index

60

100

200

300

400

500600

Index

Australian share price indices*Log scale, end December 1994 = 100

Financials

Resources

All other sectors

*ASX 200 companies

Sources: Bloomberg; RBA

Graph 2 — Changes in indices measuring the prices of Australian and international shares

20122008200420001996 201680

100

200

300

400

500

Index

80

100

200

300

400

500

Index

Australian and world share price indicesLog scale, end December 1994 = 100

ASX 200

S&P 500

MSCI World

Sources: Bloomberg; MSCI; RBA

FIGURE 2.12 Graph 1 shows trends in Australian share prices by company category, while graph 2 compares changes in indices that measure the prices of Australian and international shares.

Sources: Both graphs copied from the RBA Chart Pack, June 2016.

The finance marketNatureThe �nance market involves �nancial institutions (e.g. banks, credit unions, superannuation funds). Here, borrowers (demanders) and lenders (suppliers) of credit negotiate the rate of interest — the price or annual cost of credit that is paid. Interest rates largely re�ect the relative scarcity of credit and the conditions of demand and supply. Households, businesses and governments often need to borrow (demand) money to �nance their purchases of goods and services, including capital equipment, property, and consumer goods. However, savers of money, including some households who do not spend all their current income, lend money to �nancial institutions and are rewarded by receiving interest.

Structure for the case study research into the finance marketYou might like to use the following questions to guide your research into the �nance market. • What are the general features of the �nance market? What type of market structure commonly exists? • Who are the demanders or borrowers of �nance, and what affects their decisions? How have demand con-

ditions changed recently? Try to illustrate these hypothetically, using a D–S diagram showing the before and after effects on market demand, and the equilibrium price and quantity.

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FIGURE 2.12

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FIGURE 2.12 Graph 1 shows trends in Australian share prices by company category, while graph 2 compares

UNCORRECTED

Graph 1 shows trends in Australian share prices by company category, while graph 2 compares changes in indices that measure the prices of Australian and international shares.

UNCORRECTED

changes in indices that measure the prices of Australian and international shares.

UNCORRECTED

Both graphs copied from the RBA Chart Pack, June 2016.

UNCORRECTED

Both graphs copied from the RBA Chart Pack, June 2016.

The finance market

UNCORRECTED

The finance marketNUNCORRECTED

NatUNCORRECTED

atureUNCORRECTED

ureThe UNCORRECTED

The

PAGE

PAGE

PAGE

PAGE

PAGE

PAGE

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PAGE

PAGE Australian and world share price indices

PAGE Australian and world share price indicesLog scale, end December 1994 = 100

PAGE Log scale, end December 1994 = 100 PROOFS Bloomberg; RBA

PROOFS Bloomberg; RBA


PROOFS


Australian and world share price indices PROOFS

Australian and world share price indices



• Who are the suppliers, sellers or lenders of �nance, and what affects their decisions? How have supply con-ditions changed recently? Try to illustrate these hypothetically, using a D–S diagram showing the before and after effects on supply, and the equilibrium price and quantity.

• Using the internet, �nd and copy a graph showing changes in key Australian interest rates (the price of borrowing credit or the reward for lending credit) over the last decade to the current year. Using this graph, describe the trends in interest rates in both the short and long term.

• What are the likely effects of changes in interest rates on the �nance market, and on the economic decisions (including resource allocation) made by Australian households and businesses?

By way of an example, �gure 2.13 uses three graphs showing recent changes in Australian interest rates or the price of credit. Notice the peak in interest rates in 2007–08, followed by a sharp fall. After another rise, most recently between 2010 and 2012, interest rates have been declining (with some plateaus).

You might like to start your research into the �nance market by following the weblinks in this topic’s stu-dent resources tab.


• RBA Chart Pack — interest rates• Trading Economics

Graph 1 — Australian interest rates, 2008–16

2008 2010 2012 2014 2016

Source: www.tradingeconomics.com | Reserve Bank of Australia

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Graph 2 — Australian housing lending rates, 1996–2016

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FIGURE 2.13 Changes in selected interest rates in Australia’s �nancial market (continued)

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Graph 3 — Australian business lending rates, 2000–2016

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Source: Graph copied from RBA Chart Pack, June 2016.

The foreign exchange marketNatureInternational �nancial transactions involve exports and imports of goods and services, and investment �ows between countries. During this process, payments between countries must be made in the currency appropriate for each nation. For instance, Australian exporters generally want to be paid in our currency, not yen or pounds sterling. For this to occur, international currencies (e.g. the A$, US$, pound sterling, euro, rupee and yen) need to be swapped in the FOREX or foreign exchange market. The exchange rate is simply the price of one currency in terms of units of another (e.g. A$1 may be worth US$0.70). As occurs in all competitive markets, the price (in this case the exchange rate) is determined by the number of buyers versus the number of sellers. The exchange rate changes with the level of relative scarcity of each currency. In Australia’s case, sellers of our currency are often local households or �rms wanting to convert our dollar into some other currency to make payments abroad. Sometimes, too, speculators want to sell off the currency, especially if they feel it is soon going to fall. However, buyers of our currency are mostly foreigners wanting to pay someone in Australia.

Structure for the case study research into the foreign exchange marketYou might like to use the following questions to guide your research into the foreign exchange market. • What are the general features of the foreign exchange market for the A$? What type of market structure

commonly exists? • Who are the demanders or buyers of foreign exchange and the A$, and what factors affect their decisions?

How have demand conditions for the A$ changed recently? Try to illustrate their impact hypothetically, using a D–S diagram, showing the before and after effects on market demand, and the equilibrium price and quantity of the A$.

• Who are the suppliers or sellers of foreign exchange and the A$, and what factors affect their decisions? How have supply conditions for the A$ changed recently? Try to illustrate their impact hypothetically, using a D–S diagram showing the before and after effects on market supply, and the equilibrium price and quan-tity of the A$.

• Using the internet, �nd and copy a graph showing changes in Australia’s exchange rate over the last decade to the current year, against one or more other key currencies. Using this graph, describe the trends in the exchange rate for the A$ in both the short and long term.

• What are the likely effects of changes in the exchange rate for the A$ on the economic decisions (including resource allocation) made by Australian businesses and households? By way of an example, �gure 2.14 contains two graphs. The �rst shows the value of the Australian dollar

against the US dollar plotted every �ve years from 1900 to 2015. Notice that the price or value of the A$ has fallen considerably overall during the last 115 years, despite some rise until fairly recently. The second graph covers a shorter time period and compares the Australian dollar against the euro, yen and US dollar.

UNCORRECTED between countries. During this process, payments between countries must be made in the currency appropriate

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UNCORRECTED for each nation. For instance, Australian exporters generally want to be paid in our currency, not yen or pounds sterling. For this to occur, international currencies (e.g. the A$, US$, pound sterling, euro, rupee and yen) need to

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foreign exchange market

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in terms of units of another (e.g. A$1 may be worth US$0.70). As occurs in all competitive markets, the price (in

UNCORRECTED in terms of units of another (e.g. A$1 may be worth US$0.70). As occurs in all competitive markets, the price (in this case the exchange rate) is determined by the number of buyers versus the number of sellers. The exchange

UNCORRECTED this case the exchange rate) is determined by the number of buyers versus the number of sellers. The exchange rate changes with the level of relative scarcity of each currency. In Australia’s case, sellers of our currency are

UNCORRECTED rate changes with the level of relative scarcity of each currency. In Australia’s case, sellers of our currency are often local households or �rms wanting to convert our dollar into some other currency to make payments abroad.

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often local households or �rms wanting to convert our dollar into some other currency to make payments abroad. Sometimes, too, speculators want to sell off the currency, especially if they feel it is soon going to fall. However,

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buyers of our currency are mostly foreigners wanting to pay someone in Australia.

ructure for the case study research into the foreign exchange market

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PAGE International �nancial transactions involve exports and imports of goods and services, and investment �ows PAGE International �nancial transactions involve exports and imports of goods and services, and investment �ows between countries. During this process, payments between countries must be made in the currency appropriate PAGE

between countries. During this process, payments between countries must be made in the currency appropriate for each nation. For instance, Australian exporters generally want to be paid in our currency, not yen or pounds PAGE

for each nation. For instance, Australian exporters generally want to be paid in our currency, not yen or pounds

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APRA; RBA



You might like to start your research into the foreign exchange market by following the weblinks in this topic’s student resources tab.


• RBA Chart Pack — exchange rates• Trading Economics• Westpac exchange rate converter

Graph 1 — The exchange rate for the A$ against the US$, 1900–2015

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FIGURE 2.14 There has been over a century of decline in the exchange rate for the A$ against the US$

Sources: Data for graph 1 derived from ABS Yearbooks (various); RBA Statistics, Occasional Paper 8A; and http://www.rba.gov.au/statistics/historical-data.html#exchange-rates. Graph 2 copied from RBA Chart Pack, June 2016.

The property and housing markets (local or overseas)NatureResidential properties and businesses in Australia are regularly bought and sold in the property market. A related market is that for rental properties, where tenants and landlords negotiate the price or cost of rent. Often these markets operate at the local level, but increasingly in capital cities the property market

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involves national and international customers. The period from 1995 to 2016 saw a remarkable growth in rental costs, housing and land prices, fuelled by a buying frenzy of investors, speculators and homeowners. Population growth (immigration and natural increase) also contributed to the trends.

Structure for the case study research into property marketsYou might like to use the following questions to guide your research into the property market. • What are the general features of local and/or national property markets? What type of market structure

commonly exists? • Who are the demanders, buyers, consumers or renters of property, and what factors affect their decisions?

How have demand conditions for property changed recently? Try to illustrate their impact hypothetically, using a D–S diagram, showing the before and after effects on market demand, and the equilibrium price and quantity of property.

• Who are the suppliers or sellers of property, and what factors affect their decisions? How have supply con-ditions for property changed recently? Try to illustrate their impact hypothetically, using a D–S diagram showing the before and after effects on market supply, and the equilibrium price and quantity of property.

• Using the internet, �nd and copy a graph showing changes in average property prices over the last decade to the current year. Using this graph, describe the changes in property prices (for renters or buyers) in both the short and long term.

• What are the likely effects of changes in the market prices of property (paid by buyers and/or rents) on the economic decisions (including resource allocation) made by Australian households and businesses?By way of an example, �gure 2.15 shows the trends in median property prices across �ve Australian capital

cities. Again, price changes re�ect the level of relative scarcity, determined by the conditions of demand and supply. After a peak in late 2007, prices fell sharply in 2008 and early 2009, following the onset of global recession and the �nancial crisis. Despite some recovery in 2010–11, prices again eased in 2011–12 but rose sharply in the four years to 2016, especially in Melbourne and Sydney. In recent years, record low interest rates have also helped to drive up the demand for property.

You might like to start your research into the property market by following the weblinks in this topic’s student resources tab.


• RBA Chart Pack — household sector• Real Estate Institute of Victoria (REIV)

Australia

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FIGURE 2.15 Trends in average house prices ($000s) in Australia’s major cities, 2006–16

Source: Graph copied from the RBA Chart Pack, June 2016.

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PAGE recession and the �nancial crisis. Despite some recovery in 2010–11, prices again eased in 2011–12 but rose sharply in the four years to 2016, especially in Melbourne and Sydney. In recent years, record low interest

PAGE sharply in the four years to 2016, especially in Melbourne and Sydney. In recent years, record low interest

You might like to start your research into the property market by following the weblinks in this topic’s

PAGE You might like to start your research into the property market by following the weblinks in this topic’s

PAGE

PAGE PROOFS

D–S diagram

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effects on market supply, and the equilibrium price and quantity of property.

PROOFSeffects on market supply, and the equilibrium price and quantity of property.the internet, �nd and copy a graph showing changes in average property prices over the last decade

PROOFSthe internet, �nd and copy a graph showing changes in average property prices over the last decade in property prices (for renters or buyers) in both

PROOFSin property prices (for renters or buyers) in both

(paid by buyers and/or rents) on the

PROOFS (paid by buyers and/or rents) on the

economic decisions (including resource allocation) made by Australian households and businesses?

PROOFSeconomic decisions (including resource allocation) made by Australian households and businesses?By way of an example, �gure 2.15 shows the trends in median property prices across �ve Australian capital

PROOFSBy way of an example, �gure 2.15 shows the trends in median property prices across �ve Australian capital

cities. Again, price changes re�ect the level of relative scarcity, determined by the conditions of demand and

PROOFS

cities. Again, price changes re�ect the level of relative scarcity, determined by the conditions of demand and supply. After a peak in late 2007, prices fell sharply in 2008 and early 2009, following the onset of global PROOFS

supply. After a peak in late 2007, prices fell sharply in 2008 and early 2009, following the onset of global recession and the �nancial crisis. Despite some recovery in 2010–11, prices again eased in 2011–12 but rose PROOFS

recession and the �nancial crisis. Despite some recovery in 2010–11, prices again eased in 2011–12 but rose



The labour marketNatureAustralia’s labour market is an institution where labour resources (the physical power and mental talents of different types of workers) are bought and sold at various prices or wages that re�ect the relative scarcity of each type of worker. The sellers or suppliers of labour (S) come from the household sector and consist of around 13 million or so Australians aged 15 years and over who are able and willing to work (members of the labour force). The buyers or demanders of labour (D) are �rms wanting staff to �ll their job positions.

Structure for the case study research about the labour marketYou might like to use the following questions to guide your research into the labour market. • What are the general features of Australia’s labour market? What type of market structure is common in this market? • Who are the demanders or buyers of labour and what factors affect their decisions? How have demand con-

ditions changed recently? Try to illustrate these hypothetically, using a D–S diagram showing the before and after effects on market demand, and the equilibrium price (wage) and quantity.

• Who are the suppliers or sellers of labour and what factors affect their decisions? How have supply con-ditions changed recently? Try to illustrate these hypothetically, using a D–S diagram showing the before and after effects on market supply, and the equilibrium price and quantity.

• Because of changes in demand and supply conditions, wages or the prices paid for labour have changed. Use internet research to locate and copy a wage–price graph, and then describe the changes in market wages in both the short and long term.

• What are the likely effects of changes in labour prices or costs on the economic decisions (including resource allocation) made by Australian households and especially businesses?By way of an example, �gure 2.16 uses three graphs to show how average wages (as the price of labour) in

Australia have changed in recent years. In addition, Australian Bureau of Statistics (ABS) data is available for wages in different states, occupations, genders and educational attainment.

You might like to start your research into the labour market by following the weblinks in this topic’s student resources tab.


• Australian Bureau of Statistics• Australian Chamber of Commerce and Industry• Australian Council of Trade Unions (ACTU)

• Australian Council of Trade Unions (ACTU schools site)• Centrelink• Fair Work Commission

Graph 1 — Australian average weekly wage, 2006–16

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PAGE By way of an example, �gure 2.16 uses three graphs to show how average wages (as the price of labour) in Australia have changed in recent years. In addition, Australian Bureau of Statistics (ABS) data is available for

PAGE Australia have changed in recent years. In addition, Australian Bureau of Statistics (ABS) data is available for wages in different states, occupations, genders and educational attainment.

PAGE wages in different states, occupations, genders and educational attainment.You might like to start your research into the labour market by following the weblinks in this topic’s student

PAGE You might like to start your research into the labour market by following the weblinks in this topic’s student

PAGE

These weblinks are available in this topic’s student resources tab.PAGE

These weblinks are available in this topic’s student resources tab.PAGE PROOFS

and

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supply con

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ages or the prices paid for labour have changed.

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, and then describe the

PROOFS, and then describe the changes

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on the economic decisions (including resource

PROOFS on the economic decisions (including resource

By way of an example, �gure 2.16 uses three graphs to show how average wages (as the price of labour) in PROOFS

By way of an example, �gure 2.16 uses three graphs to show how average wages (as the price of labour) in Australia have changed in recent years. In addition, Australian Bureau of Statistics (ABS) data is available for PROOFS

Australia have changed in recent years. In addition, Australian Bureau of Statistics (ABS) data is available for




Graph 2 — Australian minimum weekly wage, 2009–16

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Graph 3 — Australian average weekly wages in manufacturing, 2012–16

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Sources: Graphs copied from Trading Economics, June 2016, see http://www.tradingeconomics.com/australia/wages, http://www.tradingeconomics.com/australia/minimum-wages , http://www.tradingeconomics.com/australia/wages-in-manufacturing.


• Commodities crash explained in 90 seconds• Commodity prices hit by China woes• What are commodities, and what do commodity prices

tell us?• Speculation and manipulation of food and commodities• Commodities supercycle’s end is nigh• How the stock exchange works • How the stock market works • The minimum wage

• Foreign exchange (FOREX)• Wall Street warriors • Peak oil and possible outcome• Commodities general introduction• Oil prices: What’s going on? • Why 2016 could be a turning point in the energy

revolution• $20 oil could be a reality if this happens

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1 Provide a brief de�nition of any two of the following markets:a commodity marketb labour marketc foreign exchange marketd stock market.

2 Identify a particular example of a market and then explain the following features of that market: e The type of market structuref Who are the buyers and what non-price factors or conditions affect demand?g Who are the sellers and what non-price factors or conditions affect supply?h How has the level of market prices changed during the last �ve years?i What are the effects of the change in relative market prices on the economic decisions that are made by

people and businesses, in that market?

SCHOOL ASSESSMENT TASKS

Apply your understanding of this subtopic by accessing and completing the school assessment task(s).

• School-assessed tasks > Simulation — the ASX online Schools’ Sharemarket Game • School-assessed tasks > Case studies of markets > Case study 1 — Australia’s property market• School-assessed tasks > Case studies of markets > Case study 2 — the oil market• School-assessed tasks > Queen Victoria Market excursion

2.5 School-assessed tasksIn order to satisfactorily complete VCE Economics Unit 1, area of study 2, your teacher must assess your ability to demonstrate the general achievement of the set of outcomes speci�ed for the unit, including key knowledge and key skills for Outcome 2. You will be assessed from a selection of school-based assessment tasks. Generally, this assessment should be part of the regular teaching and learning program, and completed mainly in class and within a limited timeframe. A range of these activities has been provided in this section.

Note to teachers: Courses and assessments can change. Please check the latest VCAA assessment guide and various bulletins to ensure that all assessment requirements are met fully.

Multiple-choice test questionsInstructions: Using the multiple-choice answer grid available in this topic’s student resources tab, select the letter (A, B, C, D) that represents the most appropriate answer for each question by marking this with a tick (✓).

Digital documentsMultiple-choice answer grid: Topic 2 Searchlight ID: doc-19266

Question 1

Concerning different types of market structure, which statement is false? A Pure monopoly exists when there is a single producer or seller in a market. B Oligopolies exist when there are many large �rms competing strongly in the market. C Pure competition exists when there are many rival �rms, each selling an identical or homogeneous product. D Monopolistic competition exists when there are quite a few competing producers in a market, each selling

a product differentiated by brand names and other elements. Question 2

In Australia’s economy, the market as an institution allocates around what percentage of resources? A 80 per centB 50 per centC 20 per centD 10 per cent

Question 3

The market or price system in Australia helps to decide or answer which of the following? A The particular types of goods or services to be producedB The volume of each type of good or service to be producedC How production and income will be distributed or shared between individualsD All of the above

UNCORRECTED : Courses and assessments can change. Please check the latest VCAA

UNCORRECTED : Courses and assessments can change. Please check the latest VCAA to ensure that all assessment requirements are met fully.

UNCORRECTED to ensure that all assessment requirements are met fully.

Multiple-choice test questions

UNCORRECTED Multiple-choice test questions

: Using the multiple-choice answer grid available in this topic’s student resources tab, select the letter

UNCORRECTED : Using the multiple-choice answer grid available in this topic’s student resources tab, select the letter

appropriate answer for each question by marking this with a tick (

UNCORRECTED appropriate answer for each question by marking this with a tick (

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Multiple-choice answer grid: T

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Multiple-choice answer grid: Topic 2

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opic 2Multiple-choice answer grid: Topic 2Multiple-choice answer grid: T

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Multiple-choice answer grid: Topic 2Multiple-choice answer grid: T

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Concerning different types of market structure, which statement is

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Concerning different types of market structure, which statement is Pure monopoly exists when there is a single producer or seller in a market.

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Pure monopoly exists when there is a single producer or seller in a market. Oligopolies exist when there are many large �rms competing strongly in the market.

UNCORRECTED

Oligopolies exist when there are many large �rms competing strongly in the market. Pure competition exists when there are many rival �rms, each selling an identical or homogeneous product.

UNCORRECTED

Pure competition exists when there are many rival �rms, each selling an identical or homogeneous product.

UNCORRECTED

Monopolistic competition exists when there are quite a few competing producers in a market, each selling UNCORRECTED

Monopolistic competition exists when there are quite a few competing producers in a market, each selling a product differentiated by brand names and other elements. UNCORRECTED

a product differentiated by brand names and other elements. Question 2UNCORRECTED

Question 2

PAGE In order to satisfactorily complete VCE Economics Unit 1, area of study 2, your teacher must assess your

PAGE In order to satisfactorily complete VCE Economics Unit 1, area of study 2, your teacher must assess your ability to demonstrate the general achievement of the set of outcomes speci�ed for the unit, including key

PAGE ability to demonstrate the general achievement of the set of outcomes speci�ed for the unit, including key

Outcome 2. You will be assessed from a selection of school-based assessment

PAGE Outcome 2. You will be assessed from a selection of school-based assessment

tasks. Generally, this assessment should be part of the regular teaching and learning program, and completed

PAGE tasks. Generally, this assessment should be part of the regular teaching and learning program, and completed mainly in class and within a limited timeframe. A range of these activities has been provided in this section. PAGE mainly in class and within a limited timeframe. A range of these activities has been provided in this section.

: Courses and assessments can change. Please check the latest VCAA PAGE

: Courses and assessments can change. Please check the latest VCAA to ensure that all assessment requirements are met fully.PAGE

to ensure that all assessment requirements are met fully.

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFSApply your understanding of this subtopic by accessing and completing the school assessment task(s).

PROOFSApply your understanding of this subtopic by accessing and completing the school assessment task(s).

School-assessed tasks > Case studies of markets > Case study 1 — Australia’s property market

PROOFSSchool-assessed tasks > Case studies of markets > Case study 1 — Australia’s property market



Question 4

Which of the following is not a precondition of a purely competitive market? A Many buyers and sellers competingB The absence of product differentiationC The use of regulations and controls by the governmentD Pro�t maximisation and a good knowledge by buyers and sellers of changing market conditions

Question 5

Generally, �rms try to maximise their pro�ts. In general, areas of production that are most pro�table are best indicated by looking at:A the �nal selling price of the good or service.B the costs or prices paid for the resources used in production of the good or service.C the difference between the �nal selling price and the prices paid for resources used in the production of

the good or service.D national sales levels for the good or service.

Question 6

Which of the following best describes the market for factors of production or productive inputs? A Where households supply labour, capital and natural resourcesB Where �rms purchase or demand resourcesC Where the prices paid for resources used in production are negotiatedD All of the above

Question 7

For a competitive market, which of the following is most correct? A Rising prices in a market usually indicate a growing shortage or underproduction. B Falling prices indicate that demand exceeds supply. C Rising prices indicate that supply exceeds demand. D Rising prices indicate that the conditions of demand and supply are steady.

Question 8

In a free or competitive market, rising prices for toothpaste re�ect:A a glut or surplus in the toothpaste market. B a shortage in the toothpaste market caused by a rise in the number of buyers relative to the number of

sellers. C an increase in supply because of new cheaper technology that can be used in making toothpaste. D too many resources allocated to the production of toothpaste and overproduction.

Question 9

Underproduction and a market shortage of bubble gum would be indicated by:A falling bubble gum prices. B both rising and falling bubble gum prices caused by the erratic behaviour of bubble gum markets and

buyers. C rising stocks and falling sales of bubble gum. D rising market prices for bubble gum.

Question 10

According to the law of demand, a contraction along the demand line for Coke from point A to point B (as illustrated below) is most likely to be caused by:A a rise in the price of Coke. B a decrease in the cost of producing Coke, such as cheaper soft drink cans. C a disappointing advertising campaign using country singer John Williamson. D an increase in the supply of Coke.

Pri

ce (

$)

of C

oke

per

bott

le (

P)

Quantity of Coke (Q)

B

A

Demand for Coke

The market for Coke

UNCORRECTED a shortage in the toothpaste market caused by a rise in the number of buyers relative to the number of

UNCORRECTED a shortage in the toothpaste market caused by a rise in the number of buyers relative to the number of

an increase in supply because of new cheaper technology that can be used in making toothpaste.

UNCORRECTED an increase in supply because of new cheaper technology that can be used in making toothpaste. too many resources allocated to the production of toothpaste and overproduction.

UNCORRECTED too many resources allocated to the production of toothpaste and overproduction.

Underproduction and a market shortage of bubble gum would be indicated by:

UNCORRECTED Underproduction and a market shortage of bubble gum would be indicated by:

falling bubble gum prices.

UNCORRECTED

falling bubble gum prices. both rising and falling bubble gum prices caused by the erratic behaviour of bubble gum markets and

UNCORRECTED

both rising and falling bubble gum prices caused by the erratic behaviour of bubble gum markets and

rising stocks and falling sales of bubble gum.

UNCORRECTED

rising stocks and falling sales of bubble gum. rising market prices for bubble gum.

UNCORRECTED

rising market prices for bubble gum.

Question 10

UNCORRECTED

Question 10

According to the law of demand, a

UNCORRECTED

According to the law of demand, a (as illustrated below) is

UNCORRECTED

(as illustrated below) is a rise in the price of Coke.

UNCORRECTED

a rise in the price of Coke. B

UNCORRECTED

B a decrease in the cost of producing Coke, such as cheaper soft drink cans.

UNCORRECTED

a decrease in the cost of producing Coke, such as cheaper soft drink cans. C UNCORRECTED

C a disappointing advertising campaign using country singer John Williamson. UNCORRECTED

a disappointing advertising campaign using country singer John Williamson. D UNCORRECTED

D an increase in the supply of Coke. UNCORRECTED

an increase in the supply of Coke.

PAGE Rising prices in a market usually indicate a growing shortage or underproduction.

PAGE Rising prices in a market usually indicate a growing shortage or underproduction.

Rising prices indicate that the conditions of demand and supply are steady.

PAGE Rising prices indicate that the conditions of demand and supply are steady.

prices for toothpaste re�ect:PAGE prices for toothpaste re�ect:

a shortage in the toothpaste market caused by a rise in the number of buyers relative to the number of PAGE

a shortage in the toothpaste market caused by a rise in the number of buyers relative to the number of

PROOFS describes the market for factors of production or productive inputs?

PROOFS describes the market for factors of production or productive inputs?

Rising prices in a market usually indicate a growing shortage or underproduction. PROOFS

Rising prices in a market usually indicate a growing shortage or underproduction.



Question 11

The law of supply states that the quantity of a good or service supplied by producers varies:A directly with a rise in price. B inversely with a rise in price. C proportionally with a rise in price. D in response to changes in the conditions of demand.

Question 12

Which of the following best explains the shift in supply of yoyos from S1 to S2 as illustrated below? A Falling wages for workers in yoyo factoriesB Higher costs of materials (e.g. string, plastic) used to make yoyosC A fall in the demand for yoyosD Rising pro�ts among yoyo producers

Pri

ce p

er y

oyo

($)

Quantity of yoyos (Q)

P

The yoyo market

S2

Q2 Q1

S1

Question 13

In 2014–15, banana crops in some parts of the world were devastated by poor growing conditions (e.g. cyclones, cold weather, �oods) in the tropics and the effects of disease that killed plants. Assuming a competitive market for bananas similar to that illustrated below, which of the following descriptions best sums up the effects of these events? A The equilibrium price of bananas would fall and the equilibrium quantity would rise. B The equilibrium price of bananas would rise and the equilibrium quantity would fall. C The demand for bananas would fall. D The supply of bananas would rise.

Pri

ce (

$)

of b

anan

aspe

r kg

(P

)

Quantity of bananas (Q)

The competitive market for bananas

Demand for bananas

Supply ofbananas

Question 14

Assume that the market for air tickets was a competitive one. In terms of market theory, which of the following is unlikely to reduce the price of Australian airfares to New Zealand? A A lower cost of planes purchased by airline carriersB Greater competition among airlines to operate on that routeC A rapid rise in Australian disposable incomesD Lower aircraft landing fees in Auckland Airport

Question 15

Between 2002–03 and 2007–08, and again during 2009–11, general interest rates in the Australian capital market rose. In terms of market theory, which of the following does not provide a logical explanation for the rise in market interest rates? A A rise in the demand for credit by households borrowing creditB Decreased savings by households held in various �nancial institutions (e.g. banks)

UNCORRECTED competitive market for bananas similar to that illustrated below, which of the following descriptions

UNCORRECTED competitive market for bananas similar to that illustrated below, which of the following descriptions

The equilibrium price of bananas would fall and the equilibrium quantity would rise.

UNCORRECTED The equilibrium price of bananas would fall and the equilibrium quantity would rise. The equilibrium price of bananas would rise and the equilibrium quantity would fall.

UNCORRECTED The equilibrium price of bananas would rise and the equilibrium quantity would fall.

UNCORRECTED

UNCORRECTED

UNCORRECTED

Pri

ce (

$)

of b

anan

as

UNCORRECTED

Pri

ce (

$)

of b

anan

aspe

r kg

(P

)

UNCORRECTED

per

kg (

P)


UNCORRECTED


UNCORRECTED

Question 14UNCORRECTED

Question 14

Assume that the market for air tickets was a competitive one. In terms of market theory, which of the UNCORRECTED

Assume that the market for air tickets was a competitive one. In terms of market theory, which of the

PAGE In 2014–15, banana crops in some parts of the world were devastated by poor growing conditions

PAGE In 2014–15, banana crops in some parts of the world were devastated by poor growing conditions (e.g. cyclones, cold weather, �oods) in the tropics and the effects of disease that killed plants. Assuming a

PAGE (e.g. cyclones, cold weather, �oods) in the tropics and the effects of disease that killed plants. Assuming a competitive market for bananas similar to that illustrated below, which of the following descriptions PAGE competitive market for bananas similar to that illustrated below, which of the following descriptions

PROOFS



C The failure of the government’s policies to encourage superannuation and increase domestic savings levels by households

D A fall in the level of government borrowing or demand for credit due to the federal government’s budget surplus where there was no need for the government to borrow or demand credit

Question 16

Which of the following would not explain the recent fall in world wool prices paid to Australian growers? A A fall in local production costs for wool growersB A fall in the demand for wool, both in Australia and overseasC A rise in the world’s supply of woolD The replacement in fashion of the famous ultra-skimpy mini-skirt that uses very little wool, with longer

maxi-skirts that use more wool in manufacture

Question 17

In a free or purely competitive market for sunglasses, equilibrium exists when:A there is no shortage or surplus.B the quantity supplied equals the quantity demanded. C there is no tendency for the market price to rise or fall.D all of the above conditions are achieved.

Question 18

In 2015–16, there was a world record crop of sugar. Prices tumbled in this competitive market. Examine the graph below representing the sugar market and then answer the question that follows.

Pri

ce/k

g ($

)

Quantity of sugar in kg (Q)

The world’s sugar market

S1

K

L

M

N

D1

S2

D2

Which change on the demand–supply diagram above best illustrates this economic development in the sugar market? A The move from market equilibrium K to LB The move from market equilibrium L to MC The move from market equilibrium N to MD None of the above

Question 19

Theoretically, which one of the following would not explain the fall in world cotton prices, assuming a competitive market existed for cotton? A A rise in the costs of machinery for cotton farmers caused by a lower Australian dollarB A weaker demand for cotton caused by a recession in Asia and the USC Stronger levels of competition from easy-care synthetic fabricsD A drop in the price of land used for growing cotton

Question 20

A rare Australian stamp was sold at public auction for $88 000. Which of the following answers offers the best explanation of why the market price for this stamp was so high? A Buyers and sellers were misled about the collection’s value. B The demand for these stamps by buyers was very strong. C The supply of these stamps was �xed or limited. D Both answers B and C help to explain the high price.

Question 21

Examine the hypothetical data contained in table 2.1 below for the new extreme form of outdoor entertainment involving ‘Wild Activities’. New venues sprang up in Melbourne and Geelong. In order to share these thrills, daily entry tickets must be purchased through the market. Assume that there is a competitive market operating for tickets.

UNCORRECTED

UNCORRECTED Quantity of sugar in kg (Q)

UNCORRECTED Quantity of sugar in kg (Q)

UNCORRECTED Which change on the demand–supply diagram above

UNCORRECTED Which change on the demand–supply diagram above

The move from market equilibrium K to L

UNCORRECTED

The move from market equilibrium K to LThe move from market equilibrium L to M

UNCORRECTED

The move from market equilibrium L to MThe move from market equilibrium N to M

UNCORRECTED

The move from market equilibrium N to MNone of the above

UNCORRECTED

None of the above

Theoretically, which one of the following would

UNCORRECTED

Theoretically, which one of the following would competitive market existed for cotton?

UNCORRECTED

competitive market existed for cotton? A rise in the costs of machinery for cotton farmers caused by a lower Australian dollar

UNCORRECTED

A rise in the costs of machinery for cotton farmers caused by a lower Australian dollar

UNCORRECTED

B

UNCORRECTED

B A weaker demand for cotton caused by a recession in Asia and the US

UNCORRECTED

A weaker demand for cotton caused by a recession in Asia and the USC

UNCORRECTED

C Stronger levels of competition from easy-care synthetic fabrics

UNCORRECTED

Stronger levels of competition from easy-care synthetic fabricsD UNCORRECTED

D A drop in the price of land used for growing cottonUNCORRECTED

A drop in the price of land used for growing cotton

Question 20UNCORRECTED

Question 20

PAGE

PAGE

PAGE

PAGE

PAGE 1

PAGE 1

PAGE

PAGE

PAGE L

PAGE L

PAGE

PAGE

PAGE

MPAGE

MPAGE

PAGE

PAGE S

PAGE S2

PAGE 2

PAGE

PAGE

PAGE

PAGE PROOFS

In 2015–16, there was a world record crop of sugar. Prices tumbled in this competitive market. Examine the

PROOFSIn 2015–16, there was a world record crop of sugar. Prices tumbled in this competitive market. Examine the graph below representing the sugar market and then answer the question that follows.

PROOFSgraph below representing the sugar market and then answer the question that follows.



TABLE 2.1 The demand and supply for ‘Wild Activities’ tickets

Price per entry ticket into ‘Wild Activities’

Demand (tickets per day)

Supply (tickets per day)

$10 9000 5000

$15 8000 6000

$20 7000 7000

$25 6000 8000

Which of the following statements about the ticket market for ‘Wild Activities’ is false? A The demand for tickets contracts as the price rises. B The supply of tickets expands as the price falls. C There would be a market glut of tickets equal to 2000 per day if the price was �xed at $25 per ticket. D In a free market, the equilibrium price of tickets would be $20 per ticket.

Question 22

In the Australian economy, which of the following is most correct?A Decisions are made mostly by the government and there is private ownership of most resources and

businesses.B It is through the operation of the market system that some decisions are made about how to allocate

resources.C The government owns most of the means of production.D Demand and supply operate to create price signals to the owners of resources to help them answer the

three basic economic questions, and there is a dominance of private enterprise or capitalism.

Question 23

The demand line for fresh tomatoes will normally shift to the left of the original demand line if:A the incomes of consumers increase.B the price of a complement like lettuce rises.C if there is successful advertising for a complementary good.D tinned tomatoes became dearer.

Question 24

Examine the graph below showing the recent world trend in the price of gold (US$ per ounce).

Jan 21990

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

Gold price1266.75 USD/ozt

10 Jun 2016

Gol

d pr

ice

(US

D/o

zt)

Jan 11995

Jan 12000

Jan 12005

Jan 12010

Jan 12015

Source: InvestmentMine, http://www.infomine.com/investment/metal-prices/gold/all.

UNCORRECTED if there is successful advertising for a complementary good.

UNCORRECTED if there is successful advertising for a complementary good.

Examine the graph below showing the recent world trend in the price of gold (US$ per ounce).

UNCORRECTED Examine the graph below showing the recent world trend in the price of gold (US$ per ounce).

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

1200UNCORRECTED

1200

1400

UNCORRECTED

1400

UNCORRECTED

UNCORRECTED

UNCORRECTED PAGE

Demand and supply operate to create price signals to the owners of resources to help them answer the

PAGE Demand and supply operate to create price signals to the owners of resources to help them answer the three basic economic questions, and there is a dominance of private enterprise or capitalism.

PAGE three basic economic questions, and there is a dominance of private enterprise or capitalism.

The demand line for fresh tomatoes will normally shift to the PAGE The demand line for fresh tomatoes will normally shift to the leftPAGE

left of the original demand line if:PAGE of the original demand line if:left of the original demand line if:leftPAGE

left of the original demand line if:left

PROOFSThere would be a market glut of tickets equal to 2000 per day if the price was �xed at $25 per ticket.

PROOFSThere would be a market glut of tickets equal to 2000 per day if the price was �xed at $25 per ticket.

made mostly by the government and there is private ownership of most resources and

PROOFS made mostly by the government and there is private ownership of most resources and

It is through the operation of the market system that some decisions are made about how to allocate PROOFS

It is through the operation of the market system that some decisions are made about how to allocate



Theoretically, which one of the following would not explain the spike or peak in the gold price in 2011–12? A There may have been an increase in the demand for gold at a given price, perhaps driven by global

economic uncertainties. B There may have been a decrease in supply of gold at all given prices. C There may have been an increase in the demand for gold combined with a decrease in supply. D There may have been an increase in the demand for gold combined with an increase in supply. Question 25

Which of the following statements about market structure is most correct? A In�ation is generally higher when there is pure competition in most markets. B Product quality and customer service are generally poorer, and industry output is lower, when there is pure

monopoly in a market. C In general, takeovers and mergers of �rms tend to reduce market power. D Material living standards are generally higher when �rms are price makers.

Digital documentsMultiple-choice answers: Topic 2 Searchlight ID: doc-19267

Terminology revisionActivity 1

Use the Puzzlemaker weblink in this topic’s student resources tab to construct a terminology crossword. Using the key words from the list below, you will need to write out de�nitions for the clues across and down (Hint: You can use the de�nitions found in your Economics dictionary as the clues.)

Weblinks The weblinks in these activities are available in this topic’s student resources tab.• Puzzlemaker

allocation of resourcescompetitionconditions of demandconditions of supplyconsumer sovereigntycontraction in demandcontraction in supplydecision makerdemandef�cient allocation of

equilibriumexpansion in demandexpansion in supplymarketmarket economy market equilibriummarket glutmarket powermarket shortagemarket structure

monopolistic competitionmonopolynon-price conditionsoligopolyprice makerprice takerpure competitionsupply

Activity 2

Match the correct terms below to complete the de�nitions that follow. You may use each term only once.

The law of demand

The law of supply

An increase in supply

A decrease in demand

The conditions of demand

EquilibriumA market shortage

A market glut The market

The equilibrium quantity

1. . . . states that the quantity of a product that �rms are willing to make available expands as the price rises.

2. . . . occurs when buyers are prepared to purchase less of a product at each possible price.

3. . . . is when the quantity of a product demanded exceeds the quantity supplied in a market at a particular price.

4. . . . is where the quantity demanded and quantity supplied at a particular price are equal.

5. . . . states that the quantity of a good or service which consumers are prepared to purchase contracts as the price increases.

6. . . . represents an institution used for decision making where buyers and sellers negotiate prices.

7. . . . are affected by changes in disposable income, advertising and other non-price factors affecting buyers.

8. . . . causes the price in the market to fall towards the equilibrium level.

9. . . . may be the result of �rms supplying more at a given price.

10. . . . exists when the quantities demanded and supplied are exactly equal.

UNCORRECTED

ef�cient allocation of

UNCORRECTED

ef�cient allocation of

equilibrium

UNCORRECTED equilibriumexpansion in demand

UNCORRECTED expansion in demandexpansion in supply

UNCORRECTED expansion in supplymarket

UNCORRECTED marketmarket economy

UNCORRECTED market economy market equilibrium

UNCORRECTED market equilibriummarket glut

UNCORRECTED

market glut


UNCORRECTED


UNCORRECTED

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The law of

UNCORRECTED

The law of demand

UNCORRECTED

demand

EquilibriumUNCORRECTED

Equilibrium

1.UNCORRECTED

1.

PAGE Using the key words from the list below, you will need to write out de�nitions for the clues

PAGE Using the key words from the list below, you will need to write out de�nitions for the clues Economics dictionary

PAGE Economics dictionary as the clues.)

PAGE as the clues.)

PAGE The weblinks in these activities are available in this topic’s student resources tab.

PAGE The weblinks in these activities are available in this topic’s student resources tab.

PAGE PROOFS

PROOFSearchlight

PROOFSearchlight ID

PROOFSID: doc-19267

PROOFS: doc-19267

PROOFS

weblink in this topic’s student resources tab to construct a terminology crossword. PROOFS

weblink in this topic’s student resources tab to construct a terminology crossword. Using the key words from the list below, you will need to write out de�nitions for the clues PROOFS

Using the key words from the list below, you will need to write out de�nitions for the clues



Activity 3

Complete the crossword below about the nature and operation of markets.

Across: 3. An ............................. is where the demand for a

product grows as the price falls. 6. A ............................. is a term used to describe a

situation in the market caused by prices being too low to create equilibrium.

8. A ............................. market is where there are no restrictions on the movement of prices up or down.

10. Resource ............................. is how inputs are used and what types of products are produced from the limited resources available.

11. A ............................. is a term used to describe a situation in the market where the quantity supplied exceeds the amount demanded for a product.

13. ............................. is the amount of a product that producers are prepared to make available at each possible price.

14. A ............................. product is where items are not differentiated by advertising or other features.

16. ............................. is a non-price condition of demand that affects the amount of a product demanded at a given price.

19. An ............................. is where several large producers control the supply of a product or industry.

20. ..................................... represent products that go with another item so they have linked demands.

21. The ............................. represents the price where the quantity of a product demanded equals the quantity of that product supplied.

22. ............................. is where there are many buyers and sellers competing strongly against each other in a market.

Down: 1. A ............................. is where the demand for a

product shrinks as the price rises. 2. ............................. represents the amount of a

product that buyers are prepared to purchase at each possible price.

4. ............................. represent products where buyers can switch between similar items depending on relative prices.

5. ............................. are what owners of resources seek to maximise by allocating resources appropriately.

7. ............................. is a condition that reduced the supply of some agricultural products in 2002–03 and 2006–08, and again in 2010–15.

9. ............................. represent supply conditions that affect how much of a product �rms produce at a given price.

12. ............................. are de�ned as factors that alter the amount of a product demanded or the amount supplied at a given price.

15. ............................. represents a demand factor or condition that affects the amount of a product purchased at a given price.

17. ............................. is where there is one seller controlling a market.

18. .................................... where there is a rise in the amount of a product demanded or the amount supplied at a given price.

1

2

3 4

6

7

8

5

9

10

11

12

14

13

15 16

17

18 19

20

21

22

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3

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3

PAGE controlling a market.

PAGE controlling a market..................................... wher

PAGE .................................... wheramount of a product demanded or the amount

PAGE amount of a product demanded or the amount supplied at a given price.

PAGE supplied at a given price.

PROOFS

PROOFSsupply of some agricultural products in 2002–03 and

PROOFSsupply of some agricultural products in 2002–03 and

epresent supply conditions that

PROOFSepresent supply conditions that affect how much of a product �rms produce at a

PROOFSaffect how much of a product �rms produce at a

e de�ned as factors that alter

PROOFSe de�ned as factors that alter

the amount of a product demanded or the amount

PROOFSthe amount of a product demanded or the amount

epresents a demand factor

PROOFSepresents a demand factor

or condition that affects the amount of a product

PROOFSor condition that affects the amount of a product purchased at a given price.

PROOFS

purchased at a given price.............................. is wher PROOFS

............................. is where there is one seller PROOFS

e there is one seller

.................................... wherPROOFS

.................................... where there is a rise in the PROOFS

e there is a rise in the



Applied economic exercisesInstructions: Complete a selection of the following short-answer questions.

Question 1

A De�ne what is meant by the term economic system. B What type of economic system do we have in Australia? Describe the two key features of this system. C De�ne what is meant by the term market. Name six different examples of individual markets found in

most cities like Melbourne, Ballarat, Bendigo, Hamilton or Geelong. D Explain what is meant by the term market structure. E Copy table 2.2 and outline �ve important differences between pure competition, oligopoly and pure

monopoly, providing one example of each type of industry.

TABLE 2.2 Features of different market structures

Some features of a particular market

Pure monopolye.g.

............

Oligopolye.g.

............

Pure competitione.g.

............

1. Level of competition or number of �rms

2. Level of product differentiation

3. Level of in�uence over prices

4. General level of ef�ciency

5. Likely level of market prices

F Below is a list of single industries or markets found in Australia. Select (and if need be research) any three of these, and then describe the four most important distinguishing features of each market.

(i) Apples at the farm gate (ii) Banking (iii) Beef cattle (iv) Broadband network (v) Cinema (vi) Container shipping (vii) Labour (viii) Lawyers (ix) Medical treatment (x) Petrol (xi) Rental property (xii) Restaurants (xiii) Retail groceries (xiv) Shares (xv) Telecommunications (xvi) Water (xvii) Wheat (xviii) Your school’s canteenG List and explain one advantage and one disadvantage of each of the following market structures:

Market structure Advantage Disadvantage

Pure competition

Pure monopoly

H The Australian aviation market is an oligopoly, with considerable barriers to entry by new rival �rms limiting the level of competition. Entry is dif�cult. Explain what is meant by barriers to entry and give examples of the types of barriers applicable to the aviation industry.

I Australian clothing manufacturers operate in a monopolistically competitive market. What is meant by the term monopolistic competition? What is the signi�cance of product differentiation in this industry and how might this be promoted by manufacturers of swimwear?

UNCORRECTED

treatment

UNCORRECTED

treatment

Rental

UNCORRECTED

Rental property

UNCORRECTED

propertyRestaurants

UNCORRECTED

RestaurantsRetail

UNCORRECTED

Retail groceries

UNCORRECTED

groceriesv)

UNCORRECTED

v) Shares

UNCORRECTED

Shares(xv)

UNCORRECTED

(xv) Telecommunications

UNCORRECTED

Telecommunications(xvi)

UNCORRECTED

(xvi) Water

UNCORRECTED

Water(xvii)

UNCORRECTED

(xvii) Wheat

UNCORRECTED

Wheat(xviii)UNCORRECTED

(xviii)G UNCORRECTED

G List and explain UNCORRECTED

List and explain

PAGE

PAGE

PAGE Below is a list of single industries or markets found in Australia. Select (and if need be research) any

PAGE Below is a list of single industries or markets found in Australia. Select (and if need be research) any

most important distinguishing features of each market.PAGE most important distinguishing features of each market.

PROOFS

PROOFS

PROOFSPure competition

PROOFSPure competitione.g.

PROOFSe.g.............

PROOFS............



J Canola producers attempt to use resources in ways that maximise their pro�ts. Explain what is meant by the term pro�t maximisation.

K It is possible to get products like snowboards and clothing cheaply using online markets such as eBay. This is partly due to strong competition among sellers. In this market, can you think of one precondition that is normally required for buyers in a purely competitive market that may not be fully met using eBay or other online markets?

L In general, it is claimed that strongly competitive markets in an economy are most likely to help maximise society’s material living standards. Explain why this may be the case.

Question 2

A In Australia’s economy, there are three basic economic questions that need to be answered. Giving speci�c examples, explain what is meant by each of these questions: (i) What and how much to produce?(ii) How to produce?

(iii) For whom to produce?B As we now know, the price or market-based system decides how most resources are used or allocated in

Australia’s economy. Given the problem of relative scarcity, explain, step-by-step, how the operation of the market determines relative prices and allocates resources among competing wants to areas of relatively highest pro�t or value.

Question 3

A Price greatly affects the quantity of an individual good or service that buyers are prepared to purchase or demand, and sellers are prepared to make available or supply.

(i) What is the law of demand and how would it apply to avocados? (ii) What is the law of supply and how would it apply to childcare?B Non-price conditions or factors can affect the quantity of a particular good or service demanded or

supplied at a given price. (i) For each of the following markets, list the two most important non-price factors or conditions that

could change the quantity demanded at any given price, shifting the position of the demand line and therefore causing either a rise or fall in the market equilibrium price.

Market Non-price factors or conditions affecting the quantity demanded at a given price

1. Property

2. Hospitals

3. Surfboards

4. Wool

5. Travel

6. Labour

7. Electricity

8. Butter

9. Milk

10. iPhones

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED Non-price factors or conditions affecting the quantity demanded at a given price

UNCORRECTED Non-price factors or conditions affecting the quantity demanded at a given price

LabourUNCORRECTED

Labour

PAGE conditions or factors can affect the quantity of a particular good or service

PAGE conditions or factors can affect the quantity of a particular good or service

most important non-price factors or conditions that

PAGE most important non-price factors or conditions that

, shifting the position of the demand line and

PAGE , shifting the position of the demand line and

therefore causing either a rise or fall in the market equilibrium price.PAGE therefore causing either a rise or fall in the market equilibrium price.PAGE

Non-price factors or conditions affecting the quantity demanded at a given pricePAGE

Non-price factors or conditions affecting the quantity demanded at a given price

PROOFS decides how most resources are used or allocated in

PROOFS decides how most resources are used or allocated in Australia’s economy. Given the problem of relative scarcity, explain, step-by-step, how the operation of

PROOFSAustralia’s economy. Given the problem of relative scarcity, explain, step-by-step, how the operation of the market determines relative prices and allocates resources among competing wants to areas of relatively

PROOFSthe market determines relative prices and allocates resources among competing wants to areas of relatively

of an individual good or service that buyers are prepared to purchase or

PROOFS of an individual good or service that buyers are prepared to purchase or



(ii) For each of the following markets, list the two most likely non-price factors or conditions that could change the quantity supplied at any given price, shifting the position of the supply line and therefore causing either a rise or fall in the market equilibrium price:

Market Non-price factors or conditions affecting the quantity supplied at a given price

1. Canola

2. Doctors

3. Iron ore

4. Bananas

5. Workers

6. Cars

7. Rental units

8. TVs

C The quantity of a particular good or service demanded at a given price is affected by changing prices in the market for a substitute product or in the market for a complementary good or service. In other words, markets for substitutes or those for complements are linked to that of the original product or service.

(i) Explain what is meant by a substitute product. (ii) Explain what is meant by a complementary good or service. (iii) For each of the following pairs of markets:

(a) indicate whether the two products are substitutes or complements (b) complete the demand diagram to show the effect of the price change for an original product on

the demand line for its substitute or the demand line for the complement.

(a) Substitutes or complements?(b) Effect on the demand for the substitute or complement

Butter and margarine Effect of a rise in the price of butter on the demand for margarine:

Quantity

D1

P

Pri

ce/u

nit

UNCORRECTED

UNCORRECTED

UNCORRECTED

The quantity of a particular good or service demanded at a given price is affected by changing prices in

UNCORRECTED

The quantity of a particular good or service demanded at a given price is affected by changing prices in the market for a substitute product or in the market for a complementary good or service. In other words,

UNCORRECTED

the market for a substitute product or in the market for a complementary good or service. In other words, markets for substitutes or those for complements are linked to that of the original product or service.

UNCORRECTED

markets for substitutes or those for complements are linked to that of the original product or service. Explain

UNCORRECTED

Explain what is meant by a

UNCORRECTED

what is meant by a Explain

UNCORRECTED

Explain what is meant by a

UNCORRECTED

what is meant by a F

UNCORRECTED

For each of the following pairs of markets:

UNCORRECTED

or each of the following pairs of markets: (a)

UNCORRECTED

(a) indicate

UNCORRECTED

indicate (b)

UNCORRECTED

(b)

UNCORRECTED

complete

UNCORRECTED

complete

UNCORRECTED

(a) Substitutes or complements?UNCORRECTED

(a) Substitutes or complements?

PAGE

PAGE PROOFS

PROOFS



(a) Substitutes or complements?(b) Effect on the demand for the substitute or complement

Coffee and sugar Effect of a rise in the price of coffee on the demand for sugar:

Quantity

D1

P

Pri

ce/u

nit

Petrol and cars Effect of a fall in the price of petrol on the demand for cars:

Quantity

D1

P

Pri

ce/u

nit

Beef and chicken Effect of a fall in the price of chicken on the demand for beef:

Quantity

D1

P

Pri

ce/u

nit

Coal-�red and solar power Effect of a government subsidy for households installing solar panels on the price of coal-�red electricity:

Quantity

D1

P

Pri

ce/u

nit

D Complete and fully label each of the following D–S diagrams representing an individual competitive market in �gure 2.17 to show the hypothetical effects of an event that alters the conditions of demand and/or conditions of supply, and hence the market equilibrium price and quantity. In most cases, you will need to add a second D line (D2) or a second S line (S2), along with a new equilibrium price (P2) and quantity (Q2). In each of these situations, explain the likely effect on relative prices, pro�ts and the allocation of resources.

UNCORRECTED

UNCORRECTED beef:

UNCORRECTED beef:

Coal-�red and solar power

UNCORRECTED

Coal-�red and solar power

PAGE

PAGE

PAGE

PAGE

PAGE Effect of a fall in the price of chicken on the demand for PAGE Effect of a fall in the price of chicken on the demand for

PROOFS

PROOFSEffect of a fall in the price of petrol on the demand

PROOFSEffect of a fall in the price of petrol on the demand

PROOFS

PROOFS

PROOFS

PROOFS



Figure 2.17 is available in Word format in this topic’s student resources tab. Searchlight ID: doc-19396

The effect on the market forraspberries of the ending of the growing season

The effect on the market for coalof a slowdown in global economicgrowth

The effect on the market for plasticswimming pools of a heatwave

The effect on the market forcaged eggs of a successfuladvertising campaign by theRSPCA

The effect on the market forsynthetic �bres (like polyester usedin clothing) of a fall in oil prices

The effect on the market forhotel rooms here and overseas ofa rise in consumer con�dence

The effect on the market for alcoholof an increase in the governmentexcise tax on sellers

The effect on the market for healthcare of a rise in the birth rate

The effect on the market forsolar panels of an increase in thegovernment subsidy to sellers

FIGURE 2.17 Demand–supply diagrams for single markets

E Assume the skateboard market is a fairly competitive market. (i) Use the following data in table 2.3 to neatly and accurately draw and label a demand–supply diagram

for skateboards.

TABLE 2.3 Demand–supply data for skateboards

Price per skateboard

Original demand (D1) at a given price

Original supply (S1) at a given price

New increased demand (D2) at a given price

New increased supply (S2) at a given price

$20 100 20 115 40

$40 80 40 95 60

$60 60 60 75 80

$80 40 80 55 100

$100 20 100 35 120

(ii) What is meant by market equilibrium? (iii) What is the original equilibrium price for skateboards resulting from the impact of non-price

conditions for D1 and S1? (iv) What is the original equilibrium quantity for skateboards resulting from the impact of non-price

conditions for D1 and S1? (v) Suggest two non-price conditions or factors that might cause the increase in the quantity of

skateboards demanded from D1 to D2.

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

Demand–supply diagrams for single markets

UNCORRECTED

Demand–supply diagrams for single markets

Assume the skateboard market is a fairly competitive market.

UNCORRECTED

Assume the skateboard market is a fairly competitive market. the following data in table 2.3 to neatly and accurately draw and label a demand–supply diagram

UNCORRECTED

the following data in table 2.3 to neatly and accurately draw and label a demand–supply diagram for skateboards.

UNCORRECTED

for skateboards.

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

E 2.3

UNCORRECTED

E 2.3 D

UNCORRECTED

De

UNCORRECTED

e

Price per

UNCORRECTED

Price per skateboard

UNCORRECTED

skateboard

$20UNCORRECTED

$20

PAGE

PAGE

PAGE The effect on the market for health

PAGE The effect on the market for healthcare of a rise in the birth rate

PAGE care of a rise in the birth rate

PAGE PROOFS

PROOFS

PROOFS

PROOFSThe effect on the market for

PROOFSThe effect on the market forhotel rooms here and overseas of

PROOFShotel rooms here and overseas ofa rise in consumer con�dence

PROOFSa rise in consumer con�dence

PROOFS

PROOFS

PROOFS



(vi) What did the increase in demand for skateboards from D1 to D2 do to the market equilibrium price and equilibrium quantity assuming the supply conditions had remained steady at S1? Quote actual numbers by reading these from the graph you have drawn.

(vii) Suggest two non-price conditions or factors that might cause the increase in the quantity of skateboards supplied from S1 to S2.

(viii) What did the increase in the supply of skateboards from S1 to S2 do to the market equilibrium price and equilibrium quantity assuming the demand conditions had remained steady at D1? Quote actual numbers by reading these from the graph you have drawn.

F Changes in relative prices in various markets send out signals — to producers and the pro� t-seeking owners of resources — indicating the type and quantity of each good or service to be produced.

(i) Explain what is meant by the term relative prices, giving an example. (ii) For each of the following, explain (giving reasons) how producers may change their use or allocation

of resources and their level of output, assuming that production costs are unchanged: (a) Canola prices rose to from $520 to $595 per tonne, but wheat prices fell. (b) Average weekly wages for unskilled labour rose 2 per cent, compared with a 25 per cent rise for

computer technicians. (c) Most share prices fell 5 per cent, but property prices increased 10 per cent.

(iii) Figure 2.18 below shows the predicted change in relative international prices to be received by farmers for various crops during 2016–17. Assume you are a farmer and are able to use your resources to produce any of these crops.

(a) Based on this price information alone, select two crops you would produce and two crops you would not produce. Justify your choices.

(b) Suggest two likely non-price conditions or factors that might have caused the relative prices of these crops to change.

The world coarse grainindicator price is forecast

to decline, re�ecting largeworld production and

stocks.

The world oilseed indicator price isforecast to average lower as a result ofhigh carry-over stocks and highersoybean meal closing stocks.

Wheat

Oilseeds

Cotton

Crops

2%to US$210/ta

in 2016–17

11%to USc 16/Ibd

in 2016–17

4%to USc 68/Ibe

in 2016–17

3%to US$160/tb

in 2016–17

2%

a US no. 2 hard red winter, fob Gulf.b US no. 2 yellow corn, fob Gulf.c US no. 2 soybeans, fob Gulf.d Intercontinental Exchange, nearby futures, no. 11 contract (Oct–Sep).e Cotlook ‘A’ index.

The world sugar indicatorprice is forecast to increaseas world sugar consumption

is forecast to outpaceproduction, resulting in a

signi�cant decline in worldstocks.

The world indicator price forcotton is forecast to fallre�ecting relatively weakdemand and higher worldcotton supply despite adecline in world cottonstocks.

The world wheat indicator priceis forecast to be the lowest inmore than 10 years in real terms,re�ecting ample world wheatsupplies.

to US$355/tc

in 2016–17

Coarse grains

Sugar

FIGURE 2.18 Predicted changes in the relative prices received by farmers for various crops during 2016–17

Source: ABARES 2015, Agricultural commodities, vol. 6, no. 1, March 2016, p. 28.

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED The world coarse grain

UNCORRECTED The world coarse grain

indicator price is forecast

UNCORRECTED indicator price is forecast

to decline, re�ecting large

UNCORRECTED to decline, re�ecting large

world production and

UNCORRECTED world production and

stocks.

UNCORRECTED stocks.

UNCORRECTED

UNCORRECTED

Oilseeds

UNCORRECTED

Oilseeds

2%

UNCORRECTED 2% US$210/t

UNCORRECTED US$210/ta

UNCORRECTED a

in 2016–17

UNCORRECTED in 2016–17

3%

UNCORRECTED 3%

UNCORRECTED

UNCORRECTED more than 10 years in real terms,

UNCORRECTED more than 10 years in real terms,re�ecting ample world wheat

UNCORRECTED re�ecting ample world wheatsupplies.

UNCORRECTED supplies.

PAGE

PAGE

PAGE The world wheat indicator pricePAGE The world wheat indicator priceis forecast to be the lowest inPAGE

is forecast to be the lowest inmore than 10 years in real terms,PAGE

more than 10 years in real terms,

PROOFS (b) Average weekly wages for unskilled labour rose 2 per cent, compared with a 25 per cent rise for

PROOFS (b) Average weekly wages for unskilled labour rose 2 per cent, compared with a 25 per cent rise for

(iii) Figure 2.18 below shows the predicted change in relative international prices to be received by

PROOFS (iii) Figure 2.18 below shows the predicted change in relative international prices to be received by

farmers for various crops during 2016–17. Assume you are a farmer and are able to use your

PROOFSfarmers for various crops during 2016–17. Assume you are a farmer and are able to use your

produce and

PROOFSproduce and two

PROOFStwo crops you

PROOFS crops you

likely non-price conditions or factors that might have caused the relative prices of PROOFS

likely non-price conditions or factors that might have caused the relative prices of



(iv) Farmers use resources to produce various agricultural products including crops. These resources are purchased in markets for resources (e.g. seed, water, pesticides, fuel, fertiliser, farm labour, tractors, fencing wire) or factors of production. The production of various crops may involve some differences in the cost or price of the resources used. If the production costs or prices involved in the production of alternative crops per hectare of land were as shown below, explain how this price information may in�uence your choice of crop and your answer to the ‘what and how much to produce’ questions.

CropTotal cost or price of resources used for producing the crop (per hectare)

A $356

B $490

C $339

Question 4

The price or market-based system decides how most resources are used or allocated in Australia. This question looks at the operation of demand and supply in a hypothetical competitive market for chocolate bars. A Buyers and sellers both respond to changes in prices. Examine table 2.4 below showing the quantity of

chocolate bars demanded and supplied.

TABLE 2.4 Demand and supply data for the chocolate bar market

Price per chocolate bar ($)Quantity of bars demanded per

year at a given price (D1)Quantity of bars supplied per

year at a given price (S1)

0.50 600 200

1.00 500 300

1.50 400 400

2.00 300 500

2.50 200 500

Using table 2.4, neatly plot a fully labelled graph showing only the demand line for chocolate bars (D1). Assume that non-price factors remain �xed. (i) According to the law of demand for chocolate bars, how does a rise in price affect the quantity of

chocolate bars demanded? Illustrate your answers by quoting �gures from the table. (ii) According to the law of demand, how does a fall in price affect the quantity demanded? Illustrate your

answers by quoting �gures from the table. B Using table 2.4, neatly plot a second fully labelled graph showing only the supply line for chocolate bars

(S1). Assume that non-price factors remain �xed. (i) According to the law of supply for chocolate bars, how does a rise in price affect the quantity of

chocolate bars supplied? Illustrate your answers by quoting �gures from the table. (ii) According to the law of supply, how does a fall in price affect the quantity supplied? Illustrate your

answers by quoting �gures from the table. C Using table 2.4, plot a third graph showing both a demand line (D1) and a supply line (S1) to represent

the market for chocolate bars. Ensure that you label the following features — the graph’s title, names and scales for each axis, D1, S1, and points E1, Pe1 and Qe1. Assume that non-price factors remain �xed.

(i) De�ne equilibrium price. From your diagram, what is the equilibrium price level of chocolate bars (Pe1) in this free or competitive market? Explain how you arrived at your answer.

(ii) From your diagram, what is the equilibrium quantity of chocolate bars (Qe1) if there is a free or competitive market?

D One day, the government decided to regulate the price of chocolate bars. (i) Explain what problems would occur in the market in each of the following instances:

(a) The government passed a law �xing the maximum and minimum price of chocolate bars at a low $1 each. There was no longer a free market.

(b) The government �xed the price of chocolate bars at a high $2.50 each. (ii) In the above two cases, how would the problems be solved if there were a return to a free or

unregulated market for chocolate bars?

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED 300

UNCORRECTED 300

Using table 2.4, neatly plot a fully labelled graph showing only the

UNCORRECTED Using table 2.4, neatly plot a fully labelled graph showing only the Assume that non-price factors remain �xed.

UNCORRECTED Assume that non-price factors remain �xed.

law of demand

UNCORRECTED

law of demandchocolate bars demanded? Illustrate your answers by quoting �gures from the table.

UNCORRECTED

chocolate bars demanded? Illustrate your answers by quoting �gures from the table.to the law of demand, how does a

UNCORRECTED

to the law of demand, how does a answers by quoting �gures from the table.

UNCORRECTED

answers by quoting �gures from the table. Using table 2.4, neatly plot a second fully labelled graph showing only the

UNCORRECTED

Using table 2.4, neatly plot a second fully labelled graph showing only the

UNCORRECTED

). Assume that non-price factors remain �xed.

UNCORRECTED

). Assume that non-price factors remain �xed. According

UNCORRECTED

According to the

UNCORRECTED

to the chocolate bars supplied? Illustrate your answers by quoting �gures from the table.

UNCORRECTED

chocolate bars supplied? Illustrate your answers by quoting �gures from the table.(ii)

UNCORRECTED

(ii)

UNCORRECTED

According

UNCORRECTED

According answers by quoting �gures from the table.

UNCORRECTED

answers by quoting �gures from the table. C UNCORRECTED

C Using table 2.4, plot a third graph showing both a demand line (DUNCORRECTED

Using table 2.4, plot a third graph showing both a demand line (Dthe market for chocolate bars. Ensure that you label the following features — the graph’s title, names and UNCORRECTED

the market for chocolate bars. Ensure that you label the following features — the graph’s title, names and

PAGE

PAGE

PAGE Quantity of bars demanded per

PAGE Quantity of bars demanded per year at a given price (D

PAGE year at a given price (D1

PAGE 1)

PAGE )

500

PAGE 500

400PAGE 400

PROOFS decides how most resources are used or allocated in Australia. This

PROOFS decides how most resources are used or allocated in Australia. This

question looks at the operation of demand and supply in a hypothetical competitive market for chocolate bars.

PROOFSquestion looks at the operation of demand and supply in a hypothetical competitive market for chocolate bars.

Buyers and sellers both respond to changes in prices. Examine table 2.4 below showing the quantity of

PROOFSBuyers and sellers both respond to changes in prices. Examine table 2.4 below showing the quantity of

PROOFS

PROOFS



E In free markets, the equilibrium price may rise and fall if new non-price conditions cause the demand line to increase or decrease. (i) On a fully labelled D–S graph, show the effect of an increase in the demand for chocolate bars at

every possible price by 100 bars per year (i.e. demand increases from D1 to D2). Assume no change in the conditions of supply (the original supply line, S1, remains). Your new graph should label the title, axes, D1, S1, Pe1, Qe1, D2, Pe2 and Qe2.

(ii) Use your diagram to estimate the new equilibrium market price (i.e. P2 in dollars), and new equilibrium market quantity (i.e. Qe2 in hundreds), following the increase in the demand line from D1 to D2.

(iii) List three hypothetical but likely non-price conditions or factors that could increase the quantity of chocolate bars demanded at each possible price by 100 bars per year, shifting the demand line from D1 to D2.

F In free markets, the equilibrium price may also rise and fall if new non-price conditions cause the supply line to increase or decrease. (i) On a fully labelled D–S graph, show the effect of a decrease in the quantity of chocolate bars

supplied at every possible price by 100 bars per year, shifting the supply line from S1 to S2. This time, assume no change in the conditions of demand (the original demand line, D1, remains unchanged). Your new graph should label the title, axes, D1, S1, Pe1, Qe1, S2, Pe2 and Qe2.

(ii) Use this diagram to estimate the new equilibrium market price (i.e. P2 in dollars), and new equilibrium market quantity (i.e. Qe2 in hundreds), following the increase in the supply line from S1 to S2.

(iii) List three hypothetical but likely non-price developments or factors that could increase the quantity of chocolate bars supplied at every price by 100 bars per year, shifting the supply line from S1 to S2.

G Assume that the actual retail price of chocolate bars increased by 10 per cent. However, at the same time, the production cost of making chocolate bars (i.e. for resources including wages, cocoa beans, silver foil, wrappers and machinery) rose by 50 per cent. (i) Explain what would probably happen to the quantity of resources allocated to the production of

chocolate bars. (In your answer, consider the effects of price and cost changes on the pro�tability and incomes of producers, and the number of �rms remaining in the industry.)

(ii) Suggest what might happen to the resources that were previously used for making chocolate bars.

Question 5

Wages represent the market price of labour. Examine �gure 2.19 showing approximate hourly wage rates in different countries. Assume that labour markets in the following countries are reasonably free or competitive affairs.

Country Hourly wage rate (US$)

Australia 15.58

France 12.83

Ireland 12.14

United States 7.25

Spain 5.85

Malaysia 1.18

Russia 0.93

Mexico 0.69

India 0.31

Sri Lanka 0.29

FIGURE 2.19 Approximate average hourly wage rates in selected countries (continued)

UNCORRECTED incomes of producers, and the number of �rms remaining in the industry.)

UNCORRECTED incomes of producers, and the number of �rms remaining in the industry.) what might happen to the resources that were previously used for making chocolate bars.

UNCORRECTED what might happen to the resources that were previously used for making chocolate bars.

. Examine �gure 2.19 showing approximate hourly wage rates in

UNCORRECTED . Examine �gure 2.19 showing approximate hourly wage rates in

labour markets

UNCORRECTED labour markets in the following countries are reasonably free or competitive

UNCORRECTED in the following countries are reasonably free or competitive

UNCORRECTED

UNCORRECTED

UNCORRECTED

United States

UNCORRECTED

United States

SpainUNCORRECTED

Spain

PAGE quantity of chocolate bars supplied at every price by 100 bars per year, shifting the supply line

PAGE quantity of chocolate bars supplied at every price by 100 bars per year, shifting the supply line

Assume that the actual retail price of chocolate bars increased by 10 per cent. However, at the same time,

PAGE Assume that the actual retail price of chocolate bars increased by 10 per cent. However, at the same time, the production cost of making chocolate bars (i.e. for resources including wages, cocoa beans, silver foil,

PAGE the production cost of making chocolate bars (i.e. for resources including wages, cocoa beans, silver foil,

what would probably happen to the quantity of resources allocated to the production of

PAGE what would probably happen to the quantity of resources allocated to the production of

chocolate bars. (In your answer, consider the effects of price and cost changes on the pro�tability and PAGE chocolate bars. (In your answer, consider the effects of price and cost changes on the pro�tability and incomes of producers, and the number of �rms remaining in the industry.) PAGE

incomes of producers, and the number of �rms remaining in the industry.) what might happen to the resources that were previously used for making chocolate bars. PAGE

what might happen to the resources that were previously used for making chocolate bars.

PROOFSsupply

PROOFSsupply

decrease in the quantity of chocolate bars

PROOFSdecrease in the quantity of chocolate bars

2

PROOFS2.

PROOFS. , remains

PROOFS, remains

and Qe

PROOFS and Qe2

PROOFS2.

PROOFS.

in dollars), and new

PROOFS in dollars), and new

in hundreds), following the increase in the supply line from

PROOFS in hundreds), following the increase in the supply line from

hypothetical but likely non-price developments or factors that could PROOFS

hypothetical but likely non-price developments or factors that could increase PROOFS

increase quantity of chocolate bars supplied at every price by 100 bars per year, shifting the supply line PROOFS

quantity of chocolate bars supplied at every price by 100 bars per year, shifting the supply line




No data

Minimum wages per hour in US dollars:

No minimum wage

$0.00–$1.00

$1.01–$2.00

$2.01–$3.00

$3.01–$5.00

$5.01–$7.50

$7.51–$10.00

$10.01–$15.58

Source: Data in table derived, and graph copied directly, from Wikipedia, the free encyclopaedia, https://en.wikipedia.org/wiki/List_of_minimum_wages_by_country. Note: Data mostly 2013–16.

A Explain what is meant by a country’s labour market. B In terms of demand–supply theory (as applied to deciding wage levels in the labour markets for these

countries), identify and explain the likely general reasons why wage rates for workers in some countries are higher than in others.

C Try to draw a demand–supply diagram which shows, hypothetically, the main reason for low manufacturing wages in India relative to high wages in Germany. (Hint: On a single demand–supply diagram, you may �nd it useful to have one set of demand–supply lines or conditions for Germany and a second set for India, so four lines in total.)

D Given the wage differences illustrated in �gure 2.19, what types of goods and services would not be made competitively in Germany as opposed to India?

E If the government of India set a minimum wage of $2 per hour to lift wages and protect low-income earners from exploitation by pro�t-hungry �rms, outline the likely economic effects (good or bad) on workers, labour markets and the economies of India and Germany.

Question 6

Assume that the federal government decided to remove a special 10 per cent tax on all producers of swimwear. You are a local producer of swimwear in a moderately competitive market involving many other business rivals. A Draw a hypothetical demand– supply diagram representing the swimwear market before the government

removed the 10 per cent seller or producer’s tax. Label all data on this diagram (i.e. D1, S1, Pe1, Qe1, the names and units of the axes, and an appropriate title). On this D–S diagram, show the likely effects on the location of the supply line after the removal of this tax. Again, ensure that all new data on this diagram are labelled (show S2, Pe2, Qe2).

B Explain why you shifted the location of the supply line in the way you did (i.e. from S1 to S2). C Explain how the government’s new tax policy would affect the quantity of resources (i.e. the quantity of

labour, capital and natural resources) allocated to the production of swimwear.

Simulation — the ASX online Schools’ Sharemarket GameBackgroundEver wished that you could try your hand at buying and selling shares but lack the money to do so? Well, your wish has just come true! A fantastic way to get �rsthand experience of how the stock market works, and how share prices provide signals to investors that in�uence decisions about resource allocation, is to actually

UNCORRECTED labour market

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UNCORRECTED (as applied to deciding wage levels in the labour markets for these countries), identify and explain the likely general reasons why wage rates for workers in some countries

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supply diagram

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manufacturing wages in India relative to high wages in Germany. (

UNCORRECTED manufacturing wages in India relative to high wages in Germany. (

UNCORRECTED diagram, you may �nd it useful to have one set of demand–supply lines or conditions for Germany and a

UNCORRECTED diagram, you may �nd it useful to have one set of demand–supply lines or conditions for Germany and a second set for India, so four lines in total.)

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second set for India, so four lines in total.)Given the wage differences illustrated in �gure 2.19, what types of goods and services would

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Given the wage differences illustrated in �gure 2.19, what types of goods and services would competitively in Germany as opposed to India?

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competitively in Germany as opposed to India? If the government of India set a minimum wage of $2 per hour to lift wages and protect low-income

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If the government of India set a minimum wage of $2 per hour to lift wages and protect low-income earners from exploitation by pro�t-hungry �rms, outline the likely economic effects (good or bad) on

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earners from exploitation by pro�t-hungry �rms, outline the likely economic effects (good or bad) on workers, labour markets and the economies of India and Germany.

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workers, labour markets and the economies of India and Germany. Question 6

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Question 6

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Assume that the federal government decided to

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Assume that the federal government decided to swimwear. You are a local producer of swimwear in a moderately competitive market involving many other

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swimwear. You are a local producer of swimwear in a moderately competitive market involving many other business rivals.

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Draw a hypothetical removed the 10 per cent seller or producer’s tax. Label all data on this diagram (i.e. DUNCORRECTED

removed the 10 per cent seller or producer’s tax. Label all data on this diagram (i.e. Dnames and units of the axes, and an appropriate title). On this D–S diagram, show the likely effects on the UNCORRECTED

names and units of the axes, and an appropriate title). On this D–S diagram, show the likely effects on the

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PAGE $7.51–$10.00

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$10.01–$15.58

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Data in table derived, and graph copied directly, from Wikipedia, the free encyclopaedia, https://en.wikipedia.org/wiki/List_of_

PAGE Data in table derived, and graph copied directly, from Wikipedia, the free encyclopaedia, https://en.wikipedia.org/wiki/List_of_

labour market PAGE

labour market. PAGE

. (as applied to deciding wage levels in the labour markets for these PAGE

(as applied to deciding wage levels in the labour markets for these

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trade shares online, by entering the Australian Securities Exchange’s (ASX) Schools’ Sharemarket Game. It is free, it runs twice yearly and, perhaps best of all, there are even money prizes for the most successful investor syndicates!

The aim of the gameAfter your teacher has completed the online registration of your trading syndicate, each group starts with a hypothetical $50 000 and your aim by the end of the 10-week game is to increase your money or wealth as much as possible. If you are fortunate, you may be able to make money by buying shares in companies when they are relatively cheap and selling them at a higher price. This requires that you research the listed com-panies (using the online databank) to �nd out more about their future prospects, pro�ts or losses, share prices, dividends and returns, and so on, before you decide to trade. The game’s winner is the syndicate that makes the most money by the closing date.

Additional follow-up research and case study of the stock marketPlaying the ASX Schools’ Sharemarket Game would be a good introduction to further case study research. The following headings may be the basis for preparing a brief report into the stock market. Here you may examine the following. • General description of the share market’s nature and features • Who are the demanders or buyers of shares and what affects their decisions to buy? • Who are the suppliers or sellers of shares and what affects their decisions to sell? • The structure and level of competition in the share market (including the issues of insider trading,

misleading reporting practices by some companies and auditors) • Price and yield trends in the share market and how these are measured • The recent causes of trends in the share market • The good and bad impacts of changes in the share market for individuals, and the effect on economic

decisions and the allocation of resources • What you learned from playing the ASX Schools’ Sharemarket Game (including some mention of your

best and worst decisions, and how you would vary your strategy if you played again)

PresentationYour case study research could be completed in groups, syndicates or individually, and delivered as a written report, oral presentation to the class or PowerPoint slide show.

ReferencesYou can �nd out more about the nature and operation of the stock market by following the weblinks in this topic’s student resources tab.


• Wall Street• Australian Securities Exchange• Australian Ethical Investments

Case studies of marketsMarkets are exciting institutions and we rely greatly on them to make key economic decisions. They are full of surprises and are ever changing. As mentioned previously and outlined in the new VCE course of study, you and your teachers are encouraged to look at markets by taking a case study approach. For example, depending on local interests and circumstances, one of the following may provide an appropriate focus: • agricultural markets such as wool, wheat and beef • other commodity markets such as minerals and energy • community markets • the �nance market • the share market • the labour market • the property/housing market • online markets • the health market.

It is hoped that this case study will bring market theory to life so that you gain a �rsthand understanding of how the operation of markets affects our daily lives and the economic decisions we make.

UNCORRECTED Your case study research could be completed in groups, syndicates or individually, and delivered as a written

UNCORRECTED Your case study research could be completed in groups, syndicates or individually, and delivered as a written report, oral presentation to the class or PowerPoint slide show.

UNCORRECTED report, oral presentation to the class or PowerPoint slide show.

can �nd out more about the nature and operation of the stock market by following the weblinks in this

UNCORRECTED can �nd out more about the nature and operation of the stock market by following the weblinks in this

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Australian Securities Exchange

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Australian Securities ExchangeAustralian Ethical Investments

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Australian Ethical Investments

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Case studies of markets

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Case studies of marketsMarkets are exciting institutions and we rely greatly on them to make key economic decisions. They are full

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Markets are exciting institutions and we rely greatly on them to make key economic decisions. They are full of surprises and are ever changing. As mentioned previously and outlined in the new VCE course of study, you UNCORRECTED

of surprises and are ever changing. As mentioned previously and outlined in the new VCE course of study, you and your teachers are encouraged to look at markets by taking a case study approach. For example, depending UNCORRECTED

and your teachers are encouraged to look at markets by taking a case study approach. For example, depending

PAGE good and bad impacts of changes in the share market for individuals, and the effect on economic

PAGE good and bad impacts of changes in the share market for individuals, and the effect on economic

you learned from playing the ASX Schools’ Sharemarket Game (including some mention of your

PAGE you learned from playing the ASX Schools’ Sharemarket Game (including some mention of your

best and worst decisions, and how you would vary your strategy if you played again)

PAGE best and worst decisions, and how you would vary your strategy if you played again)

Your case study research could be completed in groups, syndicates or individually, and delivered as a written PAGE

Your case study research could be completed in groups, syndicates or individually, and delivered as a written

PROOFSPlaying the ASX Schools’ Sharemarket Game would be a good introduction to further case study research.

PROOFSPlaying the ASX Schools’ Sharemarket Game would be a good introduction to further case study research. The following headings may be the basis for preparing a brief report into the stock market. Here you may

PROOFSThe following headings may be the basis for preparing a brief report into the stock market. Here you may

structure and level of competition in the share market (including the issues of insider trading,

PROOFSstructure and level of competition in the share market (including the issues of insider trading,

good and bad impacts of changes in the share market for individuals, and the effect on economic PROOFS

good and bad impacts of changes in the share market for individuals, and the effect on economic



One possibility is for you to present your research as an interesting PowerPoint presentation where you demonstrate the required knowledge and skills, including the linking of theory with the real-world operation of markets. In particular, the market case study is intended to help you research and better under-stand the recent factors affecting relative prices and economic decision making through the operation of markets.

A possible schematic layout of the six major sections covering your case study, might look something like that shown in �gure 2.20.

Section 1 — Title page• dentify your particular market.• reate a catchy but appropriate title for your report.• nclude interesting and attractive images of your market.

Section 2 — Background• efine your selected market.• Outline the nature key features of your market (e.g. its history, characteristics, si e). nclude a location map and relevant images. • dentify the type of market structure of your selected market and illustrate this on a continuum diagram, ustifying your selection.

Section 3 — Trends in market prices over time• Start with a general introduction. t should outline how changes in relative market prices guide the economic decisions made by profit-seeking owners of resources, leading them into the selected and most profitable types of goods and services.• Research and include an actual price graph showing increases and decreases in prices in your chosen market over time (e.g. over the last , 10 or 0 years).• Footnote the web address for the price graph.• escribe the key price trends shown on this graph, quoting statistics and referring to particular years. omment on the apparent long-term trend in price. omment on any short-term cyclical swings in prices. Try to predict the likely future trend in prices.

Section 4 — How market demand affects price • Start by defining the term demand, and state the law of demand for your market.• Outline who are the main types of buyers or demanders in your selected market. f appropriate, list the countries or areas most buyers come from (perhaps include a map). What motivates consumers to buy in this market• dentify and outline four to six key non-price conditions of demand that are likely to have changed. Explain how these might cause buyers to purchase more or less of an item at a given price, shifting the whole demand line for your market up or down and affecting the equilibrium market price as seen on the price graph.• raw a fully labelled S graph to show the hypothetical effects on the equilibrium market price of recent changes in the demand-side conditions in your selected market. ou will need to show two lines and one S line on the diagram.• Explain the price and other changes shown on this S graph caused by new demand conditions.• nclude appropriate images related to demand.

Section 5 — How market supply affects price• Start by defining the term supply, and state the law of supply for your market.• Outline who are the main types of suppliers or sellers in your selected market. f appropriate, list the countries or identify the names of companies that produce or supply most of the market’s output (perhaps include a map). What motivates suppliers to sell in this market• dentify and outline four to six key non-price conditions of supply line that are likely to have changed. Explain how these might cause sellers to supply more or less of an item at a given price, shifting the whole supply line for your market up or down and affecting the equilibrium market price as seen on the price graph.• raw a fully labelled S graph to show the hypothetical effects on the equilibrium market price of recent changes in the supply-side conditions in your selected market. ou will need to show two S lines and one line on the diagram.• Explain the price and other changes shown on this S graph caused by new supply conditions.• nclude appropriate images related to supply.

Section 6 — Effects of changes in market prices• Start with an introduction. t should state that the recent changes in the market price of your selected product or service due to changes in S conditions, have both microeconomic and macroeconomic effects.• ist and explain the likely microeconomic effects at the level of a single firm, industry or market. Think for instance about how the recent change in the relative price you described would be likely to affect relative profits, resource allocation, production, employment and unemployment, and incomes in this particular industry and in related industries. escribe each point.• ist and explain the likely macroeconomic effects of changes in the relative prices in your selected market. Think for instance about the likely effects on the whole Australian economy on G P, employment and unemployment, national income and perhaps the in ation rate. escribe each point.• nclude appropriate images and a bibliography.

FIGURE 2.20 Schematic structure of the six sections making up your PowerPoint presentation about your market case study

By way of example, two market case studies are provided to help generate some ideas for teachers and students.

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UNCORRECTED Section 5 — How market supply affects price

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Start by defining the term

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Start by defining the term supply

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supply, and state the law

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, and state the lawsupply, and state the lawsupply

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supply, and state the lawsupply of supply for your market.

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of supply for your market.Outline who are the main types of suppliers or

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Outline who are the main types of suppliers or sellers in your selected market.

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sellers in your selected market. f appropriate, list the countries or identify the

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f appropriate, list the countries or identify the

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names of companies that produce or supply most

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names of companies that produce or supply most of the market’s output (perhaps include a map).

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of the market’s output (perhaps include a map). What motivates suppliers to sell in this market

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What motivates suppliers to sell in this marketdentify and outline four to six key non-price

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dentify and outline four to six key non-price conditions of supply line that are likely to have

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conditions of supply line that are likely to have changed. Explain how these might cause sellers to

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changed. Explain how these might cause sellers to supply more or less of an item at a given price,

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supply more or less of an item at a given price, shifting the whole supply line for your market up

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shifting the whole supply line for your market up or down and affecting the equilibrium market priceUNCORRECTED

or down and affecting the equilibrium market price as seen on the price graph.UNCORRECTED

as seen on the price graph.• UNCORRECTED

• raw a fully labelled S graph to show theUNCORRECTED

raw a fully labelled S graph to show the hypothetical effects on the equilibrium market priceUNCORRECTED

hypothetical effects on the equilibrium market price

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PAGE

PAGE What motivates consumers to buy in this market

PAGE What motivates consumers to buy in this marketdentify and outline four to six key non-price

PAGE dentify and outline four to six key non-price conditions of demand that are likely to have

PAGE conditions of demand that are likely to have changed. Explain how these might cause buyers to

PAGE changed. Explain how these might cause buyers to purchase more or less of an item at a given price,

PAGE purchase more or less of an item at a given price, shifting the whole demand line for your market up

PAGE shifting the whole demand line for your market up or down and affecting the equilibrium market price

PAGE or down and affecting the equilibrium market price as seen on the price graph.

PAGE as seen on the price graph.• PAGE • raw a fully labelled S graph to show thePAGE

raw a fully labelled S graph to show the hypothetical effects on the equilibrium marketPAGE hypothetical effects on the equilibrium market

PROOFS

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PROOFS location map and relevant images.

PROOFS location map and relevant images. • dentify the type of market structure of your

PROOFS• dentify the type of market structure of your selected market and illustrate this on a continuum

PROOFS selected market and illustrate this on a continuum diagram, ustifying your selection.

PROOFS diagram, ustifying your selection.

Section 4 — How market demand affects price

PROOFSSection 4 — How market demand affects price

Start by defining the term

PROOFSStart by defining the term demand

PROOFSdemand, and state the

PROOFS, and state the

law of demand for your market.

PROOFS law of demand for your market.

Outline who are the main types of buyers or

PROOFSOutline who are the main types of buyers or

demanders in your selected market.

PROOFS demanders in your selected market. f appropriate, list the countries or areas most

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f appropriate, list the countries or areas most buyers come from (perhaps include a map).PROOFS

buyers come from (perhaps include a map). What motivates consumers to buy in this marketPROOFS

What motivates consumers to buy in this marketdentify and outline four to six key non-pricePROOFS

dentify and outline four to six key non-price



Case study 1 — Australia’s property market

The task and its presentation

Australia’s economy is based on private enterprise or ownership of property (i.e. land, houses, businesses and other assets) where people are free to buy or sell, and make pro�ts if they choose. Your task here is to �nd out more about the nature and operation of the Australian property or real estate market. The following headings and notes may provide some guidance for your written report, oral presentation to the class or an ICT-based (e.g. using PowerPoint) data slide show.1. Background and introduction. Australia’s property market involves thousands of regional or individual

markets. It is up to you how broad or narrow your study becomes. For example, you may choose to look at property in general throughout Australia; compare capital cities (e.g. Sydney and Melbourne); study Victoria; look at Melbourne, Geelong, Torquay and the Surf Coast, Mildura, Hamilton, Bendigo, Ballarat or Sale; or closely examine buying and selling in your suburb (e.g. Flemington, Essendon, Mentone, New-town, Ringwood, Norlane) or perhaps even in your street block.

2. The general features of the property market. Provide a de�nition of the property market that highlights its key features or the nature of the market.

3. Who are the demanders or buyers of property and what affects their decisions? What are the factors that in�uence the decisions of buyers in the market you have chosen? What aspects of a property are attrac-tive for buyers, and what things are a turn-off for buyers?

4. Who are the suppliers or sellers of property and what affects their decisions? What are the factors that affect the level of supply of property put on the market for sale? What are the backgrounds or motives of the sellers?

5. The structure of and level of competition in the property market. Is the property market a purely com-petitive one or is it restricted by collusion among sellers? Are sellers price makers or price takers? What practices does the unscrupulous seller use?

6. Trends in property market prices. Graph and compare trends in property prices over the past one to ten years, and provide a brief commentary summarising your �ndings. What are your predictions for future price trends and on what assumptions are these based? If you were fortunate enough to have $500 000 to invest, how would the recent trends in the property market affect your decision about the allocation of your resources?

7. What are the alternative areas of investment? How would the gains or returns compare over the past two to ten years in each area? Would these past trends have tended to attract or repel resources? What factors would affect your decision about getting into the property market? What are the hidden costs in each area of investment?

8. The good and bad effects of changes in property market prices on our economic decisions and resource allocation. Who are the people that have gained from recent price trends in the property market? How have they gained? Which groups have suffered as a result of recent property trends? In what ways have they suffered?

Case study 2 — the oil marketThe task and its presentation

Oil has sometimes been referred to as ‘black gold’. Dirty as it may be, it has brought some countries and indi-viduals great fortune. For rich Western countries, access to cheap energy is critical to economic progress, low in�ation and high material living standards. Your task here is to �nd out more about the nature and operation of the international oil market. The following notes may provide some guidance for your written report, oral presentation to the class or an ICT-based data slide show (e.g. using PowerPoint).1. Background and introduction to the nature and operation of the international oil market. Provide:

• a general de�nition of the oil market • background information about the international oil market.

For example, is it a purely competitive market, or one where there is collusion among cartel members to create a monopoly? What is the role of OPEC and who are the members?

2. Who are the demanders and buyers of oil internationally and locally, and what affects their decisions? What are the uses of oil and what drives demand? Perhaps include a map or pie chart showing which coun-tries are the main buyers or importers of oil. What are the price and non-price factors that in�uence the decisions of buyers in the oil market?

3. Who are the suppliers producing and selling oil internationally, and what affects their decisions? Include a map of the world showing OPEC producers and their share of market supply. What are the factors that affect the level of supply in the oil market? What are the motives of the sellers?

4. Trends in the international market price of crude oil. Graph and compare trends in international crude oil prices over the past 5 to 30 or more years and provide a brief commentary summarising your �ndings and relating them to changing demand and supply conditions.

UNCORRECTED How would the gains or returns compare over the past two

UNCORRECTED How would the gains or returns compare over the past two to ten years in each area? Would these past trends have tended to attract or repel resources? What factors

UNCORRECTED to ten years in each area? Would these past trends have tended to attract or repel resources? What factors would affect your decision about getting into the property market? What are the hidden costs in each area

UNCORRECTED would affect your decision about getting into the property market? What are the hidden costs in each area

good and bad effects of changes in property market prices on our economic decisions and

UNCORRECTED good and bad effects of changes in property market prices on our economic decisions and

UNCORRECTED Who are the people that have gained from recent price trends in the property market?

UNCORRECTED Who are the people that have gained from recent price trends in the property market?

How have they gained? Which groups have suffered as a result of recent property trends? In what ways have

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se study 2 — the oil market

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se study 2 — the oil marketThe task and its presentation

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The task and its presentation

Oil has sometimes been referred to as ‘black gold’. Dirty as it may be, it has brought some countries and indi

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Oil has sometimes been referred to as ‘black gold’. Dirty as it may be, it has brought some countries and individuals great fortune. For rich Western countries, access to cheap energy is critical to economic progress, low

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viduals great fortune. For rich Western countries, access to cheap energy is critical to economic progress, low in�ation and high material living standards. Your task here is to �nd out more about the nature and operation

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in�ation and high material living standards. Your task here is to �nd out more about the nature and operation of the international oil market. The following notes may provide some guidance for your written report, oral

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of the international oil market. The following notes may provide some guidance for your written report, oral

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presentation to the class or an ICT-based data slide show (e.g. using PowerPoint).

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presentation to the class or an ICT-based data slide show (e.g. using PowerPoint).Backgr

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background

PAGE petitive one or is it restricted by collusion among sellers? Are sellers price makers or price takers? What

PAGE petitive one or is it restricted by collusion among sellers? Are sellers price makers or price takers? What

Graph and compare trends in property prices over the past one to

PAGE Graph and compare trends in property prices over the past one to

ten years, and provide a brief commentary summarising your �ndings. What are your predictions for future

PAGE ten years, and provide a brief commentary summarising your �ndings. What are your predictions for future price trends and on what assumptions are these based? If you were fortunate enough to have $500

PAGE price trends and on what assumptions are these based? If you were fortunate enough to have $500invest, how would the recent trends in the property market affect your decision about the allocation of your

PAGE invest, how would the recent trends in the property market affect your decision about the allocation of your

How would the gains or returns compare over the past two PAGE

How would the gains or returns compare over the past two

PROOFS Provide a de�nition of the property market that highlights

PROOFS Provide a de�nition of the property market that highlights

What are the factors

PROOFSWhat are the factors

that in�uence the decisions of buyers in the market you have chosen? What aspects of a property are attrac

PROOFSthat in�uence the decisions of buyers in the market you have chosen? What aspects of a property are attrac

e the suppliers or sellers of property and what affects their decisions?

PROOFSe the suppliers or sellers of property and what affects their decisions? What are the factors

PROOFSWhat are the factors

that affect the level of supply of property put on the market for sale? What are the backgrounds or

PROOFSthat affect the level of supply of property put on the market for sale? What are the backgrounds or

Is the property market a purely comPROOFS

Is the property market a purely competitive one or is it restricted by collusion among sellers? Are sellers price makers or price takers? What PROOFS

petitive one or is it restricted by collusion among sellers? Are sellers price makers or price takers? What



5. The wholesale and retail market for petrol in Australia. You might also look at wholesale and retail petrol prices in Australia by considering the following issues. • What type of market is there? • Why are sellers under the scrutiny of the Australian Competition and Consumer Commission (ACCC)? • Are sellers price makers or price takers? (Note the daily price variations each week between weekends

and other days.) • What practices might unscrupulous sellers use to affect prices? • Why has the number of independently owned petrol stations fallen, and what effect might this have on

competition and prices paid by consumers?6. The microeconomic and macroeconomic effects of changes in the market price of oil and petrol. How

might price changes affect: • the allocation of resources towards oil exploration • the development of alternative energy • energy ef�ciency in cars and our decisions as consumers of energy • Australia’s trade balance • the in�ation rate or general level of prices for the consumer goods and services we all buy • the unemployment rate • the sustainable rate of economic growth • our natural environment?

Queen Victoria Market excursionA two to three hour excursion to the Queen Victoria Market (QVM) can be fun and help to clarify how a local market might operate. You can �nd a map of the market by using the Queen Victoria Market weblink in this topic’s student resources tab. The questions that follow may help to focus student research. Teachers, however, need to be mindful that there are plans to redevelop this area.


• Queen Victoria Market

1. Describe the general atmosphere of the QVM. What types of economic groups (think of the circular �ow model) are found there?

2. Politely try to interview a stallholder who does not seem too busy. What is the most common form of busi-ness ownership operating at the QVM (e.g. sole trader, partnership, franchise, company)?

3. Describe the four key features or characteristics of the most common type of business structure operating at the QVM.

4. Use the table below to estimate the number of sellers, and then rank the level of competition (i.e. level of market power) in each of the following areas in the QVM: • strong competition among sellers • moderate competition among sellers • weak competition/near monopoly among sellers.

Item Level of competition Item Level of competition

Fruit and veg Clothing

Meat and �sh Plants

Livestock Deli

Music Hardware

5. What are the main observable signs of strong competition between different sellers of the same types of product at the QVM? Explain, giving reasons for your answer (think of the preconditions for a purely com-petitive market).

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UNCORRECTED Describe the general atmosphere of the QVM.

UNCORRECTED Describe the general atmosphere of the QVM.

w a stallholder who does not seem too busy. What is the most common form of busi

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ness ownership operating at the QVM (e.g. sole trader, partnership, franchise, company)?

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ness ownership operating at the QVM (e.g. sole trader, partnership, franchise, company)? ey features or characteristics of the most common type of business structure operating at

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ey features or characteristics of the most common type of business structure operating at

Use the table belo

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Use the table below to estimate the number of sellers, and then rank the level of competition (i.e. level of

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w to estimate the number of sellers, and then rank the level of competition (i.e. level of market power) in each of the following areas in the QVM:

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market power) in each of the following areas in the QVM:strong

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strong competition among sellers

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competition among sellersmoderate

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moderate competition among sellers

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competition among sellersweak

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weak competition/near monopoly among sellers.

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competition/near monopoly among sellers.

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Fruit and veg

PAGE local market might operate. You can �nd a map of the market by using the

PAGE local market might operate. You can �nd a map of the market by using the in this topic’s student resources tab. The questions that follow may help to focus student research. Teachers,

PAGE in this topic’s student resources tab. The questions that follow may help to focus student research. Teachers, however, need to be mindful that there are plans to redevelop this area.

PAGE however, need to be mindful that there are plans to redevelop this area.

PAGE

These weblinks are available in this topic’s student resources tab.PAGE

These weblinks are available in this topic’s student resources tab.PAGE PROOFSin�ation rate or general level of prices for the consumer goods and services we all buy

PROOFSin�ation rate or general level of prices for the consumer goods and services we all buy

A two to three hour excursion to the Queen Victoria Market (QVM) can be fun and help to clarify how a PROOFS

A two to three hour excursion to the Queen Victoria Market (QVM) can be fun and help to clarify how a Queen Victoria MarketPROOFS

Queen Victoria Market



6. Try to conduct an in-depth interview with a stallholder covering the following matters. If successful, don’t forget at the end to thank them for their time and help. • How many years have they operated the store at the QVM? • From a seller’s point of view, what are the main attractions of running a store at the QVM? • Would they consider running a store elsewhere, other than the QVM? • Do strong competition and low prices make it more dif�cult to make a reasonable living from selling at

the QVM? • Is the rent expensive for their site? • From where do they buy most of their produce? • How do they set their prices (e.g. cost plus a mark-up of, say, 30 per cent; watching the prices charged by

their business rivals next door)? • What do they do if the store next to them drops its prices by, say, 10 per cent? • If applicable, explain how their prices are in�uenced by seasonal factors/conditions and the time of

the day? • Recently the Melbourne City Council released a new development plan for the QVM to improve the

appearance and attractions of the market. What do they think about this?7. Copy and complete the table below to compare trends in market prices at the QVM from 1995 to the current

year. Use your data to calculate the general price rise during this period in the basket of items purchased at the QVM.

ProductYour estimate of the number of sellers

Prices in 1995 ($)

Current prices ($)

Oranges/kg 0.80

Pineapples, each 1.20

Tomatoes/kg 1.00

Avocados, each (large) 1.00

Rump steak/kg 5.99

Flounder/kg 6.00

CD in top 10 12.00

Total: Total:

8. ‘Prices at the QVM are generally lower than those elsewhere in Geelong, Ballarat or Melbourne.’ Suggest two reasons for this observation.

9. How might you tell if market prices at the QVM for a particular item were too high or too low? What would you expect to notice or see?

An essayYou may like to select one of the following topics and write a 600-word revision essay. A Referring to recent trends in the prices received by grain, cattle or wool farmers, explain how the

free operation of the price system should work well to allocate Australia’s scarce resources between alternative uses.

B In the absence of government intervention in these primary commodity markets, what problems may arise for farmers, and for the Australian economy generally, when there is a change in relative prices?

Analysis of visual evidence — a cartoonThere are many cartoons in this topic that can be used to extend your understanding of economics. Examine the cartoons using the following questions as a guide. • What is the economic concept being presented in the cartoon? • What is the main message of the cartoon? • What is your reaction to the cartoon? Do you agree with what it is saying? • Is the message of the cartoon politically or economically biased or distorted in some way? Explain your

answer.

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at the QVM are generally lower than those elsewhere in Geelong, Ballarat or Melbourne.’ Suggest

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at the QVM are generally lower than those elsewhere in Geelong, Ballarat or Melbourne.’ Suggest two reasons for this observation.

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two reasons for this observation.w might you tell if market prices at the QVM for a particular item were too high or too low? What would

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w might you tell if market prices at the QVM for a particular item were too high or too low? What would

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you expect to notice or see?

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you expect to notice or see?

An essay

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An essayYou may like to select

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You may like to select Referring to recent trends in the prices received by grain, cattle or wool farmers, explain how the UNCORRECTED

Referring to recent trends in the prices received by grain, cattle or wool farmers, explain how the UNCORRECTED

free operation of the UNCORRECTED

free operation of the alternative uses.UNCORRECTED

alternative uses.

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PROOFSxplain how their prices are in�uenced by seasonal factors/conditions and the time of

PROOFSxplain how their prices are in�uenced by seasonal factors/conditions and the time of

w development plan for the QVM to improve the

PROOFSw development plan for the QVM to improve the

y and complete the table below to compare trends in market prices at the QVM from 1995 to the current

PROOFSy and complete the table below to compare trends in market prices at the QVM from 1995 to the current

year. Use your data to calculate the general price rise during this period in the basket of items purchased at

PROOFSyear. Use your data to calculate the general price rise during this period in the basket of items purchased at

PROOFS

PROOFS



2.6 ReviewSummaryDistinctive features of Australia’s economic system

• Australia has a market capitalist economy. This involves the dominance of the market or price system in decision making and a system dominated by private enterprise and ownership of assets.

• Ownership of resources and businesses. Our capitalist ownership system relies mostly on private enterprise or ownership of resources, businesses or the means of production. Private owners normally make economic decisions so that they maximise their pro�ts. Nevertheless, there are still some small areas of government enterprise, despite privatisation.

• Decision making. Our system of decision making relies on the price or market system, which re�ects consumer sovereignty rather than government sovereignty. This is summarised in �gure 2.21. Here, relative market prices move up and down due to new conditions of demand by buyers or supply by sellers. Changes in relative prices create signals for pro�t-seeking owners of resources to indicate which particular types of goods or services are wanted or have been under- or overproduced. Owners of resources will follow these price signals, since they want to maximise their pro�ts and incomes. As a decision maker, the market works as shown in �gure 2.21.

In economics, we all face the problem of relative scarcity.•We cannot have all the goods and services that we want.•Decision or choices have to be made about how limited resources are to be used or allocated(i.e. answer the ‘what, how and for whom to produce’ questions).

•

Australia has a market-based capitalist economic system.•The market is an institution that involves buyers and sellers who negotiate relative prices at equilibrium foreach good or service.

•

With capitalism, most resources and businesses are owned by private individuals who make key economicdecisions based on their desire to maximise their pro�ts and incomes.

•

Generally, only the most pro�table types of goods and services are produced, using the cheapest or mostef�cient production methods.

•

Over time, relative prices change as a result of new non-price conditions of demand and supply.•A change in relative prices alters the relative pro�tability of one good or service against another.•Pro�t-seeking owners of resources respond to these price signals, by changing the type and quantity of goodsand services they produce, how they produce them, and for whom they are produced.

•

FIGURE 2.21 Summary — the operation of the price system as a decision maker

The nature of markets in Australia

Markets make up the main decision-making institution in the Australian economy and, hence, we have a market-based system. There are thousands of markets scattered around the country. They allocate around 80 per cent of our resources. • Markets bring buyers and sellers together where they negotiate prices. Prices for resources are negotiated

in factor or resource markets, while prices for �nished goods and services are negotiated in �nal markets. • Market structure (or market power) is a term that describes the type and level of competition between

sellers. At the extremes, there is pure competition (many sellers, strong rivalry and sellers are price takers) and pure monopoly (only one �rm controlling the market and it is a price maker). Between these extremes are monopolistic competition and oligopoly.

• Purely competitive markets involve special preconditions or features (e.g. strong competition between sellers, no product differentiation, no government controls or regulations, good knowledge of market trends, pro�t maximisation and rational behaviour by buyers and sellers). In reality, pure markets are less common than monopolistic competition, oligopolies and monopolies. Because competition constrains personal greed, the Australian Competition and Consumer Commission (ACCC) helps to promote competition among rival sellers, and outlaws anti-competitive behaviour through the Competition and Consumer Act (2010).

• Markets tell us what types of things and how much to produce, and how to distribute production and incomes. They do this through the price system. In turn, relative prices affect whether a particular good or service is pro�table. Rising prices usually signal to pro�t-seeking owners of resources that there has been underproduction and that output needs to be lifted. Falling prices in the market signal that there has been overproduction and that output should be cut by diverting resources to other purposes.

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UNCORRECTED as a result of new non-price conditions of demand and supply.

UNCORRECTED as a result of new non-price conditions of demand and supply.

A change in relative prices alters the

UNCORRECTED A change in relative prices alters the relative pro�tability

UNCORRECTED relative pro�tability

Pro�t-seeking owners of resources respond to these

UNCORRECTED Pro�t-seeking owners of resources respond to these and services they produce, how they produce them, and for whom they are produced.

UNCORRECTED and services they produce, how they produce them, and for whom they are produced.

Summary — the operation of the price system as a decision maker

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Summary — the operation of the price system as a decision maker


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Markets make up the main decision-making institution in the Australian economy and, hence, we have a

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Markets make up the main decision-making institution in the Australian economy and, hence, we have a

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system

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system. There are thousands of markets scattered around the country. They allocate around 80 per cent of our

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. There are thousands of markets scattered around the country. They allocate around 80 per cent of our resources.

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resources. Mark

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Markets

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ets bring buyers and sellers together where they negotiate prices. Prices for resources are negotiated

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bring buyers and sellers together where they negotiate prices. Prices for resources are negotiated in factor or resource markets, while prices for �nished goods and services are negotiated in �nal markets.

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in factor or resource markets, while prices for �nished goods and services are negotiated in �nal markets. •

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• Mark

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Market structure

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et structuresellers. At the extremes, there is pure competition (many sellers, strong rivalry and sellers are price takers) UNCORRECTED

sellers. At the extremes, there is pure competition (many sellers, strong rivalry and sellers are price takers) and pure monopoly (only one �rm controlling the market and it is a price maker). Between these extremes UNCORRECTED

and pure monopoly (only one �rm controlling the market and it is a price maker). Between these extremes

PAGE

PAGE is an institution that involves buyers and sellers who negotiate relative prices at equilibrium for

PAGE is an institution that involves buyers and sellers who negotiate relative prices at equilibrium for

, most resources and businesses are owned by private individuals who make key economic

PAGE , most resources and businesses are owned by private individuals who make key economic

decisions based on their desire to maximise their pro�ts and incomes.

PAGE decisions based on their desire to maximise their pro�ts and incomes.

types of goods and services are produced, using the cheapest or mostPAGE types of goods and services are produced, using the cheapest or most

PROOFSrelative market prices move up and down due to new conditions of demand by buyers or supply by sellers.

PROOFSrelative market prices move up and down due to new conditions of demand by buyers or supply by sellers. Changes in relative prices create signals for pro�t-seeking owners of resources to indicate which particular

PROOFSChanges in relative prices create signals for pro�t-seeking owners of resources to indicate which particular types of goods or services are wanted or have been under- or overproduced. Owners of resources will

PROOFStypes of goods or services are wanted or have been under- or overproduced. Owners of resources will follow these price signals, since they want to maximise their pro�ts and incomes. As a decision maker, the

PROOFSfollow these price signals, since they want to maximise their pro�ts and incomes. As a decision maker, the

PROOFS

have to be made about how limited resources are to be used or allocated

PROOFS

have to be made about how limited resources are to be used or allocated



Looking at markets using demand–supply diagrams

The price or market system plays a vital decision-making role in our economy. Economists often use demand–supply diagrams to illustrate how various markets work. Several points can be made about these diagrams: • The demand for goods and services. The demand line in �gure 2.22 below shows that the quantity

demanded by buyers (D) contracts (from Q2 to Q1) as the price rises (from P1 to P2), and the quantity demanded expands (from Q1 to Q2) as the price falls (P2 to P1). This is the law of demand.

Pri

ce (

P)/

unit

($

)

Demand (D)

Quantity (Q)

P1

Q2

P2

Q1

The demand line illustratesthe law of demand

FIGURE 2.22 The demand line or curve for buyers

• The supply of goods and services. The supply line in �gure 2.23 shows that the quantity that would be supplied by sellers (S) expands (from Q1 to Q2) as the price rises (from P1 to P2), and the quantity supplied contracts (from Q2 to Q1) as the price falls (from P2 to P1). This is the law of supply.

Pri

ce (

P)/

unit

($

) Supply (S)

Quantity (Q)

P1

Q2

P2

Q1

The supply line illustratesthe law of supply

FIGURE 2.23 The supply line or curve for sellers

• Market equilibrium. The free market always tries to move to a position of equilibrium (E1) as shown in �gure 2.24. Only at this point do buyers (D) and sellers (S) reach an agreement about the actual market price (at Pe) and market quantity (Qe1). Here, S equals D. At prices above equilibrium, there will be a glut (overproduction) in the market where S > D. Here, prices will be forced down towards the equilibrium level (i.e. at Pe). However, at prices below equilibrium, there will be a shortage (underproduction) in the market, pushing prices up to the equilibrium level (at Pe).

Pri

ce/u

nit

($) Supply (S)

Demand (D)

Quantity (Q)

Pe

Qe S = D)

E1

The market always seeks to be inequilibrium where S = D

Shortage

Glut

FIGURE 2.24 How market equilibrium is reached

• Changes in market equilibrium due to new non-price conditions of demand and supply. Once an equilibrium market price is established for each item, these prices are unlikely to remain steady for long because buyers and sellers are continually reviewing their decisions and changing their behaviour as a result of non-price factors. Buyers may choose to demand an increased or decreased quantity of a particular good or service at any given price, while sellers may also choose to supply an increased or decreased amount of a particular good or service at any given price.

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The supply line or curve for sellers

UNCORRECTED The supply line or curve for sellers

The free market always tries to move to a position of equilibrium (E1) as shown in

UNCORRECTED The free market always tries to move to a position of equilibrium (E1) as shown in

�gure 2.24. Only at this point do buyers (D) and sellers (S) reach an agreement about the actual market

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�gure 2.24. Only at this point do buyers (D) and sellers (S) reach an agreement about the actual market price (at Pe) and market quantity (Qe

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price (at Pe) and market quantity (Qe1

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1). Here, S equals D. At prices

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). Here, S equals D. At prices (overproduction) in the market where S > D. Here, prices will be forced down towards the equilibrium

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(overproduction) in the market where S > D. Here, prices will be forced down towards the equilibrium

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level (i.e. at Pe). However, at prices

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level (i.e. at Pe). However, at prices market, pushing prices up to the equilibrium level (at Pe).

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market, pushing prices up to the equilibrium level (at Pe).

PAGE

PAGE Supply (S)

PAGE Supply (S)

PAGE

PAGE PROOFS

PROOFSThe supply line in �gure 2.23 shows that the quantity that would be

PROOFSThe supply line in �gure 2.23 shows that the quantity that would be

), and the quantity supplied

PROOFS), and the quantity supplied

law of supplyPROOFS

law of supply. PROOFS

.



• The equilibrium market price can be affected by changes in the non-price conditions of demand. These conditions of demand (the quantity demanded at a given price) can change due to changes in advertising, disposable income, tastes, fashions, weather conditions, government taxes, and the prices of complementary and substitute products. – Using diagram 1 in �gure 2.25 below, these new stronger demand conditions can cause the demand line to move and increase from D1 to D2, causing a rise in the equilibrium market price from P1 to P2.

– Alternatively, using diagram 2 in �gure 2.25 below, new weaker demand conditions can cause demand at a given price to decrease from D1 to D0, causing the equilibrium price to fall from P1 to P0.

• The equilibrium price can also be affected by changes in the non-price conditions of supply. These conditions of supply (the amount supplied at a given price) can change due to changing seasonal factors, production costs such as wages, interest rates, altered pro�tability, tax rates on �rms and government assistance to producers. – Using diagram 3 in �gure 2.25 below, these new stronger conditions can cause the supply line to move and increase from S1 to S2 resulting in falling prices from P1 to P2.

– In reverse, using diagram 4 in �gure 2.25 below, new less favourable conditions can decrease supply from S1 to S0 resulting in rising prices from P1 to P0.

• In response to rising or falling market prices, owners of resources and businesses increase or decrease their allocation of resources to produce particular types of goods or services. They follow these price signals to help maximise their pro�ts and incomes. That is, self-interest causes �rms to follow price signals and to produce the things consumers want to buy.

Pri

ce/u

nit

($)

Quantity (Q)

P1

Q2

D2

D1

S1

E2

E1

P2

Q1

1. The effect on the market of anincrease in demand (D1 to D2)

Pri

ce/u

nit

($)

Quantity (Q)

P0

Q1

D1

D0

S1

E1

E0

P1

Q0

2. The effect on the market of adecrease in demand (D1 to D0)

Pri

ce/u

nit

($)

Quantity (Q)

P2

Q2

D1

S2S1

E2

E1P1

Q1

3. The effects on the market of anincrease in supply (S1 to S2)

Pri

ce/u

nit

($)

Quantity (Q)

P1

Q1

D1

S1S0

E0

E1

P0

Q0

4. The effect on the market of adecrease in supply (S1 to S0)

FIGURE 2.25 How new conditions of demand or new conditions of supply can affect the market price

Background for case studies of markets

Given the importance of markets in the Australian economy, you should take a case study approach to illustrate the theory of the market studied earlier. One of the following markets (or others listed in the course) may provide the focus for a case study: • agricultural markets — institutions where the prices of rural commodities like canola or wheat are set by

buyers and sellers • markets for mineral commodities — institutions where the prices of commodities like oil and gold are set

by buyers and sellers • housing and property markets — institutions where land and real estate prices are determined by buyers

and sellers • labour market — an institution where buyers and sellers of labour negotiate wages and conditions • share market — an institution where share prices are determined in the stock market by buyers and

sellers • foreign exchange market — an institution where the rate at which the A$ is swapped for other currencies is

determined by buyers and sellers • �nance market — an institution where borrowers and lenders of credit or money determine interest rates.

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1

3. The effects on the market of an

UNCORRECTED 3. The effects on the market of an

(S

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FIGURE 2.25

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FIGURE 2.25 How new conditions of demand or new conditions of supply can affect the market price

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How new conditions of demand or new conditions of supply can affect the market price


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Given the importance of markets in the Australian economy, you should take a case study approach to

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Given the importance of markets in the Australian economy, you should take a case study approach to

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illustrate the theory of the market studied earlier. One of the following markets (or others listed in the course) UNCORRECTED

illustrate the theory of the market studied earlier. One of the following markets (or others listed in the course) may provide the focus for a case study:UNCORRECTED

may provide the focus for a case study:

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rice

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t ($

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PROOFSdiagram 3 in �gure 2.25 below, these new stronger conditions can cause the supply line to move

PROOFSdiagram 3 in �gure 2.25 below, these new stronger conditions can cause the supply line to move

reverse, using diagram 4 in �gure 2.25 below, new less favourable conditions can decrease supply

PROOFSreverse, using diagram 4 in �gure 2.25 below, new less favourable conditions can decrease supply

response to rising or falling market prices, owners of resources and businesses increase or decrease their

PROOFSresponse to rising or falling market prices, owners of resources and businesses increase or decrease their

allocation of resources to produce particular types of goods or services. They follow these price signals to

PROOFSallocation of resources to produce particular types of goods or services. They follow these price signals to help maximise their pro�ts and incomes. That is, self-interest causes �rms to follow price signals and to

PROOFShelp maximise their pro�ts and incomes. That is, self-interest causes �rms to follow price signals and to

PROOFS

2. The effect on the market of aPROOFS

2. The effect on the market of adecrease in demandPROOFS

decrease in demand



Key termsThe community market is a local institution, perhaps in a suburb or small town, where buyers and sellers of

crafts, foods, used wares and plants meet to negotiate prices.Conditions of demand are the non-price in�uences on the quantity of a particular good or service that

buyers are prepared to purchase or demand at a given price. When demand conditions change, this shifts the whole demand line to the right (an increase in the quantity demanded at a given price) or left (a decrease in the quantity demanded at a given price) of the original demand line, thereby affecting the equilibrium price.

Conditions of supply represent the in�uences on the quantity of a particular good or service that sellers are prepared to produce or sell at a given price. When supply conditions change, this shifts the whole supply line to the right (an increase in the quantity supplied at a given price) or to the left (a decrease in the quantity supplied at a given price), thereby affecting the equilibrium price.

Consumer sovereignty is where the particular types of goods and services produced re�ect what individual consumers purchase, rather than this decision being made through government planning.

Demand for a particular good or service represents the amount of a good or service that consumers are prepared to purchase at a given price.

Demand–supply diagrams are used to illustrate, hypothetically, how buyers (demanders) and sellers (suppliers) of a particular type of good or service help determine the market price at which the item sells.

Economies of large-scale production are reductions in per unit production costs that are gained when a �rm’s �xed costs (e.g. for product design or advertising) can be spread more thinly across a larger level of output.

Equilibrium is the natural situation towards which all free and competitive markets tend to move. It exists only when the quantity demanded exactly equals the quantity supplied, and there is no market glut or shortage.

Equilibrium price is the unique price for a particular good or service that is determined in a market when the quantity demanded is exactly equal to the quantity supplied.

The �nance market is an institution where buyers (borrowers) and sellers (lenders) of credit or �nance negotiate a price that is called the rate of interest.

The foreign exchange market is an institution where buyers and sellers of international currencies exchange or swap currencies at a price that is called the exchange rate.

International competitiveness relates to whether a business or country is able to sell its goods and services pro�tably at prices that are below those for similar goods or services abroad.

The labour market is an institution where buyers and sellers of labour resources (i.e. physical power and mental talents of workers) negotiate a price that is called a wage.

The law of demand states that as the price of a particular good or service rises, the quantity demanded contracts, whereas if the price falls, the quantity demanded expands.

The law of supply states that as the price of a particular good or service rises, the quantity supplied expands, whereas as the price falls, the quantity supplied contracts.

A market is simply an institution or organisation where buyers (who create a demand for the item) and sellers (who control the supply of the item) of an individual good or service negotiate an agreeable price.

A market capitalist economy is the type of economic system found in Australia and many other countries. Here, most decisions about the allocation or use of resources are made by consumers through the market or price system, while most businesses or the means of production are owned by private individuals (i.e. capitalism or private enterprise).

Market power exists when a �rm has much control or in�uence in a market (it is a price maker) because competition is limited and it has a monopoly or is an oligopoly.

Market shortage occurs at a price that is below the equilibrium price, where the quantity demanded is greater than the quantity supplied.

Market structure refers to the nature and level of competition that exists in particular markets (e.g. pure competition, monopolistic competition, oligopoly and pure monopoly).

Market surplus or glut occurs at a price that is too high and above the equilibrium price. Here the quantity demanded is less than the quantity supplied.

Material living standards refer to how well off an individual or society is when measured in terms of its income, production or consumption levels of goods and services per person per year.

Monopolistic competition occurs when there are quite a few sellers of each product. These products are similar but not identical, since each seller’s product is differentiated from that of its rivals by particular features including brand names and design.

Non-rural commodity markets are institutions where buyers and sellers of raw materials extracted from the ground negotiate prices.

An oligopoly exists when the level of competition is limited because a few large �rms control the output of an industry.

UNCORRECTED relates to whether a business or country is able to sell its goods and services

UNCORRECTED relates to whether a business or country is able to sell its goods and services pro�tably at prices that are below those for similar goods or services abroad.

UNCORRECTED pro�tably at prices that are below those for similar goods or services abroad.is an institution where buyers and sellers of labour resources (i.e. physical power and

UNCORRECTED is an institution where buyers and sellers of labour resources (i.e. physical power and

mental talents of workers) negotiate a price that is called a wage.

UNCORRECTED mental talents of workers) negotiate a price that is called a wage.

states that as the price of a particular good or service rises, the quantity demanded

UNCORRECTED states that as the price of a particular good or service rises, the quantity demanded

, whereas if the price falls, the quantity demanded

UNCORRECTED , whereas if the price falls, the quantity demanded

states that as the price of a particular good or service rises, the quantity supplied expands,

UNCORRECTED states that as the price of a particular good or service rises, the quantity supplied expands,

whereas as the price falls, the quantity supplied contracts.

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whereas as the price falls, the quantity supplied contracts. is simply an institution or organisation where buyers (who create a

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is simply an institution or organisation where buyers (who create a supply

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supply of the item) of an individual good or service negotiate an agreeable price.

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of the item) of an individual good or service negotiate an agreeable price.market capitalist economy

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market capitalist economy is the type of economic system found in Australia and many other countries.

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is the type of economic system found in Australia and many other countries. Here, most decisions about the allocation or use of resources are made by consumers through the market

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Here, most decisions about the allocation or use of resources are made by consumers through the market or price system, while most businesses or the means of production are owned by private individuals

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or price system, while most businesses or the means of production are owned by private individuals (i.e. capitalism or private enterprise).

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(i.e. capitalism or private enterprise).Market power

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Market power exists when a �rm has much control or in�uence in a market (it is a price maker) because

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exists when a �rm has much control or in�uence in a market (it is a price maker) because competition is limited and it has a monopoly or is an oligopoly.

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competition is limited and it has a monopoly or is an oligopoly.Market shortage

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Market shortage

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greater than the quantity supplied.UNCORRECTED

greater than the quantity supplied.UNCORRECTED

Market structureUNCORRECTED

Market structure

PAGE is the unique price for a particular good or service that is determined in a market when

PAGE is the unique price for a particular good or service that is determined in a market when

is an institution where buyers (borrowers) and sellers (lenders) of credit or �nance

PAGE is an institution where buyers (borrowers) and sellers (lenders) of credit or �nance

is an institution where buyers and sellers of international currencies exchange

PAGE is an institution where buyers and sellers of international currencies exchange

or swap currencies at a price that is called the exchange rate.PAGE or swap currencies at a price that is called the exchange rate.

relates to whether a business or country is able to sell its goods and services PAGE

relates to whether a business or country is able to sell its goods and services

PROOFSis where the particular types of goods and services produced re�ect what individual

PROOFSis where the particular types of goods and services produced re�ect what individual

for a particular good or service represents the amount of a good or service that consumers are

PROOFSfor a particular good or service represents the amount of a good or service that consumers are

are used to illustrate, hypothetically, how buyers (demanders) and sellers

PROOFSare used to illustrate, hypothetically, how buyers (demanders) and sellers

(suppliers) of a particular type of good or service help determine the market price at which the item sells.

PROOFS(suppliers) of a particular type of good or service help determine the market price at which the item sells.

are reductions in per unit production costs that are gained when a �rm’s

PROOFSare reductions in per unit production costs that are gained when a �rm’s

�xed costs (e.g. for product design or advertising) can be spread more thinly across a larger level of output.

PROOFS�xed costs (e.g. for product design or advertising) can be spread more thinly across a larger level of output.

is the natural situation towards which all free and competitive markets tend to move. It exists

PROOFS

is the natural situation towards which all free and competitive markets tend to move. It exists only when the quantity demanded exactly equals the quantity supplied, and there is no market glut or PROOFS

only when the quantity demanded exactly equals the quantity supplied, and there is no market glut or



Price makers refer to markets where �rms face little or no competition and can set their own prices.Price takers are those �rms operating in strongly competitive markets where there is strong competition and

�rms have no power to set the prices they receive.The property market is an institution where buyers and sellers of land, houses, units and industrial sites

(property) negotiate a price.Purchasing power refers to the quantity of goods or services that can be bought with each dollar of income.

It is affected by prices and in�ation.Pure competition exists when there are many sellers of a good or service in a market and each seller has

little market power.A pure monopoly occurs when competition in a particular industry or market is weak, and a single �rm

controls the output of an entire industry.Relative prices is a concept that compares the price level of one good or service against another. Relative pro�ts is a concept that compares pro�ts gained from producing one particular good or service

against those gained from producing another.Rural or agricultural commodity markets are institutions where buyers and sellers of farm produce

(e.g. grains) negotiate prices.The stock market is an institution where buyers and sellers of company stocks negotiate share prices.Supply of a particular good or service represents the amount of a good or service that sellers are prepared to

produce or sell at a given price.

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ROOFSis a concept that compares pro�ts gained from producing one particular good or service

PROOFSis a concept that compares pro�ts gained from producing one particular good or service

are institutions where buyers and sellers of farm produce

PROOFSare institutions where buyers and sellers of farm produce

is an institution where buyers and sellers of company stocks negotiate share prices.

PROOFSis an institution where buyers and sellers of company stocks negotiate share prices.

of a particular good or service represents the amount of a good or service that sellers are prepared to

PROOFSof a particular good or service represents the amount of a good or service that sellers are prepared to

Documents

Decision making in markets - Wiley making in markets ... the level of business competition or rivalry is strong with hundreds of sellers of a ... Competition is usually more intense