Jacaranda Key Concepts in VCE Economics 2 Units 3 and 4, 11e learnON & Print

About This Resource vii

Acknowledgements xiv

Unit 3 Australia’s Living Standards 1

Area of Study 1 An Introduction to Microeconomics: the Market System, Resource Allocation and Government Intervention

1 An introduction to microeconomics 3

1.1 Overview 4

1.2 BACKGROUND KNOWLEDGE What is economics? 6

1.3 Relative scarcity 8

1.4 Choice, opportunity cost and efficiency in resource allocation 14

1.5 Market structure and the conditions for a free and perfectly competitive market 23

1.6 Microeconomics — the market as an important decision maker in Australia’s economy 29

1.7 The effects of changes in non-price demand and supply factors on market equilibrium and the allocation of resources 38

1.8 The meaning and significance of price elasticity of demand and supply 53

1.9 Types of market failure and government intervention to address market failure in Australia’s economy 58

1.10 Government intervention in markets that unintentionally leads to decreased efficiency 73

1.11 Review 83

Area of Study 2 Domestic Macroeconomic Goals

2 Domestic macroeconomic goals 101

2.1 Overview 102

2.2 The difference between material and non-material living standards and factors that may affect each 105

2.3 BACKGROUND KNOWLEDGE Nature, effects and measurement of economic activity 110

2.4 The business cycle and its causes 113

2.5 The five-sector circular flow model to understand the macro influences on domestic economic activity 119

2.6 Meaning and importance of aggregate demand, and the factors that may affect aggregate demand and domestic economic conditions 125

2.7 Meaning and importance of aggregate supply, and the factors that may affect aggregate supply and domestic economic conditions 133

2.8 Using a diagram to show how changes in aggregate demand and supply factors can affect domestic macroeconomic conditions 143

2.9 The goal of low and stable inflation (price stability) 154

2.10 The goal of strong and sustainable economic growth 167

2.11 The goal of full employment 181

2.12 Aggregate demand and aggregate supply factors that have affected the achievement or non-achievement of domestic macroeconomic goals over the past two years 195

2.13 Review 211

Area of Study 3 Australia and the International Economy

3 Australia and the international economy 233

3.1 Overview 234

3.2 The gains from international trade 237

3.3 The balance of payments account used to record international transactions 245

3.4 The net foreign debt (NFD) 257

3.5 The terms of trade 262

3.6 The exchange rate 269

3.7 Australia’s international competitiveness 277

3.8 Review 288

Unit 4 Managing the Economy 307

Area of Study 1 Aggregate Demand Policies and Domestic Economic Stability

4 Aggregate demand policies and domestic economic stability 309

4.1 Overview 310

4.2 BACKGROUND KNOWLEDGE Definition and aims of budgetary policy 314

4.3 Sources of government revenue (receipts) 316

4.4 Types of government expenses (outlays) 320

4.5 The budget outcome 323

4.6 The stance of budgetary policy — is it expansionary or contractionary? 334

4.7 The roles of automatic and discretionary stabilisers in affecting the budget’s outcome and stance, and the impact on the level of government debt 337

4.8 The effect of budget initiatives over the past two years and their likely effect on the achievement of domestic macroeconomic goals and living standards 343

4.9 Strengths and weaknesses of using budgetary policy to affect aggregate demand and influence the achievement of domestic macroeconomic goals and living standards 355

4.10 Definition and aims of monetary policy, and the role of the RBA 359

4.11 Conventional monetary policy and how the RBA can affect interest rates 362

4.12 The transmission mechanisms of monetary policy and their influence on the level of aggregate demand 370

4.13 The RBA’s monetary policy stance 373

4.14 The stance of monetary policy over the past two years and its likely effects on the achievement of domestic macroeconomic goals and living standards 376

4.15 Strengths and weaknesses of using monetary policy to achieve the government’s domestic macroeconomic goals and the effect on living standards 385

4.16 Review 389

Area of Study 2 Aggregate Supply Policies

5 Aggregate supply policies 409

5.1 Overview 410

5.2 The nature of aggregate supply policies 413

5.3 The budget as an aggregate supply policy 419

5.4 Encouragement of skilled immigration as an aggregate supply policy 449

5.5 Trade liberalisation as an aggregate supply policy 463

5.6 A market-based environmental strategy as an aggregate supply policy 473

5.7 Analyse the strengths and weaknesses of using aggregate supply policies — review 488

5.8 Review 492

Appendix — VCE task words 507

Economics Dictionary 509

Index 569