​ Understanding the different components of the five sector model and their

roles/contributions to the economy (consumers, businesses, Financial institutions,

Government and overseas sectors)
​ The different parts of the business cycle (the boom, bust, contraction and expansion,
recession and depression)
​ Understanding the general events and effects of the GFC and the stimulus package
Australians were given in 2009
​ The laws of supply and demand and how they change according to different possible
factors
​ What the market equilibrium is
​ The different types of markets and their roles in the economy(i.e the four we learned
today)

Commerce notes

The business and economic environment

➔​ The economy and business environment is always changing.
➔​ When we buy goods and services, put money in a bank account or get a
casual job, we are contributing to the economy.
THE FIVE SECTOR MODEL
➔​ An important way of understanding the flow of money or finance that
moves through the economy
➔​ The circular flow of income shows the connections between the five different
sectors of an economy:
1.​ Consumers
2.​ Businesses
3.​ Financial institutions
4.​ The government
5.​ Overseas sector
➔​ It shows where money is being injected into the economy and where its being
leaked
➔​ These injections and leakages help economies calculate changes in the level of
economic activity within in an economy
The five sectors
➔​ Consumers- someone who purchases goods and services to satisfy needs and
wants
➔​ Business- an occupation or trade that purchases and sells products or services
to make a profit.
➔​ Government- the group of people with the authority to govern a country or
state; a particular ministry in office.
➔​ Financial institutions- A financial institution is a company that focuses on
dealing with financial transactions, such as investments, loans, and deposits.
➔​ The overseas sector- that part of the economy concerned with transactions
with overseas countries. The foreign sector includes IMPORTS and EXPORTS of
goods and services as well as movements in capital (money) through
investment and banking transactions.
The consumer and business sector
➔​ The household sector of an economy is made up of consumers, who hold
economic resources such as land, capital, labour and enterprise. The other
sector of the economic environment is the business/firms sector.
➔​ People sell their resources to businesses in exchange for an income. Firms
then use resources of households to produce goods and services. This is known
as production.

➔​ Households will then use their income to buy various goods and services. This
is known as consumption

➔​ Consumers and businesses are interdependent on each other

➔​ Businesses would survive without consumers buying their goods and services,
and consumers rely on businesses to provide them with the goods and
services they demand to satisfy their needs and wants and also to provide
them with an income

The financial sector:

➔​ The financial sector refers to financial institutions such as banks that act as
intermediaries (people who create a link) between the savers and the
borrowers in an economy
➔​ They receive the savings of individuals and businesses and then lend this
money to others who need to borrow money.
➔​ A choice of saving or investment is an important factor within the economy
 ➔​ Savings refers to putting money away for later use and is a leakage from the
circular flow of income
➔​ Investment is when money is borrowed and used to expand and grow a
business. This means investment is an injection into the circular flow of
income

2.2.4 THE OVERSEAS SECTOR

➔​ A more complete approach to understanding economies occurs when we also

consider the overseas sector.
➔​ This macroeconomic model details global (macro) influences upon a nation’s
economy and successfully explains the role of trade in helping an economy
grow.
➔​ Trade consists of exports and imports.
➔​ Exports (X) refers to Australian businesses selling their goods or services to
overseas individuals, businesses or governments. These are an injection into
the circular flow of income.
➔​ imports (M) refers to the buying of overseas goods or services by Australians.
These are a leakage from the circular flow of income.
WHAT IS IT USED FOR?
➔​ The circular flow of income is used by economists to measure changes in the
level of economic activity within an economy; that is, is the economy growing
or shrinking?
 ➔​ This is done by adding up the injections into the economy and comparing them
to the leakages out of the economy. When injections are greater than
leakages, economic growth occurs and the economy will expand.
➔​ When leakages are greater than injections, an economy will experience
economic decline. It is the government’s role to try to manage and maintain a
balance within their nation’s economy by altering flows of money and
influencing decisions within sectors.
2.3.1 the role of the government in protecting consumers

➔​ The government play a major role in protecting consumers as it is there job to

regulate the financial sector
➔​ The australian securities and investments commission (ASIC) is an
independent commonwealth government body responsible for the regulation
of the financial sector
➔​ It operates under the Corporations Act 2001 (Cwlth) and the National
Consumer Credit Protection Act 2009 (Cwlth)
The main role of ASIC
ASIC’S main roles are:
➔​ Monitoring the financial services industry
➔​ Monitoring financial services when providing investment advice to consumer
➔​ Providing consumer protection in financial services, including share, managed
funds, superannuation, insurance, credit and deposit taking
2.3.2 The role of the financial sector in facilitating business investment

➔​ Many people who earn an income put aside some of that income as savings
which they usually deposit into a bank or similar financial institution
➔​ Financial institutions act as intermediaries between the savers and the
borrowers in an economy. They collect the savings of thousands depositors and
then have large sums available for business to invest in growth
➔​ Businesses usually borrow money when they need to expand or add value to
their business. This could mean renovating a business facility or dwelling,
buying new equipment even moving to bigger premises
➔​ When a business uses the money for these activities it is called an
investment

2.4.1 PHASES OF THE BUSINESS CYCLE

➔​ The Australian economy does experience a cycle of ‘booms’ and ‘busts’. Periods
of high and low economic activity are referred to as the business cycle.
➔​ After a period of prosperity, business activity gradually slows until a recession
or depression is reached.
➔​ A recession is where an economy gets smaller for a period of six months or
longer.
 ➔​ A depression is a long and severe recession. Eventually, business picks up
again until prosperity is restored. This cycle is a basic feature in our economic
system.
Solutions for recovering from recession

➔​ The periods of expansion can vary from several months to several years. A
contraction does not necessarily mean an economy will fall into a recession if
the economy is able to recover.
➔​ One way to work towards recovery are encouraging consumer spending for
example, if the Reserve Bank of Australia (RBA) lowers interest rates, this
should encourage consumers and businesses to increase spending, which helps
avoid a downward spiral to recession.
➔​ This encourages consumers and businesses to increase spending, which helps
avoid a downward spiral to recession.
Contraction​

Key features

➔​ Falling levels of production (output)

➔​ Decreasing consumer spending
➔​ Rate of inflation may fall
➔​ Wage rates generally fall
➔​ Interest rates eventually fall
➔​ Level of unemployment rise

Expansion

Key features

➔​ Rising levels of production (output)

➔​ Increasing consumer spendinG
➔​ Rate of inflation may rise
➔​ Wage rates generally rise
➔​ Interest rates eventually rise
➔​ Level of unemployment falls

the cash rate is the interest rate banks charge each other to borrow money
overnight

The Great Depression

➔​ In 1929 the United States of America had never been richer. People rushed to
buy shares in companies in order to ‘get rich quick’.
➔​ But on 24 October 1929, the euphoria rapidly evaporated. On what has become
known as ‘Black Thursday’, the New York Stock Exchange saw share values
begin to fall sharply. American factories soon found it difficult to sell their
goods.
 ➔​ Employers were forced to reduce wages and dismiss many workers. This
meant more people had less money to spend, and so the whole process
accelerated.
➔​ As a result, US businesses cut back production and investment. Business and
consumer confidence were shattered. Thousands of businesses were declared
bankrupt.
➔​ Mass unemployment became common. Lifetime savings were wiped out when
thousands of banks suspended operations. Farmers were bankrupt. Families
were evicted from their homes for not being able to meet their mortgage
repayments.
➔​ And all the while, the unemployment queues grew longer.
➔​ As the US economy toppled, it dragged down other national economies. What
began as a financial crisis in the USA ended up as the Great Depression of the
1930s.
➔​ Australia was one of the worst-affected countries during the Great
Depression. In 1932, unemployment was around 32 per cent.

2.4.2 RECESSIONS- TOO LITTLE SPENDING

➔​ Recessions are caused by lack of spending, not the inability of the economy to
produce goods and services.
➔​ Most goods and services are produced before they are sold.
➔​ The amount produced depends on how much the business thinks consumers,
other businesses and governments will buy, which in turn is influenced by the
level of economic confidence.

Recession features

➔​ Income and production are at their lowest level in the business cycle.
➔​ Unemployment is at a high level.
➔​ The inflation rate tends to stay low.
➔​ Wages and salaries either fall or grow very slowly.
 ➔​ Consumer demand and, consequently, business sales and profits reach their
lowest levels.
➔​ Bankruptcies are everyday occurrences, and the business outlook is bleak.
➔​ Businesses have a lot of unused resources and no incentive to purchase new
machinery.
➔​ Interest rates remain low, while investment opportunities are few, and the
number of creditworthy borrowers is reduced.

Boom features

➔​ Income and production are at their highest levels.

➔​ There is full employment of labour and all other resources.
➔​ Wages and salaries are relatively high. Employees are now in a strong
bargaining position as businesses compete for scarce labour resources.
➔​ Businesses are operating at full capacity. Increases in consumer demand are
met by increases in prices rather than by increases in production.
➔​ Interest rates are high.
➔​ The rate of inflation rises sharply

2.4.3 booms-too much spending

➔​ The upside of the business cycle is growth and prosperity.

➔​ Production, spending and employment rise. Businesses expand, employees are
hired and incomes increase. Consequently, total spending increases even more.
Consumer and business confidence are high.
➔​ However, the economy cannot keep producing more goods and services
indefinitely. There is a limit. When this happens, additional spending pushes up
prices. Inflation, a general rise in prices, now becomes a major economic
problem and will eventually bring an end to the continued growth.
➔​ Trigger:​
The crisis was triggered by a downturn in the US housing market, exacerbated by

high-risk mortgage lending practices, particularly subprime mortgages.

Consequences:

➔​ Bank Failures: Many banks around the world incurred losses due to the

collapse of the housing market and the subsequent collapse of related

financial instruments.

➔​ Government Intervention: Governments intervened with bailouts and

stimulus packages to prevent the collapse of major financial institutions.

➔​ Economic Recessions: Major advanced economies experienced their deepest

recessions since the Great Depression, leading to millions of job losses.

➔​ Foreclosures: Many individuals lost their homes due to foreclosures.

Causes:

➔​ Excessive Risk-Taking: Financial institutions took on excessive risk in a favorable

macroeconomic environment, including low interest rates and strong economic

growth.

➔​ Subprime Mortgages: The growth of subprime mortgages, where loans were given

to high-risk borrowers, played a significant role in the crisis.

➔​ Housing Market Bubble: A bubble in the housing market, driven by low interest

rates and excessive borrowing, ultimately burst, leading to the crisis.

Global Impact:​

The crisis spread globally through the interconnectedness of financial markets,

impacting numerous countries and their economies.

Regulatory Reforms:​

In response to the crisis, governments implemented regulatory reforms to improve

oversight and prevent similar crises in the future.

Great Recession:​

The GFC triggered the Great Recession, which was the most severe downturn since

the Great Depression.

What rudd did to help australia

➔​ The Rudd government implemented a series of stimulus packages to combat

the global financial crisis

➔​ Eligible taxpayers received cash bonuses, including $950 for those earning less

than $80,000 in the 2007-08 financial year. This stimulus package helped

money to flow in the economy.

➔​ The global financial crisis of 2008 caused a downturn in world economic

conditions. In response, governments of the rich nations launched economic

stimulus packages in order to pour millions of dollars into their economies.

➔​ In Australia, for example, the Rudd Government injected about $53 billion into

the Australian economy through two budgetary stimulus packages. These

contained a mixture of immediate stimulus to encourage consumer spending

and longer-term infrastructure projects such as school buildings.

➔​ In the US, President Obama introduced a $1.21 trillion stimulus designed to

create or protect 3.5 million jobs.

➔​ Additionally, world central banks cut interest rates with the aim of

stimulating consumer spending and business.

The law of supply and demand

The interaction of buyers and sellers allows for goods, services, and resources to be

allocated their prices. These prices, and changes in price, reflect the forces of demand

and supply and help solve the economic problem.

2.5.3 PRICE MECHANISM

Once the supply and demand for a good or service has been established, it is possible

to plot them both on a graph. The point at which the demand and supply curve

intersect (meet) is called market equilibrium. This is the point at which buyers and

sellers agree on a price and exchange the good or service for money. The price

mechanism refers to the part demand and supply play in determining the price and

quantity of a good or service.

Reasons for increases in demand

➔​ A rise in consumer income: if consumers have higher incomes, they are able to

buy more This causes an increase in demand.

➔​ An increase in the size of the population: the number of people who may buy

has increased.

➔​ A substitute good becomes more expensive: if strawberries increase in price,

consumers could buy fewer strawberries and more blueberries.

➔​ A complementary good becomes cheaper: as milk prices fall, the price of

blueberry smoothies also falls. This increases the demand for blueberries.

➔​ Prices are expected to rise in the future: if people think the prices of

blueberries will be higher in the future, they will buy more blueberries now.​
Reasons for decreases in demand

➔​ A fall in consumer income: if consumers have lower incomes, this will reduce

the amount of things they can afford to buy. This decreases demand

➔​ Changes in consumer tastes and preferences:

➔​ A decrease in the size of the population: a fall in the population can lead to a

decrease the demand

➔​ A substitute good becomes cheaper: if strawberries become cheaper,

consumers may stop buying blueberries and switch to strawberries.

➔​ A complementary good becomes more expensive: if milk becomes more

expensive, people may no longer be able to afford blueberry smoothies. The

demand for blueberries will fall.

➔​ Prices are expected to fall in the future: if people think the prices of

blueberries will be lower in the future, they may put off their purchase of

blueberries and wait until the price drops.

Factors that cause an increase in supply

➔​ Increased efficiency: If blueberry farmers develop new technology, this may

allow them to increase the amount of blueberries grown.

➔​ A fall in the cost of production: If the wages of blueberry pickers fall, farmers

can employ more people and increase output.

➔​ Improved climatic conditions: Increased rainfall would increase the harvests of

blueberry farms.

➔​ An increase in the number of suppliers: More people may start blueberry

farms because they hear that blueberries are a superfood.

Factors that cause a decrease in supply

 ➔​ Decreased efficiency: A new bug found to be eating blueberries would reduce

crops.

➔​ An increase in the cost of production: If the cost of fertilisers used by farmers

increases, they may not be able to produce as many blueberries.

➔​ Unfavourable climatic conditions: A drought may reduce the amount of

blueberries farmers can grow.

➔​ A decrease in the number of suppliers: Ongoing drought may force many

blueberry farmers out of business.

What is a market?

➔​ A market exists in any situation where buyers and sellers come together to
exchange goods and services
➔​ A market can exist in a physical location across many locations or online.
There are a number of different markets that exist within the Australian
economy:
1. Retail markets e.g Westfield
2. Labour markets
3. Financial markets e.g. banks
4. Stock markets

1.​ Retail market

➔​ They are the markets that allow us to buy most of our goods and services.
They include:
➔​ The shopping areas in the central business districts (CBD) of our large cities
➔​ Online shopping websites
➔​ Shopping strips or local malls
➔​ Huge suburban shopping malls such as Westfield centres
 2.​ Labour market
➔​ The past 15 years has seen a huge increase in online shopping. In 2019, online
shopping in Australia was worth more than $23 billion, equivalent to 6.6% of
all retail sales.
➔​ About 80% of online orders involved purchases from Australian retailers.
➔​ Online shopping is likely to continue to grow, and the proportion of goods being
bought from overseas is likely to become larger as more people becoming
aware of the wide range of choices available around the world.
➔​ Those employers wish to buy or demand the skills and effort of suitable
employees. This combination of buyers and sellers of labour forms the labour
market.
➔​ Like many other markets, the labour market does not operate in a particular
location.
➔​ It relies on a variety of methods of communication between the seller of
labour (employees) and the buyers of labour (employers).
➔​ These allow employees to advertise vacancies in their businesses and potential
employees find out about the job.
The operation of the labour market can involve:
1. The simple placement of a sign in a shop or cafe window indicating a job vacancy
[Link] for job vacancies in newspapers
[Link] ‘job boards’ such as Seek, Adzuna, Jora or Australian Job Search. The
fastest-growing source of job advertisements is updated daily.
3.​ Financial market
➔​ Financial markets are the intermediaries between the savers and the
borrowers in an economy.
➔​ As households earn an income and businesses make a profit, they may
choose to save it and deposit money into the bank or other financial
institutions.
➔​ On the other hand, others in an economy need to borrow money to buy a
house, or car or go on holiday.
 ➔​ Businesses may borrow to grow and expand
➔​ The price of having access to money that actually belongs to someone else is
known as interest.
➔​ When you deposit your money into a bank account, the bank will pay you
interest on your savings.
➔​ They will usually charge a higher rate of interest to borrowers than they pay
to their depositors. This is how they make a profit.
4.​ Stock market
➔​ Like other markets, the stock market is simply a relationship between buyers
and sellers. In this case, it is shares in public companies that are bought and
sold.
➔​ A share is a unit of ownership in a company
➔​ Businesses can raise money for investment by selling shares in their
companies
➔​ The Australian Stock market is the Australian Securities Exchange (ASX). The
value of shares goes up and down depending on demand for those shares.
➔​ If the company appears to not be performing well, more shareholders may
want to sell their shares than there are buyers, so the price is likely to go
down.
2.9 customary trading practices of aboriginal