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Unit 3: Australia's economic prosperity

9 dot points, in syllabus order. Each dot point has a focused answer, with exam-style questions and worked answers where available.

How does income, expenditure and output flow through the economy?

The circular flow model of income, including the sectors and the flows between them, leakages and injections, the meaning of equilibrium in the model, and how changes in leakages and injections lead to changes in the level of economic activity

Circular flow of income. Sets out the five sectors, the flows of income, expenditure and output, the three leakages (S, T, M) and three injections (I, G, X), explains equilibrium and disequilibrium, and links the model to the business cycle and to AD.

8 min read →

What are the domestic macroeconomic goals and what determines their achievement?

The domestic macroeconomic goals of strong and sustainable economic growth, full employment, and low and stable inflation, including how each is measured, how each has been performing in recent years, and the relationships and trade-offs between them

Three macroeconomic goals. Defines strong and sustainable economic growth, full employment and price stability, identifies the measures and recent Australian performance, and explains the short-run trade-offs (Phillips curve) and long-run consistency.

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How does the market system allocate resources and what role is there for government intervention?

The market mechanism and the role of demand and supply in determining relative prices and the allocation of resources, including the conditions of perfect competition, the law of demand, the law of supply, equilibrium price and quantity, and movements along versus shifts of the curves

Market mechanism. Defines perfect competition, draws demand and supply with their shift factors, distinguishes movements along from shifts, finds equilibrium price and quantity, and applies the model to the Australian housing market.

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The concept of price elasticity of demand and price elasticity of supply, the factors that affect each, and the relevance of elasticity to the operation of markets and to the effect of government intervention

Elasticity. Defines price elasticity of demand and supply, sets out the determinants of each, explains the link to total revenue, and applies elasticity to tax incidence and Australian markets such as petrol, tobacco and housing.

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The forms of market failure (public goods, externalities, asymmetric information, market power) and the rationale for and forms of government intervention to correct market failure, including indirect taxes, subsidies, regulation, public provision and direct provision

Market failure. Identifies the four forms (public goods, externalities, asymmetric information, market power), draws the negative externality diagram, and analyses the five forms of government intervention with Australian examples.

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How is income distributed and why does equity in the distribution of income matter?

The meaning of equity in the distribution of income, the difference between equity and equality, how the distribution of income is measured (the Lorenz curve and the Gini coefficient), the causes of income inequality, and the relationship between equity and efficiency

Equity in the distribution of income. Distinguishes equity from equality, explains the Lorenz curve and the Gini coefficient, identifies the causes of inequality, sets out the equity-efficiency trade-off, and reviews the role of the tax and transfer system in redistribution.

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What factors influence Australia's macroeconomic performance?

The factors that influence aggregate demand and aggregate supply, and how each affects the achievement of the domestic macroeconomic goals, including consumer and business confidence, interest rates, disposable income, the exchange rate, government policy, productivity, costs of production and overseas economic conditions

Determinants of AD and AS. Identifies the eight main AD factors and the six main AS factors, traces the cause-and-effect chains to growth, unemployment and inflation, and applies the framework to recent Australian conditions.

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Why does the level of economic activity fluctuate over time?

The meaning and measurement of the business cycle, including the phases of expansion, peak, contraction and trough, the difference between an expansion and a recession, the causes of fluctuations in economic activity, and the consequences of booms and recessions for the domestic macroeconomic goals

Business cycle. Defines the phases (expansion, peak, contraction, trough), distinguishes an expansion from a recession, explains the demand-side and supply-side causes of fluctuations, and links booms and recessions to growth, unemployment and inflation outcomes.

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What are living standards and what factors affect their achievement?

The meaning of material and non-material living standards, the relationship between economic activity and living standards, the factors that affect living standards, and the limitations of using GDP as a measure of living standards

Living standards. Defines material and non-material living standards, links them to economic activity and the macroeconomic goals, explains the factors that affect each, and reviews why real GDP per capita is an imperfect measure alongside the HDI and other indicators.

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