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177 Cards in this Set

  • Front
  • Back

Elasticity

the responsiveness of one econ variable based on the change of another econ variable

Economics

The study of how a society allocates/uses/manages its scarce resources. Economics aims to predict and explain although not describe reality.

Economic science

The use of models to explain and predict economic phenomena and to create theories. This usually tries to follow a positivist scientific method.

Economic models

A model is a simplification of the world which uses simplified assumptions. Models seek to predict the real world by operating in an imaginary world.

Microeconomics

Considers the individual economic actors which influence an individual market (e.g. firm, household, government).

Macroeconomics

Considers the aggregate outcomes - a result from all decisions of economic agents and individual markets. (e.g. focusing on the total output in the economy (real GDP) vs output of a particular industry.

Scarcity

The limited nature of society's resources

Efficiency

Society getting the most it can from its scarce resources.

Equity

The fair and equal distribution of economic prosperity to the members of a society

Opportunity Cost

The cost of what has to be given up to gain some good or service. (e.g. a young athlete giving up uni for a million dollar professional sporting career.

Marginal change

A small incremental adjustment to an existing plan of action. An extra cost (marginal cost) should be less than the marginal benefit. MB> MC to maximise total net benefits. Marginal change underpins cost-benefit analysis.

Market economy

An economy that allocates resources through the de-centralised decisions of many firms and households as they interact in markets for goods and services.

Invisible hand

The idea that buyers and sellers are freely interacting in a market economy and will create an outcome that allocates goods and services to those people who value them most highly and makes the best use of scarce resources. This highlights how govts can be an impediment of they prevent prices from adjusting naturally to supply and demand.

Market Failure

A situation when a market left on its own fails to allocate resources efficiently

Externality

When the action of one economic actor impacts the well-being of a member(s) of society. A positive externality makes the bystander better off, a negative externality makes the bystander worse off.

Market power

When the ability of a single economic actor has a substantial influence on market prices.

Productivity

The quantity of goods and services produced from each hour of a worker's time.

Inflation

An increase in the overall level of prices in the economy.

Phillips Curve

The short term trade off between inflation and unemployment. The trade off occurs because some prices are slow to adjust to inflation or are said to be "sticky" in the short term.

Circular-flow diagram

A visual model of the economy that shows the monetary flow through markets and households and firms. Households and firms are the decision makers in this type of economy.

Factors of production

(see circular flow diagram) - Firms produce goods and services using various inputs such as labour, land and capital (bldgs and machines).

Markets for goods and services

(see circular flow diagram) - Households own the factors of production and consume all the goods and services that firms produce.

Production possibilities frontier

The PPF is a graph which shows the combinations of output that the economy can produce given the available factors of production and the available production technology. An outcome is said to be efficient if the economy is getting all it can from the scarce resources available.

Positive statements

Claims that attempt to describe the world as it is.


(e.g. Minimum wage laws cause unemployment)

Normative statements

Value driven and prescriptive. How the world ought to be (e.g. The government should raise minimum wage).

Demand curve

The demand curve looks at the effect of a good's price on the quantity of the good consumers want to buy. 










The
demand curve shows the
maximum 

price that buyers are prepared to pay for
each

successive
unit of the pro...

The demand curve looks at the effect of a good's price on the quantity of the good consumers want to buy. The demand curve shows the maximum price that buyers are prepared to pay for each successive unit of the product.

Market Equilibrium

At equilibrium price the quantity of goods that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell.This is also referred to as the market clearing price.

Surplus

Suppliers are not able to sell all the goods that they want to at a specific price. This is sometimes called excess supply.

Shortage

Shortage of a good where buyers cannot buy all they want at a going price. This creates excess demand.

Law of supply and demand

The price of any good adjusts to bring supply and demand for that good into balance.

Comparative statics

Comparing old equilibrium and new equilibrium using the following methods:


1. Decide whether the event shifts the supply or demand curve (or both)


2. Decide in which direction the curve shifts


3. Use the supply and demand diagram to see how the shift changes the equilibrium

Equilibrium Price

Price that balances quantity supplied and quantity demanded. Sometimes called market clearing.

Equilibrium Quantity

The quantity supplied and the quantity demanded at the equilibrium price.

Determinants of supply

Technology, market expectations, # of sellers, prices, input price.



Movements along a curve

When depending on price, quantity of goods moves along a fixed demand curve.

Shift of a curve

When a variable that is not named on the y or x axis changes. This shifts the curve either left or right (e.g. income).

Determinants of price elasticity of demand

available close substitutes


Necessities vs luxuries


Definition of the market


Time horizon



Total revenue

Price x quantity - price of goods x quantity sold. How revenue changes depends on price elasticity of demand. For inelastic demand curves, total revenue rises as price rises. For elastic demand curves, total revenue falls as price rises.

Price x quantity - price of goods x quantity sold. How revenue changes depends on price elasticity of demand. For inelastic demand curves, total revenue rises as price rises. For elastic demand curves, total revenue falls as price rises.

Law of supply

other things being equal when the price of a good rises the quantity of goods increases, when price of a good decreases the quantity supplied falls.

Variety of demand curves

Demand is elastic when elasticity is greater than 1.


Demand is inelastic when elasticity is less than 1.


(See price elasticity)

Price elasticity of demand

Price ceiling

The legal maximum on a price of a good or service (e.g. rent control) - if a price ceiling is below equilibrium price the quantity demanded exceeds the quantity supplied.

Price floor

Legal minimum on the price of a good or service. An example is a minimum wage or award wage.

Tax burden

Buyers and sellers share the tax burden. Incidence of a tax does not depend on whether tax is levied on buyers or sellers as it impacts both the demand and supply curve.

Investment Expenditure

xx

Consumption Expenditure

Expenses incurred in consumption, as opposed to expenses incurred in production of goods and services.

Value added

xx

Input tax credit

xx

Relative prices

xx

Efficiency in resource allocation

In each market you maximise xx

Vertical equity

When taxes are based on the ability of the individual to pay. By this logic richer tax payers should pay more than poorer tax payers.

EMTR

Effective Marginal Tax Rate - The effective marginal tax rate (EMTR) is the combined effect on a person's earnings of income tax and the withdrawal of means testing of state welfare benefits. The EMTR is the percentage of an extra unit of income (extra dollar, euro, yen etc.) that the recipient loses due to income taxes, payroll taxes, and any decline in tax credits and welfare entitlements.Calculating the EMTR is typically very dependent on individual circumstances and involves a consideration of welfare withdrawal rules, income tax laws, low income tax offsets, tax rebates and the individuals tax and welfare status. As such tables showing EMTRs are rarely published. The net effect however is generally a higher effective marginal rate of tax than that suggested by income tax tables.

Consumer Surplus

 is the total benefit or value that
consumers receive over and above what they have to pay for the good. 

is the total benefit or value that consumers receive over and above what they have to pay for the good. Consumer surplus is calculated by finding the area below the demand curve and above the price

Producer Surplus

is the total benefit or revenue that producers receive over and above the minimum they would require (or what it cost) to produce a good.

is the total benefit or revenue that producers receive over and above the minimum they would require (or what it cost) to produce a good. Producer surplus is calculated by finding the area below price and above supply curve.

Competitive Market

1- There are many buyers and sellers in the market


2 - The goods offered by different sellers are largely the same = as a result each buyer and seller takes the market price as given. No action of any single buyer or seller in the market has a negligible impact on market price.


3- Firms can freely enter or exit the market in the long run.

Deadweight loss of tax

The sum of consumer surplus, producer surplus and tax revenue.

Tax wedge

The tax wedge is the deviation from equilibrium price/quantity as a result of a taxation, which results in consumers paying more, and suppliers receiving less.

The tax wedge is the deviation from equilibrium price/quantity as a result of a taxation, which results in consumers paying more, and suppliers receiving less.

Price floor

Legal minimum on the price of a good or service. An example would be a minimum or award wage.

Price ceiling

Legal maximum on price of a good or service (e.g. rent control) - if price ceiling is below equilibrium price the quantity demanded exceeds the quantity supplied.

Tax incidence or Tax burden

tax incidence or tax burden is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that ultimately bears the burden of, or ultimately has to pay, the tax

Government subsidy

When the government places a subsidy on a good. Equilibrium quantity of the good rises. A subsidy in a market expands the size of the market.

Horizontal Equity

Similar taxpayers should pay a similar amount of taxes. Individuals with similar incomes and assets should pay the same amount of tax. The more neutral a tax system is the more horizontally equitable it is. Horizontal equity is hard to achieve in a tax system with loopholes, deductions and incentives, because the presence of any tax break means that similar individuals do not pay the same rate.

Negative Gearing

When an investor borrows money to acquire an income-producing investment property and expects the gross income generated by the investment, at least in the short term, to be less than the cost of owning and managing the investment, including depreciation and interest charged on the loan (but excluding capital repayments). The arrangement is a form of financial leverage. The investor may enter into such an arrangement and expect the tax benefits (if any) and the capital gain on the investment, when the investment is ultimately disposed of, to exceed the accumulated losses of holding the investment. Australia allows unrestricted use of negative gearing losses to offset income from other sources.

Efficient Tax System

A tax system that imposes small deadweight losses and small administrative burdens. Deadweight losses result when taxes distort decisions people make. Administrative burdens are what taxpayers bear as they comply with tax laws.

Determinants of Deadweight Loss from Tax

Price elasticities of both supply and demand


The greater the elasticitites of supply and demand the greater the deadweight loss of a tax


Tax has deadweight loss because it induces buyers and sellers to change behaviour. Buyers consume less and sellers produce less.

Laffer Curve

Reagan economist who believed that a cut in tax rates could increase tax revenue.

Price takers

When buyers and sellers in a competitive market must accept the price the market determines they are said to be price takers.

Profit maximisation

The goal of a competitive firm is to maximise profit which equals total revenue minus total cost. At the profit maximising level of output, marginal revenue and marginal cost are exactly equal.

Average revenue

Total revenue divided by quantity sold

Marginal revenue

The change in total revenue from an additional unit sold.




MR = Change Total Revenue/ Change in Quantity

Profit maximising quantity

this can be found by comparing the marginal revenue and marginal cost from each unit produced.

Marginal Cost

MC = Change in Total Cost/ Change in Quantity

Change in Profit

Marginal Revenue minus Marginal Cost

Profit Maximisation Rule

If marginal revenue > marginal cost = the firm should increase output




If marginal cost > marginal revenue = the firm should decrease its output.

Tax system purpose

To raise revenue for the government with two objectives - efficiency and equity.

Average tax rate

Total tax paid divided by total income

Marginal tax rate

Amount by which an individual's taxes increase with each additional dollar that they make.

Full line forcing

When sellers force consumers to buy more of their product (e.g. microsoft forcing you to buy IE vs Netscape).

Predatory pricing

When a seller lowers prices temporarily to eliminate competitors

Australian GST

Goods and Services tax - it is a value-added tax which is levied at each stage of production. GST avoids distortion of income tax inefficiency because it taxes consumption.

Lump sum tax

a set tax regardless of income. It is efficient but not equitable and therefore unpopular

Benefits principle

People should pay taxes based on the benefits they receive from government services (e.g. tax on petrol going to improve roads. This mainly benefits drivers who benefit from improved roads) (sometimes called "user pays).

Technology spillover

When new innovations from firms have high social benefits which advance society (e.g. robots).

Proportional, Regressive, Progressive Tax

The first system is called proportional  because all taxpayers pay the same fraction of income. The second system is called regressive  because high-income taxpayers pay a smaller fraction of their income, even though they pay a larger amount. Th...

The first system is called proportional because all taxpayers pay the same fraction of income. The second system is called regressive because high-income taxpayers pay a smaller fraction of their income, even though they pay a larger amount. The third system is called progressive because high-income taxpayers pay a larger fraction of their income.

Income contingent loans

is an arrangement for the repayment of a loan where the regular (e.g., monthly) amount to be paid by the borrower depends on his or her income. This type of repayment arrangement is mostly used for student loans where the ability of the new graduate borrower to repay is usually limited by his or her income. (e.g. HECS/HELP)

Excludable goods

If a good can be excluded from being used by other people (e.g. one ice cream)

Rivalrous good

When one person's use of a good diminishes someone else's ability to use it.

Common resources

When a good is rivalrous in consumption but not excludable (e.g. fishing) or the tragedy of the commons

Private good

When a good is said to be both excludable and rivalrous in consumption. (e.g. an ice cream). Most market goods are private goods.

Public good

When a good is neither excludable nor rivalrouse in consumption. (e.g. fireworks over the townsquare for all of the residents to enjoy, defense).

Free rider

A person who receives a benefit of a good but avoids paying for it.

Coase Theorem

The theorem states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property. So sometimes private parties can reach a bargain between themselves or sometimes the government can become involved. (e.g. congested road is considered a common resource and a non-congested road a public good)

Command and control regulations

Government regulations where regulatory bodies are used to regulate/manage a market or industry (e.g. pollution control).

Market based policy

Government policy which uses corrective taxes and/or subsidies (e.g cap and trade).

Corrective taxes

Taxes enacted to correct effects of negative externalities, raise revenue for the govt and enhance economic efficiencty.

Emissions trading

The use of tradeable pollution permits in an industry. The firms that can reduce pollution easily can sell their excess permits to firms that can only reduce pollution at a high cost and would be willing to buy permits that they need.

Internalising an externality

Is a tax on producers on quantity produced in order for firms to produce the socially desirable quantity. This is the governments way of internalising the externality. (e.g. Kyoto agreement is a good example)

positive externality in production

When the social cost of production is less than the private cost. (e.g. robots)

Technology spillover

New innovation has social benefits which advance society (e.g. new technology).

Consumption externalities

(e.g. vaccinations) - govt might subsidize firm to increase quantity supplied to meet Qoptimum (socially desirable quantity).

Q optimum

socially desirable quantity.

Price elasticity of demand

Measure how much the quantity of demand responses to a change in price.

Measure how much the quantity of demand responses to a change in price.

Inelastic demand of a good

If quantity demanded responds only slightly to price. Inelastic means that when the price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged.

Elastic demand of a good

If quantity demanded of a good responses substantially to changes in prices it is said to be elastic. By way of contrast, an elastic good or service is one for which a 1% price change causes more than a 1% change in the quantity demanded or supplied. Most goods and services are elastic because they are not unique, but have substitutes.

Determinants of price elasticity of demand

Available close substitutes


Necessities vs luxuries


Definition of the market - food market vs ice cream market


Time horizon - goods have more elastic demand over longer time horizon.

Price elasticity of supply

Measures how much quantity supplied of a good responds to changes in price. Elasticity of supply often depends on the time horizon. In most markets, elasticity of supply increases in the long run versus short run.

Measures how much quantity supplied of a good responds to changes in price. Elasticity of supply often depends on the time horizon. In most markets, elasticity of supply increases in the long run versus short run.

Income elasticity of demand

Measures how the quantity demanded changes as consumer income changes.




Income elasticity of demand = % change in quantity demand/ % change in income

Total Revenue

PxQ - Price of goods times the quantity sold.

Economic Rent

Economic rent is the positive difference between the actual payment made for a factor of production (such as land, labor or capital) to its owner and the payment level expected by the owner, due to its exclusivity or scarcity. Economic rent arises due to market imperfections; it would not exist if markets were perfect, since competitive pressures would drive down prices.

Capital gains

A capital gain is a profit that results from a sale of a capital asset, such as stock, bond or real estate, where the sale price exceeds the purchase price.

Equivalised disposable income

For poverty indicators, the equivalised disposable income is calculated from the total disposable income of each household divided by the equivalised household size. The income reference period is a fixed 12-month period (such as the previous calendar or tax year) for all countries except UK for which the income reference period is the current year and Ireland (IE) for which the survey is continuous and income is collected for the last twelve months.

Stamp Duty

A stamp duty is the tax placed on legal documents usually in the transfer of assets or property.

GDP

Gross Domestic Product (GDP) is: the market value of final goods and services produced in an economy over a given period of time, before allowance for depreciation of capital.

Unemployment Rate

The unemployment rate is the number of unemployed personsexpressed as a percentage of the labourforce–Distinguishthis from the labour force participation rate.

Labour Market Participation

The Labour Force Participation Rate, which is the percentage of the Working Age Population which is economically active, or in the Labour Force.

Labour Force

The Labour Force, which is the sum of employed and unemployed persons.

Working Age Population

The Working Age Population, which is a measure of the total number of civilians aged 15 years and over. “Civilians” excludes members of the defence force and diplomatic staff of foreign governments resident in this country.

Unemployed person

An unemployed person is someone who not being employed,Had been actively seeking full-time or part-time work, at any time in the 4 weeks up to the end of the survey week.Was available to start work in the survey week, or was waiting to be called back to work after having been temporarily stood down

Unemployment rate

The unemployment rate is the number of unemployed persons expressed as a percentage of the labour force. Distinguish this from the labour force participation rate.

Discouraged Worker Hypothesis

It claims when there is significant excess supply in the macroeconomic labour market, (that is, when it is particularly difficult to obtain a job), as reflected in a high measured unemployment rate, that some people become so discouraged by the extreme difficulty of finding a job and the cost of continuing to look, that they give up actively seeking work

3 approaches to National Income Accounting

Expenditure approach


Income approach


Production or “value added” approach

Expenditure Approach

Expenditure calls forth production ofgoods and services, which yields incomesout of which the expenditure is financed (see GDP)

Production or value added approach

xx

Underemployment rate

The underemployment rate is the number of underemployed workersexpressed as a percentage of the labour force

Underutilisation rate

In Australia, the labour force underutilisation rate is defined as the sum of the number of people unemployed and the number underemployed, expressed as a proportion of the labour force. It can also be viewed as the sum of the unemployment rate and the underemployment rate

Long term unemployed

ABS defines the long term unemployed as those without a job for 52 weeks or more.

Three types of unemployment

Frictional


Structural


Cyclical

Natural rate of unemployment

This term refers to the unemployment that exists independently of the economic cycle. It is the unemployment that always exists whether the economy is growing strongly or is in recession. The sum of frictional and structural unemployment which exist separate from the behaviour the economy.

GDP

Measures the value of all final goods and services produced within a country in a given period of time.

Nominal (Money) GDP

The quantity of various goods produced in a nation times their current prices, added together. Can increase either as a result of an increase in real output or an increase in the price level.

Calculating GDP

Adding up total expenditure by households


Adding up total income (wages, rents and profits) paid by firms.

GDP equation

Y= C + I + G + Nx




Y = GDP


C= Consumption


I= Investment - includes expenditure on new housing on form of household consumption that is considered an investment.


G = Government purchases


NX = Equals the purchases of domestically produced goods minus the domestic purchases of foreign goods.

Real GDP

Production of goods and services at constant price. Real GDP is calculated by choosing one year as the base year. Real GDP uses the constant base year to place a value on economy's production.


Real GDP is a better gauge than nominal GDP.

GDP Deflator

Measure current level of prices relative to level of prices in the base year. The GDP deflator measure average level of prices in the economy.




Nominal GDP/ Real GDP x 100

Shortcomings of GDP

It measures economic wellbeing at a macro level but it is not a good indicator of personal welfare or personal wellbeing.




It does not measure environmental wellbeing.


GDP only uses market prices and therefore excludes value of almost all activity that takes place outside of markets.

Poverty rate

Considers the distribution of income in a population as a % of the population whose family income falls below an absolute level called the poverty line.

Economic life cycle

Regular pattern of income variation.

Economic mobility

Movement of people among income classes. Temporarily poor and persistently poor face different problems. Many policies distinguish between these two groups.

Permanent income

The normal or average income of a family. To gauge inequality of living standards, the distribution of permanent income is more relevant than distribution of annual income.

Uses of Money

Money is:


Medium of exchange


Unit of account


Store ov value


Liquidity

Commodity Money

The item has value even if it were not used as $ (e.g. gold or cigarettes)

Flat money

Government decreed note that is considered legal tender.

Money Supply

Quantity of money in an economy.

Currency

Physical notes and coins. Currency also measures current bank deposits.

Three measures of money






M1 – notes and
coins (currency) 
M3 is M1 plus
all other bank deposits

Broad Money – is
M3 plus deposits with NBFIs minus holding of currency and bank deposits by the
NBFIs      










M1 – notes andcoins (currency)


M3 is M1 plusall other bank depositsBroad Money – isM3 plus deposits with NBFIs minus holding of currency and bank deposits by theNBFIs

Broad Money

Broad Money is M3 plus deposits with NBFI’S, minus the holdings of currency and bank deposits by the NBFI’s. ●The holdings of currency and the bank deposits of the NBFI’S have to be subtracted, since these have already been included in M3. (NBFI’s are part of the “non-bank public” - because they are firms which are not banks

M1 Money

M1 is notes and coins (currency) held by the non-bank public, plus current account (cheque account) deposits with banks.the non-bank public means households and firms (but NOT banks which are also firms).the non-bank public is also called the non-bank private sector.

Roles of central banks

Some central banks and regulators are responsible for the following (varies between countries):




Prudential Supervision


Providing Liquidity


Monetary Policy





Role of the RBA

The Reserve Bank of Australia (RBA) was historically involved in:




Prudential Supervision


Providing Liquidity


Monetary Policy




Main role in the modern day is involved in regulating cash in the economy, the cash rate and in controlling inflation

Australian Prudential Regulation Authority (APRA)

Since 1998 the APRA is the statutory body that regulates and supervises banks and other financial institutions such as superannuation companies and insurance companies.

Cash Rate (market)

Interest rate that the financial institutions earn on overnight loans of their currency or resources. The RBA controls the cash rate in order to influence private sector spending.




When the RBA increases or decreases the amount of cash in the system (borrowing/lending) then the RBA is setting the price of money and allowing the quantity to adjust to achieve that price.

Target cash rate

The RBA sets his once a year. The market rate should come close to this target.

Reserves

Deposits that banks have received but have not loaned. If banks hold all deposits in reserve they do not influence the supply of money.

Deposits that banks have received but have not loaned. If banks hold all deposits in reserve they do not influence the supply of money.



Fractional reserve banking

When banks keep a fraction of its deposits in reserve. if the flow of new deposits is roughly the same as the flow of withdrawals then banks only keep a fraction in reserve in order to "create money".

Reserve ratio

When the bank keeps a fraction of total deposits that banks hold as a reserve. This encourages a process of money creation.

Money multiplier

The amount of money banking systems generate with each dollar of reserves.

Leverage

The use of borrowed money to supplement existing funds for investment purposes

Leverage ration

Ration of the banks total assets to bank capital.

Exchange Settlement accounts

Exchange Settlement Accounts (ESA) are the accounts held with the Reserve Bank of Australia by banks and other institution approved by the RBA for the settlement of payment obligation to each othe

Government Securities

Bond or other type of debt obligation issued by a government with a promise of repayment at a set maturity date. Securities are usually considered low risk investments.

Interest rates

Amount of interest rates due per period as a proportion of the amount lent.

Deflation

Deflation is a general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.

Stagflation

stagflation– Inflation rate is high, the economic growth rate slows, and unemploymentremains steadily high

Monetary base

Monetary base – sum of bank’s holding of currency and the reserveof ES account deposits.The monetary base is defined as thesum of currency in circulation and reserve balances (deposits held by banks andother depository institutions in their accounts at the Federal Reserve).

Aggregate Demand

In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels.

Aggregate Expenditure

In economics, Aggregate Expenditure is a measure of national income. Aggregate Expenditure is defined as the current value of all the finished goods and services in the economy. The aggregate expenditure is thus the sum total of all the expenditures undertaken in the economy by the factors during a given time period.

Marginal propensity to consume

In economics, the marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers).

Oligopoly

Is a market with only a small number of firms. Each firm with respect to price and output have market power that can impact other firms. This means that if they make a change in price or output they can strategically impact other firms.

Overt collusion

Such as cartels - colluding companies talk openly about it. E.g. OPEC

Tacit collusion

Firms act together as if they had overtly colluded such as petrol prices at gas station. Tacit collusion occurs where firms undergo actions that are likely to minimise a response from another firm, e.g. avoiding the opportunity to price cut an opposition. Put another way, two firms agree to play a certain strategy without explicitly saying so.

Covert Collusion

Covert means hidden - companies pretend that there is no collusion

Australia: The Competition and Consumer Act

Australia has also developed competition law, originally via the 1974 Trade Practices Act and now the Competition and Consumer Act 2010, In part IV a range of conduct is prohibited in sections 44, 45, 46, 47, 48 and 50 such as:Anti-competitive agreementsMisuse of market powerExclusive DealingResale price maintenanceAcquisitions

Purpose of Australian Competition and Consumer Act

each of these sections of the Act requires a determination of the market before it can be determined if a firm has “a substantial degree of power in the market”, and if an acquisition would have the effect of “substantially lessening competition in any market

Defining a Market

the definition of the relevant market requires a consideration of substitutability both on the demand and on the supply side

Cross price elasticity of supply

if there is a decrease in the money price of product A, such that the price of another, product B, is relatively higher, to what extent does this relatively higher price increase supply of product B. :Percentage


Change in Supply of Product B


Percentage Change in Price of Product A

Cross price elasticity of demand

So products will tend to be close substitutes in terms of consumer attitudes if, following a rise in the (money) price of one product there is observed to be a large increase in demand for another product which is now relatively cheaper or lower in price.


Percentage change in demand for product X


Percentage change in price of product Y

Relative Price

Price of a commodity as it compares to another. The relative price is usually presented as a ratio between the two prices. Example: Though consumers benefit from the lower cost of gasoline, big oil companies such as Shell and Exxon are worried about the relative price of petroleum versus coal or natural gas.