HSC Economics Question Thread

[Klexos]

Informally, opportunity cost is basically what you had to forego to get what you chose to get.

A more refined definition is that it is the value of the next best alternate action, to a particular action. This means say you were choosing between producing T-shirts or trousers (and for this example's convenience, say that their price tag were the exact same). It takes you 1 hours to produce a T-shirt but 2 hours to produce a pair of trousers.

So the opportunity cost of producing the T-shirt would be "one half" of a pair of trousers.
Conversely, the opportunity cost of producing the pair of trousers would be two T-shirts.

If their price were the same, you would go for T-shirt production.

(Note: Time was treated as a resource for this question.)

In a one-person economy, well you'd be producing T-shirts.
In a multi-person economy, you'd have to think about who has the comparative advantage in what. Whoever has the comparative advantage (but not necessarily absolute advantage) is whoever should be producing that good/providing that service.

(Note: Comparative advantage has to be determined with a basis. This is because it's valuing the next best alternative. There's not always an alternative.)

So. Just to clarify. Lowest opportunity cost is when the production is not as compromising as an alternate option?

[RuiAce]

So. Just to clarify. Lowest opportunity cost is when the production is not as compromising as an alternate option?

You do want the number to be low.

Why? Because the formula OC(X) = Loss in Y/Gain in X compares how much you sacrifice of Y to get more of X. Obviously you want to sacrifice less to get more.


The idea is that you want the alternative to never be more valuable than what you choose to do. Otherwise, well, you should've done that.

[hermansia12]

Hey guys,

If someone could please impart their knowledge regarding topic 4. I would really appreciate it

This is a summary of what the syllabus has to say to about Topic 4. Make sure you keep up to date with the policies that could fit into the analysis and that you have both limitations and effects of these policies. You will also need to be able to solve simple multiplier questions (They usually pop up in multiple choice) 

Examine economic issues

Analyse the opportunity cost of government decisions in addressing specific economic problems or issues
Fiscal Policy: A macroeconomic policy whereby governments influence economic activity through government spending, taxation and the budget outcome (i.e surplus/deficit)

There are 4 main impacts of Fiscal policy:

• Economic Activity -> Injections and Leakages
• Resource Use -> Infrastructure and Public Goods
• Income Distribution -> Social Welfare
• Savings and CAD -> Servicing the debt

Investigate structural changes in the Australian economy resulting from microeconomic policies
Microeconomic policies = labour market policies
Governments intervene in labour markets in order to influence:

• Inflation: stability in economic growth -> Wage growth
• Productivity: Developing comparative and absolute advantage
• Distribution in income and Wealth -> Fair minimum standards

Example Microeconomic policy: Minimum wage
Price Floor -> Safety net for any employee not covered by an award; Fair work commission sets minimum wages to ensure that workers aren't emploited; This increases productivity -> Higher economic growth in the long run. However, this can lead to a higher rate of unemployment as businesses may reduce the number of workers in order to maintain profit margins.

Apply economic theory to explain how a government could address an economic problem or issue in hypothetical situations
Supply and demand, effects of fiscal policy on economic growth (unemployment, environmental sustainablity, inflation etc.)

Analyse alternative ways to finance a budget deficit
Governments can finance a budget deficit by:
Borrowing from the private sector
This decreases national funds, increasing the interest rate (as the supply of money decreases). However, this can lead to a "crowding out" effect on the private sector. Crowding out means that private sector investors face higher interest rates which limits the accessibility of these funds to the investors.
Borrowing from overseas:
This minimises crowding out effects but can still stimulate economic growth. However, the CAD is widened due to the increase in debt -> stifle long-term growth due to the limited amount the government can spend fiscally on infrastructure.
Selling Assets
e.g shares in Medibank;

Apply economic skills
Explain how governments are restricted in their ability to simultaneously achieve economic objectives:
Governments have to choose between goals (especially if they can conflict -> e.g inflation and unemployment, economic growth and environmental sustainability) and has limited funds to spend. Priorities are important and changes depending on the economic climate. 

Hope this helps

[conic curve]

When is the law of demand applicable?

[RuiAce]

When is the law of demand applicable?

In general, always.

An exception is what we call a giffen good - something that violates the law of demand. A giffen good is a good that an increase in price is so adversely influencing such that people buy more of it when the price goes up.

If you learnt about the substitution effect and income effect, it is a consequence of the income effect far (overly) exceeding the substitution effect. It's like saying oh shoot the price of rice went up so now I have to eat more rice and give up my meat and vegetables.

I think my lecturer once mentioned a story of how raising the princes at McDonalds or something in the US or somewhere caused this to happen.

[hermansia12]

So. Just to clarify. Lowest opportunity cost is when the production is not as compromising as an alternate option?

So the easiest way to understand opportunity cost, absolute advantage, and comparative advantage is to do a question. This is inspired by the example in the Dixon textbook

Suppose Australia produces 300 tonnes of grapes but France produces 400 tonnes. Or, Australia can produce100 tonnes of cheese and France produces 300 tonnes. Determine the opportunity cost of producing grapes and identify which country has comparative advantage producing this product

Let's get this in a table so its easier to understand:

Country   ll    Grapes       ll   Cheese
Aus                ll     300           ll     100
France          ll     400            ll     300

France definitely has absolute advantage in this market overall. But for comparative advantage, we have to compare the opportunity cost of each of the products separately.

Opportunity cost of grapes
Australia: Cheese / Grapes = 1/3 = 1/3 Tonnes of cheese
France: Cheese / Grapes = 3/4 = 3/4 Tonnes of Cheese

Since Australia gives up less resources (i.e cheese) to produce grapes, we can see that Australia has comparative advantage in producing grapes.

This is probably the hardest question you'll get for opportunity cost. It's usually only a multiple choice question (It wasn't even asked in both my trial and my HSC test).  The graph associated with this is the production possiblity curve (From preliminary)

[Essej]

So. Just to clarify. Lowest opportunity cost is when the production is not as compromising as an alternate option?

Just to add on with a more visual explanation of the opportunity cost, hermansia alluded to the notion of a 'production possibility curve' which we learned about in year 11. If you'll look in the attachments, the PPF here represents resource allocation of cotton and wine - which is really the main idea opportunity cost references. At points A,B, and C we can see that maximum allocation of resources is employed, however at point A, whilst the economy produces more wine, it sacrifices cotton production (the opportunity cost). This is often a response to comparative advantage; the basis of free trade. Countries will often reduce production in one area, as the theoretical economy has done with cotton in the graph, in order to produce more wine (because obviously the economy is highly efficient in that area e.g. Chinese manufacturing).

Further, at the big red dot X we can see that resources are, in every sense, inefficiently allocated

Inversely, at point Y on the outside of the curve represents a currently unreachable point of output - however alterations to the factors of production(land,labour,capital,enterprise) e.g. technological advancement and upgrade in capital can assist the economy to reach this point.

Hope this helps (and sorry for going on such a huge tangent but trust me it's all relevant albeit very rare to see in HSC exams)

This is a summary of what the syllabus has to say to about Topic 4.

Thanks for putting the time into this! Fantastic resource!

[Deng]

Hey, can someone help me with monetary policy as in the use of selling/buying CGS on the economy, cash markets and how the RBA's actions influence the economy ( appreciation/depreciation, investment, and whatever else ) (like i know the general gist of monetary, like the RBA lowers the cash rate to stimulate the economy but the multiple choice questions that they ask i can never get right )

Much appreciated
Attached are some examples of MC about MP

[jamie anderson]

Hey, on a AD or AS supply, how would i know by inspection if its increased or decreased e.g it says A --> A1 and the picture shows a shift to the right of the AS curve, dont have a question sorry but i hope this is enough information
Also, i attached a quota diagram below and i dont know how to visually read it

thanks guys

[hermansia12]

Hey, can someone help me with monetary policy as in the use of selling/buying CGS on the economy, cash markets and how the RBA's actions influence the economy ( appreciation/depreciation, investment, and whatever else ) (like i know the general gist of monetary, like the RBA lowers the cash rate to stimulate the economy but the multiple choice questions that they ask i can never get right )

Hi Deng,

Ok bear with me here, but we're going to start off with a defination of monetary policy. Monetary policy is actions undertaken by the Reserve Bank on behalf of the government to influence the cost and availability of money and credit in the economy(domestic market operations). Generally, it is used to make economic growth less volatile as it influences other economic issues (economic activity, employment and inflation) Monetary policy in MC basically dials down to how well you know supply and demand.

Now in domestic market operations, RBA uses the Cash Rate to affect the Exchange Settlement accounts (which is basically our money supply in the short term money market). Now think of cash rate this way. The cash rate determines how expensive it is for financial institutions (banks) to obtain funds. Higher the cash rate, harder it is to obtain funds (its literally the "price" of money.

So if we have this way of thinking, we can summarise the domestic market operations in this way:

Economic growth is low -> Loosen Monetary Policy -> Increase the amount of borrowable funds in the short term money market (i.e increase supply) -> Lower Cash rate and interest rates (because there's more supply so lower price)

The way RBA changes the amount of borrowable funds is through the act of buying/selling government securities.

Treat these securities like a object that is traded between the banks and RBA. To decrease money supply, the banks will sell government securities. The banks gives money to RBA for the object so they essentially hold less money. (sort of like you buying a coffee in the morning so you have less money supply in your wallet). They do the reverse to increase money supply. So by buying back the securities, they give money to the banks, increasing money supply. This should kickstart your answer to your Q2 MC.

The FOREX market has a similar concept but at an international level. (Whilst the FOREX market does have an effect on our Economy, RBA does not generally sell currencies as its first course of action to stimulate economy cough Q2). So in Q3, the exchange rate has fallen -> ie supply has increased, but demand has fallen.

If we lower interest rates, economies are more likely to want to borrow from us right? Lower interest to pay so higher the demand. So to lower demand, our interst rates must be raised. Now think about it. If we buy Australian Dollars, we would limit the supply in the international market so A and B are out. So in order to increase supply, we would have to sell $US to put more $AU in the market. 

Hope this helps
 

[hermansia12]

Hey, on a AD or AS supply, how would i know by inspection if its increased or decreased e.g it says A --> A1 and the picture shows a shift to the right of the AS curve, dont have a question sorry but i hope this is enough information
Also, i attached a quota diagram below and i dont know how to visually read it

thanks guys

Hi Jamie,
Check out Q3 in Deng's post. So this is just interpretating the graph and using your basic knowledge of supply and demand. So if the supply is shifted to the right (i.e quantity increasing because quantity is always X axis) Then there is an increase in supply -> Lower price of the commodity. If it reverses, then price increases cause less supply. Changes in supply could be due to advances in tech,  natural hazards etc.

But for demand, its the opposite. So if it shifts to the left, demand decrease so price decreases. etc.

Now for quota, lets start off with what a quota is. A Quota restricts the volume of certain goods that can be imported. So in your MC question, what is happening? Well the supply is shifted and its increasing i.e Quota has widened -> Government is less restrictive of imports. So we can conclude that there is less protection because there is more competition in the domestic market.

And what happens when we increase supply? Price falls. 

Hope this helps

[Adriaclya]

Hey, can someone help me with monetary policy as in the use of selling/buying CGS on the economy, cash markets and how the RBA's actions influence the economy ( appreciation/depreciation, investment, and whatever else ) (like i know the general gist of monetary, like the RBA lowers the cash rate to stimulate the economy but the multiple choice questions that they ask i can never get right )

hello deng! even though hermanasia put a nice explanation, I guess it wouldn't hurt for another style of that explanantion!
okay, so monetary policy is basically the actions taken by the RBA to influence the cash; and hence, concurrently the interest rates in other financial market. Like you said, the predominant monetary policy is the use of domestic market operations : which is essentially just the buying/selling of CGS in the cash market - or otherwise the overnight money market (Note that this is the secondary market we are talking about). As such, there are two stances of monetary policy:
contractionary/tightening
This is when the RBA sells the CGS in order decrease the money supply in the economy. the main reason for this is because they want to slow down economic activity in the case of inflation. In other words, the banks in the cash market buy these government bonds. Now just imagine the RBA as a MASSIVE safe that locks away this money from selling CGS. therefore, there is lower money supply in the economy, thus the rate for borrowing in the cash market increases. the cash rate increases. subsequently, because the banks have to pay more to borrow money which then spills over to the long term money market. aka, the rise in cash rate = rise in interest rates = more saving, less spending, more foreign investment

expansionary/easing
basically the opposite. the RBA buys the CGS to increase the money supply in the cash market = lower cash rate (or borrowing rate in the cash market) = lower interest rates = more spending, less spending, more borrowing to spend etc.

with q3)
I think I disagree with hermanasia?? (I might be wrong)

If we lower interest rates, economies are more likely to want to borrow from us right? Lower interest to pay so higher the demand. So to lower demand, our interst rates must be raised. Now think about it. If we buy Australian Dollars, we would limit the supply in the international market so A and B are out. So in order to increase supply, we would have to sell $US to put more $AU in the market. 

From my sources, higher interest rates = higher demand. why? because foreign investors want to lend money to aust in order to receive a higher return. how does this affect demand? when lending money to aust, they have to buy the aust dollars first; thus there is a higher demand for the aust dollar = increased exchange rate. conversely, decreased interest rates = lower demand.
Likewise, to buy US dollars, think of aust as trying to sell goods/services - aust sells stuff and US buys this stuff = aust is essentially buying US dollar = aust converts this USD to AUD in aust = more money in the domestic economy to spend = higher supply.
so yeah, q3) is to buy US dollars and decrease interest rates....I think.
q2) basically, RBA buy securities = more money supply = induce spending etc.

[hinakamishiro]

Hi guys! I was wondering if anyone could explain the total outlay method to me and how you can determine elasticity from it? Thanks, I've been having issue with this one for quite a while 

[Adriaclya]

Hi guys! I was wondering if anyone could explain the total outlay method to me and how you can determine elasticity from it? Thanks, I've been having issue with this one for quite a while 

hey there!
so before anything, elasticity of demand is how responsive the demand of something is to a change in price. ie how much will the change in price of a product affect the demand for the product. If demand is:
ELASTIC, means that even a slight change in price, will incur a greater change in demand for that product. Applying this to the total outlay method/ total revenue method, If T.outlay moves in the opposite direction to change in price, demand is elastic. note: both T.outlay and price can move in whatever direction they choose to - eg decrease or increase. As long as they are in opposite direction, it is demand elastic.
INELASTIC, means that a change in price will essentially have zero impact on the demand. So if T.outlay moves in the same direction, then demand is inelastic. note: again, T.outlay and price can move in any direction. As long as both move in same direction, it is demand inelastic.
UNIT ELASTIC, means that despite a change in price, there is no change in T.outlay.

Given:
PRICE OF APPLES      QUANTITY DEMANDED        TOTAL REVENUE
       $1                                                      80                                                   $80
       $2                                                      50                                                  $100
       $3                                                      40                                                  $120
       $4                                                      30                                                  $120
       $5                                                      20                                                  $100
FROM:
PRICE $1 to $2 as well as from $2 to $3, both the total outlay/revenue and price increases . since they both increase, ie move in the same direction, demand is inelastic.
PRICE $3 to $4, since total outlay/revenue is the same despite a change in price, demand is unit elastic.
PRICE $4 to $5, since price increases but revenue decreases, they move in opposite direction, therefore it is elastic.

[Spencerr]

Spoiler

hello deng! even though hermanasia put a nice explanation, I guess it wouldn't hurt for another style of that explanantion!
okay, so monetary policy is basically the actions taken by the RBA to influence the cash; and hence, concurrently the interest rates in other financial market. Like you said, the predominant monetary policy is the use of domestic market operations : which is essentially just the buying/selling of CGS in the cash market - or otherwise the overnight money market (Note that this is the secondary market we are talking about). As such, there are two stances of monetary policy:
contractionary/tightening
This is when the RBA sells the CGS in order decrease the money supply in the economy. the main reason for this is because they want to slow down economic activity in the case of inflation. In other words, the banks in the cash market buy these government bonds. Now just imagine the RBA as a MASSIVE safe that locks away this money from selling CGS. therefore, there is lower money supply in the economy, thus the rate for borrowing in the cash market increases. the cash rate increases. subsequently, because the banks have to pay more to borrow money which then spills over to the long term money market. aka, the rise in cash rate = rise in interest rates = more saving, less spending, more foreign investment

expansionary/easing
basically the opposite. the RBA buys the CGS to increase the money supply in the cash market = lower cash rate (or borrowing rate in the cash market) = lower interest rates = more spending, less spending, more borrowing to spend etc.

with q3)
I think I disagree with hermanasia?? (I might be wrong)From my sources, higher interest rates = higher demand. why? because foreign investors want to lend money to aust in order to receive a higher return. how does this affect demand? when lending money to aust, they have to buy the aust dollars first; thus there is a higher demand for the aust dollar = increased exchange rate. conversely, decreased interest rates = lower demand.
Likewise, to buy US dollars, think of aust as trying to sell goods/services - aust sells stuff and US buys this stuff = aust is essentially buying US dollar = aust converts this USD to AUD in aust = more money in the domestic economy to spend = higher supply.
so yeah, q3) is to buy US dollars and decrease interest rates....I think.
q2) basically, RBA buy securities = more money supply = induce spending etc.

Hey there, thanks for the wonderful explanation, i'd just like to add on a bit more to give that extra detail. In terms of domestic market operations, the RBA (which is the banker for the government and the commercial banks) buys and sells CGS to and from the commercial banks. This way, they alter the money supply in the overnight money market by taking cash out of  or putting cash into the commercial bank's exchange settlement accounts. By increasing or reducing the supply of cash on the overnight money market, the RBA influences the cash rate through the price mechanism. As the cash rate is changed via this DMO's, the changes are passed onto the rest of the economy through the transmission mechanism i.e. whereas banks choose to pass on the reductions in the cash rate to the interest rates given to consumers (e.g. homeloans, mortgages etc. ). So taking an example recently, the cash rate was reduced by another 25 basis points to 1.5% from 1.75%. Now commerical banks only passed on half of these cuts to their interest rates. E.g. NAB or CAB only reduced their home loan rates by 0.13% instead of the full 0.25%. This is the transmission mechanism in place and hence why collusion between banks is such a big deal. If bank's collude, they can cooperate together and not pass on any of the cuts at all, thereby making a huuuge amount of profit.

On the second issue of the AUD, in theory both is correct. If we have lower interest rates, international borrowers would be inclined to borrow from us leading to higher demand. On the flip side, if we have high interest rates we offer higher returns attracting foreign investment and capital inflow. Now in reality, given the global economy and what's happening in the world, the AUD will usually APPRECIATE with HIGHER INTEREST RATES. This is because of interest rate differentials between Australia and the global economy. If we take a loook at the global economy, there are negative interest rates in Japan, EU, American interest rates aren't that high either. So even if we lower our cash rate to 1.5%, it's still 1.5% higher than advanced economies with 0% or even negative interest rates. It is for this reason (that we have RELATIVELY higher interest rates than the global economy despite having the cash rate being a historic low), that foreign investors continue to demand AUD so they can invest in Australia.
TLDR: Interest rate DIFFERENTIALS and RELATIVITY determine whether the AUD will appreciate or depreciate from changes in the cash rate.