TECO602 Economic Environment of Business

Essay 1

Introduction

The theory of firms mentions various parameters on which a business enterprise’s production, productivity, profits and shutting down, short run equilibrium and long run equilibrium is determined (Wagner 2021). The Producer’s Profit Maximization motive makes it sustain the competition in the market. The essay focuses on how JobKeeper’s program in Australia is aligned with the firm’s behaviour in the short run and has been taken for the betterment of the overall business enterprise in the nation. The impact of the Covid pandemic was the sole reason why the program was taken up by the government to assist the firms in crisis.

The Market of the SMEs and Large business enterprises

The SMEs in Australian market account for about 98% of the enterprises, employing a considerable amount of the workforce of about 44% (Asbfeo 2016). Most of the business are mainly of the small scale with 76% micro scale business. Thus the size of this economy is huge in Australia and the employment structure too is considerably important for Australian economy. The SMEs are concentrated in the three important sector of Agricultural, fishing and forestry. Thus comprising mainly the primary sector workforce who are semi-skilled labours (Lewis  and Liu  2020). These three sectors have the highest value added to the GDP. While the construction business accounts for the highest number of interns and trainees, thus giving employment to the young age job seekers.

The above diagram shows that the percentage of turnover that the SMEs have along with their employment size. It is to be noted that most small single owner business enterprise have a greater share, owing to the fact that it is their only source of income.

Large Business Market

Large Business enterprises mainly concentrate the energy market, retail, Finance, professional services, banking and grocery. These firms cover considerable market size with larger volume of sales and revenue. The have higher size of employment in skilled and semi-skilled of the workforce. Their value added to the GDP is also high with larger turnover annually. The per capita income generated by these firms are also high compared to the SMEs. The profits earned by these firms are repatriated among the shareholders also (Ibisworld.com 2021). Meaning these large business enterprises form a very important part of the economy especially skilled sector.

Impact of JobKeeper’s program

The Covid pandemic have impacted the SMEs to a larger extent as their per capita income generation is low. The workers in this sector are either single owners or small business enterprises employing 0 – 200 employees. The demographic structure too in this sector is from 32-56 years and above who are owners and employing mostly semi- skilled workers (Australian Bureau of Statistics 2020). These firms are profit maximizers maximizing their profit where their Marginal cost of production are equal to profit revenue. Now this determines the quantity of output and price. Now when cost is minimized with respect to this specific level of output it gives the amount of labours required. Labour is thus the most important factor of production in the short run. Any reduction in this amount of labour will not be able to produce the required quantity. Although due to the lockdown of these firms firstly faced shortages of labour (Oecd 2020). Their business activities were seemingly reduced as labours along with owners were home quarantined for about 3 months. Looking from the business perspective the demand too forms an important part of the firms’ pricing mechanism and output production. There was huge demand reduced for SMEs in the construction sector, agricultural sector (as food supply chain was disrupted), retail and micro businesses. When demand is absent the market is absent. About 52% of the SMEs reported loss of profit by 50% during lockdown (Larue 2020). Their savings were invested more on consumption rather than investments in improving business. This loss of inventory and financial capital was a blow to these small firms as they had to lay off their workers voluntarily.

The JobKeeper’s program was an injection into the economy of about 70 billion AUD to cover the income gap that have been faced by the employees of over 910,055 business enterprises. It was announced for a period of 26 weeks. The government appealed the large business enterprises to not cut down the salaries of their employees, on the other hand urged the SMEs to register all their employees who were eligible for the program. The program was meant for those business which had a 30%-50% loss of profits due to pandemic. By May 2020 almost 2.9 million employees and workers were paid $1500 for each fortnight till the lockdown continued.

The main advantage that the firms received from the Jobkeeper’s program was retention of employees. The firms were given this financing support so that they do not have to hire again when the lockdown ended (Coibion,  Gorodnichenko  and Weber  2020). In March 2020, employment lost in by the labour intensive sector like Accommodation, transport, construction, food delivery services. Thus the variable costs of the firms that would have to be covered under lockdown was covered by the Government JobKeeper program, only the firms needed to pay for the fixed costs. Firm generally shut down when prices are less than the minimum average total cost (Asbfeo 2019). Here although with loss of market profits were lost, variable costs would not have been paid for. The firms would have shut down, but with their temporary variables costs covered they have returned to business post lockdown. However the large firms were able to cover both employee benefits, salaries, variable costs and fixed costs. Their profits weren’t reduced by the eligible rate so they were not applicable for the program.

Conclusion

Post Lockdown from September, 2020 most SMEs have returned to operations. Employment have reduced to 6.1% when it increased to 7.5% during lockdown. Revenues for the SMEs have increased from 16 in August 2020 to 22% in April 202. With slight increase in employment forecasts have been made that SMEs are key to recover the economy as they form a considerable portion of the economy and workforce, even if their value added is low. It benefits are spread over large number of employees.

Essay 2

Introduction

The Australian economy is under recession due to the pandemic. The pandemic has seemingly stopped most economic activities of almost all sectors of the economy. The exports were stopped due to international halt in aviation industry for some time. With lower production level in most manufacturing sector there was huge loss in the income earned by the employees. This put a pressure on the economy when the overall consumption demand, investment demand have reduced to a staggering level. The essay looks into the Australian policies being taken and how the recession resulted in most sectors (O’Sullivan, Rahamathulla  and Pawar  2020).

The Lockdown

Covid pandemic led to the development of many safety protocols to reduce infection rates. The government thus implemented those protocols in the nation. The social distancing led to the employment loss as only 50% of the workforce was allowed to work. This lowered the productivity suddenly over all sectors. The manufacturing saw a loss of employment by -7.2%, accommodation with a -18.2% loss in employment, transport with a -8.2%. All these sectors specially energy and resources like iron ore and other elements in Australia is also an export oriented sector. These forms considerable part of the export too, with 64% share contributed by resources (Reserve Bank of Australia 2020). The service sectors form 66% of the GDP (Statista 2019). There has been higher revenue loss in these service sectors as they were all closed and shut down temporarily during the lockdown. Recession happens when almost all sectors are highly devastated by productivity loss or financial losses. The hospital and health care although had the highest rate of increase in employment and activities but its revenues being outstripped by high expenditure by consumers.

All types of new investments were seemingly stopped and halted as firms were not willing to take big investments under this uncertain situation where profits could not be earned. The costs of production for some big firms in retail and grocery were their only firm’s with increasing economic activities but their net profits have reduced. Thus it is seen that not only there is a reduction in the aggregate demand but also aggregate supply.

This diagram shows the chronological situations that happened. First the economy was at the intersection of AS1 and AD1 with Q1 output. then due to lockdown the supply shifted to about AS2. With demand too falling in the short run accounted for the loss in investment demand and some consumption demand the AD1 shifted to AD2. With the increased demand for essential commodities of food, pharmaceutical products, other retail essential the demand was boosted which shifted the AD2 to AD3. Thus the resulting equilibrium is at a point at Q3 much lower than the previous equilibrium at Q1. The economy thus slipped down to a recession in and during lockdown. The basic reasons for the loss of income was higher unemployment of 7.5% overall in the economy. The SMEs were closed down, higher imports of medical equipment also stripped the foreign exchange reserves. When net exports fall (as China reduced the imports of coal, iron ore, fisheries and other imports due to tariff policies). Australia too reduced its exports to China (being its most and biggest partner in trade due to the diplomatic controversies regarding the virus) the trade benefits were not enjoyed anymore .

The Expansionary policies of the Australian Government

The expansionary policies of the government was the only way the nation could have recovered from the recession, as there was simply supply demand disruptions in the economy. The main two expansionary policies of the government was materialized in form of the four stimulus packages:

1. The employment stimulus package of the JobKeeper and JobSeeker programs. These programs were worth 70 billion AUD which was mainly provided to employees who feared job losses. This stimulus package also helped the firms retain their employees. This supplement income to the employed persons were to provide assistance to increase essential consumptions along for their families and treatment of the disease if contracted.
2. There were temporary cash flows given to business enterprise worth 14 billion AUD given to the owners and employers to boost their economic activities support their revenue loss. This amount was increased in December 2020 to 17 billion AUD to further boost their business.
3. The corona Virus Supplement was a package along with Youth allowance and Austudy was worth 5.9 billion AUD. This was a tied package solely for income for the corona virus pandemic (Aph 2020).
4. Another expansionary policy was attained via personal income tax cuts of the citizens. The receipts of the government was reduced to 6.9 billion AUD in 2020-2021. The forecast being made is expected to reduce this cost to 0.3 billion by 2025.

Hence it is evident that the government has covered both the supply side of the economy by assisting the producers and the demand side by supporting the consumers through various stimulus packages. These income support have changed the income situation and also the economic position of the economy.

The diagram above shows the fiscal position of the government. The peak in the expenditure and trough in the receipts shows the deficit position of the Australian economy in 2020 which is expected to fall with falling budget in all the programs. The economy have opened up with higher manufacturing exports and boosts in other key sectors like accommodation, construction, finance and transport even.

Future Outlook

Currently in the last quarter of 2020 and first three to four months of Australian economy have recovered with about 80% growth rate achieved in these quarter as the position in the three quarters of 2020 (Ft.com 2020). The current growth rate of the economy is at 1.445 with 3.3% growth in September 2020 alone. Household spending too have jumped by 7% from September 2020 (Australian Bureau of Statistics 2021). The year end growth rate as forecasted by economists will have  a 4.4% reduction annually.

Conclusion

Thus it is seen that the economy is recovering at a slow pace with the help of the fiscal stimulus. The macro economy contracts due to the interconnected nature of the economy. When expansionary fiscal policy is taken up by the government is increases the output of the economy.

References

Aph, 2020. Fiscal overview – Parliament of Australia. [online] Aph.gov.au. Available at: 

Asbfeo, 2016. Small Business CountsSmall Business in the Australian Economy. [online] Asbfeo.gov.au. Available at: <https://www.asbfeo.gov.au/sites/default/files/Small_Business_Statistical_Report-Final.pdf> [Accessed 3 May 2021].

Asbfeo, 2019. Small Business CountsSmall business in the Australian economy July 2019. [online] Asbfeo.gov.au. Available at: <https://www.asbfeo.gov.au/sites/default/files/documents/ASBFEO-small-business-counts2019.pdf> [Accessed 3 May 2021].

Australian Bureau of Statistics, 2020. Counts of Australian Businesses, including Entries and Exits, July 2016 - June 2020. [online] Australian Bureau of Statistics. Available at: <https://www.abs.gov.au/statistics/economy/business-indicators/counts-australian-businesses-including-entries-and-exits/latest-release#turnover-size> [Accessed 3 May 2021].

Australian Bureau of Statistics, 2021. Business Conditions and Sentiments, April 2021. [online] Australian Bureau of Statistics. Available at: <https://www.abs.gov.au/statistics/economy/business-indicators/business-conditions-and-sentiments/latest-release> [Accessed 3 May 2021].

Coibion, O., Gorodnichenko, Y. and Weber, M., 2020. Labor markets during the COVID-19 crisis: A preliminary view (No. w27017). National Bureau of Economic Research.

Ft.com, 2020. Australia’s economy powers out of Covid-19 recession. [online] Ft.com. Available at: <https://www.ft.com/content/ac98dd24-9edb-4618-a9af-5ab4cf892262> [Accessed 3 May 2021].

Ibisworld.com, 2021. IBISWorld - Industry Market Research, Reports, and Statistics. [online] Ibisworld.com. Available at: <https://www.ibisworld.com/australia/industry-trends/biggest-industries-by-revenue/> [Accessed 3 May 2021].

Larue, B., 2020. Labor issues and COVID‐19. Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, 68(2), pp.231-237.

Lewis, M. and Liu, Q., 2020. The COVID-19 Outbreak and Access to Small Business Finance | Bulletin – September Quarter 2020. [online] Reserve Bank of Australia. Available at: <https://www.rba.gov.au/publications/bulletin/2020/sep/the-covid-19-outbreak-and-access-to-small-business-finance.html> [Accessed 3 May 2021].

O’Sullivan, D., Rahamathulla, M. and Pawar, M., 2020. The impact and implications of COVID-19: An Australian perspective. The International Journal of Community and Social Development, 2(2), pp.134-151.

Oecd, 2020. Australia | Financing SMEs and Entrepreneurs 2020 : An OECD Scoreboard | OECD iLibrary. [online] Oecd-ilibrary.org. Available at: <https://www.oecd-ilibrary.org/sites/2bf6bc72-en/index.html?itemId=/content/component/2bf6bc72-en> [Accessed 3 May 2021].

Reserve Bank of Australia, 2020. Composition of the Australian Economy Snapshot | Education. [online] Reserve Bank of Australia. Available at: <https://www.rba.gov.au/education/resources/snapshots/economy-composition-snapshot/> [Accessed 3 May 2021].

Statista, 2019. Australia - GDP distribution across economic sectors 2009-2019 | Statista. [online] Statista. Available at: <https://www.statista.com/statistics/375558/australia-gdp-distribution-across-economic-sectors/> [Accessed 3 May 2021].

Tradingeconomics.com, 2021. Australia GDP Growth Rate | 1959-2020 Data | 2021-2023 Forecast | Calendar. [online] Tradingeconomics.com. Available at: <https://tradingeconomics.com/australia/gdp-growth> [Accessed 3 May 2021].

Wagner, J., 2021. A note on the firm size—Export relationship. In : Advanced Methods of Analysis and Evidence from German Enterprises (pp. 25-38).

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