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What will happen to Australian house prices in 2012?

They will increase by 10%
They will increase by a small amount
They will stay about the same
House prices will fall during 2012

Demand Factors Affecting Growth

It is time to combine your understanding of economic growth with the skills that you learned while you were studying the market mechanism. You will recall that we looked at the way in which the entire economy can be modelled through the use of the aggregate demand and supply curves. With just one extra piece of information, you will begin to see how demand factors can affect economic growth.

Until now, we have labelled the horizontal axis (the x-axis) as "quantity". When we are looking at the entire economy, this axis can be labelled "total production" or "output". In other words, it is the total quantity of goods and services produced in an economy. It follows, therefore, that any time the equilibrium point moves to the right, we are more likely to experience growth.

If we model a situation in which the equilibrium point moves to the left, then we can conclude that either the rate of growth is lower, or (in extreme situations) that the economy has moved into recession.

Let’s imagine that you were asked the following question:

Explain how an increase in consumer confidence could act to affect Australia’s economic growth.

A question like this would normally be worth four marks. That means that you need to make four distinct points when you are writing your answer. We are going to use a specific formula for answering these questions – this will help to ensure that you are always able to earn all of the marks that are being offered.

In this case, the “factor” that we are being asked to examine is consumer confidence. We might define that as the general feeling that consumers have about their economic situation. If people feel that their jobs are secure, that their wage will increase and that inflation will be low, they tend to be more confident.


This is the crucial step – you need to explain which group in the economy will change their actions as a result of this situation. There are four groups for you to choose from, and the spending by each group has a specific name. The following table will help you to make this decision:


In this case, an increase in consumer confidence is likely to result in an increase in consumption spending.

The process of naming which type of spending will be affected is called "making a demand side link". It is one of the most important skills that you can learn in Economics.


If spending is increasing, then it is likely that the demand curve will shift to the right (as you can see in the graph above). On the other hand, if spending is decreasing then it is probable that the demand curve will shift to the left.

In this particular example, an increase in consumption spending is likely to result in the demand curve shifting to the right.


Remember that the initial question you were asked was about the rate of economic growth. In the future, you will need to be able to use a similar model to make predictions about changes to the unemployment rate, the rate of inflation and more. With so many variables, it is important that you remember to make a comment about the one that you are asked about. In this case, we would expect the level of economic growth to be higher when consumer confidence increases.

Your final answer to the question might look something like this: Eventually you will also learn to add statistical proof to your analysis. For now, you should also consider drawing a supply and demand graph next to your work when you answer a question like this. The model will help you to clarify the answer that you are writing. It will also show the person reading your work that you know what you are talking about.

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