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Economics > Allocation of resources > Flashcards

Allocation of resources Flashcards

1
Q

Define microeconomics

A

the study of particular markets, and segments of the economy. It looks at issues such as consumer behaviour, individual labour markets, and the theory of firms.

It involves supply and demand in individual markets, individual consumer behaviour, and individual labour markets

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2
Q

Define macroeconomics

A

Study of the whole economy. It looks at ‘aggregate’ variables, such as aggregate demand, national output and inflation.
Involves decisions made by the government regarding

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3
Q

What is the market economy?

A

A market economy is an economic system in which economic decisions and the pricing of goods and services are guided by the interactions of supply and demand- the market mechanism

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4
Q

The basic economic problem of scarcity creates three key questions. What are they?

A

What to produce?
How to produce?
For whom to produce?

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5
Q

How does the price mechanism provides answers to these key allocation questions?

A

It aids the resource allocation decision making process. The decision is made at the equilibrium point where supply and demand meet

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6
Q

Features of price mechanism?

A

Private Economic Agents can allocate resources without any intervention from the government
Goods and Services are allocated based on price (Higher Price means more supply and lower price means more demand)
Allocation of Factors of Production is based on financial returns
Competition creates choices and opportunities for firms, private individuals and consumers

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7
Q

What is demand?

A

Demand refers to how much of a product or service is desired by buyers

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8
Q

How is demand related to price?

A

Higher price of good = less people demand that good, hence, demand is inversely related to price

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9
Q

What are the factors that affect demand?

A

Price
Advertising
Government Policies
Consumer tastes/preferences
Consumer Income
Prices of substitute/ complementary goods
Interest rates (price of borrowing money)
Consumer population (population increase = demand increase)
Weather

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10
Q

What is the individual demand?

A

the demand of one individual or firm

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11
Q

What is the market demand?

A

represents the aggregate of all individual demands

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12
Q

What is supply?

A

Supply represents how much the market can offer

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13
Q

How is supply related to price?

A

Higher price of good = higher quantity supplied, hence quantity is directly proportional to price

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14
Q

What are the factors of supply?

A

Cost of factors of production
Prices of other goods/services
Global factors
Technology advances
Business optimism/expectations

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15
Q

What is the individual supply?

A

the supply of an individual producer

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16
Q

What is the market supply?

A

the aggregate of the supply of all firms in the market

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17
Q

What is the Market Equilibrium

A

When supply & demand are equal in the economy

At this point, the allocation of goods is at its most efficient because amount of goods being supplied is the same as amount of goods being demanded & everyone is satisfied

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18
Q

Causes of Price Changes

A

A change in supply
A change in demand

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19
Q

Consequences of Price Changes

A

An inward shift of the supply curve will increase prices and vice versa
An inward shift of the demand curve will decrease prices and vice versa

20
Q

What is the Price Elasticity of Demand?

A

The responsiveness of demand to a change in price

21
Q

How do you calculate PED?

A 
         % change in price
22
Q

What happens when demand is price inelastic?

A

An increase in price would raise revenue

23
Q

What happens when demand is price elastic

A

A decrease in price would raise revenue

24
Q

Factors that affect PED

A

The number of substitutes
The period of time
The proportion of income spent on the commodity
The necessity of the product

25
Q

What is the Price Elasticity of Supply?

A

The responsiveness of quantity supplied to a change in price

26
Q

How do you calculate PES?

A

% change in quantity supplied

27
Q

Factors that affect PES

A

Time
Availability of resources
Supply available to meet demand
Spare production capacity available
Factor substitution available

28
Q

What is the Market Economic System

A

This system is run by private firms and individuals
They produce a wide variety of goods and services if it is profitable to do so but only for those consumers that are willing and able to pay for them
Market failures can cause scarce resources to be allocated to uses that are wasteful, inefficient or even harmful to people and the environment

29
Q

Advantages of market economy system

A

Wide variety of goods/services

Profit motive encourages development of new and more efficient products & processes

Quick response to change in consumers tastes and demand

No taxes on incomes and wealth or goods and services

30
Q

Disadvantages of Market economy system

A

Serious market failure

Only profitable goods provided

Firms will only supply products to consumers with the ability to pay

Resources will only be provided if it is profitable to do so

Harmful goods may be
available to buy readily

31
Q

How does market failure occur?

A

Market failure occurs when the market mechanism fails to allocate scarce resources efficiently, so social costs are
greater than social benefits

32
Q

What are social costs?

A

Private Costs + External Costs

33
Q

What are social benefits?

A

Private Benefits + External Benefits

34
Q

What are private costs?

A

The production and consumption costs of a firm, individual or the government

35
Q

What are private benefits?

A

The benefits of the production and consumption to the firm, individual or government.

36
Q

What are external costs?

A

External Costs are the negative side-effect on third parties for which the consumer doesn’t pay for.

37
Q

What are external benefits?

A

The positive side-effects enjoyed by the third-parties.

38
Q

Causes and consequences of market failure

A

Only goods and services that are profitable to make will be produced

Public goods and services such as street lighting won’t be provided as it is not possible for the private sector to earn profits from them

Resources only employed if profitable people may be left unemployed without an income

Harmful goods may be produced and sold freely

Producers may ignore environmental impacts

Monopolies dominate supply of products and charge high prices

39
Q

What is a mixed economic system?

A

Has a private sector & a public sector
A government can try to correct market failures in a mixed economic system
It can allocate scarce resources to provide goods and services that people need
Can introduce laws and regulations to control harmful activities

40
Q

What are maximum prices?

A

This is a price control method which involves the government setting the price below the equilibrium point to make things
more affordable

41
Q

What are minimum prices?

A

Government sets the price above the equilibrium to encourage the supply of certain goods.
This involves National Minimum Wage (NMW) as well.

42
Q

What are government interventions to address market failure

A

Produce merit goods such as education for the needy

It can provide public goods such as street lighting

Public sector can employ people and welfare benefits can be given to the needy

Laws to make goods illegal or high taxes to reduce consumption

Laws and regulations would protect natural environment

Monopolies can be broken up or regulated to keep prices low

Educating consumers about the private costs of consuming demerit goods

43
Q

What is privatisation?

A

Privatisation is the transfer of all assets from the public to the private sector

44
Q

What is nationalisation?

A

Nationalisation is the purchase of all assets by the government

45
Q
A

Economics (2 decks)

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