AOS 1 Flashcards
Relative scarcity
A situation where resources are limited compared to the demands placed upon those resources by our needs and wants. As consumers, we make decisions about the types and quantity of goods and services that we want to consume. As producers, we make decisions about materials, machinery and used in production.
The possibilities arising from these economic decisions are almost endless but we can’t have it all.
Needs and Wants
need are considered to be those goods and services that are essential - food, clothing, shelter etc. We have fairly limited needs for basic survival.
Wants are those goods and services that we desire and are likely to improve our standard of living, but not essential for survival. We have Unlimited wants.
Resources
Resources are things that used to produce goods and services, they are also known as factors of production. Resources tend to fall into
the following categories:
Natural
Labour
Capital
Entrepreneurship
Relative scarcity and decision making
Producers of goods and services must make decisions about how to combine resources in order to best satisfy consumers and make profit. Income earners make decisions about how they use their labour to achieve the best outcome for themselves. Consumers make decisions about how they use their incomes to gain satisfaction from spending and consumption.
How governments make decisions to meet relative scarcity
What to produce?
How to produce?
For whom to produce?
Trade offs
In any economic situation trade offs occur.
To gain something of value with our time or money, we
necessarily forego the opportunity to do a range of
other things with that time or money.
Difference between trade offs and opportunity cost
The term trade off can be used to identify any opportunity forgone in an economic transaction.
Opportunity cost is the cost of the next best alternative.
The two trade off we will consider in detail are:
1. The current and the future
2. Short run and Long run.
Production Possibility
A production possibility curve (PPC) is also referred to as
the Production Possibility Frontier (PPF). It is a tool used by economists to highlight a number of different concepts, including the concepts of scarcity, choice, opportunity cost, underutilization of resources and efficiency.
Assumptions when using a ppc
Only two goods (or services) are being produced in an
economy; All resources or factors of production can be used in the production of either good (or service), and so they are easily able to be swapped between production of the two goods (or services); and All resources are fully and efficiently employed.
Types of efficiency
Technical or Productive Efficiency: A nation’s resources are producing the maximum amount possible (and at the lowest cost). This type Of efficiency means that productivity levels in an economy are at their peak.
Allocative Efficiency: Resources are allocated or used in the economy in combinations that provide the maximum possible benefits for consumers and the nation.
Underutilisation and scarcity
If the production of an economy falls within
the PPC it is deemed to be inefficient as there
is an underutilisation of resources. The
Economy is capable of producing more.
If the economy is attempting to produce
outside the PPC this is impossible with the
scarce resources available and there would
need to be an increase in the availability of
resources in order to produce at that rate.
Competitive Markets
A competitive market is one which forms the basis of supply and demand analysis. They have key
conditions including:
A large number of buyers and sellers
Homogenous products
Ease Of entry into and exit from the market
Full information — rational choices
Resources are mobile
Buyer and sellers seek to maximise their wellbeing (profit/utility)
Economic efficiency
Economic efficiency implies a situation where resources are allocated in such a way that the goods and
services produced achieves the highest levels of collective satisfaction.
There are four types of efficiency:
Allocative efficiency
Productive (Technical) efficiency
Dynamic efficiency
Inter-temporal efficiency
Allocative Efficiency
Allocative efficiency is reached when resources
are allocated in such a way that the goods and
services produced achieves the highest level of
collective satisfaction. In this state, no one can
be made better Off without harming another.
Collective benefit. Respond to needs and wants of buyer.
Productive efficiency
Productive efficiency exists when producers
minimise the wastage of resources. A firm is
considered to be productively efficient if it is
producing the maximum amount Of outputs
(goods and services) from the minimum amount Of
inputs (resources). On PPF they are all on the curve.
Limit waste, minimise cost- max output for min input- sterilising resources correctly,
Dynamic efficiency
Dynamic efficiency is the ability of an economic system to move to a new allocatively efficient point following changes in conditions of supply and/or demand. The level of dynamic efficiency determines how quickly the market responds to changed conditions by reallocating resources to the now more profitable areas Of production.
It is linked to innovation, as When the market changes, firms will look for innovative ways to improve
allocative and productive efficiency over time. This can mean developing new or better products and
finding better ways Of producing goods and services.
Moves resources easily to respond to changing conditions. Responding for change quickly.
Intertemporal efficiency
Intertemporal efficiency is about having the right balance between resources used for current and future needs.
The unsustainable use of a nation’s resources (e.g. depleting fishing stocks or native forests) or emitting
excessive volumes Of pollution into the atmosphere are common examples Of how intertemporal efficiency might not be achieved.
The focus Of many government policies is to achieve greater intertemporal efficiency so that we use
our resources sustainably and current generations do not impose an unfair burden on future
generations. Balance current and future needs. Encourages business to be somewhat forward thinking
Effect of competitive markets on the efficiency of resource allocation
Allocative efficiency - as competitive markets have a large number of buyers and sellers as well as easy
entry and exit in the market, suppliers are more likely to pay close attention to price signals to ensure
that they allocate resources to areas of demand, increasing allocative efficiency. If they do not do this,
they will fall behind the competition.
Productive efficiency - It could be argued that greater competition Will lead to improved quality and
lower prices for goods and services. This could in turn increase demand which encourages suppliers to
increase employment Of resources so that they are able to meet the needs and wants Of consumers,
improving productive efficiency. Further to this, increased competition encourages suppliers to reduce
costs and waste in order to compete on price and maximise profits which results in greater productive
efficiency.
The Law of Demand
The law of demand states that as prices fall, demand
increases; as prices rise, demand decreases. This reflects
‘natural consumer behaviour’, whereby consumers seek
high quality goods and services at low prices (bargains),
and will quickly divert their demand to other, cheaper
substitutes when prices rise.
Movements and Shift
Movements- along the demand curve represent the changes to market equilibrium that occur
as an expansion or contraction of demand occurs without a particular factor causing the
willingness and ability of consumers to demand changing. a change in demand caused
by a shift in supply.
of the demand curve occur when the conditions that influence the willingness and ability
Shifts -of consumers to demand a particular good or service changes. For example, a shift to the right
of the whole demand line represents rising demand as an expansion along the supply line
occurs to create the new equilibrium and avoid market shortage. This reflects rising demand at
higher prices, demonstrating how the law of demand operates.
Factors affecting demand
• Disposable Income:The amount of money an individual has after the payment of direct taxes such as
personal income (PAYG) tax. If disposable income were to rise, consumption expenditure also typically
increases signaling a rise in production is required within specific markets.
• Price of Substitutes:When the price of one item in a market falls relative to another that it can easily be
substituted for, the demand for the lower priced item will rise relative to that with a higher price. For
example, in the market for butter, a fall in the price of margarine will likely cause the demand for
margarine to rise and the demand for butter to fall to a relative degree.
• Price of Complements:VVhen the price of a good or service that must be consumed alongside another
rises, the demand for the original item is likely to fall. For example, as the cost of petrol increases,
demand for cars is likely to fall.
More factors affecting demand
• Preferences and Tastes: This is a concept that simply determines the way consumer demand is not
stagnant, and is typically responsive to such influences as advertising campaigns, celebrity endorsements,
and other social factors that impact the popularity of a particular good or service in individual markets.
• Interest Rates: relating to the additional costs associated with servicing (repaying) a loan.VVhen
interest rates are low, it becomes relatively cheaper spend using credit, thus spending rises bearing some
effect on all markets within Australia.
Population:
As population continues to grow, consumer demand will likely increase in general over
time, bearing some effect on all markets within Australia
.
• Consumer Confidence: relates to the degree of optimism consumers have regarding their future
income, employment and overall economic situation.”Nhen more optimistic consumers are likely to
increase consumption, bearing some effect on all markets within Australia.
The law of supply
The law of supply states that as prices rise, supply increases; as prices fall, supply decreases. This reflects
‘natural producer behaviour’, whereby suppliers seek
high profits at low costs, and will quickly divert resources
away from less profitable forms of production towards
others yielding higher profits.
Movements and shifts in supply
• Movements along the supply curve represent the changes to market equilibrium
that occur as an expansion or contraction of supply occurs without a particular
factor causing the willingness and ability of producers to supply changing.
• Shifts of the supply curve occur when the conditions that influence the
willingness and ability of producers to supply a particular good or service
changes. For example, a shift to the right of the whole supply line represents
rising supply and an expansion along the demand line occurs to create the new
equilibrium and avoid market shortage. This reflects rising output at lower prices,
demonstrating how the law of supply operates.
Factors affecting supply
Cost Of Production:
and services.A rise in the price of even one of the resources. also known as factors of production, Will lace pressure on prices charged
to consumers to increase, as producers seeking profits will be unwilling to absorb these additional costs.
Technological Change: Technology is considered an important Component part in the production of finished goods and services.
Technological change is likely to be framed in terms of the ability of particular firms or industries to adopt the positive attributes of such
changes which will assist in expanding the productive capacity of particular firms/industries.
Productivity Growth: relates to the level of output per unit of input of resources.As productivity •grows’ the Australian econonly will
experience falling per unit costs. whereby each good or service produced in Australia will cost less to produce due to the improvements
made to the Way’ they are produced. The domestic economy will become more competitive, both internally and externally, fostering an
ongoing improvement and agenda.
refers to the way in which incidences such as cyclones, floods, drought and appropriate rain levels may create a
Climatic Conditions: more or less favourable climate within which to produce. Agricultural markets and those industries relying on the output of the domestic
primary industries sector will be directly impacted by the state of the climate and its relationship with the availability of natural
THE EFFECTS OF CHANGES IN SUPPLY AND DEMAND
ON EQUILIBRIUM PRICES AND QUANTITY TRADED
• Increased demand:A shift of the demand to the right, which occurs when demand side conditions
improve or become stronger, represents an expansion along the supply curve to create a new equilibrium point
at higher prices and higher quantity.
• Decreased demand:A shift of the demand curve to the left, which occurs when demand side conditions
weaken, represents a contraction along the supply curve to create a new equilibrium point at lower prices and
lower quantity.
• Increased supply:A shift of the supply cure to the right, which occurs when supply side conditions improve or
become stronger, represents an expansion along the demand cure to create a new equilibrium point at lower
prices and higher quantity.
• Decreased supply:A shift of the supply curve to the left, which occurs when supply side conditions become
weaker, represents and contraction along the demand cure to create a new equilibrium point at higher prices
and lower quantity.
Relative Prices
• The price of any good or service, compared to the price of
another.
• Divide the price of one item by the price of another. EG:
o Price of Mars Bar is $4 compared to a Milky Way at a price of $2.
o Can be used as a measure of opportunity cost
• Assume that Milky Way dropped in price to $1, then the new
ratio would become 4:1.
• While the price of Mars Bars has remained the same, it’s
relative price has increased in terms of what else could be purchased.
• Relative prices send signals to the market about what to
produce.
• Increased relative prices due to increased demand may tell a
supplier to use their resources to provide for this good.
Price Elasticity of Demand
PED refers to how responsive a change in demand will be relative
to the change in price.
• High PED (elastic) — Percentage change in qty demanded will be greater
than percentage change in price
• Low PED (inelastic) — Percentage change in qty demanded will be lower
than the percentage change in price
• Medium PED (unit elasticity) — Percentage change in qty demanded will be equal to the percentage change in price
Factors affecting PED
Degree of necessity
Availability of substitutes
Proportion of income
Time
Price Elasticity of Supply
• PES refers to how responsive a change in supply will be relative
to the change in price.
• High PES (elastic) — Percentage change in qty will be greater than the
percentage change in price
• Low PES (inelastic)— Percentage change in qty will be lower than the
percentage change in price
• Medium PES (unit elasticity) — Percentage change in qty will be equal to
the percentage change in price
Factors affecting PES
• Production period
• Spare capacity
• Durability of goods
MARKET FAILURE
Market failure is a term used to describe a market outcome that is sub- optimal. This means that the combination of goods and services that is produced and made available in the market does not lead to the maximisation of society’s well being, or the market does not achieve ‘allocative efficiency’. Either over or under allocating
Markets are the best way to achieve allocative efficiency because buyers and sellers act in their own self-interest and compete against each other to maximise their individual level of satisfaction (or profit in the case of businesses).
Businesses therefore have the incentive to seek the lowest cost method of production and offer the best quality product possible so that they can attract customers. In doing so, consumers are able to purchase a greater volume of goods and services that are of a higher quality, thereby improving their living standards and level of wellbeing.
Reasons:
● Public goods
● Asymmetric information
● Externalities
● Common access goods
PUBLIC GOODS
• Public goods are usually provided by the government for the benefit of everyone – even if they can’t afford to
pay for them. This can include things such as national parks, beaches, street lighting or defence.
• It creates the free rider problem – payment is difficult to extract from those who benefit from it.
• If operating in a free market – there would tend to be an under allocation of resources to these markets
• The government typically intervenes in these markets to ensure that adequate resources are allocated to them.
• The government will pay for these public goods using revenue raised from a range of sources including taxes.
Non excludable/ non-rivalrous
EXTERNALITIES
• Externalities are the costs or benefits for third parties that arise when goods and services are produced or consumed.
• Can be positive externalities or negative externalities.
• Buyers and sellers ignore the impact of the externalities when making decisions – therefore resource allocation will be inefficient. E.g Indirect taxes (excise tax on tobacco,Carbon Tax)
ASYMMETRIC INFORMATION
• Asymmetric information exists where buyers or sellers lack complete information required to make rational decisions about how to use their resources.
• In some cases, one party knows more than the other about the product and this can lead to inefficient outcomes.
The Government can again use legislation to protect against this – such as labeling of ingredients on foods.
• Access to information is important – government can assist in providing the information or at least provide a means for people to access information.
Common Access Resources
Common access resources are natural resources, such as forests, rivers and oceans, and human-made resources that are usually not owned by anyone. Generally, they can be accessed by all members of the community and used without payment.
‘The tragedy of the commons’ is a phrase which describes an economic problem in which individuals try to gain the greatest benefit from a given resource, such as fish stocks in a lake, causing overuse and depletion of the resource, which harms others who can no longer benefit from the resource.
Common Access Resources
Common access resources differ from both private and public goods.
Consumption of common access resources is non-excludable and rivalrous, whereas the use of public goods is non-excludable and non-rivalrous, while private goods are both excludable and rivalrous.
Non-excludability means that it is difficult or impossible to exclude individuals from using the resource.
Rivalrous means that one person’s use of a resource reduces or prevents another person’s use of it.
The rivalry and non-excludability of common access resources pose threats to the natural environment and reduce the ability of nations to achieve sustainable development.
The lack of a price for these goods means that individuals acting in their own self-interest have the incentive to overuse them and this tends to reduce the amount goods available for current and future generations.
This can be linked to the concept of inter-temporal efficiency.
Positive and negative externalities
A positive externality in production occurs with medical research. For example, if a business investigates cures for COVID‑19 and finds one, then others in society might benefit from this cure.
A positive externality in consumption occurs with education, where an individual pays for a tertiary education but can then help others in society through the knowledge and skills they gained.
A negative externality in production occurs when a business causes pollution to the air or water as part of its production process, thereby reducing the quality of these for others in society.
A negative externality in consumption occurs when a person consumes a cigarette, reducing the air quality for those around them.
Government failure
Government Failure
• Government failure occurs where the governmen
intervened in a market, but it has arguably resultc
inefficient allocation of resources (market failure)
living standards. E.g labour market
Price Controls / price ceilings
Price controls include price ceilings and
price floors
Price ceilings are where sellers are
prevented from selling their
goods/services above a certain prices.
• The intention may be to make items
affordable for low income earners
(perhaps affordable rent for example)
However, they often create a shortage
and black markets operate.
Price Controls/ Price floors
• Price floors are prices cannot go
below a certain level
• The intention would be to
protect the income of those
selling the products (for example,
minimum wages in the labour
market).
Often result in surpluses.
E.g minimum wage is a price floor to protect employees from getting paid less than they should have
