AOS 1- microeconomics Flashcards
Relative Scarcity
needs/wants=unlimitted
resources too satisfy them(labour, natural, capital)=limited
–> need for economic decisions to be made of how to allocate resources
need
Items which are essential to survive (water shelter clothing food)
wants
Items which are non-essential however enhance our lives (phone television computer)
opportunity cost
Value of the next best alternative for gone when economic decision is made
efficient allocation of resources
this occurs when living standards are maximised and our needs/wants are best satisfied
allocative efficiency
the efficient allocation of resources occurs when living standards and welfare are maximised. x increase living standards by reallocation
productive/technical efficiency
X possible to increase outputs without increasing inputs. maximising the output from a given level of input
inter-temporal efficiency
how well resources are allocated over different time periods so the living standards of current generations are not jeopardising the living standards of the future generations
dynamic efficiency
how quickly economies can reallocate resources to achieve allocative efficiency, being adaptive and creative in response to changing economic circumstances
three economic questions
What (and how much) to produce?
who to produce for?
how to produce it?
nature and conditions for a free and perfectly competitive market
Consumer sovereignty exists- consumers direct/allocate resources
large number of buyers and sellers, of which, none have market power (price takers)
homogenous products (identical+ easily substitutable)
ease of exit and entry (low startup costs, regulations etc)
assumptions of perfectly competitive market
Buyers and sellers operate with perfect info
resources are mobile
behavior is rational, buyers=maximise utility/satisfcaction, sellers=profit
law of demand
increase price-> decrease demand and vice versa
demand
willingness and ability of consumers to purchase goods and services
market/price mechanism
describes how forces of supply and demand influence (relative) prices of goods and services, which then coordinates productive resources (such as labour and capital and natural) are allocated in economy
income effect
reduced consumption of g/s whose prife has increased, due to reduction in consumers purchasing power or an increase in consumption of a good or service whose price has decreased due to increase in consumers purchasing power
substitution effect
decreased consumption of a g/s whose price has increased due to changed trade-off: the fact that one must give up more of another g/s to get more units of the high priced g/s
non price demand factors
changes is disposible income
price of substitutes
price of compliments
preferences+tastes
interest rates
pop. demographics
consumer confidence
discretionary income
disposible income availiable for consumption following the payment of all ‘non avoidable’ expenditures, such as food/clothing
disposible income
income availiable for spending after the receipt of welfare benfits and deduction of personal taxes
supply
Willingness and ability of suppliers/ producers to supply/produce
law of supply
as price increases so to do supply, as it decreases so to does supply
microeconomic supply non-price factors
change in cost of production
number of suppliers
technological changes
productivity
climatic conditions
market equilibrium
buyers and sellers interact in the market to determine selling price and quantity
equilibrium–> where qty demanded for g/s= quantity supplied of that g/s
7 steps for shift in demand/supply
- explain situation in own words-> NP factor
- supply or demand
- increase/decrease
- shift curve right or left
5.if at constant P1, temporary shortage/ surplus - market forces put upward/downward pressure on price to adjust to a new equilibrium, E2, with a cont/exp in curve, and a cont/exp in other curve
- Overall impact on P+Q
Price Elasticity of demand formula
%quantity demand/%Δprice
Price elasticity of demand definition
the responsiveness of total quantity demanded of a product to changes in the price of that product
factors effecting price elasticity
The degree of necessity- more needed-> purchase at any price
Availability of substitutes- more substitutes means can swap if prices go up
Portion of income, greater % of income-> up effect of % price change
time, short term-> cons= habitually consume, long term-> start to realise price changes-> price shock -> change consumption
significance of price elasticity of demand
Bus- pref low PED-> low effect of Δprice
bus take PED into account when Δprice, ie if high elasticity, sales= profit
govt consider PED when Δindirect tax
Price Elasticity of Supply
the resposiveness of quantity supply to changes in price
price elasticity of supply formula
PES=Δ%Supply/Δ%price
factors effecting Price Elasticity of Supply
Spare capacity- resources
production period
durability of goods
Significance of PES
The PES can affect the economic viability of a business sell as they’re ability to respond to changing price signals.
market/price mechanism
describes how the forces of supply and demand inlfluence (relative) prices of goods and services, which then coordinates the way productive resources are allocated in the economy
relative prices
the price of a good or service relative, or compared with another
key points for relative prices and reallocation of resources
Price Mechanism describes how the forces of demand and supply influence prices of goods and services and in turn relative prices of goods and services which then coordinates the way productive resources (such as labour and capital) are allocated in the economy.
Changes in relative prices send clear price signals to producers and consumers who investigate the reasons for the changes and hence determine whether to reallocate resources (if demand driven)
how does market system/ resource reallocation–> living standards
materially-> uphold consumer demand by produing what is demanded by producers, hence decreasing price of g/s–> increase Mat LS
non materially-> increased production to meet consumer demand may –> more pollution in order to rappidly meet consumer demand.
effect of pure competition on allocative efficiency.
No barriers to entry and exit means that producers can quickly move they’re resources in order to fulfil an emerging social need for a particular good or service–> allocative efficiency
effect of pure competition on productive efficiency
Low barriers to entry and exit combined with mobility of resources +Many sellers = high levels of competition. to be competitive, producers mustminimise costs and maximise output to be able to compete and winmarket share through low possible selling prices.
effect of pure competition on dynamic efficiency
low barriers to entry and exit means businesses can rapidly shift between markets or products in order to adapt to emerging economic condition.
effect of pure competition on inter temporal efficiency
due to immense need for productive efficiency to be competitive, businesses may not consider inter temporal efficiency in decision making, prioritising short term gain without considering the long term negative externalities for future generations ( such as pollution and degradation of resource pool). Hence limiting inter temporal efficiency
market failure
What an unregulated market is unable to allocate resources efficiently or where resources are allocated in such a way that national living standards or welfare is not maximised. It will result in an over allocation of resources to the production or consumption of some goods or services and an under allocation to others
public goods
Goods/services available for all people to use, gain benefit from all enjoy socially desirable and important to all even if poor.
Nonexcludable – you cannot exclude nonpayers from enjoying the benefits that they good or service is provided which gives rise to the free ride a problem.
Non-depletable/non-rivalrous in consumption – one persons consumption does not diminish the ability of another person to enjoy the same consumption so all benefit equally
forms of govt intervention for public goods
Government subsidies – a payment or concession of a producer or consumer that is designed to increase consumption/production of a good or service by covering some of the costs involved. = cash payment, low or no interest loan, subsidised costs.
Direct government provisions – governments directly produced the good or service such as Lighthouse, public lighting, defence, education.
Common access resources
resources which are benificial to society, and are depletable ( consumption prevents further consumption ), but is non excludable (cannot restrict individuals from accessing them in a free market), hence, have no market price.
CAR Market failure
in an unregulated market, given businesses are profit driven, they will over consume the common access resources–> depletion of common access resources which limits inter temporal efficiency
CAR govt intervention
Legislation used to reduce consumption of common access resources through permits, quotas or setting and monitoring areas.
Indirect taxes–> carbon tax/ ETS
–> places a price on they’re consumption
subsidies–> used to encourage clean technologies
under Renewable energy target scheme, Govt subsidies+ dev–> implementation of techs
externalities+ why market failure
externalities refer to the effect of production or consumption on an uninvolved third party.
Market failure because businesses in an unregulated market seek only profit, overlooking the effect that they’re production has on an independent third party. Hence not maximising the living standards of the nation as production/consumption with negative externlities (such as cigarettes or alcohol) is overproduced, while prod/cons with positive externalities( such as healthy foods or vaccinations) = underproduced
how does govt correct market failure of externalities
subsidies
direct govt provision–>. health+edu+ research+dev= csiro
govt regulations, –> legislation to inhibit or limit production/ consumption
indirect taxes
asymmetric information
a type of market failure whereby one economic agent has less than the other, hence perfect information about the value of the good or service is unknown, hence causing inefficient allocation of resources.
govt intervention for asymetric information.
govt regulation–> x allow any misleading info. ACCC-> Competion and consumer act 2010
govt awareness advertising–> benefits of eating fresh veg+ smoking drinking gambling
subsidies–> provide subsidies to firms who provide meaningful info to cons.
government failure+ example
whereby the government aims to address one economic problem but in doing so minimises the living standards of the nation. For example, the introduction of minimum wage–> inefficient market system
