ch 1. an introduction to macroeconomics

Question 1

what is microeconomics?

Answer 1

involves looking at the operation of the smaller parts that make up the wider australian economy . focusing on a single firm, industry, sector or a particular market

Question 2

what is macroeconomics?

Answer 2

looks at the broader picture combining all markets and industries and the overall state of the economy, concentrates on areas like national spending, output, income, employment, inflation and overall material living standards.

Question 3

relative scarcity

Answer 3

the problem of relative scarcity is that there are only a limited amount of goods and services than can not fully satisfy the unlimited needs and wants of society, where society must make choices on which wants will be met.

• limited resources and unlimited needs and wants

Question 4

3 main types of productive resources available in an economy

Answer 4

• natural
• labour
• capital

Question 5

3 basic economic questions

Answer 5

1. what and how much to produce?
2. how to produce?
3. for whom to produce?

Question 6

resource allocation

Answer 6

involves making choices about how scarce natural, labour and capital inputs are to be used or distributed among competing areas of production.

Question 7

opportunity cost

Answer 7

the cost of the benefit forgone or given up, when resources are used in the production of the next best alternative good or service.

Question 8

the production possibility diagram (PPD)

Answer 8

a way of illustrating the different production options, combinations or choices available for an economy.

Question 9

allocative efficiency

Answer 9

can be illustrated on the production possibility diagram~ any point on the ppf

allocative efficiency, or the efficient allocation of resources, is defined as a desirable situation where resources are used to produce particular types of goods and services that best maximise the overall satisfaction of society’s needs and wants, wellbeing or living standards(long and short term)

Question 10

types of allocative efficiency

Answer 10

1. productive or technical efficiency
2. dynamic efficiency
3. intertemporal efficiency

Question 11

productive/technical efficiency

Answer 11

-budget outlays can help firms employ the best international practices, skills, technology and equiptment.

Question 12

dynamic efficiency

Answer 12

• involves firms being adaptive and creative in response to changing economic circumstances. It is enhances when employees upgrade their education and training. Dynamic efficiency affects the speed of getting from one point on the ppf to another. Thereby increasing allocative efficiency and general welbing.

Question 13

intertemporal efficiency

Answer 13

• is about finding the right balance between employing recources for immediate versus future use, involves trade-offs. One of the costs of taking a short-term view could be leaving a degraded environment and lower living standards for future generations caused by the overexploitation of non-renewable resources and common access resources.

Question 14

a market

Answer 14

an institution where buyers of goods and services, and sellers of goods and services negotiate the price for each good or service.

Question 15

the 4 market structures

Answer 15

1. perfect competition (stronger market power)~ many buyers and sellers)
2. monopolistic competition(more competition)~(20-40 large sellers)
3. oligopoly(less competition)~ (8-10 large sellers)
4. perfect monopoly (weaker competition)~(one seller controls the output of the industry and there is no close substitute product. (e.g. NBN, electricity transmission)

Question 16

what are the conditions for a perfectly competitive market?

Answer 16

1. ease of entry and exit (no barriers)
2. little to no government regulation
3. products are homogenous
4. lots of buyers and sellers
5. there is perfect knowledge

Question 17

how can a perfectly competitive market improve efficiency and living standards?

Answer 17

• stronger competition can lead to higher efficiency in resource allocation
• strong competition can lead to lower prices and greater purchasing power of incomes (lower production costs means that firms are able to produce more at a lower price~ meaning that as a result of lower prices consumers will have more purchasing power and higher consumption levels and material living standards.)
• strong competition can lead to better quality of goods and services and improved customer service.

Question 18

the role of the price or market system in making key economic decisions and allocating resources between alternative uses.

Answer 18

step 1: buyers and sellers negotiate an equilibrium market price.
step 2: relative prices change over time due to new non-price conditions of demand and supply
step 4: resources owners make key economic decisions

Question 19

the law of demand~ shows the relationship through a downwards slope on the curve.

Answer 19

the law of demand states that the quantity of a particular good or service varies inversely with the change in price

as the price goes up~demand contracts

as the price goes down~demand expands

Question 20

what two theories explain the law of demand?

Answer 20

the income effect: when something becomes too expensive fewer people spend on it.
the substitution effect: or when something becomes too expensive they look for cheaper alternatives or substitutes.

Question 21

the law of supply~ shows the relationship between the quantity supplied and the price, upwards sloping on the curve.

Answer 21

the law of supply states that the quantity of a particular good or service that sellers are prepared to produce varies in the same direction with the change in price.

as the price increases the quantity supplied expands

as the price decreases the quantity supplied contracts.

Question 22

what two theories explain the law of supply?

Answer 22

the profit motive: where firms make more profit if they sell at a lower unit price.

consideration of opportunity costs: if opportunity cost rises, its more profitable to reallocate resources away from other uses so that output can be increased(expanding supply)

Question 24

equilibrium

Answer 24

at equilibrium, the quantity demanded exactly equals the quantity supplied for a given period of time, here there is neither a market surplus or shortage that puta pressure on the price and the market clears.

Question 25

changing non-price demand side conditions

Answer 25

can cause buyers to purchase a greater or smaller quantity of a particular good or service at all possible prices. ~ this will shift the demand line either to the right or left(showing a change in demand at a given price)

Question 28

changing non-price supply side factors

Answer 28

cause sellers to produce a greater or smaller quantity of goods or services at all possible prices. (a shift)

Question 29

non-price factors of demand

Answer 29

• changes in disposable income
• changes in the population size and age distribution
• changes in fashions and tastes
• changes in interest rates on borrowed money
• changes in the price of substitutes
• changes in the price of complementary goods and services
• changes in the level of consumer and business confidence
• changes in the seasons
• changes in the government policy and regulations

Question 30

the effect of a decrease in the quantity demanded at a given price.

Answer 30

a shift in the demand curve to the left, means a drop in price(trying to fix a surplus), where demand will expand and supply will contract until a new equilibrium price is reached

Question 31

the effect of an increase in the quantity demanded at a given price.

Answer 31

a shift in the demand curve to the right means that the price rises(trying to fix a shortage), where demand contracts and supply expands.

Question 32

non-price factors/conditions of supply- things that may increase or decrease the quantity that sellers are prepared to supply at any given price.

Answer 32

• changes in production
• changes in technology and productivity
• changes in climatic conditions
• changes on some government policies.

Question 33

the effect of a decrease in the quantity supplied at a given price

Answer 33

a shift in the supply curve to the left means that there is a decrease in the quantity supplied of goods and services that sellers are willing to produce or sell at any given price.
- a rise in the equilibrium price is necessary to clear the market shortage (where the quantity demanded exceeds the quantity supplied)

Question 34

the effect of an increase in the quantity supplied at a given price.

Answer 34

a shift in the supply curve to the right, where the conditions of supply strengthen
- a fall in the equilibrium price is necessary to clear the market surplus(where the quantity supplied exceeds the quantity demanded), where supply contracts and demand expands until a new equilibrium is reached.

Question 35

what is price elasticity?

Answer 35

price elasticity measures the degree of responsiveness of the quantity demanded or supplied, to a given change in price.

Question 36

what is price elasticity of demand?

Answer 36

price elasticity of demand measures the responsiveness of the quantity demanded relative to the percentage change in price.

given by:

the percentage change in the quantity demanded / the percentage change in its price

Question 37

when is price elasticity of demand high(responsive)

Answer 37

if the quantity of a particular good or service demanded changes by a larger proportion than the change in price.
- it means that if prices rise, the total revenue or value of consumer purchases decreases.when the demand line is flat.

Question 38

when is price elasticity of demand of unit elasticity(medium)

Answer 38

if the quantity demanded changes by the same proportion as the change in price. total revenue remains unchanged with a rise in price.

Question 39

when is demand relatively low (inelastic)

Answer 39

the price elasticity of demand is unresponsive or low if the quantity demanded changes by a smaller proportion than the change in price. where buyers are unable or unwilling to significantly contract demand. where total revenue increases with a rise in price. the demand line will be fairly steep.

Question 40

determinants of the price elasticity of demand

Answer 40

• degree of necessity
• availability of substitutes
• time period (long and short term)
• proportion of income

Question 41

what is price elasticity of supply

Answer 41

price elasticity of supply measures the responsiveness/sensitivity of the quantity supplied to the percentage change in price.

given by:
the percentage change in the quantity supplied / the percentage change in its price

Question 42

when is supply relatively elastic?

Answer 42

the price elasticity of supply is responsive or elastic if the good or service offered for sale changes by a larger proportion than the change in price. in this case firms can easily expand output in response to the rise in price. (the supply line is fairly flat)

Question 43

when is supply of unit elasticity(medium PES)

Answer 43

if the quantity supplied changes by the same proportion as the change in price.

Question 44

when is supply relatively inelastic(unresponsive)?

Answer 44

if the quantity supplied changes by a smaller proportion than the change in price. here firms are unwilling/ unable to respond to the rise in price. the supply line is fairly steep.

Question 45

determinants of the price elasticity of supply

Answer 45

• product storability and durability
• the availability of spare capacity
• the time period

Question 46

what is the significance of price elasticity of demand and supply?

Answer 46

1. the pricing policies of sellers ~ businesses consider the price elasticity of demand when pricing their products. e.g. when to discount their products(example: if the demand for a good is unresponsive/inelastic then they will increase their revenue and profits~~~in baby language: if people buy goods, regardless of how expensive it is, firms will have more money.)
2. the raising of government revenue ~ governments use products with a low or inelastic price elasticity of demand and put a heavy excise tax to raise their profits. (e.g. tobacco, alcohol, petrol, healthcare)

Question 47

5 types of market failure

Answer 47

1. the abuse of market power
2. the existence of asymmetric information
3. the occurrence of positive and negative externalities
4. the provision of public goods by the private sector
5. the misuse of common access resources

Question 48

what are public goods?

Answer 48

public goods are particular products or services that can be consumed collectively by an individual, without preventing others from accessing them and from which nobody is excluded from using, even if they don’t pay for them.

• non-excludable ~~(leads to the free rider problem in the provision of public goods where consumers who don’t pay still gain access or benefit.
  and
• non-rivalrous

market failure~~~ where insufficient resources will be allocated to the production of public goods.
- in the absence of provision by the government~~~sometimes the production of public goods will be left to the private sector and will be underproduced, even though they are highly beneficial and will improve society’s overall satisfaction and wellbeing.

• a change in budget is used to improve the provision of public goods and to provide items through outlays, paid from tax revenue

Question 49

common access resources

Answer 49

include environmental natural inputs such as air, minerals, forest. the goods are non-excludable and free, but also rivalrous.
the market fails to send proper price signals or information that lead to an efficient allocation of resources
- this is a serious problem for current and future generations,
~~ climate change, severe weather events, the release of toxic substances. pollution….

• the government can put new policies in place to protect forests and marine, fish stocks in rivers and oceans, climate as common access resources.
• carbon tax to reduce CO2 emissions, carbon tax imposes a cost on businesses releasing CO2 emissions into the atmosphere–paid directly by the polluters.this creates incentive for firms to find cleaner manufacturing processes and processes and products.

Question 50

examples of government intervention in markets that unintentionally decreased efficiency resource allocation, (allocative, technical, dynamic or intertemporal )

Answer 50

1. setting the minimum wage artificially high to help protect the living standards of low income employees may unintentionally undermine allocative efficiency and society’s wellbeing by:
   - causing a market surplus of labour that represents structural unemployment.
   - artificially raising production costs for local firms, reducing labour productivity, undermining international competitiveness, cutting business profits and adding to the closure of firms
   - increasing structural unemployment driving some people onto welfare and creating a burden for taxpayers
2. using government policies to help reverse declining home ownership and affordability, may have unintended consequences that undermine allocative efficiency, lower society’s wellbeing and lead to failure by:
   - helping to increase demand for first homes relative to the low supply. ~~ this could raise the price and reduce the affordability of first homes.
   - encouraging those individuals who may not be able to afford to make loan repayments, later creating financial stress and the possibility of negative equity during times of falling house prices.
3. paying subsidies to the coal industry to encourage production, exports and employment, may have unintentionally reduced allocative efficiency and intertemporal efficiency and society’s general wellbeing by:
   - increasing CO2 emissions, accelerating climate change, adding to negative externalities.
   - creating large opportunity cost for society that reduce our overall welbeing.

Question 51

specific example: unintended problems of allocating resources into subsidies for the coal and fossil fuel industry~

Answer 51

• the government provides producers with cash pmt/financial assistance to increase production levels, encourage new industries to start up, and old ones to restructure their operations more efficiently, generate jobs and overcome mkt failure associated with the underproduction of goods with social benefits (common access goods)
• statistics:
  ~ in 2021-22, fossil fuel mining companies received subsidies of over $11.6B, which they funded R&D projects and the provision of infrastructure like water, roads, and railways. this was an increase of $1.3B (12%) on the pervious year– spent in the budget for the national recovery and resilience agency dealing with the effects of climate change.
• an unintentional net loss of wellbeing, causing overall living standards to be lower both now and in the future
  due to:
  ~ increased negative externalities
  ~ massive opportunity cost

Question 52

specific example: first home loan deposit scheme

Answer 52

the first home loan deposit scheme is designed to help increase home ownership. here the government goes guarantor for home buyers who managed to save as little as 5% of the purchase price of a house (rather than the normal 20% required for a bank loan)
- commenced in jan 2020,
main features:
- in 2022-23, the scheme was expanded with higher limit of 35,000 buyers.

• represent an example of government failure:
  ~ that the policy intervention in the operation of the market designed to lift home ownership and increase allocative efficiency, has reduced housing affordability and not properly addressing the underlying causes .

more notes:
~ they have driven up demand for property more than they have increased its supply, by making it easier for ppl to get a loan, this unintentionally put more upwards pressure on house prices forcing first home buyers to take out larger mortgages than normal. ~~reducing affordability