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Economics - G9 Term 1 > Chapter 2: Allocation of Resources > Flashcards

Chapter 2: Allocation of Resources Flashcards

1
Q

Compare a macroeconomy and a microeconomy [2]

A

Macro: deals at an economy level
Micro: deals with a product market

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2
Q

Define an economic system [1]

A

The way in which a particular country attempts to solve the basic economic problem

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3
Q

What are the fundamental economic questions? [3]

A
  1. What to produce
  2. To whom to produce
  3. How to produce
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4
Q

Name the types of economic systems [3]

A
  1. Market economy
  2. Planned economy
  3. Mixed economy
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5
Q

What is a free market economy? [2]

A

An economy where all decisions about allocation of resources are taken by private sectors by the producers and consumers with no government intervention

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6
Q

Describe the features of a free market economy [5]

A
  1. Decisions are made by individual sellers and buyers who can generally be expected to act in their own self interest
  2. Main aim is to maximize seller profits
  3. Consumers main aim is to maximize their satisfaction/utility giving rise to the idea of consumer sovereignty (providing what consumer desires)
  4. Allocation of resources are determined by supply and demand
  5. Government won’t interfere in functioning of the private sector
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7
Q

Describe the advantages of a free market economy [3]

A
  1. Government can focus on other important things
  2. Profit motives give the seller incentives to be productively efficient that might otherwise not be the case
  3. Cost effective produces could benefit through low prices
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8
Q

Define price mechanism [1]

A

Allocation of resources determined by market forces of supply and demand

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9
Q

Define demand [2]

A

Demand is the willingness and ability of a consumer to buy a product at a specific price during a specific period of time.

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10
Q

Define quantity demanded [1]

A

The amount of goods or services consumers are willing and able to buy t a specific price.

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11
Q

State the law of demand [2]

A

If the price of a product increases, quantity demanded decreases
If the price of a product decreases, quantity demanded increases
Ceteris Paribus

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12
Q

When is there movement along the demand curve? [1]

A

When there is a change in price

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13
Q

When is there a shift in the demand curve? [2]

A
  1. A non price factor increases demand
  2. A non price factor decreases demand
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14
Q

What is a contraction and expansion along the demand curve? [2]

A

Contraction: increase in price and decrease in quantity demanded
Expansion: decrease in price and increase in quantity demanded

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15
Q

State the non-price factors affecting demand [6]

A
  1. Tastes and preferences: commodities which are out of fashion are less in demand as compared to those which are in fashion.
  2. Advertising: a successful advertising campaign may affect the demand for a product
  3. Climate: changes in climate affects the demand of certain goods and services
  4. Changes in population: an increase in population will usually result in a rise for most products
  5. Price of related goods: If the price of a substitute increases, the demand for the product will increase and vice verse. If the price of a complimentary or utility good (a good that enhances the quality of another good) increases, the demand decreases and vice versa.
  6. Income: For normal goods, if the income increases, demand increases and vice versa. For inferior goods, if the income increases, demand decreases and vice versa (goods that are low-quality as compared to substitutes).
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16
Q

Define an individual and and market demand [2]

A
  1. Individual: demand of one consumer
  2. Market demand: the total demand for that product from all its consumers willing and able to buy it
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17
Q

Define supply [2]

A

The ability and willingness of producers to provide a product at a certain price during a specific period of time

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18
Q

Define market supply [1]

A

The sum of all the individual supply curves of producers competing to supply the product

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19
Q

Define quantity supplied [1]

A

The amount of a good or service producers are willing and able to make and sell to consumers in a market.

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20
Q

Define the law of supply [2]

A

An increase in price leads to an increase in quantity supplied, and vice versa

21
Q

When is there movement along the supply curve [1]

A

When there is a change in price

22
Q

What is a contraction and extension on a supply curve [2]

A
  1. Extension: increase in price and therefore quantity supplied
  2. Contraction: decrease in price and therefore quantity supplied
23
Q

What are the non price factors affecting supply [7]

A
  1. Increase in cost of production: supply decreases (leftward shift in supply curve)
  2. Subsidy: financial aid provided by the government to producers. It reduces cost of production, and increases supply (rightward shift)
  3. Indirect tax (tax on expenditure): cost of production increases, supply decreases (the money that may have been earned by the suppliers is taken by the government in the form of indirect tax)
  4. Changes in quantity of resources available: increase in quantity increases supply
  5. Technological change: advancements in technology, increase in supply
  6. Profitability of other products: if another product seems more profitable than the one being produced, more resources are allocated to it, so supply reduces
  7. Any supply shock
24
Q

Define a planned economy [2]

A

An economic system in which resources are owned by the government and allocation is based on social welfare. No private sector.

25
Q

Define a mixed economy [2]

A

An economic system in which resources are owned both by the government and private sectors. Allocation of resources in based on social welfare and market forces. Both public and private sectors.

26
Q

Define a market [1]

A

A place where buyers and sellers meet to make a transaction

27
Q

Define market equilibrium [2]

A

A market is said to be in equilibrium when where is a balance between demand and supply. If something happens to disrupt that equilibrium then the forces of demand and supply respond until a new equilibrium is established.

28
Q

Define shortage/excess demand and surplus/excess supply [2]

A
  1. Shortage: when quantity demanded is greater than quantity supplied
  2. Surplus: when quantity supplied is greater than quantity demanded
29
Q

Define price elasticity of demand (PED) [1]

A

The measure of responsiveness of quantity demanded to a change in price

30
Q

What is the formula for PED? [1]

A

percentage change in quantity demanded/percentage change in price
OR
(((QDf-QDi)/QDi)100)/(((Pf-Pi)/Pi)100)

31
Q

Why is PED always negative? [1]

A

Due to the law of demand, which states that price and quantity demanded move in opposite directions

32
Q

State the values of PED and what they mean [5]

A
  1. PED = 0: demand is perfectly price inelastic (demand is not effected by change in price)
  2. PED between 0 & 1: demand is price inelastic
  3. PED = 1: demand is unitary price elastic
  4. PED is between 1 & ∞: demand is price elastic
  5. PED = ∞: demand is perfectly price elastic (any change in price will affect demand)
33
Q

Factors affecting PED [8]

A
  1. Number of close substitutes: if number of substitutes is low, demand is price inelastic
  2. Time period/how long the consumer has to search for a substitute: in the short run demand is price inelastic and in the long run it is elastic
  3. Proportion if income spent of commodity: if it is low, demand is inelastic
  4. Degree of necessity: if it is essential, demand is price inelastic
  5. Brand loyalty: strong loyalty, demand is price inelastic
  6. Cost of switching: if cost is high, demand is price inelastic
  7. Breadth of definition of product: narrowing the definition of the product means the demand is price elastic
  8. Addictive nature: more addictive, demand is inelastic
34
Q

Why is PED useful? [2]

A

Knowledge of PED allows firms to optimize the pricing and promotional strategies for their products to best achieve their sales, revenue or profit targets.

35
Q

Define price elasticity of supply (PES) [1]

A

The measure of responsiveness of quantity supplied to a change in price

36
Q

What is the formula to calculate PES? [1]

A

percentage change in quantity supplied/percentage change in price

37
Q

Why is PES always positive? [1]

A

Price and quantity supplied always move in the same direction according to the law of supply.

38
Q

State the values of PES and what they mean [5]

A
  1. PES = 0: supply is perfectly price inelastic (supply is not effected by change in price)
  2. PES between 0 & 1: supply is price inelastic
  3. PES = 1: supply is unitary price elastic
  4. PES is between 1 & ∞: supply is price elastic
  5. PES = ∞: supply is perfectly price elastic (any change in price will affect supply)
39
Q

State the factors affecting PES [5]

A
  1. Durability/ability to maintain stock of the product: high - supply is price elastic
  2. Time taken to produce: high - supply is price inelastic
  3. Availability of spare capacity: high - supply is price elastic
  4. Occupational mobility: low - supply is price elastic
  5. Technological advancements: supply becomes elastic
40
Q

What is the most desirable PES for a firm?

A

For it to be highly responsive because a high PES makes the firm more competitive leading to more revenue and profits.

41
Q

How can we improve the PES for a product? [10]

A
  1. Creating spare capacity
  2. Using the latest technology
  3. Keeping sufficient stocks
  4. Developing better storage system
  5. Prolonging the shelf life of products
  6. Developing better distribution systems
  7. Providing training for workers
  8. Having flexible workers who can do a range of jobs
  9. Locating production near to the market
  10. Allowing inward migration of labor if there is a labor shortage
42
Q

If there is an increase in price of coffee, explain with a diagram the impact on the market for tea [3]

A

Tea and coffee are substitutes because they serve the same purpose. If the price of coffee increases, there might be a rise in demand for tea because the tea is relatively cheaper now and people may prefer tea to coffee. As there is an increase in demand due to a non-price factor, it leads to a rightward shift in demand curve as shown in the diagram. Demand curve shifts from D1 to D2 which increases the price from P1 to P2 and the quantity traded from Q1 to Q2.

43
Q

Disadvantages of a market economic system [5]

A
  1. Overconsumption of demerit goods
  2. Inflation
  3. Unemployment because only the most skilled workers are hired
  4. Price uncertainty
  5. High risk of market failure
44
Q

Define market failure [1]

A

Market failure is when a free market fails to allocate resources efficiently

45
Q

Define social cost and social benefit [2]

A

Social cost = private cost + external cost
Social benefit = private benefit + external benefit

46
Q

Define a merit and demerit good [2]

A

Merit good: have positive externalities of consumption (eg: avocado, education)
Demerit good: have negative externalities of consumption (eg: fast food, gambling)

47
Q

Define a public good [2]

A

Public goods are those goods which are non-excludable and non-rival. Eg: street lighting, army

48
Q

Define a private good [2]

A

Private goods are those goods which are excludable and rival.

Economics - G9 Term 1 (2 decks)

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