econ U3 AOS 1 Flashcards
Relative scarcity
The basic economic problem of having unlimited needs and wants with limited resources to satisfy them
Opportunity cost
The value of the next best alternative forgone
The three economic questions & how to explain
What & how much to produce? How to produce? Who to produce for?
How to answer
What & how much to produce?
- The market indicates through relative prices the needs and wants of society which ultimately signals to producers where resources should be allocated
How to produce?
- Producers are profit-motivated thus they will choose the lowest-cost method of producing
Who to produce for?
Wages determine who gets what in a market economy
e.g. surgeons make more bc there’s less supply of surgeons and they are inelastic to society
Perfectly competitive market
[PIGBE] A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, (3) perfect knowledge, (4) little government regulation, and (5) ease of entry and exit from the market.
The law of demand
As prices increase, the quantity demanded decreases
What is the difference between a shift in the demand curve and a movement along the demand curve? (DISC PP)
A shift is caused by changes in non-price factors: [DISC PP] = a movement along supply curve
- disposable income
- substitute & complementary product prices
- preferences & tastes
- interest rates [tax, etc]
- population demographics
- consumer confidence
Movement along the curve is caused by price factors:
- meaning a change in the price of the g+s itself
How demand-side factors cause shifts in the graph
A demand-side factor
- left or right accordingly
- Increased demand = right shift
- Decreased demand = left shift
what do the shifts [decrease & increase] & movements [contractions & expansions] along the demand curve mean
shift/movement left = less quantity demanded at all prices
shift/movement right = vice versa more Qd at all prices
Disposable income + Discretionary income
- The money available for spending or saving after personal tax has been paid
= wages - taxes + transfers - Disposable income available for spending and saving after an individual has paid for non-avoidable expenditures
Demand factor
- Increase $ = increase in demand of g+s as consumers have more purchasing power.
–> demand curve shifts to the right
- vice versa = Decrease mean shift to the left
Interest rates
The cost of borrowing money/ the reward for saving money
Demand factor
- increase means a shift to the left
- decrease [low rate] means shift to the right
Substitutes + Complements
- Good or service that serves same purpose as another good or service
- Good or service that is consumed with another good or service
Demand factor
- price increase means shift to the left [ppl don’t want to buy the sub anymore bc its more $$]
- price decrease means shift to the right
Consumer confidence
a measure of how optimistic consumers are about the overall state of the economy and their own personal finances
demand factor
- increase means shift to the right
- decrease means a shift to the left
Population growth/demographics
- Increase in the # of ppl in a country or region
- Characteristics of people in a country or region e.g. age, gender, income, education & ethnicity
Pop growth is a demand-side factor
- increase means shift to the right
- decrease means a shift to the left
Labour productivity
The level of output per unit of labour
Production
The process of converting resources into goods and services
The law of supply & what does the upward slope of the supply curve indicate?
- As the price increases, the quantity supplied increases [as long as cost of production remain constant]
- Indicates a positive relationship between prices and Qs
What is the difference between a shift in the supply curve and a movement along the supply curve?
Non-price factors cause the supply graph to shift [CP COST] = a movement along demand curve
- cost of production
- # of suppliers
- tech
- productivity
- climactic changes
Price of the g+s causes an expansion or contraction of the supply curve
Contraction along supply curve & Expansion along supply curve
Movement down [left] the supply curve
- A decrease in price means a decrease in Qty supplied
Movement up the supply curve
- $ increase Qs increases
What do shifts in supply curve mean
shift left = less quantity supplied at each and every price level. [decreased supply]
shift right = vice versa more Qs at all prices
Productivity
supply-side factor: Measure of outputs per input
Increase = shift curve to the right
Production costs
increase = shift supply curve left
Climatic conditions
A supply-side factor
good climate conditions = decreased production costs = shift to the right
number of suppliers
increase # of suppliers = shift right
Technological change
A supply-side factor
- better tech = supply curve shifts right [increased productivity & outputs]
- new equilibrium price
Market mechanism
The interaction between supply and demand to determine the equilibrium price and quantity traded
Surplus & Shortage
Where Supply > Demand causing downward pressure on price
Where Demand > supply causing upward pressure on price
Material living standards
A households ability to access goods and services
Non-material living standards
The aspect of a persons quality of life that cannot be measured by monetary factors
what is the impact of a change in relative prices
Act as signal to producers to investigate market, leading to reallocation of resources better to adhere to society’s needs & wants if profit making opportunities exist
elasticity
The responsiveness of quantity demanded or supplied to a change in price [in terms of %]
Change in PED/PES is measured by:
% change in Qd/Qs [quantity demand/supply] / % change in $
Inelastic vs elastic curves for PES & PED
formula: PED/PES = % Change in QTY Demanded or [supplied] / % Change in Price
Inelastic curves = steep
- Qs/Qd is unresponsive to changes in price
- PED/PES < 1
Elastic curves = flat
- Qd/Qs is responsive to changes in price
- PED/PES > 1
High price elasticity of demand/supply means that:
A change in price will lead to a relatively large change in Qd/Qs
Low price elasticity of demand/supply means that:
A change in price will lead to a relatively small change in Qd/Qs
Factors that impact PED include:
TPAN
- degree of necessity
- availability of substitutes
- Proportion of income
- Time
factors that impact price elasticity of supply (inelasticity) [PSST D]
Production Lag – If there’s a long time needed to produce more of a good (e.g., growing crops), supply tends to be inelastic.
Spare Capacity – If there is little or no spare capacity (e.g., factories running at full capacity), supply is inelastic because it’s hard to increase production quickly.
Stock Levels – Low levels of stock make supply inelastic because producers can’t quickly respond to changes in demand by selling more.
Durable goods - elastic supply
non-durable = inelastic supply
Time – In the short term, supply is generally inelastic because it takes time to increase production. Over the long term, supply can be more elastic as firms can expand capacity.
Allocative efficiency
Point on PPF where the collective needs and wants of society are being maximised
- No one can be made better off without making someone else worse off
Technical/productive efficiency
point on ppf where resources are allocated such that maximum output is achieved with minimal inputs
- At productive efficiency we cannot produce anymore
Dynamic efficiency
Is how quickly resources can be reallocated to meet the changing wants and needs of consumers
- On PPF it determines how quickly we can move from one point of production to another point
Inter-temporal efficiency
Where resources are allocated to focus on balancing out the current needs + wants of society w the future needs + wants
point on ppf with the optimal balance of resources between now and the future
Efficient allocation of resources
- Where resources are allocated such that society’s well-being is maximised, and opportunity cost is minimised.
- No other possible combination of goods and services could provide a better standard of living
Many buyers and sellers
Means that no party can influence price, everyone is a price taker; increased comp
Products are homogenous
Means that suppliers must compete on price
Ease of entry and exit to and from markets
Means that resources can be reallocated quickly between markets
Public goods
Market failure
- Goods and services that are non-excludable (producer cannot stop the consumer from consuming product)
- non-rivalrous (one party’s consumption does not impact another)
- Market has failed to achieve efficiency as it will be underproduced by the market [not socially optimal]
- reduces allocative efficiency
Common access resources
Market failure
- Goods and services that are non-excludable (producers cannot stop consumers from consuming the product)
- rivalrous (one party’s consumption does impact another)
- Overconsumed & depletable thus not available long-term; reducing _ & inter-temporal efficiency
4 forms of market failure PEA C
- Public goods
- Common access resources
- Externalities
- Asymmetric information
Externalities
Cost or benefit imposed on a third party not directly involved with the production or consumption of the good and service
Negative externality
cost imposed on 3rd parties; this will cause an over-allocation of resources because the producer or consumer will not consider the social cost
Positive externality
Will cause an under-allocation of resources because the producer or consumer will not consider the social benefit
e.g Positive externalities in consumption refer to the positive effects on a third party (not the producer or the purchaser/consumer of a product) that arises out of the consumption of a particular product. One such good is the Covid-19 vaccines, which helps to protect the promote the initial user but also promotes herd immunity when more people consume it, which protects the health of third parties or those who refuse to, or are unable to, take the vaccine (due to health reasons).
Asymmetric information
Where one party to a transaction knows more about the product than the other party
- Efficiency is not achieved as a market may over-allocate for things society does not need/want and under-allocate resources for things society wants but did not know they wanted bc they didn’t have enough information
Direct government provision
Where the government provides the good or service to society
- By providing G+S the government is effectively shifting the supply curve to the right [higher quantity and lower price at equilibrium]
Government regulation
Where legislation imposes restrictions on the use of specific resources
- Gov will make and enforce laws that intervene in the market to achieve a more efficient outcome
Indirect taxation
A source of government revenue, cost is applied to the production of goods and services causing the final price of good/ service to increase
- Indirect tax is levied on producers & passed onto consumers e.g. prods must pay an amount per unit produced & then consumers must pay extra
- Shift the supply curve to the left [increase the cost of production thus decreasing Qs]
Government subsidy
Financial assistance provided by the government to a producer - is offered to ensure the production of certain goods and services
- Payment to suppliers to encourage production & therefore, consumption of a G+S
- Subsidies reduce the cost of production therefore shifting the supply curve to the right
- Decreasing prices for consumers
market failure
where the forces of demand+supply and the price signal causes an allocation of resources which fails to maximise society’s utility
-> where the market does not achieve efficiency
private goods
market success
- excludable
- rivalrous
-> more profit for producers
regulatory capture
regulatory agency is influenced or dominated by the industries it regulates, leading to decisions that favor those industries over the public interest; a higher-up being bribed to be more flexible with the briber
An unintended consequence of government intervention in the labour market on market failure
Minimum wage is intended to help ensure a fair income for workers and to reduce poverty. However, an unintended consequence that leads to market failure is that if its set too high unemployment rates will rise at it increases the labour costs for businesses and leads to an overall reduction in g+s produced; decrease productivity and efficiency
government failure
When government intervention leads to an inefficient allocation of resources and a net welfare loss.
equilibrium point
the point where demand equals supply, where there is no shortage, no surplus & the market clears.
types of resources
Land - things that exist naturally on earth e.g. water & minerals
Labour - human effort e.g. teachers or real estate agents
Capital - anything that is human-made & used to produce goods & services e.g. machinery, equipment & tech
what does a graph need
- title
- downward sloping demand curve
- upward sloping supply curve
- p$
- Q100
- Equilibrium point
- label shifts/movements with numbers and arrows
how markets clear shortages
consumers will bid up prices to buy scarce G + S
- contraction along demand curve
suppliers will respond to the increased prices by reallocating resources towards that market
- expansion along the supply curve
How markets clear surpluses
suppliers discount prices clear excess stock [profit motive]
- Contraction along the supply curve
consumers will respond to the decreased prices by consuming more [income/substitution effect]
- Expansion along the demand curve
How to correct under-allocation of resources [public goods & negative externalities]
- The supply curve will shift to the [left/right]
- The price will [increase/decrease]
- [More/less] resources allocated to this market
“impact on the market for blah” means you must
- Explain shifts in equilibrium
- Determine the demand or supply factor that caused the shift
- Determine the impact of the shift on price, [contraction/expansion] in demand, [higher/lower] Qd on what is affecting the target market
- [increase/decrease] demand for _ market, the demand curve shifts [left/right], D0-D1
- p0 leads to [surplus/shortage] Q0-Q1, signals $ at P0 are too [high/low]
- [reduce/increase] $ to clear market
efficiency
a measure of how an economy uses its resources
