Exam revision Flashcards
Define “utility”
A measure of personal satisfaction experienced by the consumer of a good or service.
Define “marginal utility”
The change in satisfaction that a consumer experiences by consuming 1 more unit of a good or service.
Describe a diminishing marginal utility curve and give an example
a.k.a diminishing demand curve
The level of satisfaction decreases with the consumption of each additional unit of the good/service.
Downward curve.
Define “hazard”, “risk”, and “safety” and explain the 4 classes of hazard.
> Hazard:
- A risk to one’s personal safety, a potential source of danger
Risk
- The likelihood of a hazard occurring
Safety
- A judgement of the acceptability of the risk
CLASSES:
> Physical
- Those which threaten the physical safety of a worker.
- e.g. getting hit by a forklift
> Chemical
- Chemical substances which threaten the health/safety of a worker. - e.g. pesticides
> Biological
-
Other
Define, in terms of related goods, a substitute
A good that can be consumed in place of another; e.g. a hamburgers and sandwiches are substitute lunch options. If a burger shop opens next to a sandwich shop, sandwich sales are likely to go down.
Define, in terms of related goods, a complement
Goods that are provided together; e.g. fish and chips - if the price of potatoes goes up, fish sales are likely to go down.
What would shift the demand curve to the left?
A decrease in demand.
What should shift the demand curve to the right?
An increase in demand.
What would shift the supply curve to the left?
A decrease in supply
What would shift the supply curve to the right?
An increase in supply
What are some causes/reasons for shifts in the supply curve?
> Prices of other goods, particularly substitutions and complements > Input prices > Expected future prices > Changes in the number of suppliers > Changes/improvements in technology
Explain why the demand and supply curves take the shape that they do
Supply is driven by the cost of production
if the cost increases, the quantity that one is willing to supply decreases.
Demand is driven by price
if the price decreases, the amount that a consumer is willing to purchase increases, though that depends on the marginal utility.
Define ‘consumer surplus’
People paying less than they were prepared to
Define ‘producer surplus’
Getting more for your product than you would’ve been happy with
Explain what would happen to the supply and demand curves if the demand for Australian grain was expected to increase over the next few years
Demand curve shifts to the right
Price increases
Supply increases to capture increased price
= supply curve shift to the right
= price decreases back to original state
Increasing both supply and demand results in increased quantity being sold, but for the same price.
Define and explain price ceilings and their effects on the market
A price ceiling is the maximum legal price that a seller can charge for a product or service.
They can result in shortages (when the quantity of supply doesn’t match the demand) and black markets.
Define and explain price floors (price support) and their effects on the market
A price floor is a guarenteed minimum sale price that is fixed by the government that are above equilibrium prices.
Can result in surpluses when supply is greater than the demand.
e. g. Wool floor price scheme
- demand wasn’t keeping up with supply
- caused wool stockpile
What are the effects of taxation on supply and demand curves?
Taxation = incr. costs = decr. supply = incr. price = decr. demand
Shifts supply curve left (or upward).
Explain what is meant by “the price elasticity of demand”
The % change in the quantity demanded of a good divided by % change in its price
It is essentially a measure of how sensitive the product is to changes in price affecting demand.
Important for:
> Projecting revenue
> It has an impact on taxation
> Has an impact on economic welfare
What are some factors that influence the elasticity of demand?
> The number of substitute goods/services
The proportion of a consumer’s income being spent on the good/service
The amount of time that has elapsed since the last change in price
Whether the good/service is a luxury or necessity
What is the result of an increase in price with elastic demand?
= larger percentage decrease in the quantity demanded
* total revenue and expenditure DECREASE
What is the result of an increase in price with inelastic demand?
= smaller percentage decrease in quantity demanded
* total revenue and expenditure INCREASE
What is ‘unit elasticity’?
A change in price has no effect on total revenue
What does an elastic demand curve look like?
A very shallow (close to horizontal) line, meaning that a shift in price (along Y axis) of one unit has a proportionally greater increase in quantity (X-axis). i.e. 1 unit price increase =»_space; 1 unit quantity increase.
What does an inelastic demand curve look like?
A very steep line, meaning that a shift of 1 unit in price will result in a proportionally smaller increase in quantity; i.e. 1 unit price increase =
Give an example of a completely inelastic good and explain your reasoning
Insulin; demand won’t change despite a change in price because there’s no alternative.
Know how to depict a change in revenue with a price elasticity curve
show change in unit price on the y axis
show change in unit number on the x axis
e.g. going from $5/unit to $4/unit, and selling 6 units to 6.5 units with relatively inelastic demand
revenue decr = ($5 - $4) * 6 = $6
revenue gain = (6.5 - 6) * $4 = $2
net revenue loss = $6 - $2 = $4
What are the major decisions which are relevant for ALL economic activities, and why are they significant?
- Who is affected (positively and negatively)
- What are the benefits?
- What are the risks?
- What are the opportunity costs?
- What to produce
- How to produce it
- For whom to produce it
All need to be considered to maximize resource use efficiency
Explain the meaning of social welfare
Managing resources in a way that benefits the majority of society (as a whole)
Define and explain a “market economy”
A market economy relies on supply and demand to determine resource allocation
> Private entrepreneurs that own/control resources make decisions about the use of those resources and the production of goods/services in response to the messages they receive from markets, the cost of inputs, and the value of outputs.
Define and explain a “mixed economy”
A market economy with some degree of government intervention, such as in Australia.
Supply and demand still plays a role
Define and explain a “planned economy”
Major government intervention
Minimal role of supply and demand.
e.g. N Korea, China, Cuba
Why is it that price tends to act to ration goods and services?
People only have so much money, meaning they can only buy a certain amount of things. This means that price plays a significant role in what, and how much or something they buy, which in turn dictates demand.
Explain ‘scarcity’ in the economic sense
Human wants are greater than the resources available to satisfy those wants.
Resources have to be allocated to those wants that are deemed the most important and achievable.
Wants are not just physical resources - time is a scarce resource.
Define and explain opportunity cost
The value of the alternative product/resource/option that is foregone.
Define and explain ‘market failure’, it’s three key areas, and the government interventions to address them.
> A break-down in the supply-demand concept
Where supply and demand are out of equilibrium
Occurs when the market does not allocate and/or use scarce resources effectively.
There are 3 key areas with respect to market failure:
INEFFICIENCY IN RESOURCE ALLOCATION
> Property rights and obligations being inadequately specified, allocated, or enforced
> Positive and negative externalities that arise due to an absence of appropriately specified, monitored and/or enforced property rights and obligations.
> Public goods
> Monopoly or other restrictive markets
> Missing markets (fail to establish a way to meet consumer desires)
> Discount rate (reduces the present value of future expected benefits and future expected costs)
*** Examples of government intervention:
> land- and water-use regulation
> governments directly providing or subsidising the provision of certain goods/services (e.g. police, national defense, health, education)
> social discount rates
> trade practices legislation
INEQUALITY (SOCIALLY UNACCEPTABLE DISTRIBUTIONS OF INCOME AND WEALTH)
> Resolved by government intervention to redistribute incomes and wealth through income and wealth taxation policies
INSTABILITY (DUE TO INFLATION, UNEMPLOYMENT, LOW ECONOMIC GROWTH)
Government intervention:
> monetary policies (e.g. changes in interest rates)
> fiscal policies (e.g. changes in taxation and govt. spending)
> incomes policies
What is the difference between micro- and macro-economics?
MICROECONOMICS: The study of economics at the individual, group, or company level > individuals > households > companies > industries
MACROECONOMICS: The study of the economy as a whole. > national > international > policy > unemployment rates > economic growth > government borrowing/lending
In terms of economics, what are resources described as?
Different types of capital; e.g. natural resource capital (land), human capital (labour), human-produced capital/infrastructure (capital),
In terms of economics, what are inputs?
Everything that goes in to producing something, incl. labour, infrastructure use, etc.
Define economic equity
The fairness with which the costs and benefits of a decision are distributed amongst society.
What are the benefits of a market/mixed economy?
> Decentralizes power - gives less scope for coercion or corruption
Encourages innovation through profit-seeking competition
Explain the Pareto Principle
Optimal allocation of resources occurs when no one can be made better off without someone else becoming worse off.
Explain a Pareto Improvement
Someone gaining additional satisfaction from resource allocation without it negatively affecting someone elses existing level of satisfaction
