outcome one Flashcards
what is relative scarcity
the basic economic problem that arises due to infinite needs and wants are far greater than the finite resources for production
define opportunity cost
the value of the next best alternative that is foregone whenever a choice is made
define production possibility frontier and what it illustrates
illustrates the choices available when deciding how to allocate scarce resources
illustrates opportunity cost
define allocative efficiency + relationship to PPF
market allocates resources to the needs and wants of society (no one can be more satisfied without making someone else worse off)
- spot on ppf where it is equal production of each product
define productive/technical efficiency + relationship to PPF
when it is not possible to increase output without increasing inputs
- any spot on ppf, productive efficiency is achieved
define dynamic efficiency + relationship to PPF
how quickly an economy can reallocate resources when consumer needs/wants change
- can move from one point to another on the ppf quickly
define inter-temporal efficiency + relationship to PPF
balancing the allocation of resources and consumption between different time periods
- not linked to ppf
define perfectly competitive market + relationship with efficiency
all economic agents are price takers and no individual buyer or seller has the market power to influence prices
- high allocative efficiency due to maximised utility as consumers can access what they desire
5 conditions and 4 assumptions of perfectly competitive market
conditions:
- many sellers/sellers
- price-taking (price set by market)
- selling homogenous goods
- little to no barriers to entry or exit
- limite government intervention
assumptions:
- all participants are price takers
- economic agents act rationally
- perfect market knowledge/full information
- resources are mobile
price mechanism
how the forces of demand and supply determine the relative prices of goods and services.
factors that affect demand
disposable income: income received by a household in exchange for their participation in production
price of substitutes/complimentary goods
preferences and tastes
population demographics
consumer confidence
interest rates
factors that affect supply
cost of production
number of suppliers
technological advancements
productivity
climatic conditions
market equilibrium + two words
the price at which the quantity demanded is equal to the quantity supplied
shortage
surplus
explain price elasticity of demand
refers to how responsive quantity demanded of a good or services is to a change in price
of the good or service.
explain price elasticity of supply
refers to how responsive quantity supplied of a good or services is to a change in price of
the good or service
factors affecting price elasticity of demand
degree of necessity
availability of substitutes
proportion of income
factors affecting price elasticity of supply
spare capacity
durability of goods
relative prices
price of one product in terms of another product
market failure
the price mechanism does not deliver the
most desirable/efficient outcome.
types of market failure
public goods: goods and services that produce positive externalities to society. (police and roads) – non-rivalrous: consumption by one person doesnt prevent consumption of another – non-excludable: nobody can be prevented from using product
common access resources: when consumption of resources prevents future generations from consuming them
asymmetric information
government failure + price ceiling/floor
government intervention in a market makes resource allocation less efficient
price ceiling: government sets maximum price below equilibrium, this makes product more affordable but supply will decrease (profit motive) - e.g. rent control
price floor: government sets minimum price above the free market equilibrium (e.g. minimum wage), decline in labour because firms will hire less
