THE ECONOMIC PROBLEM - TERM 1

Question 1

What is meant by opportunity cost

Answer 1

when making a choice, you have to give something up. the best alternative opportunity forgone when a choice is made.. e.g cannot study chemistry cuz you chose economics

Question 2

what are the two qualifications for calling a thing scarce

Answer 2

1- it must be wanted
2- it must be limited in supply

Question 3

define:
Recurrent wants
Complementary wants
Competitive wants

Answer 3

recurrent- wants that are never satisfied and keep recurring. e.g food
complementary- wants that go together. e.g house, furniture
competitive- goods/ services that can be substituted for each other. e.g butter and margarine

Question 4

what are the three questions every society must answer to decide how factors of production will be utilised…

Answer 4

1- what and how many goods and services are to be produced?
2- how are those good and services to be produced
3- who will receive and consume those goods and services

Question 5

explain basic roles of consumers, producers and the government. like what are they concerned with?

Answer 5

consumers- mainly concerned with obtaining maximum possible satisfaction from their income
producers- interested in maximising profits and would prefer an allocation of resources that favoured this result
the government- is different again, depending on its specific objectives at the time

Question 6

elaborate on the factors of production (land, labour, capital, enterprise)

Answer 6

LAND- factor of production tht includes all naturally occuring resources. e.g minerals, air, water, dirt
LABOUR- includes all kinds of human effort, both mental and physical e.g trainees, mentors, contract workers
CAPITAL- factor of production comprising the stock of human- made resources used to create further goods and services. e.g railways, port-facilities
ENTERPRISE- factor of production that is the ability to initiate and and manage the production process by combining and organising the other factors of production (land, labour and capital). if done efficiently, they will gain a profit.

Question 7

Australia is a what economy?
describe what this kind of economy is
also what is meant by consumer sovereignty

Answer 7

Australia is a MARKET economy. this type of economy is a system in which the nature and price of goods and services produced are determined by dollar votes cast by consumers in the market place. consumers are the ones who influence how what and much will be produced by the way they spend their income.
CONSUMER SOVEREIGNTY is when business people try and influence the demand of consumers through advertising and other selling activities but consumers make the final decision.

Question 8

A traditional classification of economic systems uses 3 broad groupings. Name these groupings and explain what they mean

Answer 8

1- Subsistence economies
they are an economy in which the individuals produce commodities primarily for their own use and not for exchange in the market
2- Capitalist market economy
an economic system where important economic questions are decided by interaction between individual buyers and sellers in marketplace
3- socialist/command economy
an economic system in which decisions about what to produce and the way the proceeds of production are distributed.

Question 9

what are markets, why are they important and name and explain the different types of markets

Answer 9

market is a place where buyers and sellers interact for purpose of trade or exchange. it has a wide range of virtually everything that flows through the economy.
Buyers in market aims to purchase a good or service at lowest price possible while sellers aim to obtain best price possible for goods and services.
different markets include-
LABOUR MARKETS- labour is exchanged for money in form of wages and salaries
GOODS AND SERVICES- goods and services of all types are exchanged for money, including online markets
FINANCIAL OR CAPITAL MARKETS- access to funds is arranged in exchange for interest payments

Question 10

what is demand and what is the law of demand

Answer 10

demand is the quantity of a commodity that will be purchased in a market over a given time
the law of demand is the proposition that the quantity demanded of a good or service is the inverse of the price of that good or service.
the lower the price, higher the demand
higher the price, lower the demand

Question 11

what are the factors that determine demand

Answer 11

• the price of a commodity
• the price of related commodities
• buyer’s income
• buyer’s taste
• population changes
• buyer’s expectations of the future

Question 12

explain what is movement along the demand curve?
hints: when does it occur
what causes it
does it expand..contract

Answer 12

movement along the demand curve only occurs when the price of commodity changes(our first demand determinant).
- the price of a commodity causes a change in the quantity demanded not a change in demand
- it will either expand or contract to different positions on the demand curve

Question 13

explain shifts in the demand curve:
what are they caused by- list them

Answer 13

shifts in the demand curve are caused by all other demand determinants, apart from price-
- the price of related commodities: competitive and complements
- buyer’s income
- buyer’s taste
- buyer’s expectations of the future
- population changes

Question 14

FINISH THE SENTENCES:

MOVEMENT ALONG DEMAND CURVE ONLY OCCURS WHEN -
THE PRIC OF A COMMODITY CAUSES A CHANGE IN-

Answer 14

MOVEMENT ALONG DEMAND CURVE ONLY OCCURS WHEN THE PRICE OF COMMODITY CHANGES( OUR FIRST DEMAND DETERMINANT).
THE PRICE OF A COMMODITY CAUSES A CHANGE IN THE QUANTITY DEMANDED NOT A CHANGE IN DEMAND.

Question 15

what is supply

Answer 15

the quantity of a commodity that will be offered for sale in a market over a given period of time

Question 16

what is the law of supply

Answer 16

the more quantity of a commodity will be supplied by producers at a higher price. There is a direct relationship.
- higher price, higher supply
-lower price, lower supply

Question 17

what are the factors affecting market supply

Answer 17

-price of the commodity
-costs of production
-technology use in production
-the effects of nature
-number of supply
-future expectations of suppliers
THESE FACTORS WILL EITHER CAUSE A MOVEMENT ALONG THE SUPPLY CURVE OR A SHIFT IN THE SUPPLY CURVE

Question 18

what leads to change in quantity supplied and what will result in decrease ad expansion in supply?

Answer 18

any change in the price of the good will lead it to a change in the quantity supplied in the same direction of the price change. This will result in movement along the supply curve.
a contraction in supplies occurs when there is a decrease in price causing the quantity supply to fall.
an expansion in supply occurs when there is an increase in price causing the quantity supply to rise

Question 19

what is equilibrium market price?

Answer 19

a right price- a price high enough for sellers and low enough for buyers. there is no tendency to change from this price. demand and supply are equal.

IF PRICE IS TOO LOW, DEMAND WILL EXCEED SUPPLY AND THERE WILL BE A SHORTAGE.
IF PRICE IS TOO HIGH, SUPPLY WILL EXCEED DEMAND AND THERE WILL BE A SURPLUS.

Question 20

What does change in equilibrium mean? eg- what if the government strongly recommends consumption of ice cream of health reasons?

Answer 20

Changes in equilibrium occur when a change in one or more economic factors shift the supply or demand curve, thus shifting the point of intersection between the two curves.
FOR THE GOVERNMENT THING- it will result in more people wanting to eat ice cream, demand will increase, creating temporary shortage. disappointed buyers willing to pay extra will force price up. PRICE WILL CONTINUE TO RISE INTIL A NEW EQUILIBRIUM IS REACHED.

Question 21

what is a production possibility frontier model is and outline the basic assumptions for this model

Answer 21

The production possibility frontier is a model used to by economists to demonstrate the concept of opportunity cost. Using the model involves some assumptions:
- that an economy aims to use all it’s resources fully and efficiently
- there are only two goods produced in this simplified economy
- all resources can be used to produce each good and hence there must be some perfect mobility between production of the two goods
-the level of technology is assumed to be fixed
- resources are fixed

Question 22

Use a diagram of the production possibility frontier to illustrate and explain the concepts of scarcity, choice opportunity cost, underutilisation of resources, efficiency and unattainable.

Answer 22

When having to make this decision, we have to give something up.
This is called the opportunity cost.
Types of wants- Recurrent wants: wants that are never satisfied and keep recurring, for example, food
Complementary wants: wants that go together, for example, house, furniture and plants.
Competitive wants: goods/services that can be substituted for each other – e.g. butter and margarine.

Question 23

Explain the ways that an economy attempts to solve the economic problem

Answer 23

Decisions must be made about how the factors of production will be used to produce goods and services people need and want.
To accomplish this, every society must answer the following three questions;
What and how many goods and services are to be produced?
How are those goods and services to be produced?
Who will receive and consume those goods and services?

Question 24

Explain the difference between the law of demand and the law of supply?

Answer 24

The law of demand is the proposition that the quantity demanded of a good or service is the inverse of the price of that good or service.
The lower the price, the higher the demand
The higher the price, the lower the demand
The law of supply is that the more quantity of a commodity will be supplied by producers at a higher price. There is a direct relationship
The higher the price, the higher the supply
The lower the price, lower the supply

Question 25

8. What are the main factors of demand?

Answer 25

The price of a commodity – law of demand
The price of related commodities
Buyer’s income
Buyer’s taste
Population changes
Buyers expectations of the future

Question 26

9. What are the main factors of supply? - same answer as what are the main factors affecting market supply

Answer 26

The price of the commodity – law of supply
The costs of production
Technology use in production
The effects of nature
Number of suppliers
Future expectations of suppliers
These factors will either cause a movement along the supply curve or a shift in the supply curve.

Question 27

10. Distinguish between movements along from shifts of demand curves and express each graphically

Answer 27

Movement along the demand curve only occurs when the price of commodity changes (our first demand determinant).
The price of a commodity causes a change in the quantity demanded not a change in demand.
It will either expand or contract to different positions on the demand curve. - LOOK AT GRAPH ON POWERPOINT THEORY OF DEMAND AND SUPPLY SLIDE 7
Law of demand: The quantity of pizza demanded:
CONTRACTS IF: the price of pizza rises
EXPANDS IF: price of pizza falls
CHANGES IN DEMAND: THE DEMAND FOR PIZZA
decreases if- the price of a competitive want falls, price of complement rises, income falls, price of pizza is expected to fall in future, population decreases.
INCREASES IF:
- price of competitive wants rises, price of complement falls, income rises, price of pizza is expected to rise in future, population increases

Question 28

11. Distinguish between movements along from shifts of supply curves and express each graphically.

Answer 28

Any change in the price of the good will lead to a change in the quantity supplied in the same direction of the price change
This will result in a movement along the supply curve.
A contraction in supplies occurs when there is a decrease in price causing the quantity supply to fall
An expansion in supply occurs when there is an increase in price causing the quantity supply to rise
A change in any one of the factors, other than price, will lead to a shift of the entire supply of the product. These shifts can be increases and decreases. An increase in supply will shift the supply to the right. A decrease in supply will shift the supply to the left.
Law of Supply-
Contracts if- price of pizza falls, Expands if price rises
Changes in supply: Supply of pizza
DECREASES IF: cost of production rises, lower technology, number of pizza suppliers decrease, number of pizza expected to decrease in future, effect of nature.
INCREASES IF:
-cost of production falls, improvement in technology, number of pizza suppliers increase, number of pizza expected to increase in future, effect of nature

Question 29

12. Explain the concept of market equilibrium and describe situations that are not in equilibrium in the short run, and express graphically to demonstrate a shortage and surplus.

Answer 29

Equilibrium is achieved at the price at which quantities demanded and supplied are equal. In a market setting, disequilibrium occurs when quantity supplied is not equal to the quantity demanded; when a market is experiencing a disequilibrium, there will be either a shortage or a surplus. Short-term disequilibrium occurs when there is a temporary imbalance in a market or economy and this could be caused by a shock to the system such as a quick increase in oil prices or a natural disaster.

Question 30

13. Explain price elasticity of demand and the difference between elastic, inelastic and unitary elastic

Answer 30

Elastic demand: a change in price brings about a more than proportional change in the quantity demanded.
Inelastic demand: the change in price brings about a less than proportional change in the quantity demanded.
Unit elasticity: where the change in price, brings about the same change in quantity demanded.

Question 31

14. Explain the factors affecting elasticity of demand.

Answer 31

The main factors that affect the elasticity of demand are;
Whether the products are necessities or luxuries
The existence of close substitutes
The proportion of income spent on the good
The length of time since a price change
Habit forming (addictive) products

Question 32

15. Describe the factors affecting the supply and demand in the housing sector.

Answer 32

Factors affecting demand for housing- Affordability of housing
Population
Speculative demand (buyer confidence)
Interest rates
Availability of credit (mortgages)
Economic growth
Cost of renting
Factors affecting supply for markets:
Number selling: As the number of home sellers increases. Housing prices may also experience a relative decline due to increased availability
Supply of land: When supply for land is low, home prices often rise and vice versa.
New builds: Similar to the supply of housing, changes in the number of new builds will have an effect on nearby existing house prices

Question 33

1. Describe the basic economic problem.

Answer 33

so the basic economic problem is scarcity and the ways in which a society decides to use the limited (scarce) resources to satisfy unlimited wants. Resources are scarce, whereas the needs, wants and desires of consumers are unlimited.

Question 34

Explain the concept of opportunity cost and how it is related to the concept of scarcity

Answer 34

scarcity means insufficiency relative to wants.Resources are scarce – the resources we have to satisfy our wants are limited
Since we cannot satisfy all our wants with our limited resources, we must choose between them
When having to make this decision, we have to give something up.
This is called the opportunity cost.
The opportunity cost is the best alternative opportunity forgone when a choice is made.