Topic 2

Question 1

what is the 1. law of demand and 2. the law of supply

Answer 1

demand: price and quantity have a linear/negative relationship
supply: a positive relationship between price and quantity supplied

Question 2

what is the 1. marginal benefit curve and 2. the marginal cost curve

Answer 2

marginal benefit: the additional benefit (real or perceived) gained by consumers from the last unit procured
marginal cost:

Question 3

movements along demand curve: what is the INCOME effect and the SUBSTITUTION effect

Answer 3

INCOME EFFECT: as price decreases, purchasing power (real income) increases, quantity demanded increases
SUBSTITUTION EFFECT: as price decreases relative to other goods, quantity demanded for the cheaper goods increases

Question 4

what are the 5 non price factors causing a shift of the supply curve

Answer 4

1. income of consumers (Y)
2. tastes of consumers (t)
3. number of consumers (N)
4. Price of related goods (Pr)
5. Expectations of future prices (Pe)

Question 5

income of consumers: what is the difference between NORMAL and INFERIOR goods

Answer 5

normal = as income increases, demand increases (luxury brand/expensive goods)
inferior = as income increases, demand decreases (home brand/cheap)

Question 6

price of related goods: what is the differences between SUBSTITUTE and COMPLIMENT goods

Answer 6

substitute: positive relationships (if sub A price increases, sub B demand increases)
compliment: negative relationship between price of good and demand for compliment

Question 7

what are the 5 factors resulting in a shift of the supply curve

Answer 7

1. price of inputs (pF) {inverse}
2. Tech changes (T)
3. Price of alternative/substitute goods
4. Expected Future prices {inverse}
5. Change in number of sellers {positive}

Question 8

explain what is meant by technology and how tech improvement can effect supply

Answer 8

tech = stock of knowledge about how to combine resources most efficiently
tech improvement = fall in production cost = supply increases (right)

Question 9

how can the price of alternative/substitute goods effect supply

Answer 9

goods that require similar inputs (eg paddocks can be used for feeding milk cows or growing corn). If corn price increases and milk decreases farmers may switch to corn not milk

Question 10

what are markets

Answer 10

markets provide a mechanism whereby RESOURCES ARE ALLOCATED AMONG COMPETING CLAIMS (reflecting needs/wants of buyers/sellers)

Question 11

define the role of 1. buyers and 2. sellers

Answer 11

buyers: only buy if they perceive marginal benefit of buying as greater than or equal to marginal cost
sellers: only sell if the price they receive is greater than or equal to the marginal cost

Question 12

what is equilibrium and define what FLUID market and STICKY market equilibrium means

Answer 12

equilibrium means there is no excess supply or demand. plans of buyers match plans of sellers (Qd = Qs)

fluid: disequilibrium is short and rare so market is always clear (stock market)
sticky: disequilibrium lasts long before buyers/sellers have time to adjust (housing market)

Question 13

when does a surplus occur - draw the diagram

Answer 13

when quantity demanded is less than quantity supplied there is downward pressure on prices, as price falls, quantity demand increases until equilibrium is reached

Question 14

when does shortage occur - draw the graph

Answer 14

when quantity demand is greater than quantity supplied there is upward pressure on prices meaning as price rises, quantity demanded falls until equilibrium is reached

Question 15

what is consumer surplus and where is it represented on the d/s graph

Answer 15

consumer surplus = marginal benefit (maix price willing to be paid) - marginal cost (price actually paid).

CS is the are between the demand curve (=MB) and equilibrium (=market price line)

Question 16

what is producer surplus and where is it represented on the d/s graph

Answer 16

producer surplus = marginal benefit (selling price ) - marginal cost (actual cost)
PS is area between supply curve (=MC) and equilibrium (=market price line)

Question 17

when does allocative efficiency occur and define
what is productive efficiency
what is dynamic efficiency

Answer 17

1. when MB = MC: number of resources allocated to produce a good reflects the value society places on the goods and the benefit consumers recieve from buying it
2. firms cost minimised
3. innovation to improve production

Question 18

when does DWL occur

Answer 18

loss of potential surplus not transferred to any other party - when marginal benefit (value of goods to consumer) IS NOT EQUAL TO Marginal cost (resources allocated to produce the goods)

Question 19

what is the linear function for demand or supply

Answer 19

quantity demanded or quantity supplied = Quantity (0) - Price(x)
equilibrium is when demand equation = supply equation

Question 20

when does a country export (draw graph going through PS,CS etc)

Answer 20

if domestic price of producing a goods is less than world price a country is relatively more efficient, it has a lower opportunity cost or a comparative advantage in producing it

Question 21

when does a country import (draw graph going through PS,CS etc)

Answer 21

if domestic price is less than world price a country doesnt have a comparative advantage of producing a good, the world is more cost efficient

Question 22

what are the 5 arguments for protectionist policies

Answer 22

1. protect local job
2. infant industry (new industries need protection so over time they become internationally competitive and develop a comparative advantage)
3. national security
4. unfair competition
5. protection as a bargaining chip: use trade to punish people eg China to aus wine and sanction with russia

Question 23

what are tariffs (draw graph etc)

Answer 23

a tax on an import designed to increase the price of foreign goods and services so that competing domestic good receives a price benefit (cheaper) and gov gets revenue: increasing world price for consumers

Question 24

what is a subsidy (draw graph etc)

Answer 24

a grant or payment made by the gov to domestic producers which directly lowers a producers cost of production