Topic 2: Allocation of Resources Flashcards
Microeconomics
The study of individual economic units like households, firms and industries
Macroeconmics
The study of the Economy as a whole, including national output and inflation
Define the Market System
The market system allocates resources through the interaction of buyers and sellers, driven by supply and demand
The three key resource allocation questions
What to produce: Based on consumer demand
How to produce: Using the most efficient production methods
For whom to produce: Determined by individuals’ ability to pay
What is the Price Mechanism
The price Mechanism is how prices adjust to allocate scarce resources efficiently through changes in supply and demand (e.g A shortage of smartphones leads to higher prices, encouraging more production)
Define Demand
Demand is the quantity of a good or service that consumers are willing and able to buy at different prices over a period of time
What causes a shift in the demand curve
Changes in income
Price of substitute goods or complements
Changes in tastes/preferences
What is the difference between indivudual demand and market demand
Individual Demand: Demand by one comsumer
Market Demand: The total demand of all consumers for a good/service
What are movmentes along the demand curve
Extension in demand: Increase in quantity demanded due to a lower price
Contraction in demand: Decrease in quantity demanded due to a higher price
Define Supply
Supply is the quantity of a good or service that producers are willing and able to sell at different prices over a period of time
What causes a shift in the supply curve
Changes in production costs
Technological advancements
Government taxes or subsidies
What are movements along the supply curve
Extension in supply: Increase in quantity supplied due to a higher price
Contraction in supply: Decrease in quantity supplied due to a lower price
What is market equilibrium
Market equilibrium occurs where demand equals supply, determining the equilibrium price and quantity
What is market disequilibrium
Shortage: Demand exceeds supply, causing upward pressure on prices
Surplus: Supply exceeds demand, causing downward pressure on prices
What casues price changes
Changes in demand: Seasonal trends or income changes
Changes in supply: Natural disasters or new technology
What are the consequences of price changes
Higher prices: Consumers buy less, producers supply more
Lower prices: Consumers buy more, producers supply less
What is price elasticity of demand (PED)
PED measures how responsive the quantity of demanded is to a change in price
How is price elasticity of demand (PED) calculated
PED = (% change in quantity demanded) / (% change in price)
What are the determinants of price elasticity of demand
Availability of substitutes
Proportions of income spent
Necessity vs luxury goods
How does price elasticity of demand affect total revenue
Elastic demand: Price increase decreases total revenue
Inelastic demand: Price increase increases total revenue
What is price elasticity of supply (PES)
Price elasticity of supply measures how responsive the quantity supplied is to a change in price
How is price elasticity of supply calculated
PES = (% change in quantity supplied) / (% change in price)
What determines price elasticity of demand
Availability of resources
Time period for production
Flexibility of production methods
What is a market economic system
A market economic system relies on supply and demand to allocate resources with minimal government intervention
