U3 AOS1 Flashcards
What is microeconomics
= study of how individual c’er + bus behave in individual markets
What is macroeconomics
= study of economy as a whole or the “top down view” of the economy focussing on aggregate characters
What are needs
= items which are essential 2 survival
What are wants
= items which are x essential 2 survival h/r enhance our lives
What is relative scarcity
= basic economic whereby our unlimited needs + wants are x able 2 be fully satisfied as our resources are limited
-> forces eco. agents 2 make decisions
What is opportunity cost
= the value of the next best alternative foregone whenever a decision is made
What is allocative efficiency
= most efficient allocation of resources occurs when living standards + welfare are maxed + it is possible 2 further inc living standards by changing the way resources are allocated
What is productive / technical efficiency
= when it is x possible 2 inc output without inc inputs t/f max output from inputs
What is inter-temporal efficiency
= how well resources are allocated over different time periods so that living standards of current generations are x jeopardising future generations living standards
What is dynamic efficiency
= how quickly an economy can reallocate resources 2 achieve allocative efficiency, entails firms being adaptive + creative in responses 2 changing economic circumstances
What is a market
= main instrument 4 allocating scarce resources in Aus + method of answering 3 basic eco. Q’s
What are the 3 basic economic questions
1) What + how much 2 produce
2) How to produce
3) For whom 2 produce
What are the 4 preconditions of a perfectly competitive market (characteristics)
1) c’er sovereignty exists
2) lrg number of buyers + sellers = price takers
3) products are homogenous
4) ease of entry + exit
What are the 3 traditional viewpoints of consumers
1) c’er have ordered set of preferences
2) c’er make informed decisions
3) c’er act rationally
What is the market / price mechanism
= describes how the forces of D+S influence (relative) prices of g/s which then coordinates the way productive resources are allocated in the economy
What is demand
= willingness + ability of c’er 2 purchase g/s
What is the law of demand
- Qty demanded inc, price dec
- Qty demanded dec, price inc
What is the income effect
= dec consumption of g/s whose price has inc due 2 dec in c’ers purchasing power / inc in consumption of a g/s whose price has dec due 2 the inc in c’er purchasing power
What is the substitution effect
= dec consumption of a g/s whose price has inc due 2 the changed trade off : the fact that one must give up more of another g/s 2 get more units of the high priced g/s
What is disposable income
= income available 4 spending after the receipt of welfare benefits + deduction personal tax
What is discretionary income
= disposable income available 4 consumption following the payment of all “x-discretionary” / “x-avoidable” expenditures i.e related 2 food, clothing, shelter
What are the microeconomic demand side non-price factors
-> shift of demand curve
1) Changes in disposable income
2) The price of sub
3) The price of compliment
4) Preferences + tastes
5) Interest rates
6) Population demographics
7) C’er confidence (sentiment) = confidence in future state of the economy + job security
What is supply
= ability + willingness of p’ers 2 produce
What is the law of supply
- As $ inc the qty supplied inc
- As $ dec the qty supplied dec
What is the profit motive
= particularly given the higher the price, the inc chance of making profit
What are the microeconomic supply non price factors
-> result in shifts
1) changes in cost of production
2) number of suppliers
3) Technological change
4) productivity
5) climatic conditions
What is the equilibrium
= where qty demanded 4 g/s = 2 qty supplied of g/s
What is the 7 step process of answering changes in demand supply Qs
1) explain situation in your own words
2) supply / demand
3) inc or dec
4) shift curve left or right
5) if prices 2 remain at P1, shortage or surplus
6) market forces put upward or downward pressures on price 2 adjust 2 new equilibrium
7) overall impact on price qty
Distinguish b/n movement + shift
p.o.d = the factor causing the change
movement = influenced by prices changing that sees contractions + expansions along curve
shift = influenced by non price factors that physically shifts whole curve fav or unfav
What is price elasticity of demand
= responsiveness of total qty demanded of a product 2 a change in price of that of a product
-> inelastic = hard 2 change
-> elastic = easy 2 change
What is the price elasticity of demand equation
= percentage change in qty demanded / percentage change in price
Factors affecting the price elasticity of demand + how
1) the degree of necessity
= if necessity, c’ers dec likely 2 dec qty consumed x matter price change
2) availability of substitutes
= if x / dec substitutes 4 product then c’er dec likely 2 dec qty consumed x matter price change
3) proportion of income
= inc proportion of income required 2 purchase g/s, inc impact of price change
4) time
= s.t -> c’ers continue 2 make buying decisions on a habitual basis
= m-l.t-> start 2 realise price changes, often occurs with products e.g bills
What is the significance of price elasticity of demand
-> important measure 4 bus + gov.t
1) bus prefer 2 operate in environment where there is dec PED 4 their g/s as an inc in price will only result in small % change in qty demanded = overall impact = inc rec
2) bus take PED into account when pricing products
3) gov.t consider PED 4 goods when replacing / inc indirect taxes
Guide 2 PED values
High PED > 1
Medium PED = 1
Low PED < 1
What is price elasticity of supply
= refers 2 the responsiveness of total qty supplied of a product 2 a change in the price of that product
-> High PES = elastic
-> Low PES = inelastic
What is the price elasticity of supply equation
PES = % change in Qty supplied / % change in price
Factors affecting elasticity of supply (+how)
1) Spare capacity
-> lot’s out back = elastic
-> none out back = inelastic
2) Production period
-> short time 2 produce = elastic
-> long time 2 produce = inelastic
3) Durability of goods
-> lasts long time = elastic
-> short life = inelastic
Guide 2 PES values
High PES > 1
Med PES = 1
Low PES < 1
What is the significance of the price elasticity of supply
-> PES can affect the viability of a bus as well as their ability 2 respond 2 changing price signals
What is the price mechanism
= describes how the forces of demand and supply influence (relative) prices of g/s which then coordinates the way productive resources are allocated in the economy
What are relative prices
= prices of g/s compared 2 the price of another g/s
What is consumer sovereignty
= ability of c’er in competitive markets 2 direct or allocate resources
The effect of competitive markets on allocative efficiency
-> right g/s need 2 be produced, in the right way
-> relative prices send signals, producers pay close attention 2 these
-> ease of entry + mobile resources
-> many sellers -> inc competition keeping low prices -> prod efficiency
-> lowest possible prices + maxed MLS
The effect of competitive markets on productive efficiency
-> homogenous g/s t/f 2 be competitive, producers must dec costs + inc output t/f low prices
-> low barriers 2 entry + exit with mobility of resources = inc comp
-> many sellers = inc comp
-> producers boost productivity = profit max
The effect of competitive markets on dynamic efficiency
-> when relative prices change, lvls of d. efficiency determined by how quickly producers can reallocate
-> features + assumptions of comp market that will assist process = ease of entry + exit; mobile resources; many sellers = incentive 2 innovate
The effect of competitive markets on inter-temporal efficiency
-> L.S of future gens may x be taken into account (b/c c’er sovereignty
-> Market x factor in full cost of prod + consumption e.g pollution
-> gov.t intervention required through things like emissions trading scheme
What are the behaviours of key economic agents
Producers aim 2 max profits
Consumers aim 2 max L.S + utility
Gov.t aim 2 max national L.S
What is market failure
= when an unregulated market is x able 2 allocate resources efficiently 2 maximise national L.S / welfare
-> over/under allocation of resources 2 production of g/s
What are public goods
= g/s that are socially desirable + important 2 all, it is x excludable + x depletable / x rivalrous in consumption
What do public goods provoke
= free-rider problem -> an economic agent who receives benefit from public good h/r x pay 2 use it
t/f reason 4 public goods being market failure
Types of market failures
1) Public goods
2) Common access resources
3) Externalities
4) Asymmetric information
Role and effect of gov.t interventions: Public goods
-> in general, role of gov.t intervention = 2 ensure public goods are provided in order 2 address under allocation of resources
1) Gov.t subsidies
2) Direct provision
What are common access resources
= x owned by anyone + usually do x have a market price making them available 2 anyone h/r they are depletable / rivalrous in consumption b/c 1 person reduces the amount available 2 another
How are common access resources a market failure
= lack of excludability + absence of price -> excessive production + consumption of goods that use of common access resources
-> overuse = unsustainable = intertemporally inefficient
Role and effect of government intervention: common access resources
-> ultimate goal is 2 prevent/dec over use of common access resources
1) gov.t regs i.e environmental + licensing
2) indirect taxes i.e ETS
3) Subsidies -> Used 4 RnD
What is an externality
= results when the wellbeing of a 3rd party x involved in a transaction is affected -> either +ve or -ve, occurring in the production / consumption of a g/s
What is a positive externality
= when a 3rd party receives a benefit from the production / consumption of a g/s
What are examples of positive externatlities
prod-> Beekeeper
cons-> Vaccinations
How is a positive externality an example of a market failure
= all + externalities will -> inefficient allocation of resources via under allocation of resources
Role and effect of gov.t intervention: positive externalities
1) Subsidies -> dec cost of production
2) Direct provisions = health + edu or RnD
What is a negative externality
= occurs when a cost is imposed on a 3rd party x involved in a transaction from the production / consumption of a g/s
What are examples of negative externalities
prod-> pollution
cons-> smoking
How are negative externalities an example of market failure
= all -ve externalities -> inefficient allocation of resources via an over allocation of resources
Role and effect of government intervention: negative externalities
1) gov.t regulations
2) indirect taxes i.e excise taxes on petrol/cigs
3) Subsidies
4) government advertising
What is asymmetric information
= type of market failure where one party has greater info than the other in a transaction -> inefficient allocation of resources (under over al) 2 the prod/consumption of certain g/s over time
What is adverse selection
= an economic outcome that x maximise wellbeing 4 @least 1 of the parties 2 a transaction due 2 1 party having more info than the other
What is moral hazard
= occurs when economic agents adjust behaviours without other party being aware, 2 1 that = dec efficient / favourable in society pov after transactions occurred
Role an effect of gov.t intervention: asymmetric information
1) Gov.t regulations
-> Aus c’er law
-> ACCC
-> Regs 2 ensure p’er gives c’er inc info
2) Gov.t advertising (awareness)
3) Subsidies -> maybe 4 firms who provide meaningful info
What is government failure
= a term used 2 describe a situation where gov.t intervention fails 2 improve allocation of resources / makes allocation of resources less efficient compared 2 free market outcome
What are price controls
1) price ceiling
2) price floor
What is price ceiling
= gov.t failure where sellers of g/s are banned from inc prices above certain lvl
What is price floor
= gov.t failure where price offered in a market = prohibited from falling below lvl
What is an example of price floor
= Minimum wage
-> designed 2 protect workers with weak bargaining powers from excessive exploitation in the workforce - currently $23.23
How do government failures result in inefficient allocation of resources
1) productive efficiency impeded b/c x meet equilibrium t/f inefficient b/c valuable labour underutilised
2) Disturbs price mech t/f low skilled labour wages artificially high t/f disincentives ppl 2 inc skills = inefficient -> dec dynamic efficiency b/c less creativity + adaptability of economy
3) Due 2 inc wages + low skilled work offshored, dec L.S of portions of economy i.e structurally unemployed
