U3 AOS1 - Microeconomics Flashcards
Relative scarcity refers to
Unlimited needs and wants and limited resources to fulfil them.
Opportunity cost is
the value of the next best alternative foregone in production
Any point along the PPF is ______________ however only one point is ______________
Technically efficiency, allocatively efficient
The three basic economic questions are:
What and how much to produce?
How to produce?
For whom to produce?
The three main types of economic resources are:
Natural, labour and capital
A situation where resources are allocated in such a way that opportunity costs are minimised and living standards are maximised
Allocative efficiency
Producing at the least cost for the maximum output is ______________ efficiency
Technical/productive
The speed at which an economy can reallocate it’s resources to match societies changing needs and wants refers to:
Dynamic efficiency
The balancing of resource use between time periods
Intertemporal efficiency
State the conditions for a free and perfectly competitive market
Ease of entry and exit,
Many buyers and sellers
Homogenous goods
The law of demand states that
As price rises quantity demanded falls or
As price falls quantity demanded increases
An expansion of demand refers to
When the selling price of a product is reduced and the quantity demanded increases
A contraction of demand refers to
When the selling price of a good or service increases and the quantity demanded decrease
The non-price factors which would shift demand are:
Changes in disposable income, the prices of substitutes and complements, preferences and tastes, interest rates, population demographics and consumer confidence.
The income effect refers to:
As one’s income grows, the income effect predicts that people will begin to demand more (and vice-versa).
The substitution effect refers to
The substitution effect is the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price rises.
The law of supply states
As price increases, quantity supplied increases
or
As price decreases, quantity supplied decreases
A contraction of supply refers to
A decrease in selling price leading to a reduction in quantity supplied
An expansion of supply refers to
An increase in selling price leading to an increase in quantity supplied.
The non price factors likely to shift the supply curve are:
Costs of production, number of suppliers, technology, productivity and climatic conditions.
The equilibrium refers to
The price and quantity where the quantity supplied and demanded is equal.
Outline the process of a new equilibrium being created if there was a favourable shift in demand.
Initially there would be a shortage at the original price as quantity demanded exceed supply, consumers then bid up prices causing a contraction in demand until a new equilibrium is met at a higher price and quantity.
Price elasticity refers to
The responsiveness of quantity demanded/supplied to a change in price.
The factors impacting price elasticity of demand are:
Degree of necessity, availability of substitutes, proportion of income and time
The factors impacting price elasticity of supply are:
Spare capacity, production period, durability of goods.
Relative prices refer to:
The selling price of one good or services compared to another similar good or service.
A change in relative prices is likely to:
Lead producers to investigate the cause of the change.
If the change was driven by an increase in demand then producers will allocate resources towards the production of the good as it is now more profitable to produce.
Describe one strength of perfectly competitive markets in achieving efficiency in resource allocation
They’re likely to be allocatively efficient as businesses must produce the goods and services demanded by society to remain profitable and therefore maximises living standards.
or
Can achieve dynamic efficiency as the resource mobility and ease of entry and exit allows businesses to quickly allocate resources to meet societies changing needs and wants.
Describe one weakness of perfectly competitive markets at achieving efficiency in resource allocation
Perfectly competitive markets are driven by profitability and consumers still demand goods and services which cause negative externalities which can undermine allocative efficiency.
Due to firms needing to produce the highest output at the lowest price, this can undermine intertemporal efficiency as production may not be sustainable.
The four types of market failure are:
Externalities, asymmetric information, common access resources and public goods.
A school being built leading to your house appreciating in value is an example of which market failure?
Positive externalities.
Public goods are:
Goods which are non-rivalrous and non-excludable which means that no one can be prevented from using them and one person consuming them does not prevent others from consuming them in the future. This leads to the underproduction of public goods as businesses cannot profit on their continued use.
Common access resources are
Rivalrous and non-excludable which means that anyone can consume these resources, however one person consuming a common access resource means it no longer exists for the next person (eg. fish in the ocean). This leads to the overconsumption of the common access resource in an unregulated market.
Methods to correct market failure are:
Indirect taxation, subsidies, regulations, advertising and direct provision.
The minimum wage is an example of government intervention in the free market which unintentionally lead to a decrease in the efficiency in resource allocation because:
It increases the cost of production for firms which undermines technical efficiency.
Higher COP can also lead businesses to be less willing to produce in Australia, leading to higher unemployment and undermining allocative efficiency.
