U3 AOS1 - Microeconomics

Question 1

Relative scarcity refers to

Answer 1

Unlimited needs and wants and limited resources to fulfil them.

Question 2

Opportunity cost is

Answer 2

the value of the next best alternative foregone in production

Question 3

Any point along the PPF is ______________ however only one point is ______________

Answer 3

Technically efficiency, allocatively efficient

Question 4

The three basic economic questions are:

Answer 4

What and how much to produce?
How to produce?
For whom to produce?

Question 5

The three main types of economic resources are:

Answer 5

Natural, labour and capital

Question 6

A situation where resources are allocated in such a way that opportunity costs are minimised and living standards are maximised

Answer 6

Allocative efficiency

Question 7

Producing at the least cost for the maximum output is ______________ efficiency

Answer 7

Technical/productive

Question 8

The speed at which an economy can reallocate it’s resources to match societies changing needs and wants refers to:

Answer 8

Dynamic efficiency

Question 9

The balancing of resource use between time periods

Answer 9

Intertemporal efficiency

Question 10

State the conditions for a free and perfectly competitive market

Answer 10

Ease of entry and exit,
Many buyers and sellers
Homogenous goods

Question 11

The law of demand states that

Answer 11

As price rises quantity demanded falls or
As price falls quantity demanded increases

Question 12

An expansion of demand refers to

Answer 12

When the selling price of a product is reduced and the quantity demanded increases

Question 13

A contraction of demand refers to

Answer 13

When the selling price of a good or service increases and the quantity demanded decrease

Question 14

The non-price factors which would shift demand are:

Answer 14

Changes in disposable income, the prices of substitutes and complements, preferences and tastes, interest rates, population demographics and consumer confidence.

Question 15

The income effect refers to:

Answer 15

As one’s income grows, the income effect predicts that people will begin to demand more (and vice-versa).

Question 16

The substitution effect refers to

Answer 16

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.

Question 17

The law of supply states

Answer 17

As price increases, quantity supplied increases
or
As price decreases, quantity supplied decreases

Question 18

A contraction of supply refers to

Answer 18

A decrease in selling price leading to a reduction in quantity supplied

Question 19

An expansion of supply refers to

Answer 19

An increase in selling price leading to an increase in quantity supplied.

Question 20

The non price factors likely to shift the supply curve are:

Answer 20

Costs of production, number of suppliers, technology, productivity and climatic conditions.

Question 21

The equilibrium refers to

Answer 21

The price and quantity where the quantity supplied and demanded is equal.

Question 22

Outline the process of a new equilibrium being created if there was a favourable shift in demand.

Answer 22

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.

Question 23

Price elasticity refers to

Answer 23

The responsiveness of quantity demanded/supplied to a change in price.

Question 24

The factors impacting price elasticity of demand are:

Answer 24

Degree of necessity, availability of substitutes, proportion of income and time

Question 25

The factors impacting price elasticity of supply are:

Answer 25

Spare capacity, production period, durability of goods.

Question 26

Relative prices refer to:

Answer 26

The selling price of one good or services compared to another similar good or service.

Question 27

A change in relative prices is likely to:

Answer 27

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.

Question 28

Describe one strength of perfectly competitive markets in achieving efficiency in resource allocation

Answer 28

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.

Question 29

Describe one weakness of perfectly competitive markets at achieving efficiency in resource allocation

Answer 29

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.

Question 30

The four types of market failure are:

Answer 30

Externalities, asymmetric information, common access resources and public goods.

Question 31

A school being built leading to your house appreciating in value is an example of which market failure?

Answer 31

Positive externalities.

Question 32

Public goods are:

Answer 32

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.

Question 33

Common access resources are

Answer 33

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.

Question 34

Methods to correct market failure are:

Answer 34

Indirect taxation, subsidies, regulations, advertising and direct provision.

Question 35

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:

Answer 35

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.