Unit 2: The allocation of resources Flashcards
3 factors that cause the demand curve to slope downwards.
Substitution effect
Income effect
Diminishing marginal utility
Why does the supply curve slope downwards?
Labour Opportunity Cost Leisure
What impacts quantity supplied?
Price
List 8 non-price factors that affect supply.
I - Input Prices G - Global factors O - Other goods and services T - Taxation P - No. of producers E - Expectations T - Technology S - Subsidies
What are public goods?
Non - diminishable
Non - excludable
Causes free-rider problems
List 3 main sectors in an economy.
Primary - involves in the production of raw materials
Secondary - the manufacturing sector
Tertiary - the services sector
What is microeconomics?
Microeconomics deals with the choices of a single individual, firm
What is macroeconomics?
Macroeconomics deals with the actions of the economy as a whole
List 3 economic systems and explain each of them.
Free Market Economy - it is an economic system where private firms and individuals make decisions and the price mechanism affects both buyers and sellers who negotiate prices. Government doesn’t make decisions .
Mixed Market Economy - it is an economic system where the ownership of scarce resources and the decisions on how to use them are split between private and public sector firms
Planned Economy - government makes all the decisions
What is market failure?
Market failure occurs when the market forces of supply and demand fail to allocate the resources in the most efficient way and when social costs are greater than social benefits.
Name the 5 ways of market failure.
Externalities Public goods Merit and Demerit goods Monopoly Asymmetric Information Which causes inequality
What are social costs ?
Social costs are private cost + external costs.
Name 3 types of demand.
Individual Demand, Market Demand and Effective Demand
What is individual demand?
It looks at demand of one person for a product at different market prices.
What is market demand?
It is the total demand for a product at each price in a market.
What is effective demand?
It must have the means and desire to purchase the product.
List the factors that effects demand.
S - Price of substitutes E - Future Expectations P - Population T - Taste I - Income C - Price of Compliments
Define surplus and shortage .
Surplus - excess supply
Shortage - excess demand
List the 5 factors that affect PED.
No of substitutes
Type of Good
Period of Time
Cost of switching into a different supplier ( long term/short term contract)
Proportion of consumer’s income spent of the product
List the 3 factors affecting PES.
Time for producing the product
Availability and mobility of resources
- having stock or unused machinery
formula to calculate PES
PES = %change in QS/ %change in P
List the 4 macroeconomic polices ( government intervention ) to correct market failure.
The direct provision of goods and services ( providing free public schools / hospitals )
Adding price controls - maximum prices below the equilibrium to encourage demand of merit goods , minimum prices above the equilibrium to discourage demand of demerit goods.
Adding taxes to reduce consumption of demerit goods such as cigarettes
Granting subsidies to reduce costs and increase supply
What is consumer surplus?
Consumer Surplus = buyer’s maximum - price
What is producer surplus ?
Producer Surplus = price - seller’s minimum
