UNIT 3 AOS 1 Flashcards
Relative Scarcity
A situation where resources are limited compared to the demands placed upon those resources by our needs and wants
Needs
Goods and Services that are considered essential
Wants
Goods and Services that we desire and are likely to improve our standard of living
Resources
things that are used to produce goods and services
Types of Resources
- Natural
- Capital
- Labour
- Entrepreneurship
Competitive Markets
is one which forms the basis of a supply and demand analysis
Conditions of a Competitive Market
- Large number of buyers and sellers
- Homogenous Products
- Ease of entry and exit
- Buyers and sellers seek to maximise profit
Law of Demand
as prices fall - demand increases
as prices rise - demand decreases
Law of Supply
Prices rise - supply increases
Prices fall - supply decreases
Factors that affect Supply curve
- Cost of Production
- Technological Change
- Productivity Growth
- Climatic Conditions
Factors that affect shift in demand
- Preference/Taste
- Interest Rates
- Population
- Consumer Confidence
Factors that affect movement in demand curve
- Disposable Income
- Price of Substitutes
- Price of Complements
Relative Prices
- Price of any good or service, compared to the price of another
- Send signals to market about what to produce
- Increase in relative prices due to increase in demand tells supplier to use the resources to provide for this good
Disposable Income - Demand (Movement)
amount of money and individual has after the payment of direct taxes
Price of Substitutes - Demand (Movement)
Price of one item in a market falls relative to another that it can be easily substituted for.
Lower priced items demand will increase relative to the higher priced item
Price of Complements - Demand (Movement)
Price of a good or service that must be consumed alongside another rises, demand for original is likely to fall
Interest rates - Demand (Shift)
the additional costs associated with repaying a loan
interest rates low - increase in demand
interest rates high - decrease in demand
Consumer Confidence - Demand (Shift)
degree of optimism consumers have regarding their future income, employment and overall economic situation
Increase consumer confidence - increase in demand
Decrease consumer confidence - decrease in demand
Cost of Production - Supply
Costs associated with accessing the goods required to produce goods
Increase in cost - Decrease in Supply
Decrease in cost - Increase in Supply
Climatic Conditions - Supply
way in which incidences such as floods and fires may create a more or less favourable condition to produce
Types of efficiency
Allocative
Productive
Dynamic
Inter-temporal
Allocative Efficiency
resources are allocated that the goods and services produced achieve maximum satisfaction
Productive Efficiency
producing maximum amount of goods and services from the minimum amount of resources
Dynamic Efficiency
move to a allocatively efficient point following changes to supply and/or demand
Intertemporal Efficiency
balance between resources used for current and future needs
Market Failure
Market hasn’t achieved allocative efficiency as their has been an under allocation or over allocation of resources
Reasons for Market Failure
Public Goods
Asymmetric Information
Externalities
Common access goods
Public Goods
Public goods are provided by the government for the benefit of everyone
It creates the free rider problem – payment is difficult to extract from those who benefit from it.
If operating in a free market – an under allocation of resources
The government typically intervenes in these markets to ensure that adequate resources are allocated
The government will pay for these public goods using revenue raised from a range of sources including taxes.
Externalities
the costs or benefits for third parties that arise when goods and services are produced or consumed.
Can be positive externalities or negative externalities.
Buyers and sellers ignore impact of externalities when making decisions - resource allocation becomes inefficient.
How can government intervene in Externalities
regulations and laws (CleanEnergyAct)
•Indirect taxes (excise tax on tobacco, CarbonTax)
• Providing subsidies (incentives for solar panels)
• Education and advertising to inform the public (anti-smoking ads)
Asymmetric Information
where buyers or sellers lack the information required to make decisions about how to use their resources.
one party knows more than the other about the product and this can lead to inefficient outcomes.
The Government can again use legislation such as labeling of ingredients on foods.
Common Access Resources
Natural resources that are usually not owned by anyone.
Generally can be accessed by all members of the community and used without payment.
Non-excludability - means that it is difficult or impossible to exclude individuals from using the resource.
Rivalrous - means that one person’s use of a resource reduces or prevents another person’s use of it.
Government Failure
government intervened in a market resulting in a more inefficient allocation of resources (market failure) and worse living standards.
Price Ceilings
- Goods/services can’t be sold above a certain prices.
- The intention may be to make items affordable for low income earners (perhaps affordable rent for example)
- However, they often create a shortage and black markets operate.
Price Floors
- are prices cannot go below a certain level
- The intention would be to protect the income of those selling the products (for example, minimum wages in the labour market)
- However, they often result in ongoing surpluses
Price Elasticity of Demand
change in demand relative to the change in price.
- High PED (elastic) – demand greater than change in price
- Low PED (inelastic) – demand will be lower than the change in price
- Medium PED (unit-elasticity) – demand is equal to the change in price
Factors Affecting PED
Degree of necessity
Availability of substitutes
Proportion of income
Time
Price Elasticity of Supply
change in supply relative to the change in price.
- High PES (elastic) – Percentage change in qty will be greater than the percentage change in price
- Low PES (inelastic) – Percentage change in qty will be lower than the percentage change in price
•- Medium PES (unit elasticity) – Percentage change in qty will be equal to the percentage change in price
Factors affecting PES
Production period
Spare capacity
Durability of goods
Effects of changes in supply and demand on equilibrium prices and quantity traded
Increase demand
- shift demand curve right
- expansion along the supply curve
- new equilibrium at higher prices and quantity
Decrease demand
- shift demand curve left
- contraction along the supply curve
- equilibrium at lower prices and quantity
Increased supply
- shift supply curve right
- expansion along demand curve
- equilibrium at lower prices and higher quantity
Decrease supply
- shift supply curve left
- contraction along the demand curve
- equilibrium at higher prices and lower quantity
