Unit 3 AOS 1 Flashcards
What is relative scarcity?
Relative scarcity refers to having unlimited needs and wants but only having limited resources to fulfill them
What is opportunity cost?
The value of the next best option foregone whenever a choice or decision is made
What is allocative efficiency?
Allocative efficiency is the most efficient allocation of resources where living standards have been taken into account and are being maximised
What is productive/technical efficiency?
Productive/technical efficiency is when an economy achieces the most efficient level of production from a given level of inputs - does not take living standards into account
What is dynamic efficiency?
Dynamic efficiency is how quickly an economy can reallocate its resources to achieve allocative efficieny
What is inter-temporal efficiency?
Inter-temporal efficiency is how well resources are allocated over different time periods so the living standards of current generations are not impacting future generations living standards
The nature of a free and perfectly competitve market
Consumer sovereignty exists, ability of the consumer to direct or allocate resources, large number of buyers and sellers (price takers), homogenous products, low barriers to entry and exit
What are the assumptions for a perfectly competitive market?
Buyers and sellers operate with full information, resources are mobile and buyers and sellers act rationally
What is the market/price mechanism?
Describes how the forces of demand and supply influence relative prices of goods and sevices which then coordinates the way productive resources are allocated in the economy
What is the law of demand?
Demand is the willingness and ability of consumers to purchase goods or services
The quantity demanded increases, as the price decreases
The quantity demanded decreases, as the price increases
What is the income effect?
A reduced consumption of a good or service whose price has increased that is due to the reduction in the consumers purchasing power or an increase in consumption of a good or service whose price has decreased that is due to the increase in the consumers purchasing power
What is the substitution effect?
The reduced consumption of a good or service whose price has increased that is due to the changed trade off: the fact that one must give up more of another goods or services to get more units of the high priced good or service
Demand side non-price factors
Changes in disposable income, price of a substitute, price of complements, preferences and tastes, interest rates, population demographics and consumer confidence
What is disposable income?
Disposable income is income available for spending after the receipt of welfare benefits and deduction of personal taxes
What is discretionary income?
Discretionary income is the disposable income available for consumption following the payment of all ‘non-discretionary’ or ‘non-avoidable’ expenditures such as those related to food, clothing and shelter
What are the supply side non-price factors?
Changes in cost of production, number of suppliers, technological change, productivity and climatic conditions
What is the law of supply?
As price rises, the quantity supplied increases and as price falls, the quantity supplied decreases
What is the 7 step method?
1: Explain the situation in own words
2: Supply or demand
3: Increase or decrease
4: Cruve shifts to the left or right
5: If price remains at P1 temporary shortage/surplus
6: Market forces put downward/upward pressure on price to adjust to new equilibrium
7: Overall impact on price and quantity
What is market equilibrium?
Equilibrium is where the quantity demanded for a good or service is equal to the quantity supplied of a good or service
What is price elasticity of demand?
The price elasticity of demand refers to the responsiveness of total quantity demanded of product to a change in the price of that product
Inelastic = hard to change
Elastic - changes easily
PED equation
Percentage change in quantity demanded/percentage change in price
What are the factors affecting price elasticity of demand?
The degree of necessity, availability of substitutes, proportion of income and time
What is price elasticity of supply?
The price elasticity of supply refers to the responsiveneess of total quantity supplied of a product to a change in the price of that product
PES equation
Percentage change in quantity supplied/percentage change in price
What are the factors effecting price elasticity of supply?
Spare capacity, production period and durability of goods
What is price mechanism?
Price mechanism describes how the forces of demand and supply influence relative prices of goods and services which then coordinates the way productive resources are allocated in the economy
What are relative prices?
Relative prices are the prices of a good or a service relative or compared to the price of another good or service
What are public goods?
Public goods are goods that are available for public consumption and are non-excludable and non-depletable
What are free riders?
A free rider is an economic agent who revcieves the benefit from a public good but does not pay for it
What is the market failure when reffering to public goods?
When an unregulated market is unable to allocate resources efficiently or maximise living standards it can result in an under or over allocation of resources to the consumption of some goods and services
How do government subsidies address the market failure of public goods?
Government subsidies are a payment or concession of a producer or consumer that is designed to increase consumption/production of a good or service by covering some of the costs involved e.g cash payments
How do direct government provisions address the market failure of public goods?
Direct government provisions address the market failure by not relying on a private business to produce the public good e.g production of hospitals
What are common access resources?
Common access resources are goods that are available for public consumption and are non-excludable but are depletable e.g fish in the ocean
What is the amrket failure when reffering to common access resources?
A lack of excludability and the absence of price leads to excessive production or consumption of goods that use up valuable common access resources
How do government regulations address the market failure of common access resources?
Environmental regulations and legislation such as permits, quotas and prodcution techniques all address the market failure because they introduce a level of excludability and limit access
How do indirect taxes address the market failure of common access resources?
Indirect taxes such as carbon taxes and ETS address the over consumption by placing a price on the consumption of common access resources
How do subsidies address the market failure of common access resources?
Subsidies can be used to encourage the development of clean technologies and this can reduce the consumption of common access resources as these alternative solutions become cheaper
What are positive externalities?
Posistive externalitites occur when a third party recieves a benefit from the production or consumption of a good or service
How does government intervention relate to positive externalities?
The role of government intrervention is to ensure that the consumption and production of positive externalitites continue to take place through the use of subsidies and direct provision (health and education, R&D)
What are negative externalities?
Negative externalities occur when a cost is imposed on a third party not involved in the transaction, from the production or consumption of a product
How does government intervention relate to negative externalities?
The role of government regulation is to ensure the consumption and production of the negawtive externailities does not take place or is minimised through the use of government regulation, indirect taxes (excise taxes), subsidies and government advertising
What is asymmetric information?
Asymmetric information is an essential assumption made for a perfectly competitive market that buyers and sellers possess perfect information and this allows for certainty in purchases and sales
What is adverse selection?
Adverse selection is an economic outcome that does not maximise well being for at least one of the parties of a transaction due to one party having more information than the other
What is moral hazard?
Moral hazard occurs when economic agents adjust their behaviour, without the other party being aware, to one that is less efficient or favourable from societys point of view after the transaction has occured
How do governments intervene to address asymmetric information?
Government regulation such as legislation and the ACCC make it illegal to operate in a way that misleads or decieves customers or other businesses and this reduces the level of asymmetric information within a market
What is government failure?
Government failure is a term used to describe a situation where gov intervention fails to imporive the allocation of resources or makes the allocation of resources less efficient compared to the free market outcome
What are price ceilings?
Price ceilings are where the sellers of the good or service are banned from raising prices above a certain level
What are price floors?
Price floors are where the price offered in a market is prohibited from falling below a certain level
