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eco 3/4 > unit 3 aos 1 > Flashcards

unit 3 aos 1 Flashcards

1
Q

define economics

A

the study of how individuals and societies allocate limited resources to meet needs and wants.

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2
Q

state the key economic assumptions (4)

A

ceteris parabus, rational economic decision making, consumers are utility maximisers and firms are profit maximisers, diminishing marginal utility

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3
Q

ceteris parabus (key economic assumptions)

A

all other factors that might affect the decision to buy the product at a point in time are held constant. this assumption helps isolate key economic relationships

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4
Q

rational economic decision making (key economic assumption)

A

whenever a decision needs to be made, an economic agent will consider all of the relevant information and weigh up pros and cons. this implies that consumers have access to perfect information and know exactly what they’re buying

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5
Q

consumers are utility maximisers and firms are profit maximisers (key economic assumption)

A

firms will make decisions that maximise profit. consumers will purchase goods and services that generate high levels of satisfaction

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6
Q

diminishing marginal utility (key economic assumption)

A

the more of a good or service consumed per period, the smaller the increase in total satisfaction generated from the last unit.

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7
Q

define relative scarcity

A

where peoples needs and wants are unlimited and exceed the limited resources available to satisfy needs and wants

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8
Q

define needs

A

good or service we cannot live without. necessary for survival

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9
Q

define wants

A

good or service that is not necessary. enhances quality of life and material living standards

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10
Q

state the factors of production (3)

A

land, labour, capital

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11
Q

define labour (factor of production)

A

mental/physical effort by humans in the production process

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12
Q

define land/natural (factor of production)

A

occur in nature. can be utilised in production or consumed raw

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13
Q

define capital (factor of production)

A

resources made by combining labour and natural resources to create a more sophisticated input. made with the intention of making more goods and services

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14
Q

enterprise (factor of production)

A

skills of an individual who combines resources to produce goods and services

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15
Q

define opportunity cost

A

the value of the next best alternative when a choice Is made

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16
Q

key economic questions (3)

A

what to produce, how to produce and for whom to produce

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17
Q

types of efficiency (4)

A

dynamic, technical/productive, inter temporal, allocative

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18
Q

define inter temporal efficiency

A

focuses on balancing the allocation of resources between different time periods so no generation is to suffer a decrease in living standards.

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19
Q

define dynamic efficiency

A

how quickly an economy can reallocate resources to achieve allocative efficiency. relates to speed of adjustment and how easily resources can be allocated so needs and wants can be maximised

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20
Q

define technical/productive efficiency

A

occurs when its not possible to increase output without increasing inputs. productivity is at a maximum and average costs at a minimum

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21
Q

define allocative efficiency

A

goods and services are made in correct quantities and will go to people who value them most, therefore no resources are wasted. best maximise overall satisfaction.

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22
Q

define microeconomics

A

looks at the behaviour of individual economic agents. usually households and businesses

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23
Q

define market

A

main instrument for allocating scarce resources. seen as any type of arrangement that facilitates exchange between buyer and seller

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24
Q

conditions of a perfect market (3)

A

1) products are homogenous (identical) so suppliers are encouraged to provide at lowest price. 2) ease of exit and entry into market (low set up costs if profit making opportunities exist new entrants can capture a share). 3) large number of buyers and sellers so no individual can influence price

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25
Q

assumptions of a perfect market (3)

A

buyers and sellers operate with full information, buyers and sellers seek to maximise wellbeing, resources are mobile and will be allocated towards areas of production that will generate greatest benefit

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26
Q

define allocation of resources

A

how resources are directed towards the production of goods and services to meet the needs of households, businesses and governments

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27
Q

the law of demand

A

there is an inverse relationship between price and quantity demanded. as price decreases, quantity demanded will increase and vice versa. law of demand makes sense because some people may be unable to afford as price goes up, price will exceed products worth and higher prices may encourage consumers to look for alternatives

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28
Q

microeconomic demand factors (6)

A

disposable income, preferences and tastes, consumer confidence, price of substitutes & complements, interest rates, population growth/demographic change

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29
Q

disposable income (demand factor)

A

rewards received by households for their contribution to the production process plus government transfers less direct taxes. total amount consumers have to spend. high disposable income - high demand for Normal goods and low demand for inferior goods

30
Q

interest rates (demand factor)

A

reward for lending or the cost of borrowing, expressed as a percentage of the beginning amount. an increase will mean indebted households will have less discretionary income- decrease in demand

31
Q

price of substitutes and complements (demand factor)

A

substitute (viable good or service that can be used instead. fulfil a similar need). complement (consumed together. higher price of complement is viewed as higher price for the combined experience).

32
Q

population growth/demographic change (demand factor)

A

growing population needs more goods and services. people are living longer therefore higher demand for aged care and health care.

33
Q

consumer confidence/sentiment (demand factor)

A

a measure of households general expectations about the future state of the economy. may impact willingness to consume - decreasing demand

34
Q

the law of supply

A

while a higher price may deter consumers, it acts as am incentive for the supplier. positive relationship between price and quantity supplied. as price increases, quantity supplied increases and vice versa

35
Q

microeconomic supply factors (3)

A

changes in cost of production, technological change and productivity growth, climatic conditions

36
Q

changes in cost of production (supply factor)

A

higher costs impact profitability

37
Q

technological change and productivity growth (supply factor)

A

new technology will increase productivity. more advanced capital being introduced can result in greater volume being produced per hour. results in a decrease of cost per unit of output

38
Q

climatic conditions (supply factor)

A

most products rely on battue for provision of raw materials required

39
Q

define price mechanism

A

system where producer supply and consumer demand interact in the marketplace to set prices for goods and services

40
Q

define equilibrium

A

price where quantity demanded equals quantity supplied. the market will always tend to move towards equilibrium. when price is above equilibrium, market pressures will bring it back down and vice Versa

41
Q

changes in demand while supply remains constant

A

causes a shortage at original price, allowing suppliers to increase price. this increase cause a decrease in demand but will provide suppliers with more incentive to supply

42
Q

changes in supply while demand remains the same

A

(shift to the right) results in a surplus. forces seller to reduce price, thus attracting more customers and increasing demand. at the same time, supply contracts as firms are unable to supply at previously high price

43
Q

define relative price

A

refers to the price of one good/service measured in terms of the price of another good/service. changes in relative prices provide the suppliers with an incentive to alter the type of good/service produced or the way they are produced

44
Q

define price elasticity of demand

A

measures the responsiveness of changes In the quantity demanded to changes in price. Ped = percentage changes in quantity demanded divided by percentage change inn price

45
Q

define high PED (elastic)

A

absolute value greater than 1, meaning if a supplier lowers their price by a Certain percentage, they’re likely to attract a higher percentage increase in demand. demand curve will be relatively flat

46
Q

define low PED (inelastic)

A

absolute value less than 1, meaning if supplier lowers price by a certain percentage, they’re likely to attract a smaller percentage increase In quantity demanded. demand curve will be relatively steep

47
Q

define unit elastic

A

% change in price is equal to % change in quantity demanded. value will be exactly 1

48
Q

define price elasticity of supply

A

the responsiveness of total quantity supplied of a product to a change in the price of that product. PES = percentage change in quantity suppled divided by percentge change in price

49
Q

factors affecting PED (4)

A

proportion of income, time, degree of necessity, availability of substitutes

50
Q

factors affecting PES (3)

A

production period, storability & durability, spare capacity

51
Q

define production time period (PES)

A

in short term, hard to expand supply following a price rise (no mobile resources and no excess stock) which means it is inelastic
long term: becomes more elastic

52
Q

define spare capacity (PES)

A

when a firm has some under-utilised factors of production, it has a greater ability to respond fast to changing prices. PES will decrease as firms get closer to productive capacity

53
Q

define storability &durability (PES)

A

if goods can be stored it would be much easier to respond to changing prices.

54
Q

sources of market failure (5)

A

common access goods, public goods, positive and negative externalities and asymetric information

55
Q

define public goods

A

provided by government and consumed by members of the public. non excludeable and non rivalrous. underallocated if left to market. government intervention: subsidies

56
Q

define common access goods

A

naturally occurring resources not owned by anyone. non excludable and rivalrous. can be over consumed due to np market price, reducing temporal efficiency. government intervention: environmental laws

57
Q

define asymmetric information

A

when one party has more knowledge about the product then another (normally producer)during a transaction. unfair advantage. leads to an increase in demand and therefore an overallocation of resources to the good/service, failing to provide allocative efficiency

58
Q

define positive externalities

A

consumption/production that causes benefits to an independent third party not directly involved in transaction. results in underproduction since producers are not involved in benefits to third party

59
Q

define negative externalities

A

a negative consequence of production/consumption placed on an independent third party not directly involved in transaction. results in over production as producers do not suffer costs. government intervention is indirect tax, advertising, legislation.

60
Q

government intervention (4)

A

indirect taxation, subsidies, advertising, government regulation

61
Q

define indirect taxation (government intervention)

A

a tax levied to producers/suppliers. but is ultimately paid by consumers due to suppliers passing on added cost in the form of higher prices. used as a means of rectifying market failure by attempting to decrease demand. can be used to address negative externalities by raising prices, reducing production/consumption and diverting resources to more socially optimal products.

62
Q

define subsidies (government intervention)

A

a payment to a producer designed to encourage production and therefore increase consumption. reduces costs and increases profit. hence, producers are more willing to produce at any given price.

63
Q

define advertising (government intervention)

A

used to increase demand where positive externalities accrue from consumption or to decrease demand where negative externalities occur. increases awareness of consumers of the Impact of their consumption on living standards.

64
Q

define government regulation (government intervention)

A

regulation - rule/law that must be followed or consequences will follow. government regulation is used to alter consumer and producer behaviour and hence how resources are allocated. in common access resources, legislation is enforced by environmental laws. in asymmetric information, legislation is enforced through consumer protection laws

65
Q

relative price & allocative efficiency

A

when the price of one product increases compared to another, this influences firms to change how they produce/what they produce. goods and services seen as profitable will be produced more

66
Q

relative price & living standards

A

higher competition drives producers to keep prices low. this increases living standards as people are able to purchase more with their discretionary income, but decreases living standards for stressed workers (overworking)

67
Q

pure monopoly

A

Exists when a single firm controls the output of a particular market. The firm is a price maker. Competition is weak.

68
Q

oligopoly

A

A few large firms control the output of a product for which there is no close substitute. There are a small number of dominant suppliers controlling a high percentage of the market share

69
Q

problems of weak competition

A

Higher prices can be charged where competition is weaker. May have poor quality and service as customers have little choice. Reduced Efficiency and Economic Growth – less rivalry and pressure to cut costs can result in inefficiencies and reduced output.

70
Q

strong competition and efficiency

A

allocative: ensuring firms use their resources in ways that minimise the opportunity costs of their decisions. The right goods are produced, in the right way, and then distributed to those who value them most.
Technical/productive: firms need to innovate by using the latest technology.
dynamic: Firms need to be even more responsive to rapid market shifts in fashions, products and customer requirements.
Strong competition in various markets can lead to intertemporal efficiency where there is the right balance between resources allocated for current consumption, and future consumption

eco 3/4 (3 decks)

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