Unit 3 AOS 1

Question 1

Relative Scarcity

Answer 1

The fundamental economic problem that exists because societies needs and wants a virtually unlimited and resources to satisfy them are scarce/limited.

Question 2

Opportunity Cost

Answer 2

The value of the next best alternative forgone whenever a choice is made.

Question 3

Land/Natural Resource

Answer 3

all resources that occur in nature.

Question 4

Labour Resource

Answer 4

The mental and physical effort by humans in the production process.

Question 5

Capital Resource

Answer 5

Used to aid in the production of another good or service .

Question 6

Resource Allocation

Answer 6

Involves making choices about how scarce resources are to be used or distributed among areas of production.

Question 7

Allocative Efficiency

Answer 7

A situation where resources are used to produce particular types of goods and services that best maximise the overall satisfaction of societies needs and wants, well-being and living standards.

Question 8

Productive/Technical Efficiency

Answer 8

This is when the production of goods and services is maximised at lowest possible cost. It is no longer possible to increase outputs without increase inputs.

Question 9

Dynamic Efficiency

Answer 9

Is when resources are allocated quickly to increase choice and meet the changing demands of consumers.

Question 10

Inter-temporal Efficiency

Answer 10

Refers to finding the optimal balance between current consumption (spending of income) versus future consumption (saving of income to finance investment)

Question 11

Price Mechanism

Answer 11

Is a system where by producers supply and consumers demand interact in the marketplace to set prices for goods and services.

Question 12

The Law of Demand

Answer 12

States that the quantity demanded of a particular good or service that buyers are prepared to purchase varies inversely with change in price.

Question 13

The Law of Supply

Answer 13

States the quantity of a particular good or service that sellers are prepared to produce varies directly with price.

Question 14

Relative Prices

Answer 14

Refers to the price of one good or service measured in terms of the price of another good or service.

Question 15

Price Elasticity of Demand (PED)

Answer 15

Refers to the responsiveness of total quantity demanded of a product to a change in the price of that product.

Question 16

Price Elasticity of Supply (PES)

Answer 16

refers to the responsiveness of total quantity supplied of a product to a change in the price of that product.

Question 17

Pure Monopoly

Answer 17

This is when a single frim controls the output of a particular good or service. The firm is the price maker as competition is weak.

Question 18

Oligopoly

Answer 18

This is when a few large firms control the output of a product for which there is no close substitute. This market is fairly difficult to enter and exit as there is small number of dominate suppliers.

Question 19

Pure Competition

Answer 19

This is when there is a large number of buyers and sellers. This markets is fairly easy to enter and exit. All products are homogenous.

Question 20

Market Failure

Answer 20

Refers to when a market is unable to allocate resources efficiently or where resources allocation does not maximise living standards or welfare.

Question 21

Unit Elasticity

Answer 21

When percentage change in price leads to an equal change in quantity demanded/supplied.

Question 22

High Price elasticity

Answer 22

Percentages change in price causes a larger percentage change in quantity demanded/supplied

Question 23

Low Price elasticity

Answer 23

Percentage change in price is causes a smaller percentage change in quantity demanded/supplied

Question 24

Factors affecting PED

Answer 24

Degree of Necessity, Availability of substitutes,

time period, proportion of income.

Question 25

PED formula

Answer 25

total quantity demanded/change in price, times 100

Question 26

Factors affecting PES

Answer 26

Product storability and durability, resource mobility and unused industrial capacity, production time period.

Question 27

Types of Market failure

Answer 27

public goods, positive externalities, negative externalities, asymmetric information, common access resources.

Question 28

Public Goods

Answer 28

Provided by government and consumed by members of the public. These are non-excludable, non-rivalrous, and there are free-rider problems and left to the market they will be under produced as there is very little benefit for a supplier.

Question 29

Postive externalities

Answer 29

When there is an unintentional benefit to a third party not related to the transaction. Under produced as there is no benefit for the supplier, under allocation to these areas.

Question 30

Negative externalities

Answer 30

When there is an unintended consequences of consumption or production of goods and services that negatively impact on a third party. Over allocation as producers do not bear the cost.

Question 31

Asymmetric information

Answer 31

When one party has more information than the other during an exchange. Over allocation because of lack of information and over consumption to resources that might not be as beneficial.

Question 32

Common Access Resources

Answer 32

Naturally occurring goods not owned by anyone and have no marketplace, these are non-excluded and are rivalrous. These are over consumed.

Question 33

Demand Factors that cause a shift

Answer 33

Price of substitutes/compliments, Population growth, Interest Rates, consumer confidence, change in consumer taste/preference, disposable income.

Question 34

Supply Factors that cause a shift

Answer 34

Climatic Conditions, change in cost of production, technological advancements, productivity growth.

Question 35

The effect of a competitive market on Allocative efficiency

Answer 35

Allocative efficiency is when resources are allocated to best maximise societies wellbeing. A competitive market is said to promote allocative efficiency as suppliers pay close attention to relative price signals, as it is easy to exit and enter these markets it is simple for suppliers to act in own self-interest and redirect resources to meet consumers needs and wants, while maximise the wellbeing and living standards of society.

Question 36

The effect of a competitive market on productive/technical efficiency.

Answer 36

This is when production is maximised at lowest possible cost. The competitive market imposes a discipline on on firms to seek the lowest cost method. Given that the products offered for sale in a competitive market are assumed to be homogenous, one of the most effective ways to attract new consumers is through offering the lowest price.

Question 37

The effect of a competitive market on dynamic efficiency

Answer 37

Dynamic efficiency is when resources are allocated to maximise societies wellbeing and the production of goods and services is to meets future needs and wants of consumers. Suppliers will pay close attention to price signals and as resources are assumed to be mobile and it is easy to enter and exit the markets. This makes it easy for suppliers to change production process to meet new needs and wants

Question 38

The effect of a competitive market on inter-temporal efficiency.

Answer 38

Inter-temporal efficiency is when there is a balance between current (spending) and future (saving) consumption. This balance levels societies satisfaction. A competitive market can lead to inter-temporal efficiency when there is the right balance between resources allocated for current consumption and those being set aside through saving and investment for future use. National output and average incomes are usually higher when there is more competition.

Question 39

The role and effect of government intervention on public goods.

Answer 39

If public goods are left to the market they will be under produced. Therefore a government will intervene with subsidies, usually in the form of direct cash payments but can also take the form of low or no interest loans and subsidised cost. These benefits provide incentive for suppliers to produce products as costs of production are now decreased due to the grant received.

Question 40

The role and effect of government intervention on positive externalities.

Answer 40

Positive externalities is when the production and consumption provides an unintentional benefit to a third party not included in the transaction. As there is no direct benefit to suppliers they are underproduced. Government intervention includes; Government regulation which is legislation around the production and consumption of certain activities, this can increase production and consumption of positive externalities by making certain activities mandatory. Subsidies is another way to increase the production of positive externalities as they reduce the cost of production making suppliers more willing and able to produce goods and services.

Question 41

The role and effect of government intervention on negative externalities

Answer 41

Negative externalities is when there is an unintended consequence from the consumption or production of a good or service the impacts negatively on a third party. Usually over allocated and over produced as producers don’t bear costs. Government intervention may include; indirect taxation which is a tax placed on the a good or service, they are usually placed on the producer, driving up cost of production and leading to suppliers becoming less willing to produce negative externalities. A government can also reduce the production of negative externalities by providing subsides for goods and services that cause fewer negative externalities.

Question 42

The role and effect of government intervention on asymmetric information.

Answer 42

asymmetric information is when party has more information than the other during the exchange. Over allocation and over consumption as there is a lack of information. Government advertising helps to fight the misinformation through providing consumers with the information they need to ensure they are making informed decisions

Question 43

The role and effect of government intervention on common access resources.

Answer 43

Common access resources are naturally occurring goods that aren’t owned by anyone and have no market place. These are rivalrous resources and are over consumed. Government intervention to reduce the consumption of these resources may include government regulation, which is a legislation that may limit consumption of particular activities and there by promote sustainable development. Subsidies may also help provide incentives for ‘clean’ energy sources as reduce carbon pollution and help limit the use of fossil fuels.

Question 44

one contemporary example of government intervention in markets.

Answer 44

Minimum Wage: if the minimum wage is set too high and above the competitive market rate, this may lead to unintended consequences such as higher unemployment. This is due to labour rate becoming greater than labour demand meaning that a number of people who are willing and able to be employed are unable to obtain employment as the wage rate is unable to fall below the minimum rate to clear the shortage and employers will be reluctant to hire workers at the above market price.