Unit 3 - AOS1 Flashcards
Non-price Factors of Demand (7)
- disposable income
- interest rates
- price of substitutes
-price of complements (e.g. bread & jam) - changing preferences/tastes
- population growth & demographic change (e.g aging)
- consumer confidence
Movement (along curve)
An expansion or contraction in demand/supply due to change in price.
Shift (of a curve)
The shift of an entire curve (either left or right) due to non-price factors.
Law of Demand
As price increases, demand decreases. As price decreases, demand increases.
Law of Supply
As price increases, supply increases. As price decreases, supply decreases.
Non-price Factors of Supply
- changes in cost of production
- climate conditions (e.g. drought)
- technology change
- number of suppliers
Characteristics of a Perfectly Competitive Market
- large number of independent buyers/sellers
- homogeneous (identical) products
- ease of exit and entry
Assumptions:
-perfect knowledge
-mobile resources
-economic agents are self interested
Income Effect
As price increases, the purchase of a product takes up a wider proportion of a consumer’s income, decreasing their willingness to buy it.
Substitution Effect
As price increases, consumers will look for cheaper alternatives to a product.
Diminishing Marginal Utility
Each additional unit of a product that is consumed decreases the satisfaction of the consumer.
Disposable Income
The total amount that consumers have to spend on goods/services, calculated as a consumer’s wages minus taxes.
Discretionary Income
The amount of disposable income left over after households have paid essential expenses such as power, mortgage, water, food, transportation etc.
Consumer Sentiment (Consumer Confidence)
The measure of households’ general expectations towards the state of the economy (e.g. poor sentiment = unwilling to spend).
Marginal Propensity to Consume
The proportion of a wage raise that is spent on goods/services. (e.g. spending 10 cents of a $1 wage increase).
Equilibrium Price
The point where quantity demanded equals quantity supplied.
Shortage
When quantity demanded exceeds quantity supplied.
Surplus
When quantity supplied exceeds quantity demanded.
Relative Prices
The price of a good/service in comparison to another good/service. Example: $2.50 product vs $5.00 has 1:2 relative price). Measures opportunity cost of producing one product over another.
Price Elasticity of Demand
The responsiveness of the quantity demanded of a product to its change in price.
PED/S Formula
∆% of quantity d/s divided by ∆% in $
Elastic
High price elasticity; greater than one (flatter)
Inelastic
Low price elasticity; less than one (steeper)
Unit Elastic
Price elasticity equal to one (exponential).
Factors Effecting PED
- degree of necessity
- availability of substitutes
- proportion of income
- time
Price Elasticity of Supply
The responsiveness of the quantity supplied of a product to its change in price.
Factors Effecting PES
- production period time
- spare capacity
- durability of goods
Price Mechanism
A system where the forces of demand and supply determine prices and how resources are allocated.
Market Failure
A sub-optimal allocation of resources such that living standards are not maximised.
Profit Motive
Producers aim to make as much profit as possible, regardless of the impact on the consumer.
Purchasing Power
The volume of goods/services a household can buy with a set income.
Economics
A social science which studies the decision making of individuals, businesses, and governments in allocating scarce resources.
Relative Scarcity
The fundamental economic problem of having unlimited needs and wants but only a finite amount of resources to satisfy them.
Microeconomics
The study of the individual decision making of households and businesses.
Macroeconomics
The study of large scale economic factors such as inflation or unemployment.
Ceteris Paribus
“Other things equal”; a concept that shows the cause and affect between two factors (e.g. price and demand) while keeping all other variables constant (e.g. weather).
Diminishing Marginal Utility
The more good/service that is consumed, the less satisfaction is gained.
Need
A good/service that is necessary for survival (e.g. shelter).
Want
A good/service that adds to quality of life but is not necessary for survival (e.g. new phone).
Factors of Production
The three types of resources - land, labour (entrepreneurship) and capital - used to create goods/services.
Land Resources
All resources found in nature, such as trees, crops, minerals, land, animals and water.
Labour Resources
The mental (e.g. teaching) and physical (e.g. construction) effort exerted by humans in the production process
Capital Resources
The tools used in the production process, such as machinery, factories or AI.
Entrepreneurship Resources
The individuals who take financial risks to establish businesses that produce goods/services.
Three Basic Economic Questions
What to produce? How to produce? For whom to produce?
Market
A place that allows for the exchange of goods/services between buyers and sellers.
Opportunity Cost
The value of the next best alternative forgone when a decision is made.
Production Possibility Frontier (PPF/C)
A graph illustrating the possible resource allocations to two goods in an economy.
Allocative Efficiency
A hypothetical economy where resources are allocated to achieve the highest levels of satisfaction. Resources will be produced in the right quantities and go to the people who value them most.
Technical Efficiency
The point where maximum output is being achieved without increasing input.
Dynamic Efficiency
The ability of an economy to reallocate its resources quickly.
Inter-Temporal Efficiency
The balancing of resource consumption over time (e.g. not cutting down too many trees).
Monopoly
A market structure where a single producer has complete control over the market.
Oligopoly
A market structure where the market is shared by a small number of producers with little competition. Other firms cannot enter the market. E.g. airline industry
Material Living Standards
The ability of households to access goods/services, measured by real GDP.
Non-Material Living Standards
Non-material factors that affect an individual’s quality of life, such as social networks, freedom of speech, and a healthy environment.
Public Goods
Products that are non-excludable and non-rivalrous in consumption. (e.g. street lights, defence, radios). Result in a market failure where there is an under allocation of resources. Fixed through government subsidies or direct government provision.
Private Goods
Products that are excludable and rivalrous in consumption, such as a chocolate bar.
Rivalrous/Depletable
The consumption of the product by one person diminishes the quantity available for others. (e.g. eating a chocolate bar)
Excludable
There is a way to prevent people who have not paid for the product from using it. (e.g. fence at a zoo)
Non-Rivalrous
The consumption of the product by one person does not diminish the quantity available for others. (e.g. standing under a street light)
Non-Excludable
It is difficult to prevent people who have not paid for the product from using it. (e.g. beach)
Free Rider Problem
A type of market failure associated with public goods, when a consumer is benefiting from goods/services that they have not paid for. Results in under allocation of resources.
Subsidy
A sum of money granted by the government to a business or individual for financial assistance.
Positive Externality in Production
When a firm produces a product that benefits a third party not involved in the process. (e.g. research)
Private costs > social costs
Gov intervention includes: regulation, advertising, subsidies, direct provision
Positive Externality in Consumption
When the consumption of a product improves the wellbeing of a third party not involved in the activity. (e.g. vaccines)
Social benefits > Private benefits
Gov intervention includes: regulation, advertising, subsidies, direct provision
Negative Externality in Production
When a firm produces a product that imposes a cost on a third party not involved in the process. (e.g. pollution from factories)
Private costs < social costs
Gov intervention includes: indirect taxes, subsidies of alternatives, advertising
Negative Externality in Consumption
When the consumption of a product lowers the wellbeing of a third party not involved in the activity. (e.g. smoking)
Social benefits < Private benefits
Gov intervention includes: indirect taxes, subsidies of alternatives, advertising
Asymmetric Information
A type of market failure where one party in a transaction has more information than the other party. (e.g. used cars market, insurance)
Moral Hazard
A market failure caused by asymmetric information when an economic agent takes unnecessary risk because another party pays for the consequences (e.g. insurance)
Adverse Selection
A market failure caused by asymmetric information where a seller does not disclose information about a product, resulting in a buyer purchasing a faulty product. (e.g. used car). Results in an overallocation of resources.
Merit Goods vs Demerit Goods
Merit = positive for society but under consumed (e.g. education)
Demerit = bad for society and over consumed (e.g. smoking)
Common Access Resources
Products that are non-excludable and rivalrous in consumption, such as a forest. Results in inter-temporal inefficiency where too many CARs are consumed.
Government Failure
A situation where government intervention into a market fails to improve the allocation of resources.
Price Ceiling
A government price control that bans sellers of products from raising their prices above a certain level. (e.g. rent) Can lead to shortages and a black market.
Price Floor
A government price control that mandates that the price of a product must not go below a certain level (e.g. minimum wage). Can lead to an ongoing surplus that then has to be bought by the government.
Types of Government Failure
- price controls (ceiling/floor)
- subsidies & indirect taxes
- protectionism
- moral hazard
