Unit 3 AOS1 Flashcards
What is relative scarcity, and why is it a fundamental economic problem?
Relative scarcity occurs because resources (land, labour, capital) are limited, but human needs and wants are unlimited.
This forces individuals, businesses, and governments to make choices about how to allocate resources in order to fulfil their self interest.
What is the difference between needs and wants?
Needs: Essential for survival (e.g., food, water, shelter).
Wants: Things people desire but are not essential (e.g., luxury cars, vacations).
Define opportunity cost and provide an example.
Opportunity cost is the value of the next best alternative foregone when making a decision.
E.g. When you spend 15 dollars on blueberries you cannot spend that money on apples
Example: If a government spends money on hospitals, the opportunity cost might be fewer schools built.
What are the three basic economic questions?
What to produce? (Which goods and services should be produced?)
How to produce? (What resources and methods should be used?)
For whom to produce? (Who will receive the goods and services?)
What does the PPF model illustrate?
The PPF shows the maximum possible production of two goods/services given available resources and technology.
It demonstrates efficiency, opportunity cost, and economic growth.
What are the four types of economic efficiency?
Allocative Efficiency – Resources are used to produce what society values most.
Productive Efficiency – Goods/services are produced at its most efficient point at the lowest possible cost, regardless of living standards.
Dynamic Efficiency – How quickly the economy can reallocate resources as conditions change.
Intertemporal Efficiency – Balancing resource use between present and future generations.
What are the conditions of a perfectly competitive market?
Many buyers and sellers – No single buyer or seller can influence the market.
No barriers to entry or exit – Firms can freely enter or leave the market.
Homogeneous products – All goods/services are identical.
Perfect knowledge between producers and consumers
Explain the law of demand.
The law of demand states that as the price of a good increases, the quantity demanded decreases, and vice versa.
How do the income effect and substitution effect explain the law of demand?
Income Effect – As prices increase, purchasing power decreases, leading to lower demand.
Substitution Effect – As prices increase, consumers switch to cheaper alternatives.
What causes a movement along the demand curve versus a shift?
Movement along: Caused by a change in price.
Shift: Caused by non-price factors (e.g., income, preferences).
Non-price factors affecting demand (minimum 3)
Disposable Income – More income → Higher demand.
Prices of Substitutes/Complements – Higher price of substitutes → Higher
demand.
Consumer Confidence – High confidence → More spending.
Also: Preferences, interest rates + population demographics.
Explain the law of supply.
The law of supply states that as the price of a good increases, the quantity supplied increases, and vice versa.
How does the profit motive explain the law of supply?
Higher prices increase profitability, encouraging producers to supply more.
What causes a movement along the supply curve versus a shift?
Movement along: Caused by price changes.
Shift: Caused by factors like technology, production costs, or number of suppliers.
Non-price factors affecting supply. (Minimum 3)
Technology – Increases efficiency → Increases supply.
Costs of Production – Higher costs → Lower supply.
Climatic Conditions – Poor weather → Reduced agricultural supply.
Also: Number of suppliers
How is equilibrium determined in a competitive market?
Equilibrium occurs where quantity demanded = quantity supplied, setting the market-clearing price.
What is price elasticity of demand?
High PED on graph vs Low PED
PED measures how responsive demand is to price changes.
Flat vs steep
Name two factors affecting price elasticity of demand.
Availability of Substitutes – More substitutes → More elastic demand.
Degree of Necessity – Essentials have inelastic demand.
Also: Proportion of income and time
Name two factors affecting price elasticity of supply.
Spare Capacity – More spare capacity → More elastic supply.
Production Time – Shorter production times → More elastic supply.
Also: Durability of goods
What are four types of market failure?
Public Goods – Underprovided by the market.
Externalities – Third-party effects (e.g., pollution).
Asymmetric Information – One party knows more than another.
Common Access Resources – Overused and depleted (e.g., fisheries).
How can the government address market failure?
Taxes – Discourage negative externalities.
Subsidies – Encourage positive externalities.
Regulations – Enforce rules (e.g., emission limits).
Give an example of government intervention that reduces efficiency.
Subsidising fossil fuels reduces dynamic efficiency by discouraging investment in renewable energy.
What is the difference between material and non-material living standards?
Material Living Standards – Access to goods and services.
Non-Material Living Standards – Well-being factors like health, environment, and crime rates.
Market definition
An institution where buyers and sellers of a good or service meet to negotiate price.
