Unit 3 AOS1 - Chapter 1: Microeconomics Flashcards
What are material living standards?
These refer to the economic wellbeing via per capita consumption of goods and services as well as incomes per year.
What are non-material living standards?
These refer to quality of life and tend to be more subjective. It can be affected by the amount of leisure time, happiness, life expectancy, crime rates and the quality of the natural environment.
What is the relationship between material and non-material living standards?
Material and non-materiel living standards affect each other because one can cause the other to not be as prominent.
For example increasing material living standards by growing Australia’s national production each year may not just impact on the ability of future generations to lift their output levels (because we use too many scarce resources), but it may also affect our short- and long-term non-material living standards.
What is economics?
Economics examines how limited resources are used to produce goods and services to satisfy needs and wants as well as improve living standards.
What is microeconomics?
This is a branch of economics that examines individual decision making by firms and households, and how this impacts on particular markets for goods or services.
What is macroeconomics?
Macroeconomics is a branch of economics that examines the workings and problems of the economy as a whole.
What do some of our needs and wants come from?
A fundamental assumption in economics is that people’s needs and, especially, wants for goods and services are virtually infinite or unlimited. Needs and wants originate in different parts of the economy:
. The needs and wants of individuals and households for consumer goods and services
. The needs and wants of private businesses
. The needs and wants of governments
. The needs and wants of the overseas sector
Explain the needs and wants of individuals and households for consumer goods and services.
. Australian households need essential consumer goods and services eg. food, housing, clothing, education and health services.
. We also have wants for less essential consumer items that help make life more enjoyable eg. iPads, magazines or ice-cream.
. Satisfying even some of these needs and wants generally takes money.
. Many factors influence the spending decisions made by consumers, including:
- their level of income after tax
- how optimistic they are about the future
- fashions and advertising
- and their desire to maximise the satisfaction gained from the choices they make.
Explain the needs and wants of private businesses.
. Australian firms need to purchase various resources to make finished goods and services. Eg. they must buy producer goods like capital equipment, raw and processed materials including oil and petrol, hire employees and pay for finance or credit for expanding the business.
. In making their spending decisions, firms will be affected by their production costs, profitability, market share and changes in consumer tastes.
Explain the needs and wants of governments.
. In Australia, federal, state and local governments also have needs and wants. They must have:
- capital equipment (such as kindergartens, power generators and roads)
- land
- finished consumer goods (for example, stationery)
- and the services of staff (such as economists, doctors, teachers and defence personnel).
. The purpose of purchasing all these things is to make it possible for the public sector to produce certain goods and services that will help to satisfy society’s needs and wants (that are not met fully by the private sector).
. Ultimately, this should help to raise general living standards.
Explain the needs and wants of the overseas sector.
. Foreign governments, firms and households living overseas purchase Australian-made goods and services to help satisfy their particular needs and wants.
. They buy our exports of wool, wheat, minerals, tourism, education and manufactured items.
. Their decisions may be influenced by factors such as how many and what sort of resources they have, or by production costs.
. Offsetting these exports are Australia’s needs for imports for goods and services such as oil, electronics, machinery and travel.
.We import goods and services because we are not self-sufficient.
How can the problem of unlimited wants be made even more severe?
. Many needs and wants recur; for example, the need for food, petrol for the car.
. Our expectations of material things tend to grow since the more we have, the more we want.
. Population growth adds to the number of wants.
. Advertising, fashion and planned obsolescence, such as the toaster that is designed to last for only two years, contribute to our growing wants.
. The widespread acceptance of materialism as a personal goal (ownership of more possessions), along with growing affluence, contribute to the escalation of society’s wants.
How do limited resources restrict national production?
It means that Australia’s capacity to produce is severely restricted and therefore our ability to satisfy the unlimited needs and wants of society is severely restricted.
What are resources?
Resources are productive inputs (or factors of production) and include natural, labour and capital used by businesses to make goods and services.
What are natural resources?
Natural resources are the gifts of nature, such as arable land, oil, minerals, rivers, climate, forests, air quality and oceans. Natural resources have the potential to support a variety of primary (extractive), secondary (manufacturing) and even tertiary (service) industries.
What are labour resources?
Labour resources used in production are physical power and mental talents provided by employees.
What are capital resources?
Capital resources are manufactured items often involving physical plant and equipment (such as machinery, factories, power generators, computer systems, trucks, dams, railways, and roads) used by businesses and governments to help make other goods and services.
What is relative scarcity?
Relative scarcity is also known as the basic economic problem and describes when a nations wants are virtually unlimited, but there are not enough resources in comparison to satisfy these wants. The relative price of a good or service is normally a rough guide to the level or degree of relative scarcity.
Moreover, relative scarcity means that only the most important material wants of households, firms and governments can be satisfied. Other less important priorities that provide less satisfaction or pleasure must normally be abandoned.
Why is there a need for choices?
There is a need for choice because we must decide how to use our limited resources as efficiently as possible because we cannot have all the goods and services that we want. Given that we cannot have all things in unlimited quantities, individuals and nations are forced to make difficult choices between alternative or competing areas of production. This raises the problem of opportunity cost.
Explain opportunity cost. And resource allocation
Opportunity cost refers to the benefit forgone when a choice is made to not direct resources towards the next best alternative use. It arises as a result of unlimited needs and wants, but limited resources. Therefore, decisions must be made to determine how resources should be allocated. It is important to analyse which decision is most beneficial. It can exist for individuals as well as governments.
How does opportunity cost exist for individuals?
Opportunity cost for individuals involves taking into consideration things like time, money and overall benefit. For example, choosing to pursue tertiary education does open up a lot of job opportunities, however you could be spending that time with a full-time job so you can earn money.
How does opportunity cost exist for nations and governments?
For example in 2013–14, the Australian government planned to spend around $22 billion on defence.
. while there were benefits to this decision and some of society’s wants could be satisfied
. these scarce resources could have been reallocated (It is likely that welfare, childcare, health and industry assistance all suffered cutbacks because of this decision).
Environmental opportunity costs exists as a result of various economic activities in Australia, such as:
. using coal to generate power
. packaging
. aspects of the timber industry
. a transport system dependent on the private motor car
. water use and irrigation-based crops in deserts
. and aviation as well as tourism.
These activities accelerate global warming and serious climate change.
What is the production possibility diagram?
The production possibility diagrams illustrates the production choices available to society in the ways resources may be used or allocated. This diagram shows the production combinations that, theoretically, are possible for a nation when all available resources are used efficiently.
Extra production possibility diagram.
Between the two production combinations there can be many other choices or possibilities available that help to make up the production possibility frontier. This shows the physical limits to a nation’s production when all the available resources are used efficiently. Unfortunately, however, all these choices involve an opportunity cost.
If a nation decides to only produce services then the benefit of producing goods is forgone and vice versa. It is not possible for the nation to produce maximum quantities of both goods and services at the same time.
What is the production possibility frontier?
The production possibility frontier illustrates the physical limits to a nation’s production levels (its productive capacity) due to the quantity and efficiency of productive resources available to that country.
What are living standards?
Living standards refer to how well off a nation is overall at a point in time. Living standards can be split into material and non-material living standards.
Production possibility diagram: Showing an efficient allocation of resources that maximise living standards.
The choice that minimises the opportunity cost so that total production, satisfaction and material living standards are maximised is a point usually towards the middle of the production possibility frontier.
Eg. This is where the total potential value of national output of both services (9.4 billion units) plus goods (1.0 billion units) would equal a total volume of production of 10.4 billion units, which is the highest possible production of both at the same time.
This choice would maximise national output and income, as well as the satisfaction of society’s wants and economic wellbeing, since no other possible allocation of resources can match this output
What is an efficient allocation of resources and an inefficient allocation of resources?
An efficient allocation of resources occurs when productive inputs are used to produce particular types of goods and services that best maximise the general satisfaction of society’s needs and wants, wellbeing and living standards.
An inefficient allocation of resources is one where the satisfaction of society’s wants could be increased simply by changing the way resources are used or the types of goods and services that are produced.
Production possibility diagram: Showing choices that result in unemployment.
. Another inappropriate and wasteful decision would be the choice of a point somewhere inside the production possibility frontier.
. This decision would mean that the combined production levels of both goods and services (GDP) would be too low to ensure that all resources are fully employed.
. There would be unemployment of labour and other inputs, and material living standards would be reduced.
Production possibility diagram: Increasing the nations productive capacity and living standards.
Points outside the production possibility frontier cannot be obtained currently because of the lack of resources available. This limits economic or productive activity. However, if there was an increase in the quantity (volume) and quality (efficiency) of productive resources available, the whole production possibility frontier could grow and shift outwards. The nation’s productive capacity would then become greater.
What is Australia’s economic system?
A contemporary market capitalist economy.
What is an economy or economic system?
An economy or economic system is a way of organising the production and distribution of the nation’s goods, services and incomes. There are various types of economic systems, but Australia has adopted a contemporary market capitalist economy.
What is a market capitalist economy?
This involves the market or price system making key decisions about what to produce, how to produce and for whom to produce, with private ownership of most resources.
What are the three important economic questions?
- What and how much to produce?
- How to produce?
- For whom to produce?
Explain the following important economic question: What and how much to produce?
This looks at the type and quantity of particular goods and services to be produced. This is determined by looking at consumer demand.
Explain the following important economic question: How to produce?
This involves selecting a method of production for making a good or service. Businesses will attempt to minimise costs in order to maximise profits. They may also take consumers views into account (ethical labour).
Explain the following important economic question: For whom to produce?
This refers to how income from production and sale of goods an services should be shared. For example, income could be divided between individuals fairly evenly or relatively unevenly.
What are the approaches to decision making in the Australian economy?
The market (also called the price system, market forces or market mechanism).
What is market failure?
Market failure occurs when the price system allocates resources inefficiently, reducing the overall satisfaction of society’s wants, wellbeing and living standards.
What are the influences on Australia’s resource allocation?
. Market forces, consumer-based allocation of resources 80%
. Government-based allocation 20%
Other influences on Australia’s allocation of resources:
. Financial institutions e.g. banks, stock market, building societies
. Powerful business monopolies and oligopolies
. Unions and labour organisations e.g. ACTU, AMWSU, AMA, AWF
. Advertising agencies shaping fashions and tastes
. Opposition political parties
. Traditions, customs and beliefs
. Journalists and the media shape our behaviour
. Pressure groups — e.g. RSL, consumer protection groups, Australian Conservation Foundation
What is a central feature of microeconomics?
The study of how particular markets operate to answer the three economic questions facing an economy.
What does Australia’s market economy predominately rely on?
The operation of the free market or price system to answer the three economic questions.
What is a market?
A market is an institution where buyers and sellers negotiate the price for a particular good or service. In our economy, there are lots of different types of markets including the: . labour market . capital or financial markets . foreign exchange market . property market . stock market . fruit market . fish market . iron ore market . aviation market . and wool market.
How does the market or price system work? Read pages 13-17
The price system (also known as the market mechanism) is heavily relied upon to make key economic decisions about production and how resources are allocated between competing uses. Australia has a capitalist system involving private enterprise that is largely driven by a desire to maximise profits. Here, profit-seeking owners of resources look to the market for price signals or instructions that will tell them how resources should be allocated to best satisfy consumer wants and maximise business profits and incomes. Here, profits often drive decisions.
What are relative profits?
The term relative profits means the level or rate of profit gained from producing one type of good or service, relative to that gained from producing an alternative good or service.
What are relative prices?
The term relative prices simply means the price level of one good (such as wheat) or service compared with or relative to the price level of another good (such as wool) or service. Changes in relative prices (price signals) affect the relative profitability of different types of goods and services and hence dictate how scarce resources are used or allocated.
When do markets operate best?
Markets operate best or most efficiently when they are free or purely competitive.
What is a market structure?
Market structure refers to the type and level of competition that exists in various markets, such as monopoly or pure competition. It relates to how much market power or control a particular firm has in affecting the level of market prices.
