unit 3 area of study 1

Question 1

relative scarcity

Answer 1

where peoples needs and wants are virtually unlimited and our nation has limited resources (L,L,C) to satisfy these needs and wants.

Question 2

opportunity cost

Answer 2

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

Question 3

resource allocation

Answer 3

involves making choices or decisions about how scarce resources are used or distributed among competing areas of production to meet the needs of households, businesses and governments.

Question 4

allocative efficiency

Answer 4

defined as a desirable situation where resources are used to produce particular types of G+S that best maximise the overall satisfaction of societies needs and wants, well being or living standards.

Question 5

technical efficiency

Answer 5

implies using the lowest cost production methods, and minimising wastage of resources in making G+S.

Question 6

Dynamic efficiency

Answer 6

occurs when resources are reallocated quickly to increase choice and meet the changing needs of consumers.

Question 7

intertemperal

Answer 7

refers to finding the optimal balance between current consumption or spending of income versus saving income to finance investment and hence future consumption.

Question 8

law of demand

Answer 8

the quantity of a particular G+S that buyers are prepared to purchase varies inversely with a change in price.

Question 9

law of supply

Answer 9

the quantity of a particular G+S that sellers are prepared to purchase varies directly (in the same direction) with the change in price.

Question 10

movement versus shift

Answer 10

a movement in supply/demand is a result of a change in price causing a contraction or expansion. whereas a shift is a result of a non-price factor, causing the curve to shift either to the left or right.

Question 11

equilibrium

Answer 11

the moment at which the quantity producers are willing to supply exactly equals the quantity consumers will purchase and there is no shortage or surplus.

Question 12

Demand factors (non-price)

Answer 12

• price of substitutes and compliments
• consumer confidence
• disposable income
• interest rates
• consumer preference, taste and fashions
• demographic change and population growth
• discretionary income

Question 13

supply factors

Answer 13

• climatic conditions
• change in cost of production
• technological advances
• productivity growth

Question 14

3 economic questions

Answer 14

what to produce?
How to produce?
Whom to produce for?

Question 15

relative prices

Answer 15

refers to the price of one G or S measured in terms of the price of another G or S.

Question 16

role of relative prices on allocation of resources

Answer 16

producers can refer to relative prices of another G or S, by analysing the market to see if there resources can be allocated to maximise the needs and wants of consumers. if producers don’t do this may lead to unsatisfied consumers as well as shortages in the market with resources not being produced to benefit society.

Question 17

role of relative prices and the effect on living standards

Answer 17

if producers respond to signals of relative prices and allocate resources, then living standards are optimised as consumers have their needs and wants met as well as producer earning higher profits. if markets are competitive, producers will seek to achieve technical efficiency which will maximise profit as well as keeping prices low for consumers. but this could cause stress and increased workload on workers resulting on a negative impact on living standards.

Question 18

PED

Answer 18

Price elasticity of demand refers to the responsiveness of total quantity demanded of a product to a change in the price of that product. it determines the slope of demand curve with it flattening out as PED increases and steepening as PED falls. %change in quantity demanded/ % change in price.

Question 19

factors affecting PED

Answer 19

• degree of necessity
• availability of substitutes
• time period
• proportion of income

Question 20

degree of necessity

Answer 20

usually demand for essential items (food, accommodation, medication) relatively inelastic; not atlot of change in price or quantity demanded. Whereas usually demand for non essentials (luxury cars, holidays, and entertainment) is usually relatively elastic; can be a large degree of change in price and quantity demanded.

Question 21

availability of substitutes

Answer 21

products that have a large no. substitutes (different cereals) are usually fairly elastic with a higher PED while unique products (petrol) tend to be inelastic have a low PED.

Question 22

Time period

Answer 22

long term, demand tends to be more elastic due to time giving buyers opportunity to find alternatives or substitutes, or change their habits. this means in the short term demand is fairly inelastic.

Question 23

proportion of income

Answer 23

$$ things that take up more proportion of income tend to have more elastic demand, while cheaper things representing lower % of income have a more inelastic demand. generally the greater the % of income needed to purchase, the higher the PED.

Question 24

PES

Answer 24

price elasticity of supply refers to the responsiveness of total quantity supplied of a product to a change in the price for that product. PES determines slope of the curve, with the slope flattening out as the PES increases and steepening as PES falls. % change in quantity supplied/ % change in price.

Question 25

PES factors

Answer 25

• product storage-ability and durability
• production period
• resource mobility and unused industry capacity

Question 26

product storage ability and durability

Answer 26

items that can be stored successfully without deterioration (minerals, wheat, wool, red wine) generally more elastic. because of this if a rise in prices occur then suppliers can easily access their extra supplies by reducing amount of unsold stock. Because of this services usually tend to be more inelastic because they can’t be stored.

Question 27

resource mobility and unused industry capacity

Answer 27

supply is likely to be more elastic if productions can be readily and inexpensively changed by moving resources between industries. supply is very elastic when there is unused or spare productive capacity in an industry or firm.

Question 28

effect of competitive markets on efficiency

Answer 28

with many rivals and no power to set prices, firms in competitive markets need to find ways to cut costs and to produce more with less.

• forced to have allocative efficiency to ensure resources minimise opportunity cost of their decisions. right goods are produced, in right way, then distributed via market to those that need and value most.
• to survive, firms need to innovate by using latest tech and cut costs, leading to technical efficiency.
• firms need to be responsive to rapid market shifts in fashions, products and customer requirements, leading to dynamic efficiency
• strong comp in various markets lead to inter temporal efficiency where there is right balance between resources allocated for current consumption as opposed to those set aside through saving and investment for future use.

Question 29

assumptions of perfectly competitive markets

Answer 29

• homogeneous products
• large no. buyers and sellers
• ease of entry and exit

Question 30

reasons for market failure

Answer 30

• public goods
• common access resources
• asymmetric info
• positive externalities
• negative externalities

Question 31

asymmetric info

Answer 31

one party knowing more than the other in an exchange , lead to market failure in short term as and increase demand and over or under allocation of resources cause of lack info.

Question 32

negative externalities

Answer 32

unintended consequences of consumption or production of goods and services that negatively impact a third party.

Question 33

public goods

Answer 33

provided by government and consumed by members of the public. are non excludable (as free to use) non rivalrous ( one persons consumption doesn’t exclude another persons consumption). problem though is free rider as cant charge to use e.g prisons, street lighting, fire brigade. left to market would to be under produced..

Question 34

common access resources

Answer 34

naturally occurring goods not owned by anyone and have no market price. they are non excludable (cant prevent people from accessing) are rivalrous and depletable as consumption will reduce access for others.

Question 35

positive externalities

Answer 35

producer unintentionally causes a benefit to a third party not related to transaction.

Question 36

market failure

Answer 36

occurs when the market fails to allocate resources efficiently to maximise the satisfaction of societies needs and wants and overall well being.

Question 37

role of government intervention

Answer 37

role of government is to try and fix market failure so that resources are allocated efficiently and society living standards are maximised. however because of government intervention some times unintended consequences can occur that leads to a decrease in the efficiency of resource allocation.