Week 2- Economic fundamentals

Question 1

John Rawls - A Theory of Justice (1971)

Answer 1

political philosophy:
Put all people from all generations behind a veil of Ignorance…. would decide that all natural and human-made resources are shared exactly equally

Question 2

Production Possibility Frontiers (description and curve)

Answer 2

A great way of describing production vs environment tradeoffs to be sustainable:

• A certain amount of market goods consumption determines the environmental quality.
• Current generation may be able to consume a certain amount of goods for a certain level of environmental quality, though future generations will need to lower consumption significantly to retain the same level of environmental quality

Question 3

Perfectly competitive markets

Answer 3

-sellers sell identical products
-buyers and sellers are price takers
-all firms have relatively small market share
-Buyer have complete information
free and easy entry and exit

Question 4

Law of demand

Answer 4

higher price of a good, lower the quantity demanded (diminishing willingness to pay)

Question 5

diminishing marginal utiliity

Answer 5

how much happiness you get from consuming a good or service (e.g if you get a scoop of ice cream that you like at a high price, but would like more after, you are less willing to pay at the same price)

Question 6

If all other market influences stays the same, but the price moves, the demand curve….

Answer 6

stays the same, though consumers shift along the demand curve for greater quantity.

Question 7

Shift in demand curve caused by:

Answer 7

• substitutes (e.g relative price of butter to margarine)
• complements (e.g if shoes decreases in demand, so does sock market
• Income (normal and inferior goods)
  
  • Normal: more demand for a good with income rise
  • Inferior: less consumption of good as income rise (e.g 2min noodles). Curve shift the opposite way
• Population (e.g housing demand)

Question 8

Supply

Answer 8

willingness to produce or sell

Question 9

Factors affecting quantity supplied

Answer 9

-price of good being produce
-input prices
-technology
-market expectations
number of sellers

Question 10

If only price changes, but all other factors remain constant, the supply curve…

Answer 10

stays the same, though quantity supplied of the good changes.

Question 11

Factors that shift supply curve

Answer 11

• Input prices (e.g fuel extraction more expensive)
• expectations (war in the Middle East)
• number of suppliers (more is being produced)

Question 12

Elastic demand

Answer 12

• Substitutes (can easily switch)

- Luxuries

Question 13

Inelastic demand

Answer 13

• Necessities

Question 14

Short term demand elasticity

Answer 14

inelastic

Question 15

Long term demand elasticity

Answer 15

elastic

Question 16

Draw: perfectly inelastic, inelastic, unit elastic, elastic, perfectly elastic DEMAND

Answer 16

• perfectly inelastic: e.g water
• inelastic: e.g fuel
• unit elastic: 22% inc. in price leads to a 22% decrease in quantity demanded
• Elastic: e.g Luxury

Question 17

Draw: perfectly inelastic, inelastic, unit elastic, elastic, perfectly elastic SUPPLY

Answer 17

• Perfectly inelastic: e.g water allocated to farmers
• Inelastic: cost of production relatively high
• unit elastic: perfectly 45º curve

Question 18

Draw: profit maximisation of 200% inc. of price in inelastic supply curve

Answer 18

($1-3)

Question 19

Draw: Total revenue of wheat growers before and after technology adoption (inelastic)

Answer 19

supply curve moves down to right. Farmers are able to produce more at lower production cost. increased production, however people are not inclined to buy more wheat (necessary good), so in order to sell surplus of wheat, price must be lowered. TR is actually less with technology adoption.

Question 20

Draw: TR of timber growers after adoption of improved genotypes (elastic)

Answer 20

supply cost moves down. lower consumer price. more quantity demanded due to elastic supply curve. People will be inclined to use timber over alternative building materials (e.g brick, steel).

Question 21

Draw: Australian banana market when a cyclone damages plantations in north Queensland

Answer 21

• supply curve shifts up (new eq)

Question 22

Draw: qld tourism market when tourists change their travel plans due to severe coral bleaching in the great barrier reef

Answer 22

• demand shifts down (new eq)

Question 23

Draw: market for undeveloped farmland when gov pays some of land clearing costs (tax deduction)

Answer 23

• Supply shift down, consumers are reacting to lower price, and buying a greater quantity of farm land (no change in demand curve, just movement along demand curve)