1: Introduction to Microeconomics Flashcards
1
Q
Explain the relationship between living standards and resources
A
Resources (natural, labour, capital etc.) are needed to produce the goods and services which enable enjoyment of high living standards.
As resources are scarce/limited, production levels and therefore material living standards are restricted.
2
Q
What is economics?
A
Economics is the study of human behaviour which involves analysing the ways businesses, individuals, governments and families (B.I.G FAMILIES) make decisions/choices about how to use their limited resources to satisfy their basic needs and unlimited wants.
3
Q
Identify 2 main branches of economics
A
Macroeconomics & Microeconomics
4
Q
What is microeconomics?
A
A branch of economics which examines individual decision-making by firms and households, and how this impacts a particular market for a single good or service.
5
Q
What is macroeconomics?
A
A branch of economics which looks at the whole economy and the factors that affect the nation’s general economic conditions.
6
Q
What are needs?
A
Goods and services necessary for survival
7
Q
What are wants?
A
Unessential goods and services that make life more enjoyable
8
Q
What is a fundamental assumption about needs and wants in economics?
A
They are infinite/unlimited
9
Q
Why are needs and wants unlimited?
A
- They arise from several sources e.g. household, business, government and overseas sector.
- Keep up with trends (materialism)
- As one satisfied, another appears
- More have, more want due to advertising
- Many needs and wants reoccur e.g. need for food
- Planned obsolescence
- Population growth
10
Q
What are resources/factors of production?
A
Productive inputs used by firms to make or supply good and services
11
Q
Identify the three main types of resources
A
- natural
- labour
- capital
12
Q
What are natural resources?
A
Productive inputs that occur in nature
e.g. soil, oceans, rivers, snow, rainfall, forests etc.
13
Q
What are labour resources?
A
The intellectual skills, knowledge and manual effort that people provide as members of the nation’s labour force
e.g. those of doctors, engineers, teachers etc.
14
Q
What are capital resources?
A
Manufactured or produced goods that are used by a firm to help make other finished goods and services. They are seen as the stock of past production that is used to aid current and future production
e.g. highways, mills, tractors, machinery etc.
15
Q
What is productive capacity?
A
The maximum possible output of an economy using its limited resources as efficiently as possible.
Represented as PPF
16
Q
What is relative scarcity?
A
The basic economic problem where the resources available for production are limited and relative to society’s unlimited wants.
17
Q
Describe some consequences of relative scarcity
A
Economic activity and growth is limited, and not all needs/wants can be satisfied. So, only the most important ones are actually satisfied.
18
Q
Indicate the relationship between price and relative scarcity
A
Price of good/service linked to its relative scarcity.
$$$ diamonds are relatively scarcer than air which is not scarce at all and therefore free. A low priced item that is more scarce than air, but not as scarce as diamonds may be found in abundance.
19
Q
What is resource allocation?
A
Involves making choices about how scarce productive inputs are to be used and distributed among competing areas of production
20
Q
How does resource allocation lead to opportunity costs?
A
Relative scarcity means unlimited volume of goods and services cannot be produced. So, firms must decide how to use and distribute resources most efficiently, selecting certain areas of production in which most efficient production can be achieved. This gives rise to opportunity costs.
21
Q
What is an opportunity cost?
A
The value of the next best alternative that was forgone when a choice was made.
22
Q
What is a production possibility diagram?
A
A diagram used to illustrate the many production combinations of a country that is able to produce just two products and where all resources are used most efficiently. These combinations are illustrated as points on a production possibility frontier and illustrate the concept of opportunity cost.
23
Q
Identify simplified assumptions made in PPDs
A
assumes only 2 types of output can be produced
assumes total quantity of resources available is fixed
assumes nation uses most efficient production methods
24
Q
What is the production possibility frontier (PPF)?
A
A line which traces out the productive capacity or a nation’s potential output, given the efficient and complete use of all resources.
25
What is efficient allocation of resources formally known as?
Allocative efficiency
26
What is economic efficiency?
When there is maximum output gained from a given volume of productive inputs, thereby maximising society’s general wellbeing and material living standards. It can mean allocative, dynamic, productive and intertemporal efficiency
27
Define allocative efficiency
When resources are distributed in ways that maximise society’s satisfaction and minimise opportunity costs.
28
Define Productive or Technical Efficiency
When lowest cost production methods are used and wastage of resources in making goods and services is minimised.
Anywhere along the lines of the PPF curve is technically efficient; increase in technical efficiency would help shift PPF outwards.
29
Define dynamic efficiency
When resources are reallocated quickly to increase choice and better meet the changing needs of consumers. Shown on PPF as moving along curve quickly.
30
Define intertemporal efficiency
Refers to finding a balance between current consumption versus saving for future consumption. On PPF curve it can refer to anywhere not on the edges as either extremes are not balancing resources across long term
31
What things could increase the volume and efficiency of a nation’s resources and expand the PPF?
• rise in foreign investment
• increase in the target for skilled immigration
• discovery of new natural resources
• technological breakthroughs
• government spending on education and training of the labour force, or a rise in outlays on R&D
• rises in worker productivity or efficiency
• the building of new infrastructure such as roads, water and telecommunications
32
What can we say about the efficiency of a point INSIDE the PPF?
Can say that it's is using resources inefficiently and would CERTAINLY lower society’s satisfaction and wellbeing.
33
What do points INSIDE the PPF indicate about employment?
At any point inside PPF, production levels are below maximum level and potential capacity. This implies that some resources are not being full used, and there is unemployment of workers and unused capacity in businesses.
34
What would we expect about living standards if point is inside the PPF?
Fall in income and living standards; potential rise in poverty
35
What does a point OUTSIDE the PPF signify?
It is currently beyond the economy’s productive capacity because there are insufficient resources to enable such high levels of output. Any attempt to operate at this level of national production would be likely to cause inflation by causing a general shortage in resources.
36
What is an economic system?
A way of organising the production and distribution of the nation's goods, services and incomes.
37
What is a market capitalist economy?
An economic system in which resources are privately owned and decisions about what to produce, how to produce and for whom to produce are made by the market system
38
What is a market?
An institution where buyers and sellers of goods and services negotiate the price for each good or service.
39
How does the market price change when the number of buyers exceeds the number of sellers?
Market price rises
40
How does the market price change when the number of sellers exceeds the number of buyers?
Market price falls
41
What is market structure?
Refers to the type and level of competition that exists in various markets.
42
When do markets operate best?
When they are freely competitive
43
Identify the different market structures
- pure of perfect competition
- monopolistic competition
- oligopoly
- pure or perfect monopoly
44
What is pure of perfect competition?
A type of market structure in which there are many buyers and sellers of identical products, and competition is strong. Firms, having no market power, are price takers and have perfect knowledge about market conditions. There are no government barriers/restrictions so ease of entry exists.
45
What is monopolistic competition?
A type of market structure where there is a moderate number of buyers and sellers of similar, but not identical products. Competition is quite strong so firms are price takers, and product differentiation and advertising is important. Knowledge of market conditions is quite good and there is moderate ease of entry and exist as there are few government barriers/restrictions.
46
What is oligopoly?
A type of market structure where there are relatively few, large buyers who are price makers. Here, there is opportunity for collusion. Product differentiation is quite important, and entry/exit is fairly difficult due to many government barriers and restrictions.
47
What is a pure or perfect monopoly?
A type of market structure where one seller is a price maker and controls the output of an entire industry and there is no close substitute product. No competition exists and product differentiation is unimportant. Entry and exit are difficult due to government barriers and restrictions.
48
Identify the conditions of a perfectly competitive market
Consumer sovereignty
No market power
Ease of entry or exit
Identical products
Mobile resources
Profit maximisation
Perfect knowledge
49
What is consumer sovereignty?
When consumers of goods and services, not the government, dictate how resources will be used.
50
What is an acronym to help remember the conditions of a perfectly competitive market?
MInCE PPie!!!
Mobile Resources
Identical products
No market power
Consumer sovereignty
Ease of entry and exit
Perfect knowledge
Profit maximisation
51
What are the effects of competitive markets on efficiency in resource allocation?
- higher efficiency in resource allocation
- lower prices and higher purchasing power
- better quality goods and services
52
How does strong competition lead to higher efficiency?
With many rivals and no market power, firms must try to get more output from the same input and use their resources in ways that minimise opportunity costs, boosting allocative efficiency.
They must also innovate technology to survive, increasing productive/technical efficiency.
Firms need to be more responsive to changes in consumer demand to continue selling; increasing dynamic efficiency.
53
What effect can strong competition have on a nation's productive capacity and living standards?
Strong competition = rivalling firms try to get more output from same inputs = increased inefficiency = PPF moves outwards and productive capacity increases
= higher GDP = higher employment = higher average income = improved material living standards.
54
How can strong competition lead to lower prices and greater purchasing power?
With more rivalry, firms will be forced to price their products competitively, and being price takers, will not collude or exploit consumers, leading to lower market prices, and increasing purchasing power.
55
How can strong competition lead to better quality goods and services?
Having many rivals, firms are forced to ensure that product quality is high so consumers are not motivated to buy from other sellers.
56
Outline some negative effects of strong competition?
- A struggling firm may employ aggressive cost-cutting and render low quality, unsafe products
- With many small-sized competitors, business would be less likely to gain e economies of large-scale production
57
Identify the three key economic questions
1. What and how much to produce?
2. How to produce?
3. For whom to produce?
58
What are relative prices?
The price of one good or service compared to that of another.
59
How is the "what to produce" question addressed?
Product has higher equilibrium market price = relatively more profitable = produced more
Product has lower equilibrium = relatively less profitable = produced less
60
How is the "how to produce?" question addressed?
Cheaper + most efficient resources = minimise production costs and maximise output = preferred
61
How is the "for whom to produce?" question addressed?
People with higher incomes get more.
Incomes relative to relative scarcity of work provided.
Relatively scarcer work = higher relative income = higher purchasing power e.g. doctors
Relatively less scarce work = lower relative income = lower purchasing power e.g. teachers
62
What is demand?
The quantity of a good or service that consumers are willing to purchase at any given price.
63
What is the law of demand?
States that the quantity of a particular good or service that buyers are prepared to purchase varies inversely with change in price.
64
What happens as price increases?
There is contraction in the quantity demanded.
65
What happens as price decreases?
There is expansion in the quantity demanded.
66
Why does demand contract as price increases?
good or service is more expensive so not everyone can afford it
good or service becomes less desirable and opportunity cost increases, reducing satisfaction and demand
67
What does it mean when there is movement upwards along the demand curve?
- contraction in demand
- rise in price
68
What does it mean when there is movements downwards along the demand curve?
- expansion in demand
- fall in price
69
What is supply?
Refers to the quantity of a particular good or service that sellers are willing to sell at any given price.
70
What is the law of supply?
States that the quantity of a particular good or service that sellers are prepared to produce varies directly with the change in price.
71
What happens to supply as price increases?
There is expansion in the quantity supplied
72
What happens to supply as price decreases?
The is contraction in the quantity supplied.
73
Why does supply expand as price rises?
revenue increases, making production of that particular good or service more profitable
firms are more confident and better able to cover production costs
opportunity cost of producing ANOTHER good or service rises
74
What does a move upwards on the supply line mean?
- expansion in supply
- rise in price
75
What does a move downwards on the supply line mean?
- contraction in supply
- fall in price
76
What is equilibrium?
The natural situation to which all free and competitive markets tend to move. It exists when the quantity demanded exactly equals the quantity supplied.
77
What is a market glut?
When the quantity of a particular good or service supplied exceeds the quantity demanded, putting downward pressure on the equilibrium market price.
78
What is market shortage?
When the quantity of a particular good or service demanded exceeds the quantity supplied, putting upward pressure on the equilibrium market price.
79
What are conditions of demand?
The non-price factors that affect the quantity of a good or service that buyers are prepared to purchase or demand at all possible prices.
80
What are conditions of supply?
The non-price factors that affect the quantity of a good or service that sellers are willing to make available at all possible prices.
81
List different conditions of demand
Disposable Income
Population (size and age distribution)
Changes in fashion and tastes
Interest rates
Substitute product price
Complementary product price
Seasons
Government policies
82
What is an acronym to recall conditions of demand?
Culbert Can't Get PISSeD
Changes in fashion and tastes
Complementary product price
Government policies
Population size and age distribution
Interest rates
Substitute product price
Seasons
Disposable income
83
How does change in disposable income affect demand at all possible prices?
More disposable income (such as after a pay rise, an increase in welfare benefits or a tax cut) tends to increase demand.
Cut in disposable income lowers demand.
EXCEPTION: cut in disposable income may increase demand for relatively cheaper substitutes (inferior goods) to replace the expensive ones (superior goods).
84
What is a substitute product?
A product/service that consumers can easily replace with another.
85
What is a complementary product?
A good/service that is bought together and adds to the value of the original product.
86
How do government policies affect demand?
Through outlays and taxes in budget and through legislation.
E.g. outlays on transport = increased demand for construction materials and workers; cash subsidies can also encourage demand; bans, high taxes = decreased demand for socially undesirable goods and services
87
List different conditions of supply
Cost of resources
Technology
Profitability and Bankruptcy rates
Climactic conditions
Government action
88
What is the acronym to recall conditions of supply?
PACCT G
Profitability and bankruptcy rates
a
Climactic conditions
Cost of resources
Technology
Government action
89
How does the use of new technology affect supply?
Use of new tech lifts efficiency and thus cuts unit production costs.
As a result, firms become more willing to increase their supply at a given price.
90
How do profitability and bankruptcy rates affect supply?
Bankruptcy rates fall and profitability rises = increased supply
Increased bankruptcy and reduced profits = decreased supply
91
How does government action affect supply?
Governments may provide financial assistance and funding to firms and industries to cover some of their production costs; increasing supply.
They may increase taxes on goods sold and on the income of firms which my decrease supply.
92
What is elasticity?
Measures the responsiveness or sensitivity of the quantity of a good or service demanded or supplied when there is a change in its price.
93
What is elasticity?
Measures the degree of responsiveness of the quantity demanded or supplied when there is a change in price.
94
Define the price elasticity of demand
Measures the responsiveness of the quantity demanded relative to the percentage change in price.
95
How is Price Elasticity of Demand (PED) calculated?
PED = Percentage change in the quantity demanded/Percentage change in price
96
What are the three types of price elasticity for demand?
- Relatively elastic (high PED)
- Unit elasticity (medium PED)
- Relatively inelastic (low PED)
97
Describe relatively elastic demand (high PED)
- PED more than 1
- Quantity demanded changes by a larger proportion than the change in price
- Means buyers can easily switch their demand elsewhere in response to higher prices
- If price rises, total revenue (which equals the unit price multiplied by quantity demanded) decreases
98
Draw a relatively elastic line of demand
Pg.48 Textbook
99
Describe unit elasticity demand (medium PED)
- PED = 1
- quantity demanded changed by the same proportion as the change in price
- total revenue remains unchanged with rise in price
100
Draw a unit elasticity demand line
Pg. 48 Textbook
101
Describe relatively inelastic demand (low PED)
- PED less than 1
- the quantity demanded changes by a smaller proportion than the change in price
- buyers unable or unwilling to significantly contract demand
- total revenue increases with rise in price
102
Draw a relatively inelastic demand line
Pg. 48, Textbook
103
Identify factors affecting the elasticity of demand
Cost TeMPTations
1. Cost and relative importance
2. Type of Item
3. Minor complementary items
4. Product substitutability
5. Time period
104
Elaborate on each factor affecting price elasticity of demand
Cost and relative importance: Expensive things representing higher proportion of household spending have more elastic demand, cheaper items representing lower percentage of household spending have more inelastic demand.
Type of item: demand for necessities is normally inelastic while that for non-necessities is normally relatively elastic.
Minor complementary items: Cheap complementary items to be used together with dearer product normally have inelastic demand.
Product substitutability: Demand for substituted is normally relatively elastic, while that for unique products is normally inelastic.
Time Period: In the long term, demand is more elastic while in the short term it is more inelastic.
105
Define the price elasticity of supply
Measures the responsiveness of the quantity supplied to the percentage change in price.
106
How can the price elasticity of supply (PES) be calculated?
PES = Percentage change in quantity supplied/ percentage change in price
107
Identify the three types of price elasticity for supply
- relatively elastic (high PES)
- unit elasticity (medium PES)
- relatively inelastic (low PES)
108
Describe relatively elastic supply (high PES)
- PES more than 1
- quantity supplied changes by a larger proportion than the change in price
- firms can easily expand output in response to price
109
Draw a relatively elastic supply line
110
Describe unit elasticity of supply (medium PES)
- PES = 1
- quantity supplied changes by the same proportion as the change in price.
111
Draw a supply curve with unit elasticity
112
Describe relatively inelastic supply (low PES)
- PES less than 1
- quantity supplied changes by a smaller proportion than the change in price.
- firms relatively unwilling or unable to respond to changes in price
113
Draw a relatively inelastic supply curve
114
What factors influence the price elasticity of supply (PES)?
- Storability and durability of product
- Time period
- Resource mobility and unused industry capacity.
115
What factors influence the price elasticity of supply (PES)?
Resource mobility and unused industry capacity
The time period
Storability and durability of product
116
Elaborate on the how the factors of PES influence the price elasticity of supply
- Product storability and durability: Durable items that are easily stored without deterioration have more elastic supply, while items difficult to store have more inelastic supply.
- Resource mobility and unused industry capacity: If production levels can be readily and inexpensively changed by moving resources between industries, and if there is unused productive capacity, supply is likely to be more elastic.
- Time period: In the short-term, supply is relatively more inelastic (as it is difficult for firms to expand/contract supply especially is resources are not mobile). In the long-term, it is more elastic (there is more availability of resources over time).
117
What is market failure?
Occurs when the price system allocates resources inefficiently, reducing society's general wellbeing.
118
How does the government respond to market failure?
- budgetary policy measures (taxes, outlays, cash subsidies)
- special legislation to change law and society's behaviour
- educational advertising to increase buyer/consumer knowledge
- minimum/maximum prices in selected markets
- microeconomic and other efficiency reforms
119
What are the primary reasons for market failure?
PACE
Public goods
Asymmetric information
Common access goods
Externalities
+
Abuse of market power
120
How does abuse of market power cause market failure?
- sellers oligopolies/monopolies are price makers and may collude by restricting competition and output, lifting prices and reducing efficiency in resource allocation and customer service.
- reduces society's general satisfaction and wellbeing, thus causing market failure
121
How do governments respond to market failure caused by abuse of market power?
- government deregulation of key markets: removal of unnecessary government restrictions to competition to expose industries to greater competition, creating higher efficiency, lower prices and improved living standards.
- reducing the level of tariff protection from imports for local firms and liberalising trade: reducing the indirect tax added to the price of imports, forcing local firms to lift efficiency in resource allocation (allocating into areas where Australia has a comparative cost advantage) to survive, and improve product quality, cut production costs.
- promoting price competition and regulating monopolies/oligopolies: establish laws (e.g. Australian Competition and Consumer Act 2010) to promote greater competition and thus promote higher efficiency in resource allocation and higher living standards.
122
What is asymmetric information?
When buyers lack the complete information required to make rational decisions about how to use their resources
Investopedia Def: When one party in a transaction is in possession of more information than the other
123
How does asymmetric information lead to market failure?
When one party in a transaction has more information than the other.
They may buy or sell a product at a higher or lower price than what would be reflective of its true benefit or cost and be socially optimal.
As a result, rational and effective decisions about resource allocation cannot be made.
Reduces overall wellbeing = market failure.
124
How do governments respond to market failure caused by asymmetric information?
- government laws to improve market knowledge: can pass laws requiring full product disclosure by sellers of all relevant information needed for effective decision making by potential buyers e.g. product labelling laws
- improved access to information or knowledge: conduct advertising campaigns to inform consumers of potential dangers of products so that more effective choices can be made and resources allocated efficiently to maximise society's wellbeing + improving speed of and public access to internet to facilitate effective research by buyers and sellers, improving their knowledge of the consequences of their economic decisions
125
What are externalities?
Represent a market failure and are the costs or benefits that arise from the economic activities of firms and households that are unpriced (not accounted for in the market price) and passed on to third parties not directly involved in the original activity.
126
What are negative externalities?
Costs paid by third parties due to the production or consumption of a good or service.
127
Explain negative externalities in consumption
Occur when consumption imposes a cost on a third party.
There tends to be an over-allocation of resources towards products with negative consumption externalities as the price mechanism cannot capture the impact on a third party. This reduces society's general wellbeing, leading to market failure.
e.g. passive smoking.
128
Explain negative externalities in production
Occur when production imposes costs on a third party. There tends to be an over-allocation of resources towards products with negative production externalities as the price mechanism cannot capture the impact on a third party. Sellers themselves do not bear these costs, inflating their profits, and overproducing socially undesirable goods. This lowers society's general wellbeing and can lead to market failure.
e.g. pollution from factories.
129
What are positive externalities?
The benefits of economic activity (production of consumption) that are unpriced (unaccounted for in market price) and are passed onto third parties not involved in the original transaction.
130
Explain positive externalities in consumption
Occurs when the consumption of a goods or service improves the wellbeing of a third party not involved in the transaction. There tends to be an under-allocation of resources towards products with positive consumption externalities as the price mechanism cannot capture the impact on a third party. Thus, resources are not allocated efficiently in sufficient quantities and society's general wellbeing will be lowered, leading to market failure.
E.g. vaccines as they provide herd immunity, education as society as a whole benefits, and manicured gardens as the whole neighbourhood benefits.
131
Explain positive externalities in production
Occurs when a firm produces a product that causes a benefit to a third party not involved in the transaction. Producers tend to under-allocate resources to the production of goods/services with positive production externalities as the price mechanism cannot capture their impact on a third party. This means resources are not allocated efficiently in sufficient quantities and society's general wellbeing will be lowered, leading to market failure.
E.g. research and development as others can use their findings; airports as local businesses benefit due to increased accessibility; and beekeepers as other people’s crops get pollinated.
132
How does the government respond to market failure caused by externalities?
- government laws to reduce negative externalities: pass legislation to force firms and/or consumers to change their activities or behaviours causing negative externalities.
- governments use the budget to reduce the problem of positive externalities: using budget tax revenues to provide socially beneficial goods and services free of charge or at a low subsidised price so all people can have access. This causes additional resources to be allocated, lifting their production consumption and society's general wellbeing.
- indirect excise tax: Impose taxes on socially undesirable products to raise their price and discourage their production and consumption. This can repel resources from this socially undesirable area, improving society's wellbeing.
- government cash subsidies and the provision of free services: Cash incentives could be used to encourage consumers/suppliers to change behaviour that currently causes negative externalities or adopt behaviour that creates positive externalities to address the underproduction of socially desirable products. This would see resources allocated away from socially undesirable areas to socially desirable ones, improving society's general wellbeing.
- education and advertising to inform the public: advertising campaign to inform the public and to encourage a change in behaviour that will help minimise socially undesirable behaviour and maximise socially desirable behaviour. Thus, improving society's general satisfaction.
133
What are public goods?
Non-rivalrous, non-depletable and non-excludable goods. Footpaths are an example of public goods.
134
What are the two preconditions of public goods?
- Non-excludable
- Non-rivalrous
135
Explain how public goods are non-excludable
Those who do not pay for public goods cannot easily be refused access to those goods. Thus, consumers are 'non-excludable'.
(this leads to the emergence of the free-rider problem)
136
What is the free rider problem?
Occurs when a service is provided but payment is difficult or almost impossible to extract from the users who benefit from it (e.g. national defence, police and street lighting). Users are non-excludable.
137
Explain how public goods are non-rivalrous
One person using and benefitting from a public good does not prevent another person from doing the same.
138
How does lack of provision of public goods lead to market failure?
Due to the free rider problem. This means consumers can consume the product without paying for it, which makes the product less profitable, and suppliers will often under-allocate resources to such areas, even though they are seen as beneficial and improve society's general wellbeing.
139
How does the government respond to market failure caused by the underproduction of public goods?
- using annual budget to provide public goods and services. helps to ensure that they are not underproduced. thereby enhancing efficiency in resource allocation and maximising society's general wellbeing.
140
What are common access goods?
The environmental natural resources such as air, minerals, oil, forests that we all depend on. They are typically non-excludable but yet are rivalrous.
140
What are common access goods?
The environmental natural resources such as air, minerals, oil, forests that we all depend on. They are typically non-excludable but yet are rivalrous.
141
How can markets fail in using common access resources?
The market fails to send the proper price signals that lead to an efficient allocation of resources. Hence, the survival of current and future generations may be jeopardised when these goods are used up or degraded. This would reduce society's general wellbeing.
142
How do governments respond to market failure due to failed use of common access resources?
- environmental laws: legislation to prevent the degradation of environmental resources that we need to access. ensure these laws are policed and enforced.
- pricing carbon emissions and other market-based methods for reducing climate change: introducing carbon tax on polluters to encourage firms to change to cleaner, greener production. or introducing emissions trading scheme (ETS) where carbon price is free to go up or down as determined in the carbon market by the actions of buyers and sellers
- international agreements: internationally agreeing upon reduced emissions
- direct action: direct action policies
143
Identify two other reasons for government intervention in a competitive market economy
- stabilising the level of economic activity: to moderate economic fluctuations (inflationary booms and recessions)
- redistributing income more equitably: Extreme income inequality may develop asa a result of the free price system, if left unchecked, this may exacerbate difference in living standards so that the general wellbeing of society reduces. Thus, government moderates the extent of this inequality.
144
What is government failure?
occurs when the government intervenes in a market using various policies that are intended to improve efficiency in resource allocation and living standards, but which unintentionally, lowers the general satisfaction of society's wants and wellbeing. Possible examples could include subsidizing the coal industry, setting the minimum wage and perhaps schemes to increase housing affordability and ownership.
145
What is minimum wage?
Set by the Fair Work Commission and is the lowest wage that an employee can be legally paid.
146
Why was minimum wage introduced?
- provide safety net wage for low-paid workers and reduce poverty
- avoid exploitation of employees by profit-seeking businesses keen to minimise their costs
- increase the incentive for employment, boosting efficiency in use of resources
- improve equity and fairness by protecting and lifting consumption levels or purchasing power of workers, and increasing the extent to which society's wants are sat
147
Without minimum wage, what would a free market look like?
Wage levels would be set at equilibrium by the forces of supply and demand.
Wages would rise if labour demand exceeded supply, or fall if supply exceeded demand.
148
Identify the unintended consequences of setting an artificially high minimum wage?
1. Slow the growth in labour productivity
2. Increase trade deficit
3. Increase the level of structural unemployment
4. Increase inequality in income distribution
149
How does establishing minimum wage lead to slow growth in labour productivity?
Disconnects pay levels from the value of people's work. This disincentivises improvement in labour productivity and discourages efficient use of resources. Thus, growth in the nation's productive capacity is slowed.
150
How does establishing minimum wage lead to increase in trade deficit?
Artificially high wages and low productivity make local firms uncompetitive against their overseas rivals and thereby add to an international trade deficit (imports end up having more value than exports).
151
How does establishing minimum wage lead to increase in the level of structural unemployment?
Can cause some local businesses to closure because they are less competitive (not working as efficiently). Some may relocate overseas. Locally, this causes higher levels of structural unemployment.
152
How does establishing minimum wage lead to increased inequality in income distribution?
By increasing structural unemployment, the setting of artificially high minimum wages can in some ways, undermine equity in income distribution (especially in the long term), hurting vulnerable members of society. In addition, inequality is worsened because excessively high minimum wages discourage employment, cause firms to reduce the number of hours that staff work and hence depress incomes and purchasing power. Furthermore, by increasing unemployment, they add to the number of people dependent on inadequate government welfare payments of perhaps $250–$350 per week (as opposed to around $1740 per week on average weekly earnings). Clearly, lower incomes and purchasing power significantly reduce efficiency and society’s general wellbeing.
153
How could reducing/abolishing penalty rates of pay?
- create more jobs and employment opportunities (especially for young people where unemployment rates are high) by making it more profitable for firms in retail and hospitality to stay open for longer trading hours
- increase efficiency in the use of labour and other resources, thereby growing the economy’s productive capacity and incomes, thereby enhancing our wellbeing.
