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Economics 3/4 > 3.1 - Introduction to Microeconomics > Flashcards

3.1 - Introduction to Microeconomics Flashcards

1
Q

Relative Scarcity

A
  • That our limited resources are scarce, relative to our unlimited needs and wants
  • Competing uses for resources
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2
Q

Opportunity Cost

A

The cost of the next best option foregone whenever a decision is made

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3
Q

Allocative Efficiency

A

When resources are allocated in a way that maximises living standards

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4
Q

Productive/Technical Efficiency

A

When the economy is producing the maximum level of outputs from a given level of inputs

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5
Q

Inter-temporal Efficiency

A

How resources are allocated over time, so that the living standards of current generations are not jeopardising future generations’ living standards

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6
Q

Dynamic Efficiency

A

How quickly an economy can reallocate resources to achieve allocative efficiency

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7
Q

Conditions for a Perfectly Competitive Market

A

o Consumer sovereignty exists
o Large number of buyers and sellers who are all price takers
o Goods and services are homogenous
o Ease of entry and exit

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8
Q

Assumptions of a Perfectly Competitive Market

A

o Buyers and sellers operate with full information
o Resources are mobile (dynamic efficiency)
o Behaviour is rational

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9
Q

Demand

A

The ability and willingness of consumers to purchase goods and services

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10
Q

Law of Demand

A

o As the price decreases, the quantity demanded increases
o As the price increases, the quantity demanded decreases

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11
Q

Income Effect

A

o A decreased consumption of a good or service that has increased in price is due to a decrease in consumers’ purchasing power
o An increased consumption of a good or service that has decreased in price is due to an increase in consumers’ purchasing power

o Leads to substitution effect

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12
Q

Substitution Effect

A

o A decreased consumption of a good or service that has increased in price is due to a higher trade-off – consumers must give up more of another good or service to buy the same amount of this good or service

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13
Q

7 Non Price Demand Factors

A

o Changes to disposable income
o Price of substitute
o Price of complement
o Taste and preferences
o Interest rates
o Population demographics
o Consumer confidence

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14
Q

Law of Supply

A

o As the price increase, the quantity supplied increases
o As the price decreases, the quantity supplied decreases

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15
Q

Supply

A

The ability and willingness of producers to produce goods and services

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16
Q

Price Elasticity of Demand

A

Refers to the responsiveness of total quality demanded of a product to a change in the price of that product

PED=(percentage change in quantity demanded)/(percentage change in price)

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17
Q

Factors Affecting Price Elasticity of Demand

A
  • Degree of necessity – necessary goods and services tend to be elastic
  • Availability of substitutes – more substitutes leads to elasticity, less substitutes leads to inelasticity
  • Proportion of income – lower income leads to elasticity, higher income leads to inelasticity
  • Time – short term, consumers are less likely to notice changes to price so demand remains inelastic; long term, consumers are more likely to notice changes to price so demand becomes elastic (bill shock)
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18
Q

Price Elasticity of Supply

A

Refers to the responsiveness of total quality supplied of a product to a change in the price of that product

PES=(percentage change in quantity supplied)/(percentage change in price)

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19
Q

Factors Affecting Price Elasticity of Supply

A

Spare capacity:
o Lots of spare capacity – elastic supply
o No space capacity – inelastic supply
Production period:
o Short production period – elastic supply
o Long production period – inelastic supply
Durability of goods (shelf life):
o Long lasting goods – elastic supply
o Short lasting goods – inelastic supply

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20
Q

Market Mechanism

A

Describes how the forces of demand and supply influence relative prices of goods and services, which then coordinates the allocation of resources

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21
Q

Relative Prices

A
  • The price of a good or service compared to the price of another good or service
  • Changes to relative prices are caused by a shift of the curve (non price factor)
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22
Q

Relative Prices and Allocation of Resources

A
  • Relative prices determined through forces of supply and demand interacting = market mechanism
  • Increase in relative prices –> sends price signals to producers that a temporary shortage exists
  • Producers investigate whether shortage is caused by demand or supply factors
  • If it is caused by demand factors, producers are likely to reallocate resources due to the higher profit making opportunity and as producers are profit motivated
  • Ultimately, this upholds consumer sovereignty and ensures that consumers’ demands are met –> improved living standards
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23
Q

How Competitive Markets Achieve Productive Efficiency

A
  • Large number of sellers –> producers must remain price competitive so remain profitable –> must maximise outputs from inputs
  • Goods/services are homogenous –> producers only compete on price –> must remain price competitive so remain profitable –> must maximise outputs from inputs
  • Producers act rationally –> work to maximise profits –> maximise outputs from inputs
24
Q

How Competitive Markets Achieve Allocative Efficiency

A
  • Perfect information –> consumers are able to purchase the good/service that best suits their needs –> maximise living standards
  • Act rationally –> producers aim to maximise profits –> produce goods/services that consumers demand the most –> maximise material living standards
  • Large number of buyers/sellers –> producers must remain price competitive so remain profitable –> lower prices –> maximise material living standards
25
Q

How Competitive Markets Achieve Dynamic Efficiency

A
  • Low barriers to entry/exit –> producers are easily able to move between markets to respond to changes in economy
  • Resources are mobile –> can be reallocated to respond the changes in economy
26
Q

How Competitive Markets DO NOT Achieve Inter-Temporal Efficiency

A
  • Large number of buyers/sellers –> producers must remain price competitive so remain profitable –> may use unsustainable/unethical practices
27
Q

Market Failure

A

When an unregulated market does not allocate resources efficiently or maximise living standards, resulting in either an under or over allocation of resources

28
Q

Public Goods

A
  • Goods/services that are socially desirable, non excludable (available for all) and non depletable (where one’s consumption does not prevent another from consuming)
29
Q

Government Interventions to Public Goods

A
  • Subsidies: a payment or concession to a producer/consumer to increase production/consumption of a good or service by covering some of the costs involved
    o Incentivises production –> address under allocation of resources so resolves market failure
  • Direct provision: when the government provides the good/service themselves
    o The government is not motivated by profit but the welfare of the public –> increases production –> address under allocation of resources so resolves market failure
30
Q

Common Access Resources

A
  • Resources that are not owned by anyone, do not have a market price, are non excludable but are depletable
31
Q

How Common Access Resources Create a Market Failure

A
  • Lack of price –> overconsumption of resources –> not available for future generations to enjoy –> does not achieve efficient allocation of resources (intertemporal efficiency)
32
Q

Government Interventions to Common Access Resources

A
  • Government regulations: legislation to reduce consumption, such as permits, quotas or bans
    o Reduces consumption –> ensures greater availability for future generations –> achieves efficient allocation of resources & resolves market failure
  • Indirect taxes: places a price on consumption on resource
    o Reduces consumption –> ensures greater availability for future generations –> achieves efficient allocation of resources & resolves market failure
  • Subsidies:
    o Make alternatives cheaper –> reduces consumption –> ensures greater availability for future generations –> achieves efficient allocation of resources & resolves market failure
33
Q

How Public Goods Create a Market Failure

A

Non excludable –> free rider problem (an economic agent who receives the benefit from a public good but does not pay for it) –> low profit making opportunity for public goods –> under allocation of resources = market failure

34
Q

Externality

A

Occurs when the wellbeing of a third party not involved in a transaction is affected by the production or consumption of a good/service

35
Q

Positive Externality

A

Occurs when an uninvolved third party receives a benefit from the production or consumption of a good/service

36
Q

How Positive Externalities Cause Market Failure

A

Lack of profit incentives –> under allocation of resources

37
Q

Government Intervention to Positive Externalities

A
  • Subsidies –> reduce cost of production –> greater production and allocation of resources so resolves market failure
  • Direct provision –> The government is not motivated by profit but the welfare of the public –> increases production –> address under allocation of resources so resolves market failure
38
Q

Negative Externalities

A

Occurs when a cost is imposed on an uninvolved third party as a result of production or consumption of a good/service

39
Q

How Negative Externalities Cause Market Failure

A

Consumers/producers do not internalise cost –> overallocation of resources

40
Q

Government Intervention to Negative Externalities

A
  • Government regulations –> bans/restrictions on production/consumption –> reduced allocation of resources
  • Indirect tax –> increased cost of production –> reduction of supply and contraction in demand –> reduced allocation of resources
  • Subsidies of alternatives –> reduced cost of production increased supply and expansion in demand of alternative –> reduced allocation of resources towards original good/service
  • Government advertising – influences taste and preferences by raising awareness around negative aspects –> decreased demand and reduced allocation of resources
41
Q

Asymmetric Information

A
  • Occurs when one party had greater information than the other in a transaction, leading to an inefficient allocation of resources as over/under allocation may occur
42
Q

How Adverse Selection Causes Market Failure

A

Occurs when one party had greater information than the other in a transaction, leading to a party not choosing the good/service that best maximises their living standards –> overallocation of resources toward a good/service that does not meet their needs and allocative efficiency not achieved

43
Q

How Moral Hazard Causes Market Failure

A

Occurs when economic agents adjust their behaviour without the other party being aware after the transaction has occurred = inefficient allocation of resources

44
Q

Government Intervention to Asymmetric Information

A
  • Government regulation – Consumer and Competition Act prevents producers from misleading or deceiving consumers –> prevents overallocation of resources toward a good/service that does not meet their needs
  • Government advertising – raises awareness around the impacts of goods/services, when producers are unwilling to do so themselves –> prevents overallocation of resources toward a good/service that does not meet their needs
45
Q

Government Failure

A
  • Occurs when government intervention fails to improve the allocation of resources or makes the allocation of resources less efficient comparted to the free market
46
Q

How Minimum Wage Causes Market Failure

A
  • Market cannot achieve equilibrium wage –> supply is greater than demand –> inefficient allocation of resources
  • Higher cost of production –> does not achieve productive efficiency
47
Q

Market Evaluation - Advantages of PCM

A
  • High levels of competition –> producers must maximise outputs from inputs to remain profitable –> productive efficiency
  • Consumer sovereignty –> consumer demands are fulfilled –> maximise living standards and allocative efficiency achieved
48
Q

Market Evaluation - Disadvantages of PCM

A
  • Market failures:
    o Public goods
    o Common access resources
    o Externalities
    o Asymmetric information
  • Large number of buyers/sellers –> producers must remain price competitive so remain profitable –> may use unsustainable/unethical practices so allocative efficiency/inter temporal efficiency not achieved
49
Q

Relative Price of Good/Service has FALLEN

A

Relative price of good/service being compared to has RISEN

50
Q

Significance of Price Elasticity of Supply

A

It allows producers to make more informed decisions about how to allocate their resources to maximise profitability around price changes

51
Q

Significance of Price Elasticity of Demand

A

It allows us to see how quickly consumers will respond to a change in price

52
Q

Significance of Allocative Efficiency

A

Determines whether living standards are being maximised or not

53
Q

Significance of Productive Efficiency

A

Determines whether the economy is producing at the maximum level of outputs from a given level of inputs or not

54
Q

Significance of Inter-Temporal Efficiency

A

Determines whether future generations’ living standards are being jeopardised or not

55
Q

Significance of Dynamic Efficiency

A

Determines whether the economy can quickly reallocate resources to respond to change

56
Q

Demand Market Failure Interventions

A
  • Advertising
  • Government regulation
57
Q

Supply Market Failure Interventions

A
  • Excise Tax / Indirect Tax
  • Government regulation
  • Subsidies
  • Direct provision

Economics 3/4 (6 decks)

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