AOS 1- microeconomics

Question 1

Relative Scarcity

Answer 1

needs/wants=unlimitted
resources too satisfy them(labour, natural, capital)=limited
–> need for economic decisions to be made of how to allocate resources

Question 2

need

Answer 2

Items which are essential to survive (water shelter clothing food)

Question 3

wants

Answer 3

Items which are non-essential however enhance our lives (phone television computer)

Question 4

opportunity cost

Answer 4

Value of the next best alternative for gone when economic decision is made

Question 5

efficient allocation of resources

Answer 5

this occurs when living standards are maximised and our needs/wants are best satisfied

Question 6

allocative efficiency

Answer 6

the efficient allocation of resources occurs when living standards and welfare are maximised. x increase living standards by reallocation

Question 7

productive/technical efficiency

Answer 7

X possible to increase outputs without increasing inputs. maximising the output from a given level of input

Question 8

inter-temporal efficiency

Answer 8

how well resources are allocated over different time periods so the living standards of current generations are not jeopardising the living standards of the future generations

Question 9

dynamic efficiency

Answer 9

how quickly economies can reallocate resources to achieve allocative efficiency, being adaptive and creative in response to changing economic circumstances

Question 10

three economic questions

Answer 10

What (and how much) to produce?
who to produce for?
how to produce it?

Question 11

nature and conditions for a free and perfectly competitive market

Answer 11

Consumer sovereignty exists- consumers direct/allocate resources
large number of buyers and sellers, of which, none have market power (price takers)
homogenous products (identical+ easily substitutable)
ease of exit and entry (low startup costs, regulations etc)

Question 12

assumptions of perfectly competitive market

Answer 12

Buyers and sellers operate with perfect info
resources are mobile
behavior is rational, buyers=maximise utility/satisfcaction, sellers=profit

Question 13

law of demand

Answer 13

increase price-> decrease demand and vice versa

Question 14

demand

Answer 14

willingness and ability of consumers to purchase goods and services

Question 15

market/price mechanism

Answer 15

describes how forces of supply and demand influence (relative) prices of goods and services, which then coordinates productive resources (such as labour and capital and natural) are allocated in economy

Question 16

income effect

Answer 16

reduced consumption of g/s whose prife has increased, due to reduction in consumers purchasing power or an increase in consumption of a good or service whose price has decreased due to increase in consumers purchasing power

Question 17

substitution effect

Answer 17

decreased consumption of a g/s whose price has increased due to changed trade-off: the fact that one must give up more of another g/s to get more units of the high priced g/s

Question 18

non price demand factors

Answer 18

changes is disposible income
price of substitutes
price of compliments
preferences+tastes
interest rates
pop. demographics
consumer confidence

Question 19

discretionary income

Answer 19

disposible income availiable for consumption following the payment of all ‘non avoidable’ expenditures, such as food/clothing

Question 20

disposible income

Answer 20

income availiable for spending after the receipt of welfare benfits and deduction of personal taxes

Question 21

supply

Answer 21

Willingness and ability of suppliers/ producers to supply/produce

Question 22

law of supply

Answer 22

as price increases so to do supply, as it decreases so to does supply

Question 23

microeconomic supply non-price factors

Answer 23

change in cost of production
number of suppliers
technological changes
productivity
climatic conditions

Question 24

market equilibrium

Answer 24

buyers and sellers interact in the market to determine selling price and quantity
equilibrium–> where qty demanded for g/s= quantity supplied of that g/s

Question 25

7 steps for shift in demand/supply

Answer 25

1. explain situation in own words-> NP factor 2. supply or demand 3. increase/decrease 4. shift curve right or left 5.if at constant P1, temporary shortage/ surplus 6. market forces put upward/downward pressure on price to adjust to a new equilibrium, E2, with a cont/exp in curve, and a cont/exp in other curve 7. Overall impact on P+Q

Question 26

Price Elasticity of demand formula

Answer 26

%quantity demand/%Δprice

Question 27

Price elasticity of demand definition

Answer 27

the responsiveness of total quantity demanded of a product to changes in the price of that product

Question 28

factors effecting price elasticity

Answer 28

The degree of necessity- more needed-> purchase at any price Availability of substitutes- more substitutes means can swap if prices go up Portion of income, greater % of income-> up effect of % price change time, short term-> cons= habitually consume, long term-> start to realise price changes-> price shock -> change consumption

Question 29

significance of price elasticity of demand

Answer 29

Bus- pref low PED-> low effect of Δprice bus take PED into account when Δprice, ie if high elasticity, sales= profit govt consider PED when Δindirect tax

Question 30

Price Elasticity of Supply

Answer 30

the resposiveness of quantity supply to changes in price

Question 31

price elasticity of supply formula

Answer 31

PES=Δ%Supply/Δ%price

Question 32

factors effecting Price Elasticity of Supply

Answer 32

Spare capacity- resources production period durability of goods

Question 33

Significance of PES

Answer 33

The PES can affect the economic viability of a business sell as they're ability to respond to changing price signals.

Question 34

market/price mechanism

Answer 34

describes how the forces of supply and demand inlfluence (relative) prices of goods and services, which then coordinates the way productive resources are allocated in the economy

Question 35

relative prices

Answer 35

the price of a good or service relative, or compared with another

Question 36

key points for relative prices and reallocation of resources

Answer 36

Price Mechanism describes how the forces of demand and supply influence prices of goods and services and in turn relative prices of goods and services which then coordinates the way productive resources (such as labour and capital) are allocated in the economy. Changes in relative prices send clear price signals to producers and consumers who investigate the reasons for the changes and hence determine whether to reallocate resources (if demand driven)

Question 37

how does market system/ resource reallocation--> living standards

Answer 37

materially-> uphold consumer demand by produing what is demanded by producers, hence decreasing price of g/s--> increase Mat LS non materially-> increased production to meet consumer demand may --> more pollution in order to rappidly meet consumer demand.

Question 38

effect of pure competition on allocative efficiency.

Answer 38

No barriers to entry and exit means that producers can quickly move they're resources in order to fulfil an emerging social need for a particular good or service--> allocative efficiency

Question 39

effect of pure competition on productive efficiency

Answer 39

Low barriers to entry and exit combined with mobility of resources +Many sellers = high levels of competition. to be competitive, producers mustminimise costs and maximise output to be able to compete and winmarket share through low possible selling prices.

Question 40

effect of pure competition on dynamic efficiency

Answer 40

low barriers to entry and exit means businesses can rapidly shift between markets or products in order to adapt to emerging economic condition.

Question 41

effect of pure competition on inter temporal efficiency

Answer 41

due to immense need for productive efficiency to be competitive, businesses may not consider inter temporal efficiency in decision making, prioritising short term gain without considering the long term negative externalities for future generations ( such as pollution and degradation of resource pool). Hence limiting inter temporal efficiency

Question 42

market failure

Answer 42

What an unregulated market is unable to allocate resources efficiently or where resources are allocated in such a way that national living standards or welfare is not maximised. It will result in an over allocation of resources to the production or consumption of some goods or services and an under allocation to others

Question 43

public goods

Answer 43

Goods/services available for all people to use, gain benefit from all enjoy socially desirable and important to all even if poor. Nonexcludable – you cannot exclude nonpayers from enjoying the benefits that they good or service is provided which gives rise to the free ride a problem. Non-depletable/non-rivalrous in consumption – one persons consumption does not diminish the ability of another person to enjoy the same consumption so all benefit equally

Question 44

forms of govt intervention for public goods

Answer 44

Government subsidies – a payment or concession of a producer or consumer that is designed to increase consumption/production of a good or service by covering some of the costs involved. = cash payment, low or no interest loan, subsidised costs. Direct government provisions – governments directly produced the good or service such as Lighthouse, public lighting, defence, education.

Question 45

Common access resources

Answer 45

resources which are benificial to society, and are depletable ( consumption prevents further consumption ), but is non excludable (cannot restrict individuals from accessing them in a free market), hence, have no market price.

Question 46

CAR Market failure

Answer 46

in an unregulated market, given businesses are profit driven, they will over consume the common access resources--> depletion of common access resources which limits inter temporal efficiency

Question 46

CAR govt intervention

Answer 46

Legislation used to reduce consumption of common access resources through permits, quotas or setting and monitoring areas. Indirect taxes--> carbon tax/ ETS --> places a price on they're consumption subsidies--> used to encourage clean technologies under Renewable energy target scheme, Govt subsidies+ dev--> implementation of techs

Question 47

externalities+ why market failure

Answer 47

externalities refer to the effect of production or consumption on an uninvolved third party. Market failure because businesses in an unregulated market seek only profit, overlooking the effect that they're production has on an independent third party. Hence not maximising the living standards of the nation as production/consumption with negative externlities (such as cigarettes or alcohol) is overproduced, while prod/cons with positive externalities( such as healthy foods or vaccinations) = underproduced

Question 48

how does govt correct market failure of externalities

Answer 48

subsidies direct govt provision-->. health+edu+ research+dev= csiro govt regulations, --> legislation to inhibit or limit production/ consumption indirect taxes

Question 49

asymmetric information

Answer 49

a type of market failure whereby one economic agent has less than the other, hence perfect information about the value of the good or service is unknown, hence causing inefficient allocation of resources.

Question 50

govt intervention for asymetric information.

Answer 50

govt regulation--> x allow any misleading info. ACCC-> Competion and consumer act 2010 govt awareness advertising--> benefits of eating fresh veg+ smoking drinking gambling subsidies--> provide subsidies to firms who provide meaningful info to cons.

Question 51

government failure+ example

Answer 51

whereby the government aims to address one economic problem but in doing so minimises the living standards of the nation. For example, the introduction of minimum wage--> inefficient market system