CHAPTER 5 AND 6 A PLUS

Question 1

how do market exist?

Answer 1

They exist whenever two or more parties voluntarily interact with the aim of exchanging goods, services or information.

Question 2

what are the two types of markets and provide an example for each

Answer 2

Physical markets: places where buyers and sellers actually meet to exchange goods and services
example- shopping markets, retail stores, medical centres.
Virtual markets: an umbrella term for commercial web portals
example- educational courses, medical courses, online gaming links

Question 3

Business and the market-
Markets can only satisfy consumer wants if there are firms willing to supply goods and services.
and firms are motivated to supply markets when this maximises their profits.
HOW IS THIS ACHIEVED ( HINT: MARGINAL REVENUE AND MARGINAL COST)

Answer 3

They achieve this by producing at a level of output where marginal revenue equals marginal cost.
Marginal revenue: the extra (or marginal) revenue obtained by producing and selling another unit of output.
Marginal cost: the addition to total costs that occurs when one more unit of output is produced.
Markets provide information on what and how much to produce, but each business must decide the most cost-effective way to produce and level of production that will deliver the greatest profit.

Question 4

EFFICIENCY:
The economic problem can’t be avoided so the objective of economic systems which is -to achieve optimal satisfaction of wants, necessitates that the goods and services most valued by consumers are produced in the least costly way.
HOW IS THIS DONE- like how are they more efficient?

Answer 4

This involves allocating productive resources to their optimum use and combining them in the most productive ways.

The finished products should be distributed in ways that best satisfy the wants of consumers.

Markets operating optimally will product the most efficient solutions to the economic problem.

Question 5

WHAT IS The law of diminishing marginal productivity???

Answer 5

Increasing the amount of any one resource (eg labour) will not necessarily result in an increase in production.
As more and more of a variable factor of production (eg Labour) are added to a fixed factor of production (eg Land), a point will eventually be reached at which the output resulting in each additional unit of the variable factor will start to decline
farming is a real life example of this.

Question 6

WHAT DOES EFFICIENCY MEAN

Answer 6

means using the least amount of resources to produce the goods and services that people value the most; how cheaply and productively firms can combine land, labour and capital resources to maximise output while generating profits.

Question 7

what does efficiency do?

Answer 7

Maximises consumer satisfaction and business profits.
It promotes economic growth through the more productive use of resources and the development of innovative products and processes.

Question 8

what are the three types of efficiency?

Answer 8

Productive
Allocative, or
Dynamic efficiency.

Question 9

DESCRIBE PRODUCTIVE EFFICIENCY

Answer 9

Productive efficiency occurs in an economy, industry or firm when resources are used in a way that achieves the maximum quantity of output from a given quantity of productive resources. Resources are being used in the most efficient ways and nothing is being wasted.
This will result in goods and services being produced at the lowest cost.
Productive efficiency is said to occur on the production possibility frontier.
To achieve productive efficiency, firms must gain maximum productivity.
Productivity: is a measure of the efficiency of production, expressed in terms of the rate of output per unit of inputs
When it is fully utilising factors of production
Firm- producing at lowest average cost possible.

Question 10

what is a way to increase productivity and explain it-

Answer 10

One of the main way that firms can increase their productivity is to increase specialisation.
specialisation= the use of factors of production to perform narrowly defined, specific functions, such as assigning specific production tasks to a worker.

Question 11

Explain the four main ways that a firm can specialise:

Answer 11

Through land, labour, capital and enterprise.

Question 12

finish the sentence-
A firm can avoid the limitations of the law of diminishing marginal productivity by —
As a firm or industry grows, there are certain benefits to be gained, called —

Answer 12

A firm can avoid the limitations of the law of diminishing marginal productivity by expanding its scale of production.
As a firm or industry grows, there are certain benefits to be gained, called economies of scale.

Question 13

define economies of scale
What are the two different economies of scale?
What is meant by diseconomies of scale?

Answer 13

Economies of scale: results in lower costs of unit of output as total output increases.
There are two types of economies of scale: internal and external economies of scale. Internal economies of scale are firm-specific—or caused internally—while external economies of scale occur based on larger changes outside the firm.
Diseconomies of scale happen when a company or business grows so large that the costs per unit increase. It takes place when economies of scale no longer function for a firm.

Question 14

define allocative efficiency

Answer 14

Allocative efficiency is achieved when resources go to the production of goods and services that people most want, in the quantities that provide the greatest benefits.
The market is delivering the socially level of output.
It is concerned with where the available productive resources of an economy are used.
It occurs when resources are allocated to the production of the goods and services demanded in the quantities that provide the greatest possible welfare for that society.

Question 15

define dynamic efficiency

Answer 15

Dynamic efficiency: The ability of an economy to respond to changing consumer demands by reallocating resources to new industries and production processes.
Dynamically efficient firms or economies develop new products and productions processes using new ideas and technologies to meet, or even lead changes in, consumer preferences and tastes.
The key to dynamic efficiency is innovation is the ability to put new ideas, inventions or approaches into action, and to commercially exploit them.
Applying these new technologies and ways of organising production reduces production costs and therefore increases productive efficiency.

Question 16

what is market failure? define-
what are the 2 reasons market failure can occur?

Answer 16

Market failure is the inability of the market to determine the use and allocation of resources in a way society most desires, because certain conditions are lacking.
Market failure can occur due to the following reasons;
The market structure
The nature of the good

Question 17

what are market structures:
what influences the behaviour and performance of that market.

Answer 17

The size and market power of firms supplying a product.
The larger the market power, the more potential a firm has to use that power to manipulate the market to maximise profits at the expense of achieving market efficiency.

Question 18

Market structures are classified by different characteristics. define these characteristics:

Answer 18

Number of firms in the market
Firm’s industry market share – what % of the markets buyers does an individual firm have?
Type of products sold – do the firms in the industry sell the exact same product or is the product differentiated.
Barriers to entry – is it easy or hard for a new firm to enter the market due to cost or government regulations
Access to relevant information – do the firms have a good understanding of the market and of their competitors.
Pricing power – the ability of a firm to have the power to control the price of their products.
Market power – the ability of a firm to control and influence the market

Question 19

when else can market failure arise?

Answer 19

Market failure can arise when goods or services are over-provided or under-provided relative to what an efficient market would expect to provide.
This can be due to certain characteristics of the good or service that distinguishes it from most other goods and services.

Question 20

The market failure caused by the nature of the good can be divided into three sub-categories:
what are they??

Answer 20

Public goods
Private goods - Merit and demerit goods
Externalities

Question 21

what are public goods

Answer 21

Public goods are products or services provided by the government for societal use and benefit, usually in response to a market not being able to supply that product at a reasonable cost.
We are provided these goods and services for free as the private market would fail provide the socially efficient quantity as they do not have the rights or the ability to profit from them.
A public good needs to exhibit the following two distinct qualities;
Non-excludability: meaning that people cannot be prevented from consuming the good or service.
Non-rivalry: meaning that consumption of the good or service does not reduce the quantity consumed by other people,
Public goods include goods and services such as national defence, tap water, roads and street lighting.

Question 22

what are private goods?

Answer 22

A product or service provided by the business sector for use and consumption by individual consumers, usually for personal benefit and utility.
There are two types of private goods; merit and demerit.

Question 23

what are merit goods?

Answer 23

A merit good is a good or service that is not produced in sufficient quantities by markets because individuals do not value them enough to pay for them; a private good with positive externalities).
The government can encourage people to consume them by providing them free or at a reduced rate.
Without the government, merit goods can lead to market failure because they are under-produced and under-consumed.
Examples of merit goods include; education, public health, libraries and galleries.
Governments assist their production because they have merit or benefits to third parties.

Question 24

what are demerit good?

Answer 24

Demerit goods are private goods that have negative effects for the public but are over-consumed due to individual incentives.
These include alcoholic beverages, tobacco, junk food and gambling.
Due to the over-consumption of these goods, the government may introduce negative advertising campaigns to educate society on the negative impact of these goods,
The government may also intervene to reduce the demand by imposing a high taxation rate on the demerit goods.
This will lead to high prices of the products, thereby reducing consumption.

Question 25

what are externalities

Answer 25

An externality is a cost or benefit that affects a party who not choose to incur that cost or benefit.
An externality occurs when production or consumption decision affect a third party who did not agree to incur those costs or benefits.
Externalities can be either positive or negative.

Question 26

what are some positive externalities?

Answer 26

The production or consumption of a good or service can indirectly cause positive effects to people who may not be consumers of the good.
A positive externality occurs when the third-party benefits from the activity.
An example of a positive externality is a merit good.
For example; Australia’s public health free child immunisation not only provides future protection against diseases for each child immunised, but it also reduces the chance of major outbreaks of contagious in the community, therefore benefiting people who have never been immunised.

Question 27

what are some negative externalities?

Answer 27

The production or consumption of a good or service can indirectly cause harmful effects to people who may not be consumers of the good.
Negative externalities occur when goods are sold at prices that do not include the full social cost.
The social cost is the total cost to society. It includes the private cost plus the external costs.
An example of a negative externality due to production is air pollution.
Air pollution can cause many environmental and public health problems (respiratory problems).
An example of a negative externality due consumption is a demerit good.
Alcohol can cause health issues, loss of productivity at work, absenteeism, crime and traffic accidents.

Question 28

what are Negative externalities of environmental resources

Answer 28

Negative externalities can also occur due to the inefficient allocation of environmental resources.
These negative externalities include resource depletion, loss of biodiversity, pollution and enhanced climate change.
These resources are commonly owned by the community, rather than privately owned and are titled ‘common property goods.’
Examples of common property goods include; the ocean, atmosphere, wilderness and space.
Due to being owned by the community, they are often overused and degraded as they have not price and so markets do not ration their consumption.
This problem is called the ‘tragedy of the commons.’
An example of the tragedy of the commons is overfishing.

Question 29

Why do we need to modify markets?

Answer 29

The government uses intervention strategies to seek to modify the market in an effort to reduce the chances of market failure and improve positive socially desirable outcomes.
The challenge for government is to deciding whether to live with the consequences of market failure or make a conscious choice to intervene in the market to improve social outcomes.

Question 30

what are some of the most commonly cited solutions to market failure include;

Answer 30

Imposing taxes
Providing subsidies
Changing the legal and regulatory environment

Question 31

Government taxation can modify the marketplace by influencing consumer choices and business behaviour.
how can taxation assist?
three ways-

Answer 31

The imposition of taxes on certain commodities or business practices.
For example; the government will place higher tax on commodities that create negative externalities (alcohol and cigarettes)
Selectively assisting producers of some commodities and restricting others.
For example; the government will provide subsidies via the taxation system on goods and services that provide positive externalities (Solar panels producers), and they will also provide our public goods via the taxation system.
Redistributing income through taxation, social welfare payments and wages policy.

Question 32

what are the two types of tax- explain:

Answer 32

Direct tax: tax that is borne by the person or firm on whom it levied, for example, income tax and company tax.
Direct taxes are long established and relatively acceptable forms of taxation.
They are important tools used by the Government in its efforts to maintain economic stability.
Indirect tax: tax that can be passed on to others by the person or firm on whom it is levied, for example, goods and services tax or customs duty.
Indirect taxes do not ultimately burden the person for whom the tax was levied for.
Wholesalers and retailers (GST) and Importers (Customs duty), pass on part or all of the tax on the consumer in the form of higher prices.

Question 33

how is legislation used to modify-

Answer 33

Through the use of legislation, governments try to remedy what they perceive as failures in the market system to ensure that markets work as efficiently and fairly as possible to benefit all of society.
Legislation is created by governments at all levels, federal, state and local, in an attempt to regulate many markets.

Question 34

Legislation – price controls
Most prices are controlled by supply and demand, unless the government steps in to control the price.
The government will legislate in markets where the good or service is deemed too expensive or too cheap.
Price controls mostly assist people with —— finish the sentence:
what are the 2 types of price controls and define-

Answer 34

Price controls mostly assist people with a lower socioeconomic background.
There are two types of price controls:
Price floor: a price fixed by the government at a higher level than what would be established by the free operation of the market, for example minimum wage legislation.
Price ceiling: a price fixed by the government at a lower level than what would be established by the free operation of the market, for example rent control legislation.

Question 35

Price fixing above market equilibrium – minimum wage
what is purpose of minimum wage legislation?
what is price floor?

Answer 35

The purpose of such legislation is to aid the poorest paid workers in society whose bargaining power with firms is comparatively weaker.
Price floor: a price fixed by the government at a higher level than what would be established by the free operation of the market.

Question 36

what is a price ceiling- describe circumstances leading up to it aswell-

Answer 36

In low socioeconomic areas where there is low residential rental vacancies and high rents, significant social problems will occur for people living in the area.
The government intervenes and modifies the market by imposing rent control in the area so that landlords cannot charge more than a certain amount a week.
The government imposes a price ceiling: a price fixed by the government at a lower level that would be established by the free operation of the market,

Question 37

Tragedy of the common’s solution

Answer 37

To avoid the overuse and degradation of our common property goods (air, water and public land), the government can assign property rights.
Property rights: are legislative measures created by government to administer the ownership, uses and disposal of resources by individuals and firms