U3 AOS 1 MICROECONOMICS 1/3 Flashcards
(24 cards)
define economics
allocation of resources. wants and needs are limited while society desires are unlimited.
define production
transforms inputs into outputs by firms to earn profit / meet objective
Concept of relative scarcity
needs and wants are unlimited whilst resources are limited. we can only produce a limited amount of goods and services at any point in time
define needs
essential products for survival e.g food, water, shelter
define wants
non-essential products a person can live without but would improve quality of life e.g books, fast food
All resources (factors of production)
labor - human resource
land - natural resource
capital - manufactured resource
define opportunity cost
value that is forgone or benefits sacrificed once resources is used a certain way
define production possibility fronter
visual representation of opportunity cost
Three basic economic questions
what to produce
how to produce
whom to produce
What to Produce as a question
Australia = market capitalist economy
Determined by which g/s is high in demand as they generate most profit
business allocates resource in that good and increasing price.
signals suppliers for potential profit, thus through opportunity cost, suppliers allocate scarce resource to produce products with more potential profit
How to produce as question
Producers will produce g/s in a way that minimizes cost whilst selling product at highest price possible.
This increases efficiency in product process for higher quality and lower cost, thus offering higher quality products at cheaper prices without loss of profit
Whom to produce as question
Determined by potential consumers ability to pay.
Resources are allocated to production of high demanded products however some consumers will have greater accessibility to g/s than others.
Resources may be allocated towards material needs of high income earners as they can afford more g/s.
Define economic efficiency
use of resources in the best way possible to maximize satisfaction & societal wellbeing. Ensuring scarce resources aren’t wasted and meeting society needs effectively.
Allocative efficiency
when most efficient allocation of resources maximizes needs & wants of society.
- minimizes cost of production and provides highest level of satisfaction for customers
- only 1 point on the PPF curve can be deemed allocative efficient
Technical efficiency
when productivity is at maximum & average costs are at minimum.
- can occur when workers produce more out per hour
- Curve itself on PPF graph are all technically efficient
Dynamic efficiency
how quickly economy can reallocate resources to achieve allocative efficiency.
- as trend changes, there is a time lag before resources are able to be relocated to best meet the need & want of society.
- Shown in a PPF of how quickly 1 point of allocative efficiency moves to another point of allocative efficiently to meet demands of society.
Inter-temporal efficiency :
optimal allocation of resources between present and future. Balances immediate consumption with future needs, ensuring resources aren’t depleted too quickly.
define Microeconomics
looks into behavior of individual businesses & consumer within a set market
define MACROECNOMICS
looks into behavior of whole nation. A more generalized approach to explain how one factor may influence entire country.
Characteristics of perfectly competitive market
- many buyers and sellers. no one can influence the market & therefore individuals are price takers
- products are homogenous - meaning products are virtually the same therefore consumers are usually price driven
- competitors can easily enter & leave market. can enter when profits are high and leave to pursue other profitable ventures
- perfect information - both buyers and sellers know what is going on to make informed decisions
- both buyers and sellers aim to maximize own wellbeing. buyers maximizes utility while sellers maximize profits
impact of perfect competition on allocative efficiency
producers seek to maximize profits / consumers seek to maximize utility at lowest possible price
as consumer demand rises and exceeds available supplies, producers increase price
increased price provides incentive for producers to increase output and capitalize on greater profits
due to ease of entry, businesses will enter market and increase overall availability of products to obtain profits
allocative efficiency is thus achieved as perfect competition allows for the right combination of products to be made for society as a whole
impact of perfect competition on technical efficiency
products are homogenous therefore rather than uniqueness of a product, consumers favor lower prices. Thus if a seller intends to increase market share, they would strive to sell products cheaper than its competitors whilst making profit. This is attainable only through increased production efficiency where there is increased outputs and decreased inputs, reducing overall expense per unit. Therefore perfect competition capsulates producers in a encouraging environment where they strive to maximize efficiency to increase market share and ultimately profits.
impact of perfect competition on dynamic efficiency
resources are mobile within a perfect competition market, easily entering and exiting markets. Therefore change in relative prices causes producers to shift production to profitable products. As result, dynamic efficiency is achieved within perfectly competitive market as its easy to move around.
impact of perfect competition on inter-temporal efficiency
consumers must find balance between needs/wants today and needs/wants tomorrow
consumer sovereignty determines how consumers allocate resource to maximize profits and consumer satisfaction
consumers in a perfectly competitive market are after cheaper prices thus hard for businesses to cut costs whilst remaining profitable and without negative impact to environment doing so
