U3 AOS 1 MICROECONOMICS 2/3

Question 1

relative prices

Answer 1

price of one g/s in comparison to another

Question 2

Relative price on consumer choices

Answer 2

relative prices guide consumer choices by indicating costs of two similar goods. e.g. relative price of beef increases to chicken = consumers are likely to purchase chicken as the cheaper good, thereby shifting demand. Directs resource to the production of chicken that is now in higher demand.

Question 3

Relative prices on producer decisions

Answer 3

relative prices determines most profitable g/s to produce. As relative price of one good increases, producers are incentivized to allocate more resources toward price increased goods for greater returns. Conversely, if a g/s relative price falls, producers may reduce output of that good to another g/s.

Question 4

Market efficiency

Answer 4

relative prices help achieve allocative efficiency. Relative price change = resources allocated to g/s most desired b consumers = maximizing society’s welfare allowing for efficient distribution of resources as producers respond to price signals and direct resources towards goods with highest demand.

Question 5

Resource allocation

Answer 5

As relative price changes from shifts in supply and demand, resources are allocated across different sectors. Resources must be flexible and responsive to changes in market conditions. Relative prices reflect opportunity cost of using resources one way or another, providing necessary information for reallocation.

Question 6

Long-term effects

Answer 6

Relative-price directs where future investments should be made. If a g/s continues to possess high relative price, firms may increase production efficiency to supply more of g/s, thus balancing demand and supply over time. This contributes to dynamic efficiency by encouraging innovation / adaption.

Question 7

ROLE OF FREE AND COMPETITIVE MARKETS IN PROMOTING EFFICIENT ALLOCATION OF RESOURCES AND IMPROVING LIVING STANDARDS

Answer 7

Relative prices guides resource allocation. price acts as a signal reflecting consumer preferences, production costs and availability of good. as price shift in response to supply and demand, direct producers direct resources that maximize efficiency.

In a free market where competition, relative prices help prevent monopolies / inefficiencies by encouraging business to innovate and respond quickly to changing market conditions. Competitive markets allow dynamic reallocation of resources, ensuring supply meets demands and that goods are produced at lowest cost possible. Relative prices allow consumers to benefit from more choice / lower prices whilst producers are incentivized to improve productivity and offer better value.

Question 8

DEFINE LIVING STANDARDS

Answer 8

ability of individuals to access g/s
- assesses impact of economic events based on average human

Question 9

Non-material living standards (intangible

Answer 9

quality-of-life-aspects not directly related to monetary or material wealth but subjective well-being and societal conditions contributing to person overall happiness and life satisfaction.

e.g environmental quality, physical / mental health, life expectancy

Question 10

measuring mls

Answer 10

• real GDP
• real GDP per capita

Question 11

define market failure

Answer 11

Market failure : refers to a situation where allocation of g/s by a free market is inefficient leading to net loss in social welfare. This occurs when market fails to maximize overall economic well-being.

Question 12

types of market failures

Answer 12

• public goods
• externalities
• asymmetric information
• common access resources
• government failure

Question 13

Public goods as market failure

Answer 13

goods that are socially desirable or beneficial and important for public use.

• products are costly and cannot be sold cheap for everyone to afford. leading to low profit margins. may only be provided to rich people e.g. private education / health.
• non-rivalrous meaning one person consumption doesn’t reduce amount available for someone else
• e.g. light house, police force, street lights

Question 14

how does governments fix public goods as market failure

Answer 14

Fixed by direct provision - government provides as its best interest in society

Government subsidies - government provides direct cash payments to reduce cost of production as there’s little profit made

Question 15

Externalities as market failure

Answer 15

indirect cost or benefit to uninvolved third party as effect of business activities.

Buyers / sellers don’t consider externalities when consuming / producing = inefficiencies

e.g air pollution, noise pollution

Question 16

examples of positive externalities

Answer 16

positive externalities e.g business offering training to improve output level per person, firm undertaking research and development improving technology

Question 17

Asymmetric information as market failure

Answer 17

when one party has more information than the other. which can lead to altered behavior thus below value prices thus inefficient allocation of resources.

Question 18

define adverse selection

Answer 18

where economic outcome does not maximize wellbeing for at least one of the parties.

Question 19

Asymmetric information effects on moral hazards and inefficiency

Answer 19

• Moral hazards are a situation where a person adjusts their behavior to one that is less efficient or favorable from society’s point of view.
• If you know you have car insurance you may be more reckless on the road. As a result there are a large allocation of resources used to repair vehicles than being used to provide more meaningful economic benefits to society because you were careless.
• If you buy health insurance you may be paying extra for services you actually don’t need. As a result your opportunity cost is the extra products you could have bought to maximize your wellbeing.

Question 20

Government Regulation to Asymmetric information

Answer 20

Government regulation - ACCC (Australian Competition and
Consumer Commission) makes it illegal for firms to engage in conducts
that misleads or deceives consumers or other businesses.

Question 21

Common access resources as market failure:

Answer 21

Common access resources do not have a market place. As a result they are available for everyone and no payment is required for its use.Overconsumption of common access resources causes environmental problems e.g unsustainable resources.

Question 22

Common Access
Resources causes conflict
between economic goals
and environmental goals.

Answer 22

• EG new technology makes it more efficient to extract fish from the oceans per hour. As a result, there is a shift in the supply curve to the right and prices drop causing greater purchasing power for current generations. But as a result, fish stock are depleting much faster than before and will reduce the living standards of future generations.

Question 23

Examples of government intervention through
regulations

Answer 23

- employ hunting laws who can hunt

• reduce consumption of common access resources
• non-excludable
• non-rivalous similar to public goods

e.g fish in ocean or rivers / clean air

Question 24

define government failure

Answer 24

occurs when government intervention in the economy leads to inefficiencies or worsens the situation.

• generally occurs when government has no reason to intervene

Question 25

Price ceilings

Answer 25

maximum price set by the government that sellers cannot exceed. For example, rent control is a common price ceiling. - **Effects**: - **Shortages**: When the price is kept below the market equilibrium, demand exceeds supply, leading to shortages. - **Reduced Quality**: Producers may reduce the quality of goods or services due to lower prices. - **Black Markets**: Shortages can lead to the emergence of illegal markets where goods are sold at higher prices.

Question 26

Price Floor

Answer 26

- minimum price set by the government that sellers cannot go below. A common example is the minimum wage. - **Effects**: - **Surpluses**: When the price is set above the equilibrium, supply exceeds demand, leading to surpluses. - **Unemployment**: In labor markets, a minimum wage can lead to higher unemployment if employers cannot afford to hire as many workers. - **Inefficiencies**: Resources may be misallocated as producers continue to supply goods that are not in demand at the higher price.