UNIT 3 AOS 1

Question 1

Relative Scarcity

Answer 1

A situation where resources are limited compared to the demands placed upon those resources by our needs and wants

Question 2

Needs

Answer 2

Goods and Services that are considered essential

Question 3

Wants

Answer 3

Goods and Services that we desire and are likely to improve our standard of living

Question 4

Resources

Answer 4

things that are used to produce goods and services

Question 5

Types of Resources

Answer 5

• Natural
• Capital
• Labour
• Entrepreneurship

Question 6

Competitive Markets

Answer 6

is one which forms the basis of a supply and demand analysis

Question 7

Conditions of a Competitive Market

Answer 7

• Large number of buyers and sellers
• Homogenous Products
• Ease of entry and exit
• Buyers and sellers seek to maximise profit

Question 8

Law of Demand

Answer 8

as prices fall - demand increases

as prices rise - demand decreases

Question 9

Law of Supply

Answer 9

Prices rise - supply increases

Prices fall - supply decreases

Question 10

Factors that affect Supply curve

Answer 10

• Cost of Production
• Technological Change
• Productivity Growth
• Climatic Conditions

Question 11

Factors that affect shift in demand

Answer 11

• Preference/Taste
• Interest Rates
• Population
• Consumer Confidence

Question 12

Factors that affect movement in demand curve

Answer 12

• Disposable Income
• Price of Substitutes
• Price of Complements

Question 13

Relative Prices

Answer 13

• Price of any good or service, compared to the price of another
• Send signals to market about what to produce
• Increase in relative prices due to increase in demand tells supplier to use the resources to provide for this good

Question 14

Disposable Income - Demand (Movement)

Answer 14

amount of money and individual has after the payment of direct taxes

Question 15

Price of Substitutes - Demand (Movement)

Answer 15

Price of one item in a market falls relative to another that it can be easily substituted for.

Lower priced items demand will increase relative to the higher priced item

Question 16

Price of Complements - Demand (Movement)

Answer 16

Price of a good or service that must be consumed alongside another rises, demand for original is likely to fall

Question 17

Interest rates - Demand (Shift)

Answer 17

the additional costs associated with repaying a loan
interest rates low - increase in demand
interest rates high - decrease in demand

Question 18

Consumer Confidence - Demand (Shift)

Answer 18

degree of optimism consumers have regarding their future income, employment and overall economic situation

Increase consumer confidence - increase in demand
Decrease consumer confidence - decrease in demand

Question 19

Cost of Production - Supply

Answer 19

Costs associated with accessing the goods required to produce goods

Increase in cost - Decrease in Supply
Decrease in cost - Increase in Supply

Question 20

Climatic Conditions - Supply

Answer 20

way in which incidences such as floods and fires may create a more or less favourable condition to produce

Question 21

Types of efficiency

Answer 21

Allocative
Productive
Dynamic
Inter-temporal

Question 22

Allocative Efficiency

Answer 22

resources are allocated that the goods and services produced achieve maximum satisfaction

Question 23

Productive Efficiency

Answer 23

producing maximum amount of goods and services from the minimum amount of resources

Question 24

Dynamic Efficiency

Answer 24

move to a allocatively efficient point following changes to supply and/or demand

Question 25

Intertemporal Efficiency

Answer 25

balance between resources used for current and future needs

Question 26

Market Failure

Answer 26

Market hasn't achieved allocative efficiency as their has been an under allocation or over allocation of resources

Question 27

Reasons for Market Failure

Answer 27

Public Goods Asymmetric Information Externalities Common access goods

Question 28

Public Goods

Answer 28

Public goods are provided by the government for the benefit of everyone It creates the free rider problem – payment is difficult to extract from those who benefit from it. If operating in a free market – an under allocation of resources The government typically intervenes in these markets to ensure that adequate resources are allocated The government will pay for these public goods using revenue raised from a range of sources including taxes.

Question 29

Externalities

Answer 29

the costs or benefits for third parties that arise when goods and services are produced or consumed. Can be positive externalities or negative externalities. Buyers and sellers ignore impact of externalities when making decisions - resource allocation becomes inefficient.

Question 30

How can government intervene in Externalities

Answer 30

regulations and laws (CleanEnergyAct) •Indirect taxes (excise tax on tobacco, CarbonTax) • Providing subsidies (incentives for solar panels) • Education and advertising to inform the public (anti-smoking ads)

Question 31

Asymmetric Information

Answer 31

where buyers or sellers lack the information required to make decisions about how to use their resources. one party knows more than the other about the product and this can lead to inefficient outcomes. The Government can again use legislation such as labeling of ingredients on foods.

Question 32

Common Access Resources

Answer 32

Natural resources that are usually not owned by anyone. Generally can be accessed by all members of the community and used without payment. Non-excludability - means that it is difficult or impossible to exclude individuals from using the resource. Rivalrous - means that one person’s use of a resource reduces or prevents another person’s use of it.

Question 33

Government Failure

Answer 33

government intervened in a market resulting in a more inefficient allocation of resources (market failure) and worse living standards.

Question 34

Price Ceilings

Answer 34

- Goods/services can't be sold above a certain prices. - The intention may be to make items affordable for low income earners (perhaps affordable rent for example) - However, they often create a shortage and black markets operate.

Question 35

Price Floors

Answer 35

- are prices cannot go below a certain level - The intention would be to protect the income of those selling the products (for example, minimum wages in the labour market) - However, they often result in ongoing surpluses

Question 36

Price Elasticity of Demand

Answer 36

change in demand relative to the change in price. - High PED (elastic) – demand greater than change in price * Low PED (inelastic) – demand will be lower than the change in price * Medium PED (unit-elasticity) – demand is equal to the change in price

Question 37

Factors Affecting PED

Answer 37

Degree of necessity Availability of substitutes Proportion of income Time

Question 38

Price Elasticity of Supply

Answer 38

change in supply relative to the change in price. - High PES (elastic) – Percentage change in qty will be greater than the percentage change in price - Low PES (inelastic) – Percentage change in qty will be lower than the percentage change in price •- Medium PES (unit elasticity) – Percentage change in qty will be equal to the percentage change in price

Question 39

Factors affecting PES

Answer 39

Production period Spare capacity Durability of goods

Question 40

Effects of changes in supply and demand on equilibrium prices and quantity traded

Answer 40

Increase demand - shift demand curve right - expansion along the supply curve - new equilibrium at higher prices and quantity Decrease demand - shift demand curve left - contraction along the supply curve - equilibrium at lower prices and quantity Increased supply - shift supply curve right - expansion along demand curve - equilibrium at lower prices and higher quantity Decrease supply - shift supply curve left - contraction along the demand curve - equilibrium at higher prices and lower quantity