Unit 3 AOS 1 - Microeconomics

Question 1

relative scarcity

Answer 1

refers to the economic problem of unlimited wants and needs in relation to limited resources

Question 2

opportunity cost

Answer 2

the cost of the benefit forgone by a decision not to direct resources into the next best alternate use

Question 3

resource allocation

Answer 3

involves making choices or decisions about how scarce natural, labour and capital inputs are to be used or distributed among competing areas of production

Question 4

3 basic economic questions

Answer 4

what and how much to produce, how to produce and for whom to produce

Question 5

allocative efficiency

Answer 5

where resources are used to produce goods and services that best maximise the overall satisfaction of society’s needs and wants, wellbeing or living standards

Question 6

technical efficiency

Answer 6

using the lowest cost production methods, and minimising wastage of resources in making goods and services. At a point in time, any one choice selected by a society on the PPF could represent maximum efficiency where output per unit of input is at its maximum.

Question 7

dynamic efficiency

Answer 7

occurs when resources are reallocated quickly in response to the changing needs and tastes of consumers. Resources are highly mobile and can be reallocated easily between alternative uses when relative prices change.

Question 7

Movement vs Shift

Answer 7

Movement = change in price
Shift = non price factor

Question 8

Market

Answer 8

an institution where buyers of goods and services, and sellers of goods and services, negotiate the price for each good or service.

Question 9

Intertemporal efficiency

Answer 9

a balance between current consumption versus saving income to finance investment and hence increase future consumption. It is often a matter of finding the right balance between satisfying our immediate wants for goods and services, versus those of future generations.

Question 10

Preconditions for a perfectly competitive market

Answer 10

• many buyers and sellers
• strong competition
• homogenous product
• firms are price takers
• equal knowledge of the market
• ease of entry/exit
• no government intervention

Question 11

Income effect

Answer 11

the change in consumption of consumer due to changes in income, the more income people have the more they will buy goods

Question 12

Law of demand

Answer 12

there is an inverse relationship between the quantity demanded and the price due to the income effect (peoples ability to buy) and perceive diminishing utility (peoples willingness to buy), as price increases the quantity demanded decreases

Question 13

Substitution effect

Answer 13

consumers will look to purchase substitutes when the price of a product increases

Question 14

Non price supply factors

Answer 14

• change in cost of production
• change in technology
• change in productivity growth
• change in climatic conditions
• change in government restrictions

Question 14

Non price demand factors

Answer 14

• change in disposable income
• change in tastes and preferences
• change in consumer confidence
• change in demographics
• change in interest rates
• change in government policy
• change in price of complementary good
• change in price of substitute goods

Question 15

Law of supply

Answer 15

the positive relationship between the quantity supplied and the price, supply increasing when price increases because producers want to make a greater relative profit

Question 16

Price elasticity

Answer 16

measures the degree for responsiveness of the quantity demanded or supplied to a given change in price

Question 17

Unit elasticity

Answer 17

change in quantity is proportionate to change in price

Question 18

Elastic demand

Answer 18

change in price has more than proportional effect on quantity

Question 19

Inelastic demand

Answer 19

change in price has less than proportional effect on quantity

Question 20

Relative profits

Answer 20

the profit made in one area of production compared to another

Question 20

Factors affecting price elasticity of supply

Answer 20

storability = easily stored goods will be elastic as they can be sold when the price rises

spare capacity = is elastic because the quantity supplied can be increased following a rise in price

production period = longer is elastic whilst shorter is inelastic

Question 21

Factors affecting price elasticity of demand

Answer 21

necessities = will be inelastic as they are always required so a change in price will not affect demand

unique items = will be inelastic as they cannot be found easily

time = short term will be inelastic but long term will be elastic as there is time to find cheaper replacements

income = the lower proportion of income the more inelastic it will be

Question 22

Relative prices

Answer 22

the price of one good compared to another

Question 23

Types of market failure

Answer 23

1. Abuse of market power 2. Asymmetric information 3. Externalities 4. Provision of public goods by the private sector 5. Misuse of common access resources

Question 23

Market failure

Answer 23

when the price system allocates resources inefficiently which reduce society's overall satisfaction and wellbeing

Question 24

Government failure

Answer 24

when the government intervenes in a market using policies that aim to improve efficiency, but unintentionally lower living standards

Question 25

Abuse of market power

Answer 25

Market power can be restricted by oligopolies or monopolies. Firms may become price makers, and reduce efficiency and purchasing power. The government could: - promote international trade by cutting tariffs - introduce laws to regulate monopolies

Question 26

Asymmetric information

Answer 26

occurs when buyers lack accurate information required to make rational decisions about how to use their resources. An imbalance of knowledge. Government can: - laws about product disclosure - educational campaigns

Question 27

Externalities

Answer 27

costs or benefits that arise from the activity of firms/households that are passed onto third parties not directly involved in the original activity Government can: - introduce laws (carbon tax) - indirect taxes - subsidies

Question 28

Public goods

Answer 28

socially beneficial, merit type goods and services that are no excludable and non rivalrous. Consumers don't pay to use them and one person using it does not prevent another from doing so, eg. a street light. Government can: - provide these goods free of charge in the budget

Question 29

Common access resources

Answer 29

natural resources such as air that are free and non excludable but are rivalrous. Government can: - protect forests/fish through laws