Unit 3 AOS1 - Chapter 1: Microeconomics Flashcards
(121 cards)
1
Q
What are material living standards?
A
These refer to the economic wellbeing via per capita consumption of goods and services as well as incomes per year.
2
Q
What are non-material living standards?
A
These refer to quality of life and tend to be more subjective. It can be affected by the amount of leisure time, happiness, life expectancy, crime rates and the quality of the natural environment.
3
Q
What is the relationship between material and non-material living standards?
A
Material and non-materiel living standards affect each other because one can cause the other to not be as prominent.
For example increasing material living standards by growing Australia’s national production each year may not just impact on the ability of future generations to lift their output levels (because we use too many scarce resources), but it may also affect our short- and long-term non-material living standards.
4
Q
What is economics?
A
Economics examines how limited resources are used to produce goods and services to satisfy needs and wants as well as improve living standards.
5
Q
What is microeconomics?
A
This is a branch of economics that examines individual decision making by firms and households, and how this impacts on particular markets for goods or services.
6
Q
What is macroeconomics?
A
Macroeconomics is a branch of economics that examines the workings and problems of the economy as a whole.
7
Q
What do some of our needs and wants come from?
A
A fundamental assumption in economics is that people’s needs and, especially, wants for goods and services are virtually infinite or unlimited. Needs and wants originate in different parts of the economy:
. The needs and wants of individuals and households for consumer goods and services
. The needs and wants of private businesses
. The needs and wants of governments
. The needs and wants of the overseas sector
8
Q
Explain the needs and wants of individuals and households for consumer goods and services.
A
. Australian households need essential consumer goods and services eg. food, housing, clothing, education and health services.
. We also have wants for less essential consumer items that help make life more enjoyable eg. iPads, magazines or ice-cream.
. Satisfying even some of these needs and wants generally takes money.
. Many factors influence the spending decisions made by consumers, including:
- their level of income after tax
- how optimistic they are about the future
- fashions and advertising
- and their desire to maximise the satisfaction gained from the choices they make.
9
Q
Explain the needs and wants of private businesses.
A
. Australian firms need to purchase various resources to make finished goods and services. Eg. they must buy producer goods like capital equipment, raw and processed materials including oil and petrol, hire employees and pay for finance or credit for expanding the business.
. In making their spending decisions, firms will be affected by their production costs, profitability, market share and changes in consumer tastes.
10
Q
Explain the needs and wants of governments.
A
. In Australia, federal, state and local governments also have needs and wants. They must have:
- capital equipment (such as kindergartens, power generators and roads)
- land
- finished consumer goods (for example, stationery)
- and the services of staff (such as economists, doctors, teachers and defence personnel).
. The purpose of purchasing all these things is to make it possible for the public sector to produce certain goods and services that will help to satisfy society’s needs and wants (that are not met fully by the private sector).
. Ultimately, this should help to raise general living standards.
11
Q
Explain the needs and wants of the overseas sector.
A
. Foreign governments, firms and households living overseas purchase Australian-made goods and services to help satisfy their particular needs and wants.
. They buy our exports of wool, wheat, minerals, tourism, education and manufactured items.
. Their decisions may be influenced by factors such as how many and what sort of resources they have, or by production costs.
. Offsetting these exports are Australia’s needs for imports for goods and services such as oil, electronics, machinery and travel.
.We import goods and services because we are not self-sufficient.
12
Q
How can the problem of unlimited wants be made even more severe?
A
. Many needs and wants recur; for example, the need for food, petrol for the car.
. Our expectations of material things tend to grow since the more we have, the more we want.
. Population growth adds to the number of wants.
. Advertising, fashion and planned obsolescence, such as the toaster that is designed to last for only two years, contribute to our growing wants.
. The widespread acceptance of materialism as a personal goal (ownership of more possessions), along with growing affluence, contribute to the escalation of society’s wants.
13
Q
How do limited resources restrict national production?
A
It means that Australia’s capacity to produce is severely restricted and therefore our ability to satisfy the unlimited needs and wants of society is severely restricted.
14
Q
What are resources?
A
Resources are productive inputs (or factors of production) and include natural, labour and capital used by businesses to make goods and services.
15
Q
What are natural resources?
A
Natural resources are the gifts of nature, such as arable land, oil, minerals, rivers, climate, forests, air quality and oceans. Natural resources have the potential to support a variety of primary (extractive), secondary (manufacturing) and even tertiary (service) industries.
16
Q
What are labour resources?
A
Labour resources used in production are physical power and mental talents provided by employees.
17
Q
What are capital resources?
A
Capital resources are manufactured items often involving physical plant and equipment (such as machinery, factories, power generators, computer systems, trucks, dams, railways, and roads) used by businesses and governments to help make other goods and services.
18
Q
What is relative scarcity?
A
Relative scarcity is also known as the basic economic problem and describes when a nations wants are virtually unlimited, but there are not enough resources in comparison to satisfy these wants. The relative price of a good or service is normally a rough guide to the level or degree of relative scarcity.
Moreover, relative scarcity means that only the most important material wants of households, firms and governments can be satisfied. Other less important priorities that provide less satisfaction or pleasure must normally be abandoned.
19
Q
Why is there a need for choices?
A
There is a need for choice because we must decide how to use our limited resources as efficiently as possible because we cannot have all the goods and services that we want. Given that we cannot have all things in unlimited quantities, individuals and nations are forced to make difficult choices between alternative or competing areas of production. This raises the problem of opportunity cost.
20
Q
Explain opportunity cost. And resource allocation
A
Opportunity cost refers to the benefit forgone when a choice is made to not direct resources towards the next best alternative use. It arises as a result of unlimited needs and wants, but limited resources. Therefore, decisions must be made to determine how resources should be allocated. It is important to analyse which decision is most beneficial. It can exist for individuals as well as governments.
21
Q
How does opportunity cost exist for individuals?
A
Opportunity cost for individuals involves taking into consideration things like time, money and overall benefit. For example, choosing to pursue tertiary education does open up a lot of job opportunities, however you could be spending that time with a full-time job so you can earn money.
22
Q
How does opportunity cost exist for nations and governments?
A
For example in 2013–14, the Australian government planned to spend around $22 billion on defence.
. while there were benefits to this decision and some of society’s wants could be satisfied
. these scarce resources could have been reallocated (It is likely that welfare, childcare, health and industry assistance all suffered cutbacks because of this decision).
Environmental opportunity costs exists as a result of various economic activities in Australia, such as:
. using coal to generate power
. packaging
. aspects of the timber industry
. a transport system dependent on the private motor car
. water use and irrigation-based crops in deserts
. and aviation as well as tourism.
These activities accelerate global warming and serious climate change.
23
Q
What is the production possibility diagram?
A
The production possibility diagrams illustrates the production choices available to society in the ways resources may be used or allocated. This diagram shows the production combinations that, theoretically, are possible for a nation when all available resources are used efficiently.
24
Q
Extra production possibility diagram.
A
Between the two production combinations there can be many other choices or possibilities available that help to make up the production possibility frontier. This shows the physical limits to a nation’s production when all the available resources are used efficiently. Unfortunately, however, all these choices involve an opportunity cost.
If a nation decides to only produce services then the benefit of producing goods is forgone and vice versa. It is not possible for the nation to produce maximum quantities of both goods and services at the same time.
25
What is the production possibility frontier?
The production possibility frontier illustrates the physical limits to a nation’s production levels (its productive capacity) due to the quantity and efficiency of productive resources available to that country.
26
What are living standards?
Living standards refer to how well off a nation is overall at a point in time. Living standards can be split into material and non-material living standards.
27
Production possibility diagram: Showing an efficient allocation of resources that maximise living standards.
The choice that minimises the opportunity cost so that total production, satisfaction and material living standards are maximised is a point usually towards the middle of the production possibility frontier.
Eg. This is where the total potential value of national output of both services (9.4 billion units) plus goods (1.0 billion units) would equal a total volume of production of 10.4 billion units, which is the highest possible production of both at the same time.
This choice would maximise national output and income, as well as the satisfaction of society’s wants and economic wellbeing, since no other possible allocation of resources can match this output
28
What is an efficient allocation of resources and an inefficient allocation of resources?
An efficient allocation of resources occurs when productive inputs are used to produce particular types of goods and services that best maximise the general satisfaction of society’s needs and wants, wellbeing and living standards.
An inefficient allocation of resources is one where the satisfaction of society’s wants could be increased simply by changing the way resources are used or the types of goods and services that are produced.
29
Production possibility diagram: Showing choices that result in unemployment.
. Another inappropriate and wasteful decision would be the choice of a point somewhere inside the production possibility frontier.
. This decision would mean that the combined production levels of both goods and services (GDP) would be too low to ensure that all resources are fully employed.
. There would be unemployment of labour and other inputs, and material living standards would be reduced.
30
Production possibility diagram: Increasing the nations productive capacity and living standards.
Points outside the production possibility frontier cannot be obtained currently because of the lack of resources available. This limits economic or productive activity. However, if there was an increase in the quantity (volume) and quality (efficiency) of productive resources available, the whole production possibility frontier could grow and shift outwards. The nation’s productive capacity would then become greater.
31
What is Australia's economic system?
A contemporary market capitalist economy.
32
What is an economy or economic system?
An economy or economic system is a way of organising the production and distribution of the nation’s goods, services and incomes. There are various types of economic systems, but Australia has adopted a contemporary market capitalist economy.
33
What is a market capitalist economy?
This involves the market or price system making key decisions about what to produce, how to produce and for whom to produce, with private ownership of most resources.
34
What are the three important economic questions?
1. What and how much to produce?
2. How to produce?
3. For whom to produce?
35
Explain the following important economic question: What and how much to produce?
This looks at the type and quantity of particular goods and services to be produced. This is determined by looking at consumer demand.
36
Explain the following important economic question: How to produce?
This involves selecting a method of production for making a good or service. Businesses will attempt to minimise costs in order to maximise profits. They may also take consumers views into account (ethical labour).
37
Explain the following important economic question: For whom to produce?
This refers to how income from production and sale of goods an services should be shared. For example, income could be divided between individuals fairly evenly or relatively unevenly.
38
What are the approaches to decision making in the Australian economy?
The market (also called the price system, market forces or market mechanism).
39
What is market failure?
Market failure occurs when the price system allocates resources inefficiently, reducing the overall satisfaction of society’s wants, wellbeing and living standards.
40
What are the influences on Australia's resource allocation?
. Market forces, consumer-based allocation of resources 80%
. Government-based allocation 20%
Other influences on Australia's allocation of resources:
. Financial institutions e.g. banks, stock market, building societies
. Powerful business monopolies and oligopolies
. Unions and labour organisations e.g. ACTU, AMWSU, AMA, AWF
. Advertising agencies shaping fashions and tastes
. Opposition political parties
. Traditions, customs and beliefs
. Journalists and the media shape our behaviour
. Pressure groups — e.g. RSL, consumer protection groups, Australian Conservation Foundation
41
What is a central feature of microeconomics?
The study of how particular markets operate to answer the three economic questions facing an economy.
42
What does Australia's market economy predominately rely on?
The operation of the free market or price system to answer the three economic questions.
43
What is a market?
```
A market is an institution where buyers and sellers negotiate the price for a particular good or service. In our economy, there are lots of different types of markets including the:
. labour market
. capital or financial markets
. foreign exchange market
. property market
. stock market
. fruit market
. fish market
. iron ore market
. aviation market
. and wool market.
```
44
How does the market or price system work? Read pages 13-17
The price system (also known as the market mechanism) is heavily relied upon to make key economic decisions about production and how resources are allocated between competing uses. Australia has a capitalist system involving private enterprise that is largely driven by a desire to maximise profits. Here, profit-seeking owners of resources look to the market for price signals or instructions that will tell them how resources should be allocated to best satisfy consumer wants and maximise business profits and incomes. Here, profits often drive decisions.
45
What are relative profits?
The term relative profits means the level or rate of profit gained from producing one type of good or service, relative to that gained from producing an alternative good or service.
46
What are relative prices?
The term relative prices simply means the price level of one good (such as wheat) or service compared with or relative to the price level of another good (such as wool) or service. Changes in relative prices (price signals) affect the relative profitability of different types of goods and services and hence dictate how scarce resources are used or allocated.
47
When do markets operate best?
Markets operate best or most efficiently when they are free or purely competitive.
48
What is a market structure?
Market structure refers to the type and level of competition that exists in various markets, such as monopoly or pure competition. It relates to how much market power or control a particular firm has in affecting the level of market prices.
49
What are the different market structures?
. Pure competition
. Monopolistic competition
. Oligopoly
. Pure monopoly
50
Explain the following market structure: Pure Competition
This exists when:
. there are many buyers
. there are many sellers competing strongly in an industry
. firms are price takers
. potential competitors can easily enter and exit the market
. there is perfect knowledge of relevant conditions in the market by buyers and sellers to allow them to make rational decisions
. and there is no product differentiation (no advertising or identical products)
(Does not exist - theoretical)
51
Explain the following market structure: Monopolistic Competition
This exists when:
. there are many sellers in an industry
. some product differentiation
. moderate ease of entry and exit
52
Explain the following market structure: Oligopoly
This exists when a few large firms control the output of a product for which there is no close substitute.
. there are few sellers in the industry
. there is some product differentiation (advertisements and branding)
. it is fairly difficult to enter and exit the market
53
Explain the following market structure: Pure Monopoly
This exists when a large firm controls the output of a particular market. That firm is a price maker and competition is weak
. one seller in the industry
. weak competition
. product differentiation is unimportant (no other choice)
54
What are the benefits of weak competition?
Sometimes, large-scale operations can deliver better per unit cost reduc- tions and lower prices, and undertake more innovative research and development, than small-sized businesses.
55
What are problems with weak competition?
. Higher prices
. Poor quality and service
. Reduced efficiency and economic growth
. Reduced international competitiveness
56
Explain the following problem with weak competition: Higher prices
Prices of goods and services are often relatively higher, leading to faster inflation rates, in markets where there are oligopolies and monopolies. Here competition is weaker and market power is concentrated (for example, Australian super- markets, banking, petroleum, some services).
57
Explain the following problem with weak competition: Poor quality snd service
Degraded competition between firms often reduces the quality of the goods and services we pur- chase, along with the level of customer service and satisfaction.
58
Explain the following problem with weak competition: Reduced efficiency and economic growth
In markets where competition is weak, there is less rivalry between firms and perhaps less need to cut costs or use resources efficiently to survive. This slows down the rate of economic progress and living standards.
59
Explain the following problem with weak competition: Reduced international competitiveness
The absence of strong competition can reduce our international competitiveness and ability to export, because business and worker efficiency tends to be lower, and costs higher.
60
What are the benefits of strong competition?
It often helps to keep prices low, quality up and efficiency high.
61
What are the problems with strong competition?
Aggressive cost cutting by rival profit-hungry firms struggling to survive (for example, aviation, manufacturing and food production) may in the short term actually reduce public safety, product durability, quality assurance and customer satisfaction.
62
What preconditions as well as strong competition between sellers push markets to make the best decisions?
. Consumer sovereignty exists
. There are identical products
. There is ease of entry
. Owners of resources want to maximise profits or incomes
. There is good knowledge of current market trends
63
Explain the following precondition which encourages markets to make the best decisions: Consumer sovereignty exists
This means that consumers of goods and services )not governments) dictate how resources will be used. Unconsciously, consumers decide how most of Australia’s resources are allocated (nowadays about 80 per cent) through the goods and services they choose to buy and by those they reject. This affects relative prices and hence relative profits in different areas of production.
64
Explain the following precondition which encourages markets to make the best decisions: There are identical products
In a purely competitive market, it is assumed that identical products are sold that are not differentiated using advertising, design or brand names. This is hard for us to imagine but sections of primary industry, such as grains and minerals, perhaps come closest to the mark.
65
Explain the following precondition which encourages markets to make the best decisions: There is ease of entry
In a purely competitive market, there should be ease of entry by new firms wishing to start up, and an ability for existing firms to exit or leave the market if they want to change the things they produce.
66
Explain the following precondition which encourages markets to make the best decisions: Owners of resources want to maximise their profits or incomes
It is assumed that in a purely competitive market, owners of resources want to maximise their profits or incomes. They do this by minimising production costs, producing things that are wanted by consumers, and selling these at the highest possible price.
67
Explain the following precondition which encourages markets to make the best decisions: There is good knowledge of current market trends
Since buyers and sellers are guided by changing prices, a market system can operate effectively only when buyers and sellers are well informed and have a good knowledge of current market trends. In addition, buyers must have reliable and complete information to enable them to make rational and effective decisions about how resources should be used.
68
What is used to show the working of the price or market system for a particular product?
Demand-supply diagrams.
69
What are demand-supply diagrams?
It illustrates the behaviour of buyers and sellers of a particular good or service in the market, and how prices are determined.
The demand line represents the behaviour of the buyers, the supply line represents the reactions of sellers and the market price is the agreement struck between these two groups.
70
The behaviour of buyers in a market - the demand line.
. Price is one of the most important factors affecting the way buyers or demanders behave. It has been observed that a rise in price usually results in a contraction in the quantity of particular goods or services demanded, because there are fewer buyers with the necessary money.
. However, a fall in price causes an expansion in demand, since the item becomes more affordable for more people.
. This inverse relationship between the quantity demanded and the price of a good or service is known as the law of demand.
71
What is demand?
Demand refers to the quantity of a good or service that consumers are willing to purchase at a given price. This can be shown by a demand line.
⬇️ price = ⬆️ demand (consumers can stretch their disposable income more)
72
What is price?
Price is one of the most important factors affecting the way buyers or demanders behave. Price is the purchase cost or amount paid in exchange for the supply of goods and services.
⬆️price = ⬇️ demand (as there are fewer buyers with the necessary money)
73
Price elasticity of demand.
The elasticity of demand relates to responsiveness of the quantity demanded, relative to the change in price. For instance, given a rise in price, elasticity here relates to whether the demand contracts by a lot or a little, as reflected by the steepness of the demand line.
74
What is elasticity?
Elasticity measures the responsiveness of the demand for, or supply of a product that is relatively responsive to changes in its price. There are three different degrees of elasticity for both demand and supply.
75
What are the different degrees of demand elasticity?
. Demand is relatively elastic
. Demand is of unit elasticity
. Demand is relatively inelastic
76
Explain the following degree of demand eleasticity: Demand is relatively elastic
This is when the change in the quantity demanded is proportionally greater than a change in price.
(Demand line is almost horizontal)
77
Explain the following degree of demand elasticity: Demand is of unit elasticity
This is when the change in the quantity demanded is proportionally equal to a change in price.
(Demand line is diagonal)
78
Explain the following degree of demand elasticity: Demand is relatively inelastic
This is when a change in the quantity demanded is proportionally smaller than a change in price.
(Demand line is almost vertical)
79
What things help determine the elasticity of demand?
. Type of item - necessitates (eg. basic foods and medical attention) are relatively inelastic whilst luxuries (eg. luxury cars and holidays) are relatively elastic.
. Substitutability - when there are many substitutes an item is elastic (eg. wool and synthetics, butter and margarine, Australian wheat versus overseas wheat, different breakfast cereals) while unique products or products with few substitutes (such as petrol for most car owners, eggs) are quite inelastic.
. Time Period - in the long term, the demand for most things tends to be more elastic (consumers can shop around and find alternatives or substitutes) than in the short term when demand is more inelastic (consumers take it or leave it).
. Cost and Relative Importance - expensive things representing a high proportion of household spending tend to have a more elastic demand (eg. cars), while cheaper items representing a lower percentage of our spending have a more inelastic demand (eg. matches).
. Minor Compliments - items that 'go with' a bigger purchase tend to be inelastic (eg. pool cleaning chemicals) because after the big purchase of a pool people will want to maintain it, even if the price goes up a fair bit.
80
The behaviour of sellers in a market - the supply line.
. While price is also of great importance to suppliers, the behaviour of sellers is opposite to that of buyers.
. As prices rise, suppliers expand the quantity they are prepared to make available. This is because a higher price normally makes the production of that particular good or service more profitable, justifying reallocating resources away from other uses so that output can be increased.
. By comparison, a drop in price causes a contraction in the quantity supplied because of declining relative profitability for this particular item.
81
What is supply?
Supply refers to the quantity of a particular good or service that sellers are willing to make available at a given price. This can be shown by a supply line.
82
What is the law of demand?
The law of demand states that the quantity of a good or service demanded varies inversely to price.
83
What is the law of supply?
The law of supply states that the quantity of a good or service supplied varies directly with price.
84
Price elasticity of supply.
The elasticity of supply relates to the responsiveness of the quantity supplied, relative to the change in price. The extent to which the quantity supplied responds when the price changes, is reflected in the elasticity of supply. Again, elasticity reflects the steepness of the supply line.
85
What are the different degrees of supply elasticity?
1. Supply is relatively elastic
2. Supply is of unit elasticity
3. Supply is relatively inelastic
86
Explain the following degree of supply elasticity: Supply is relatively elastic
This is when a change in the quantity supplied is proportionally greater than the change in price.
(Supply line is almost horizontal)
87
Explain the following degree of supply elasticity: Supply is of unit elasticity
This is when a change in the quantity supplied is proportionally equal to a change in price.
(Supply line is diagonal)
88
Explain the following degree of supply elasticity: Supply is relatively inelastic
This is when a change in the quantity supplied is proportionally less than the change in price.
(Supply line is almost vertical)
89
What affects the elasticity of supply?
. Storability - items which are able to be stored without deteriorating tend to be more elastic (eg. wheat, wool and wine). Whilst items which cannot be stored well (eg. services and fresh fruit) tend to be more inelastic.
. Resource Mobility and Unused Industry Capacity - when production levels can be readily and inexpensively changed by moving resources between industries then the quantity of an item supplied is likely to be more elastic. Supply is especially elastic when there is unused or spare productive capacity in a industry or firm as the quantity supplied can be increased quickly following a price rise.
. The Time Period - in the short term it is often difficult for firms to expand supply following a price rise for their product, in this case supply is relatively more inelastic. However, in the long term supply becomes more elastic. Over a greater number of years, the availability of most resources can be increased, making supply more responsive to price changes.
90
What is an equilibrium?
Equilibrium occurs in a market at the price where the quantity demanded and quantity supplied are exactly equal. (Looks at notes with invisible hands)
91
Determining the market or equilibrium price.
Buyers prefer to purchase at a relatively low price, while suppliers prefer to sell at a relatively high final price. This apparent conflict of interest is resolved by the operation of a free and competitive market. There is only one price on which both buyers and sellers agree and are satisfied, being the equilibrium market price. Equilibrium is the natural situation which all free and competitive markets have a tendency to move towards.
92
Determining the market or equilibrium price continued.
When there is an item at a very low price with low supply in comparison to demand this creates a market shortage, making buyers unhappy. In order for this to addressed prices must rise. As the price moves upwards, there is a contraction along the demand line as well as an expansion along the supply line until this shortage disappears and the market reaches the point where demand and supply are exactly equal.
When there is an item at a very high price with high supply in comparison to demand this creates a surplus or glut, meaning sellers would be unhappy. In order for this to be address prices must fall. As this happens demand would expand and supply would contract, restoring equilibrium where the quantities demanded and supplied were again exactly equal.
93
Changes in the equilibrium price.
If market conditions change so that, at a particular price, consumers suddenly alter their demand or if producers vary their supply of a good or service, the market price will move up or down in response, so as to restore market equilibrium.
94
A shift in the whole demand line caused by new conditions of demand.
If demand conditions weaken and buyers reduce the quantity of a par- ticular item they purchase at all possible prices, the location of the whole demand line will move down and to the left of the original line.
If conditions of demand strengthen and consumers decide to increase the amount of a particular item they purchase at all possible prices, then the position of the whole demand line will shift up and to the right.
95
What factors (demand-side conditions) can bring about changes in the market conditions that shift the demand line?
. changes in the seasons of the year (that is, summer versus winter)
. increases or decreases in tax rates on particular items and on personal incomes
. a product becoming more or less fashionable
. success or failure of a particular advertising campaign
. rise or fall in population size or its age distribution
. rises or falls in the level of interest rates charged on borrowed credit used for expensive purchases
. anticipated or speculative changes in the future price of an item
. rise or fall in the price of a substitute item (for example, margarine is a substitute for butter)
. rise or fall in the price of a complementary product (for example, petrol is a complementary product to owning a car)
. new government regulations affecting consumers of a particular product
. rises or falls in consumer or business confidence about the future
. rises or falls in pay and income levels
96
Shifts in the whole supply line causes by new conditions of supply.
If the conditions of supply become less attractive, sellers are likely to reduce their supply across the full range of possible prices.
Ifthe conditions of supply become more attractive, sellers are encouraged to increase their supply at all possible prices.
97
What factors (supply-side conditions) can bring about changes in the market conditions that shift the supply line?
Availability Cost Efficiency
. Changes in supply due to increases or decreases in the profitability of a firm or industry, perhaps as affected by production costs
. Changes in supply due to rises or falls in wages and on-costs of labour in an industry or firm
. Changes in supply due to increases or decreases in the level of interest rates paid by businesses on money borrowed for expansion
. Changes in supply due to higher or lower costs for utilities (such as water and power) used by a firm in production
. Changes in supply due to rises or cuts in rates of company tax and indirect taxes (like the carbon tax) placed on producers
. Changes in supply due to increases or decreases in productivity or efficiency of resources used, perhaps reflecting changes in the availability of new technology in an industry
. Changes in supply due to more or less favourable climatic conditions applicable to tourist, mining and rural industries (for example, floods, drought, climate change)
. Changes in supply due to more or less generous levels of government assistance including subsidies, tax concessions and investment allowances, for an industry.
98
What are the effects of changes in relative market prices on economic decisions?
. Alter 'what and how to produce'
. Alter 'how goods and services are produced'
. Alter distribution of income between individuals
99
When are free and competitive markets usually an efficient way of allocating resources?
. There is an existence of strong competition between buyers and sellers in the market
. Firms are price takers (not price makers) and no firm has the market power to affect or control prices
. There is a lack of product differentiation (that is, the product is homogeneous)
. There is a large level of consumer sovereignty that guides how resources are allocated
. There is perfect knowledge or complete information about the product and market is known
by buyers and sellers
. There is ease of entry and exit by producers exists
. There is a desire by sellers and owners of resources to maximise their profits and incomes.
100
When does efficiency in resource allocation occur?
Efficiency in resource allocation occurs when productive inputs are used to produce particular types of goods and services that help to satisfy the general satisfaction of society's needs and wants as well as overall wellbeing.
101
What is market failure?
This is when the market fails to use resources well, resulting in the lowered satisfaction of societies wants and in turn affects the wellbeing of society. When market failure occurs, governments often intervene using a range of policies designed to modify and improve how resources are used.
Market failure exists when the price system, profitability, self-interest and consumer sovereignty are unsuccessful or inefficient in directing resources into areas that promote the public interest and society’s general wellbeing or living standards.
102
What are some instances of market failure?
. When firms have market power and competition is weak
. When there is asymmetric information
. When externalities occur
. When markets fail to produce sufficient socially desirable public goods and services
. When socially undesirable goods and services are over-produced
103
Explain the following instance of market failure: Firms have market power and competition is weak
When market power is exercised by oligopolies and monopolies in an industry, it is likely that sellers will restrict competition and output, lift prices (since firms are price makers), reduce efficiency in resource allocation and lower customer service. For these reasons, society’s living standards and wellbeing are lower than would otherwise be the case.
104
Explain the following instance of market failure: When there is asymmetric information
Asymmetric information exists in a market when buyers lack the complete information required to make rational decisions about how to use their resources. Often, for example, sellers have more information than buyers in a transaction, so rational choices and efficient decisions about resource allocation cannot be made. Here, the market fails to work well and society’s overall wellbeing is reduced.
This can occur in the car market, online transactions, the building trades and harmful ingredients used in food.
105
Explain the following instance of market failure: When externalities occur
Externalities represent a market failure and are the costs or benefits that arise from the economic activities of firms and households. Goods and services with positive externalities (known as merit goods) are usually less demanded because consumers do not realise the true benefits. Whilst goods and services with negative externalities are usually more demanded because consumers don't realise the true costs. (Eg. The generation of power releasing carbon dioxide into the atmosphere and leads to global warming. These costs are not payed by the producers who have created the damage).
106
Explain the following instance of market failure: When markets fail to produce sufficient socially desirable goods and services
. Some types of goods and services are seen as socially desirable or beneficial and are so important that everybody should be able to use them, even if they are poor and cannot afford to pay for them.
. Eg. education, health, energy, housing, transport and communications.
. However, these goods and services are costly to produce or run and are therefore cannot be sold at a low price so that everyone can afford them, otherwise firms producing these services would be unable to make good profits.
. With low profits, insufficient resources would be allocated to these areas by the private sector and there would be underproduction and a reduced general level of wellbeing.
107
What are public goods and services?
Public goods and services are provided, usually by the government, for the benefit of the general community. Examples include education and health.
108
What is the free rider problem?
The free rider problem occurs when a service is provided but payment is difficult or almost impossible to extract from the users who benefit from it, such as street lighting.
109
Explain the following instance of market failure: When socially undesirable goods and services are over-produced
. When there is demand for socially undesirable goods and services, resources are allocated to them even though they usually have negative externalities.
. Eg. alcohol, tobacco, pornography, prostitution, gambling, some drugs and chemicals, carbon dioxide emissions, abortion, certain commercial activities, contract killings and firearms.
. In these cases, the Australian government may decide to limit or ban the allocation of resources towards socially undesirable areas of production.
. This is because it believes that some consumers are not always sufficiently mature, discerning, fully informed or knowledgeable, aware and educated about the dangers of unrestricted consumption for their own wellbeing.
. Consumption of these goods and services can also reduce the general wellbeing and living standards of others in society.
110
What measures may be taken by the government when dealing with market failure due to firms having market power and competition being weak?
. Government deregulation of key markets - This is a microeconomic reform which exposes industries and workers to greater competition as it involves removing unnecessary government restrictions and breaking up monopolies and oligopolies. The hope is that the level of competition between sellers will be greater, creating increased efficiency, lowering prices and improving living standards.
. Reducing tariffs on imports - Tariffs are an indirect tax added onto the price of imports. They are designed to make foreign goods dearer and less attractive, thereby reducing overseas competition for local firms. However, reducing tariffs on imports means local firms have to improve product quality and cut their production costs in an effort to lift efficiency in resource allocation. Living standards should rise as a result.
. Government promotion of stiffer price competition - Generally, competition promotes greater efficiency in resource allocation and higher living standards. With this in mind, the Competition and Consumer Act 2010 requires that Australian firms compete with each other. Activities like price maintenance, price leadership, market zoning,
interlocking directorships and exclusive dealing are illegal. Heavy fines of up to $10 000 000 are imposed on companies that break the law, and directors who break the law may face jail sentences.
111
What measures may be taken by the government when dealing with market failure due to asymmetric information?
. Government legislation or laws - the government could require full product disclosure by sellers of all relevant information needed for effective decision making by potential buyers. This could be done through appropriate legislation, such as useful labelling on products like food. The government could make it illegal for sellers to withhold certain information.
. Improved access to information - the government could conduct an advertising campaign to educate and inform consumers of potential dangers of products so that effective choices can be made and resources allocated efficiently to maximise society’s wellbeing. Eg. The QUIT campaign.
112
What measures may be taken by the government when dealing with market failure due to externalities occurring?
. Government laws or legislation - the government can reduce negative externalities is by passing laws or legis- lation to force firms or consumers to change the activities or behaviours causing negative externalities. Eg. Clean energy act = carbon tax
. Using an indirect tax - the introduction of a government indirect tax helps make the offending item dearer and less attractive to produce or consume. Eg. the carbon tax (to reduce CO2 emissions from dirty industries).
. Using government cash subsidies - a government cash subsidy could also be used to encourage consumers of a product to change the behaviour that currently results in negative externalities. For instance, paying cash incentives to convert petrol cars to LPG with lower CO2 emissions could help reduce negative externalities.
. Education and advertising to inform the public - when consumers or producers have a complete knowledge of the impacts of their economic activities, negative externalities are less likely to arise. One approach is for the government to conduct an advertising campaign to educate or inform the public, and to encourage a change in behaviour that will help minimise the problem.
113
What measures may be taken by the government when dealing with market failure due to markets failing to produce sufficient socially desirable public goods and services?
. Using the annual budget to pay for public services
. Using the budget to pay for subsidies to consumers and producers - the government could provide cash subsidies to private producers or private consumers, or make some services free of direct charge.
. Changing government laws or legislation -the government may use laws mandating the consumption of some goods and services. Eg. the compulsory use of bike helmets and setting a minimum school leaving age. Again, the aim is to encourage the production and consumption of socially desirable things.
114
What measures may be taken by the government when dealing with market failure due to socially undesirable goods and services being overproduced?
. Taxes - one approach used by the government is to use indirect taxes, such as a sales or excise tax, to help limit the allocation of resources to socially undesirable production. By having their profits cut, producers will be discouraged from producing or supplying the item, causing a decrease in supply at a given price.
. Other methods - age identification requirements, licences for consumers or producers, laws prohibiting production and consumption and a system of government inspectors.
115
What are the two other reasons for the government intervening in a competitive market economy?
. Stabilising the level of economic activity
| . Redistributing income more equitably
116
Explain the following other reason for government intervention: stabilising the level of economic activity
We know that most individual markets and hence the whole market economy can be quite unstable, resulting in booms and recessions. This reduces society’s wellbeing and living standards. As a result, the government attempts to moderate the severity of these fluctuations using special stabilisation policies.
117
Explain the following other reason for government intervention: Redistributing income more equitably
In the absence of government, the free oper- ation of the price system greatly affects the level of people’s wages (the price of labour) and contributes to income inequality. As we shall see, governments reduce the level of income inequality using special policies to redistribute some income from higher to lower income earners.
118
What are the other influences on Australia's resource allocation?
. Pressure groups and international forces
| . Advertising
119
Explain the following influence on Australia's resource allocation: pressure groups and international forces
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120
Explain the following influence on Australia's resource allocation: Advertising
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121
What are some influences on living standards?
. The rate of economic growth
. Domestic and international events
. Increased efficiency in the allocation of resources
. The quantity and quality of natural resources
. The quantity and quality or efficiency of labour resources
. The quantity and quality of capital resources
. The pattern of income distribution
. The inflation rate
. The unemployment rate
. Government policies
. The amount of leisure time
. Degree of tolerant, free and democratic society
. The state of the environment
. World peace
. Personal happiness
