Economics Semester 1 Review

A comprehensive set of flashcards covering key concepts for the Semester 1 economics exam, including foundational principles, market mechanics, elasticity, market failure, government intervention and policy, and the classification of goods.

What is the economic problem in economics?

Scarcity—unlimited wants but limited resources.

Why does the government face an economic problem?

Limited funds force a trade-off between providing services and building infrastructure.

What does microeconomics study?

Individual markets—behaviour of consumers, producers and prices of specific products.

What does macroeconomics study?

The whole economy—total output, employment, inflation, interest rates.

What is positive economics concerned with?

'What is'—objective, testable statements about the economy.

Give an example of a positive economic question.

“What is the current unemployment rate?”

What is normative economics concerned with?

'What should be'—value judgements and opinions.

Give an example of a normative economic question.

“Is the unemployment rate too high?”

Define opportunity cost.

The value of the next-best alternative foregone.

What does a Production Possibility Frontier (PPF) show?

Maximum possible output combinations with fixed resources and technology.

State three key assumptions of a basic PPF model.

Resources are fixed; technology is fixed; only two goods are produced.

Why is the PPF bowed outward?

Law of increasing opportunity cost—resources are not perfectly adaptable between uses.

Why does the PPF have a negative slope?

Scarcity: producing more of one good means producing less of another.

List the three fundamental economic questions.

What to produce? How to produce? For whom to produce?

Define a market.

A mechanism where buyers and sellers voluntarily exchange goods and services.

Name the four elements present in every market.

Buyers, sellers, a product, voluntary participation.

State the Law of Demand.

As price increases, the quantity demanded decreases, vice versa.

Explain the substitution effect.

Consumers switch to cheaper alternatives when a good’s price rises.

Explain the income effect for normal goods.

Higher price lowers real purchasing power, reducing quantity demanded.

What causes a movement along a demand curve?

A change in the good’s own price.

How does an increase in price affect quantity demanded?

It decreases quantity demanded (movement up the curve).

How does income affect demand for normal vs. inferior goods?

Higher income increases demand for normal goods, decreases demand for inferior goods.

How do consumer preferences affect demand?

Favourable tastes or advertising shift demand right; unfavourable shift left.

What happens to demand if the price of a substitute rises?

Demand for the good increases (shift right).

What happens to demand if the price of a complement rises?

Demand for the good decreases (shift left).

How do future price expectations influence current demand?

Expecting higher future prices raises current demand; expecting lower prices reduces it.

How can demographics shift demand?

Population growth or ageing can raise demand for certain goods (e.g., cruises).

Differentiate between ‘quantity demanded’ and ‘demand’.

Quantity demanded changes with price (movement); demand shifts due to non-price factors.

State the Law of Supply.

As price increases, quantity supplied increases, vice versa,

Why does the profit motive create an upward-sloping supply curve?

Higher prices increase potential profit, encouraging producers to supply more.

How do input costs affect supply?

Higher costs shift supply left; lower costs shift supply right.

What causes a movement along a supply curve?

A change in the good’s own price.

Name the six non-price factors that shift supply.

Production costs, technology, prices of related goods, expectations of future prices, number of suppliers, disruptions.

How does improved technology affect supply?

Shifts supply curve right (more output at each price).

What happens to supply if the price of an alternative product rises?

Producers may switch, decreasing supply of the original good.

How do future price expectations influence current supply?

Expecting higher future prices may reduce current supply (withholding stock).

How does the number of suppliers affect market supply?

More firms → supply shifts right; fewer firms → supply shifts left.

Give an example of a supply disruption.

Flood or earthquake reducing agricultural output.

Define market equilibrium.

The price where quantity demanded equals quantity supplied.

What is a shortage?

QD > QS at a price below equilibrium—upward pressure on price.

What is a surplus?

QS > QD at a price above equilibrium—downward pressure on price.

List two reasons prices fluctuate in a market.

Shifts in demand or shifts in supply.

Define Price Elasticity of Demand (PED) and its formula.

Responsiveness of QD to price changes: %ΔQD / %ΔP.

How do many substitutes affect PED?

More substitutes → demand is more elastic.

How does necessity affect PED?

Necessities have inelastic demand; luxuries are elastic.

How does the proportion of income spent on a good influence PED?

Large budget share → more elastic demand.

How does time affect PED?

Demand is more elastic in the long run than the short run.

How does market definition affect PED?

Narrowly defined goods (pizza) are more elastic than broad categories (food).

Define Price Elasticity of Supply (PES) and its formula.

Responsiveness of QS to price changes: %ΔQS / %ΔP.

How does time horizon affect PES?

Supply is more elastic in the long run; less elastic in the short run.

Why does the ability to store inventories increase PES?

Stock can be released when prices rise, making supply more responsive.

How does the nature of industry influence PES?

Manufacturing is more elastic; agriculture less elastic due to natural constraints.

Define Total Revenue (TR).

Price × Quantity sold.

What happens to TR for an elastic good when price rises?

TR decreases because quantity falls proportionally more than price rises.

What happens to TR for an elastic good when price falls?

TR increases due to a large rise in quantity demanded.

How should a firm raise TR for an elastic product?

Lower its price to increase quantity sold.

What happens to TR for an inelastic good when price rises?

TR increases because quantity falls only slightly.

How should a firm raise TR for an inelastic product?

Increase its price.

Define market failure.

A situation where resources are not allocated efficiently; total surplus isn’t maximised.

What is market power?

Ability of a firm to raise price by restricting output, harming consumers.

Define externality.

A cost or benefit from an activity felt by third parties not involved in the transaction.

Give an example of a negative externality.

Pollution from production.

Give an example of a positive externality.

Education improving societal productivity.

Define social cost.

Total cost to society: private cost plus external cost.

Define social benefit.

Total benefit to society: private benefit plus external benefit.

What does ‘rival in consumption’ mean?

One person’s use prevents others from using the same unit.

What does ‘excludable’ mean?

Users can be prevented from consuming unless they pay.

List the four categories of goods with an example each.

Private (food), Club (Netflix), Common resource (fishery), Public (national defence).

What is the free rider problem?

People consume a non-excludable good without paying, leading to under-provision.

What is the tragedy of the commons?

Overuse of a rival, non-excludable resource, depleting it.

State two characteristics of an imperfect market.

Few firms and barriers to entry, giving firms price-setting power.

How does output and price differ in competitive vs. imperfect markets?

Competitive: P = MC, max total surplus; Imperfect: lower output, higher price, deadweight loss.

Define a tax in economic terms.

Compulsory levy on consumers or producers to raise government revenue.

How does a tax affect a supply curve?

Shifts supply left/up by the tax amount, reducing quantity and surplus.

Define a subsidy.

Government payment to producers (or consumers) to lower costs and increase output.

How does a subsidy affect market efficiency?

Increases output, raises CS and PS but creates a deadweight loss funded by taxpayers.

What is the role of the ACCC?

Enforce competition law, prevent anti-competitive practices and misuse of market power.

How does trade liberalisation affect market power?

Lower tariffs invite foreign entrants, increasing competition and limiting dominance.

Define a price ceiling.

Government-set maximum price below equilibrium, intended to help consumers.

What is the main market outcome of a binding price ceiling?

Creates a shortage and deadweight loss; may lead to black markets.

Define a price floor.

Government-set minimum price above equilibrium, intended to help producers.

What is the main market outcome of a binding price floor?

Creates a surplus and deadweight loss; consumers pay more and buy less.

What is a common policy reason for subsidies on merit goods?

To internalise positive externalities by encouraging higher consumption.

What is a product market?

Where final goods and services are bought by households and supplied by firms.

What is a factor market?

Where resources (land, labour, capital) are sold by households and demanded by firms.

What is a capital market in economics?

Financial market where firms obtain funds to invest in capital goods.