Eco AOS 1 Unit 3

Microeconomics

An economy on a small scale involving buyers and sellers in specific industries or sectors.

Types of resources

The main categories of resources: Labor, Natural, and Capital.

Labor

The physical and mental efforts of people.

Natural resources

Resources derived from the earth.

Capital

Resources that are man-made.

Needs

Items required for survival.

Wants

Items desired but not required for survival.

Relative scarcity

The concept that there are unlimited needs and wants but limited resources.

Opportunity cost

The value forgone when choosing the next best alternative.

Living standards

Factors contributing to quality of life, including material (access to goods and services) and non-material aspects.

Resource allocation

How scarce resources are allocated among competing uses.

Market capitalism

An economic system where decisions are made by private owners rather than the government.

Market socialism

An economic system where decisions are made by the government instead of private owners.

Production possibility diagram (PPF)

A graph that displays different output options based on allocation of resources, representing maximum efficiency.

Allocative efficiency

Where resources are used to produce goods and services that maximize society's living standards.

Technical efficiency

The lowest cost production methods, including minimizing waste.

Dynamic efficiency

The ability to quickly reallocate resources to meet changing needs.

Intertemporal efficiency

Allocation that optimally covers current and future consumption.

Competition on efficiency

In a market, competition typically drives efficiency, but excessive competition can lead to lower efficiency.

Market

A place where buyers and sellers meet to exchange goods and services.

Consumer Sovereignty

The principle that consumers dictate how resources are utilized based on their preferences.

Homogenous products

Products that are identical or very similar in nature.

System of allocation

The method by which relative scarcity is addressed.

Three economic questions

What to produce, how to produce it, and for whom to produce it.

Perfectly competitive conditions

A market structure characterized by a large number of sellers, identical products, and low barriers to entry.

Perfectly competitive assumptions

Assumptions include full information, resource mobility, maximization of well-being, and minimal government intervention.

Market structures

Different types of market configurations, including pure perfect competition, monopolistic competition, oligopoly, and monopoly.

Cost

What the producer spends to make a product.

Price

What the consumer pays for the product in the market.

Total revenue

Calculated as price multiplied by quantity supplied.

Total costs

Calculated as cost per unit multiplied by quantity supplied.

Profit

The difference between total revenue and total costs.

Law of demand

As the price increases, the quantity demanded decreases.

Reasons underpinning the law of demand

Factors include income effect, perceived utility, diminishing marginal utility, and substitution effect.

Demand factors

Determinants that influence the demand for a product, including disposable income and consumer preferences.

Law of supply

As the price increases, the quantity supplied also increases.

Reasons underpinning law of supply

The profit motive drives businesses to increase supply when prices rise.

Equilibrium

The condition where quantity demanded equals quantity supplied.

Market price mechanism

The process of negotiation that leads to market equilibrium, causing relative prices to change over time.

Relative price

The comparison of value between two products.

Market failure

A situation where market operation leads to inefficient resource allocation, failing to satisfy society's needs.

Types of market failure

Include positive externalities, negative externalities, public goods, asymmetric information, and common access resources.

Government intervention

Actions taken by the government that can inadvertently lead to inefficiencies in resource allocation.

Price controls

Regulations on prices set by the government, including price floors and ceilings.

Price ceiling

A maximum price set by the government, potentially leading to shortages or black markets.

Price floor

A minimum price set by the government, which can lead to unemployment and surplus supply.

Subsidies

Financial assistance from the government to reduce production costs or to increase demand.

Protectionism

Government policies designed to protect local industries from foreign competition.

Price elasticity of demand (PED)

Measures how sensitive quantity demanded is to a change in price.

Elasticity of demand factors

Factors influencing demand elasticity include necessity, income proportion, availability of substitutes, and time.

Elasticity of supply factors

Factors affecting supply elasticity, including storability, production period, spare capacity, and time.