Learn: Economics: Key Concepts, Market Dynamics, and Externalities | Quizlet

The economic problem

Unlimited wants vs limited resources → scarcity → choice.

Four economic questions

What to produce; how to produce; how much to produce; for whom to distribute.

Individual wants

Utility, needs, income‑dependent.

Collective wants

Healthcare, education, transport.

Land (factor of production)

Reward: rent.

Labour (factor of production)

Reward: wages.

Capital (factor of production)

Reward: interest.

Enterprise (factor of production)

Reward: profit.

Opportunity cost

Value of the next-best alternative foregone.

PPF (Production Possibility Frontier)

Shows maximum output combinations of two goods.

Outward PPF shift

More resources or improved technology.

Inward PPF shift

Resource depletion.

Future implications of choices

Capital goods → future growth; education → future productivity.

Individual decision-making factors

Income, age, expectations, preferences.

Business decision-making factors

Pricing, production, resource use.

Government decision-making factors

Taxes, incentives, regulation.

Consumer sovereignty

Consumers determine what is produced.

Factors influencing consumer choice

Income, price, substitutes, complements, tastes, advertising.

Ceteris paribus

"All other things constant."

Role of markets

Solve scarcity through demand and supply; determine relative prices.

Law of demand

Price ↑ → quantity demanded ↓.

Law of supply

Price ↑ → quantity supplied ↑.

Demand shift right

Higher income, favourable tastes, higher price of substitutes, lower price of complements.

Supply shift right

Lower production costs, more suppliers, better technology.

Market equilibrium

Quantity demanded = quantity supplied.

Excess demand

Shortage → price rises.

Excess supply

Surplus → price falls.

Public goods

Non-excludable and non-rival.

Negative externality

Social cost > private cost → overproduction.

Positive externality

Social benefit > private benefit → underproduction.

Price ceiling

Maximum legal price below equilibrium → shortage.

Price floor

Minimum legal price above equilibrium → surplus.

Tax (on producers)

Reduces negative externalities; shifts supply left.

Subsidy

Encourages positive externalities; shifts supply right.

Elasticity of demand

Responsiveness of quantity demanded to price changes.

Elastic demand

Quantity responds strongly to price changes.

Inelastic demand

Quantity responds weakly to price changes.

Unit elastic demand

Total outlay unchanged when price changes.

Total outlay method

P↑ & TO↑ → inelastic; P↑ & TO↓ → elastic; TO unchanged → unit elastic.

Factors affecting demand elasticity

Necessity vs luxury, substitutes, proportion of income, time.

Elasticity of supply

Responsiveness of quantity supplied to price changes.

Factors affecting supply elasticity

Time, storage ability, excess capacity.

Perfect competition

Many firms, identical products, low barriers.

Monopolistic competition

Many firms, differentiated products, easy entry.

Oligopoly

Few large firms, high barriers.

Monopoly

One firm, very high barriers.

Labour force

People employed + actively seeking work.

Participation rate

Labour force ÷ working-age population.

Unemployment rate

Unemployed ÷ labour force.

Cyclical unemployment

Due to downturns in the business cycle.

Structural unemployment

Mismatch between skills and jobs.

Frictional unemployment

Short-term job transition.

Seasonal unemployment

Due to seasonal industries.

Minimum wage

Price floor in labour market.

Casualisation

Shift toward casual and part-time work.

Fair Work Commission

Sets minimum wages and employment standards.

Awards

Legal documents outlining minimum employment conditions.

Enterprise agreements

Negotiated workplace-specific employment conditions.

NES (National Employment Standards)

Minimum employment entitlements for all workers.

Role of financial markets

Link savers and borrowers.

Financial intermediaries

Banks, credit unions, finance companies.

Financial products

Loans, bonds, shares, futures, foreign exchange.

Exchange rate (AUD)

Determined by supply & demand for AUD.

Factors affecting exchange rate

Interest rates, trade flows, investment flows, speculation.

Why governments intervene

Resource allocation, redistribution, competition, stabilisation.

Fiscal policy

Government spending and taxation to influence the economy.

Budget outcome

Surplus, deficit, balanced.

Budget stance

Expansionary, contractionary, neutral.

Automatic stabilisers

Progressive tax and welfare.

Discretionary policy

Deliberate changes to spending or taxation.

Progressive tax

Higher income → higher tax rate.

Regressive tax

Lower income pays higher proportion.

Proportional tax

Same percentage for all incomes.

Direct tax

Paid directly to government (income tax).

Indirect tax

Paid through purchases (GST)