Economics ATAR 11 - Test 1 Terms

Economics

The study of how people allocate their limited resources to satisfy their unlimited wants

The Economic Problem

There are limited resources to fulfil unlimited wants and needs

Scarcity

There are limited means in which to satisfy society's unlimited wants

Free Goods + Example

Free goods do not have a price and are not relatively scarce. E.g: Air, Water, etc.

3 basic questions of economics

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

The Economic Impact of COVID 19

- Global economy shrunk by 4%- Government imposed tight restriction on travel- Millions of workers were put on government - supported job retention schemes

Types Of Resources

natural resources, human resources, and capital resources

Natural Resources

Natural resources are any resource that is supplied from the natural environment. (e.g.: air, water, minerals, energy resources such as coal and oil, and soil and vegetation).

Human Resources

Human resources refer to the quantity and quality of the labour force. Human resources refer to the quantity and quality of the labour force. Human resources can be divided into labour E.g.:(the physical or mental effort applied in the production of a good or service) And enterprise:E.g.: (the coordination and management of production by an entrepreneur).

Capital Resources

Capital refers to the man-made resources which assists human resources in theproduction of goods and servicesE.g.: Machinery, Tools, Equipment, Technology

Microeconomics

Deals with the economic problem from an individual or 'micro' point of view. Microeconomics attempts to understand how consumers and producers make decisions.

Macroeconomics

Deals with the economic problem from society's point of view. The prefix 'macro' refers to a large perspective. Macroeconomics is concerned with the performance of the whole economy. It focuses on total economic activity in terms of total production, total employment, and overall price level.

What is an economic model?

An economic model is a simplified representation of economic reality showing the relationship between certain economic variables.

Ceteris Paribus

A Latin term which translates to: "all other things are constant"

Positive Economics + Example Statement

Testing and developing economic theory. Positive economics is concerned with "what is in the economy". Positive economics statements can be tested objectively.e.g:

What is the current unemployment rate?

What would happen if tariffs are removed from imported cars?

Normative Economics + Example Statement

Subjective statements which opinions rather than facts, so they cannot be tested objectively. Normative statements often state, 'what should be' (a value or an opinionated prediction)e.g:

- The government should increase the tax on cigarettes

Opportunity Cost

The value of the next best alternative that you forego (a trade - off)

The Principle of Decreasing Marginal Benefit.

As you consume more of something the extra or additional benefit received declines

Production Possibility Frontier (PPF)

The PPF shows all the combinations of goods and services that can be produced by an economy given the available resources and the level of technology.

What are the three assumptions of the PPF model?

• resources are fixed

• technology is fixed

• the economy produces just two goods

The relationship between good A and good B on the PPF

The PPF illustrates the trade-off between producing good A and good B. To produce more of good A, production of good B must decrease.

What if a point is along the curve?

Any point along the curve indicates that goods are being made at maximum volume, as resources are being used efficiently without much wastage.

What if a point is below the curve?

A point which is inside the frontier is attainable, but it is inefficient. This indicates that resources are being used ineffectively or are unemployed.

What if a point is above the curve?

That point is impossible, because we do not have enough resources

The Law of Increasing Opportunity Cost

as production increases, the opportunity cost increases

Why is the PPF usually bowed?

This PPF is bowed outwards because of the law of increasing opportunity cost. As more of one good is produced, the opportunity cost increases since resources are not equally productive at both goods.

What will cause the PPF to shift to the right?

Economic Growth

What is economic growth?

Refers to an increase in the capacity of an economy to produce goods and services

What is a pure market economy?

One in which the forces of supply and demand determine what, how and for whom questions

What is a command or planned economy?

An economy in which resources are owned by the state and decisions are made by a planning authority

What are some examples of a command or planned economy?

North Korea, Cuba, China

What is a mixed economy?

A market which combines elements of both market and planned economies

What is a market?

A place in which buyers and sellers exchange goods, services, or resources

What are the three important elements of a market?• buyers (demand)• sellers (supply)• something to exchange (a good, service or resource)

• buyers (demand)

• sellers (supply)

• something to exchange (a good, service or resource)

Product Markets

Product markets deal with the buying and selling of goods and services. In a product market, consumers represent the demand side of the market, while producers or firms represent the supply side

Factor Markets

Factor markets deal in the buying and selling of factors of production or resources such as the labour market, the capital market and natural resource markets. In a factor market, households represent the supply side of the market, while firms represent the demand side.

What is a competitive market?

A competitive market is characterised by:

• a large number of buyers and sellers

• firms are price takers

• very similar (homogeneous) products

• easy entry into the market (no barriers to entry or exit)

What is a non - competitive / imperfect market?

An imperfect market is characterised by:

• a small number of firms

• product differentiation

• firms are price setters - they have market power

• entry into the market is restricted

A monopoly market

an extreme type of imperfect market with just one dominant firm.

What are price makers?

Firms with market power that can set their own price

Consumer Sovereignty

In a market economy, the consumer is king (consumer sovereignty), meaning that consumers determine what will be produced, and how much will be produced.

Demand

Demand refers to the buying intentions of consumers

The Law of Demand

As the price of a good rises, the demand for the good decreases.

The Income Effect

When the price of a good rises, consumers are not willing to buy as much of the good because their real income or purchasing power has decreased

The Substitution Effect

When the price of one good rises, other goods become more attractive to buyers because they are relatively cheaper. An increase in price will cause consumers to switch to relatively cheaper substitutes.

Are there any exceptions to the law of demand?

NO! The law of demand holds for all goods and services - as long as the ceteris paribus (keeping other factors constant) condition holds

What is a demand schedule?

A demand schedule is a table showing the quantity demanded of a good that consumers are willing to purchase at various prices.

What is a demand curve?

a curve that shows the relationship between the price of a product and the quantity of the product demanded

What is on the y- axis (vertical) of a demand curve?

Price

What is on the X- axis (horizontal) of a demand curve?

Quantity Demanded

What is the relationship of the demand curve?

Price and quantity demanded are negatively related, ceteris paribus. As price rises, quantity demanded falls, as price falls, quantity demanded rises.

Non - price factors affecting demand

- levels of disposable income

- the price of related goods

- tastes and preferences

- expectations of consumers

- demographic factors

Levels of disposable income / how it affects demand

Your level of income determines your budget - what you can and cannot afford. Consumers will normally purchase more of a good when their income increases (increase in quantity demanded)

The price of related goods / how it affects demand

On most occasions, consumers can choose between a number of goods and services which satisfy the same wants. This depends on the price of substitute goods and compliment goods.

Tastes and preferences / how it affects demand

The tastes and preferences of consumers effects demand. Consumers tend to quickly embrace modern products and services, which increases its demand. Older products and services tend to decrease in quantity demanded.

Expectations of consumers / how it affects demand

If people expect conditions to change in the future, they may make decisions now rather than postpone them. For example, if the price of a good is expected to rise in the future, then consumers will have an incentive to increase their purchases now to beat the price rise. Expectations of a future price rise will increase demand now and shift the demand curve to the right.

Demographic factors / how it affects demand

The size and age composition of the population can have an important bearing on the pattern of demand. A growing population increases the market size for all goods and services whereas a change in the age profile will affect specific goods and services

Complement Goods

Goods which are often are purchased and consumed with other goods

Substitute Goods

Goods that can be used in place of each other

Compliment Goods Trend

- As the price for compliment goods increases, the demand for the other good will decrease

- As the price for the compliment goods decreases, the demand for the other good will increase

Substitute Goods Trends

- As the price of a substitute good increases, the demand for the other good will increase

As the price of a substitute good decreases, the demand for the other good will decrease

What are the two changes in demand on the demand curve?

a movement along the curve - caused by a change in price

AND

a shift of the entire curve to the right or left - caused by a non-price factor.

An increase in price on the demand curve will cause a ... (price factor)

Contraction of Demand (movement up along the curve)

A decrease in price on the demand curve will cause a ... (price factor)

Expansion of Demand (movement down along the curve)

An increase in quantity demanded on the demand curve will cause a ... (non - price factor)

Shift to the Right

A decrease in quantity demanded on the demand curve will cause ... (non - price factor)

Shift to the Left

How can an increase in demand be caused?

• an increase in consumer income for a normal good

• a decrease in consumer income for an inferior good

• a fall in the price of a complementary good

• an increase in the price of a substitute good

• a change in tastes and preference in favour of the good

• the expectation that price will rise in the future

• an increase in the number of consumers in the market

Supply

the amount of a good or service that producers are willing and able to sell at a particular price and at a particular point in time

The Law of Supply

The law of supply states that as the priceof a good or service rises, the quantity supplied will also rise

What is a supply schedule?

A supply schedule is a table showing the quantity supplied of a good producers are willing to sell at various prices

What is a supply curve?

A graph of the relationship between the price of a good and the quantity supplied

What is the relationship of the supply curve?

Price and quantity supplied are positively related, ceteris paribus. As price rises, quantity supplied rises.

Non - price factors affecting supply

1. Costs of production.

2. Technology

3. Number of Sellers

4. Expectations of Producers

5. Prices of Other Goods

Costs of Production

The price of resources such as labour, capital and raw materials determine the firm's costs of production

Technology

Technology is knowledge about the techniques of production. If technology improves, then more output can be produced from the same quantity of resources. This means that the firm's costs of production will fall. Hence, other things being equal, an improvement in technology will result in an increase in supply

Number of Sellers

If new sellers enter the market, then market supply will increase, and the market supply curve will shift to the right

Expectations of Producers

Suppliers expectations of future conditions will affect supply. If a higher price is expected in the future, then firms will decrease their current supply in order to take advantage of future higher prices

Prices of Other Goods

Production is a process which involves combining productive resources to produce a final good. In many cases the same resources could be used to produce other goods. The producer will closely monitor movements in the prices of the goods they are capable of supplying so that they can take advantage of profit opportunities

What are the two changes in supply on the supply curve?

• a movement along the supply curve - caused by a change in price

OR

• a shift of the entire supply curve - caused by a change in a non-price factor

An increase in price on the supply curve will cause ... (price factor)

An extension (movement up along the curve)

A decrease in price on the supply curve will cause a ... (price factor)

A contraction (movement down along the curve)

An increase in quantity supplied on the supply curve will cause a (non - price factor)

Shift to the Right

A decrease in quantity supplied on the supply curve will cause a (non - price factor)

Shift to the Left

How can an increase in supply be caused?

• an improvement in technology

• a decrease in production costs (input prices)

• the expectation that prices will fall in the future

• an increase in the number of producers in the market

Equilibrium Price

The price that clears the market (when there is a balance between quantity supplied and quantity demanded)

How does the equilibrium price appear on a graph?

The equilibrium occurs where the demand curve intersects the supply curve

where the demand curve

intersects the supply curve.

What is a price mechanism?

Price mechanism is a system where the forces of demand and supply determine the prices of commodities and the changes therein