economics summary SAC 1

types of efficiency

allocative

productive

dynamic

inter-temporal

allocative efficiency

resources used to satisfy society’s needs

productive efficiency

lowest cost production methods used

dynamic efficiency

quickly allocating resources

inter-temporal

optimal allocation between current consumption and future investment

movements on demand and supply graph

price changes cause movements along the curve

shifts on demand and supply graph

non price factors cause entire curve to move

demand - non price factors

PISTICC

• Population demo

• Interest rates

• Substitutes

• Preferences and tastes

• Disposable income 

• Complements

• Consumer confidence

population demographics

changing size/composition of the population, affected by immigration, birth rates etc 

interest rates

the cost of borrowing money 

substitutes

price of a product that can be used in place of another

disposable income

income available to spend after tax is paid 

complements

price of products consumed in conjunction with another product e.g phone + phone case

consumer confidence

level of optimism of households regarding future employment and income 

supply non price factors ccntp

• Cost of production 

• Tech change 

• Productivity growth 

• Climatic conditions

• No. of suppliers 

Three categories of supply factors - ACE

• Availability of resources

• Cost of production 

• Efficiency of resource use

cost of production

change to the cost of resources will impact upon a producer’s profitability which influences their willingness/ability to supply g/s 

technological change

 refers to changes in the way g/s are made 

Productivity growth

 % change in efficiency of businesses in terms of ability to convert inputs into products (total output per input) 

climatic conditions

changes to the climate or weather conditions that impact producers ability to supply g/s

number of suppliers

 more suppliers in market w g/s lead to increase in supply, if firms in industry making losses, more likely to choose to leave market reducing supply

types of gov failure

• Externalities 

• Public goods

• Asymmetric info 

• Common access goods

elasticity

responsiveness of change in QD or QS relative to a change in price 

price elasticity of demand PED

measures responsiveness of changes in QD to changes in price

• small change in price = large change in QD, elastic

•  large change in price = small change in QD, inelastic

price elasticity of supply PES

measures responsiveness of changes in QS to changes in price

• small change in price = large change in QS, elastic

•  large change in price = small change in QS, inelastic

factors affecting PED - dapt

• Degree of necessity 

• Availability of substitutes 

• Proportion of income

• Time 

dapt

degree of necessity

 demand more elastic for lux goods as they r “optional extras” whilst inelastic for necessities bc regardless of price demand will not change significantly 

availability of substitutes

 closer substitutes are the more elastic demand is whilst the more unique a good is the more inelastic it is 

proportion of income

when price takes up high % of income, D more elastic whereas when product takes up small % of income D is more inelastic 

time

longer the consumer has to make decisi, the more elastic demand is as they are able to seek subs in the short time PED remains relatively inelastic 

factors affect PES - spd

• Spare capacity 

• Production period

• Durability of goods

spare capacity

 if there’s lots of spare capacity business can increase output w out rise in $ and supply will be elastic in response to change in demand

production period

 supply more elastic in long run than short more time allows easier production adjustment while slow-to-produce goods have inelastic supply

durability of goods

if good more durable = lasts longer supply will be elastic, perishables are inelastic

relative prices

price of any one g/s compared in terms of another g/s

In a competitive market what determines prices of goods and services? 

 determined by S/D thru price mechanism

when D increases or S decreases, prices rise, signalling producers to allocate more resources to those goods

ensuring allocative efficiency.

free markets

operate w out gov intervention in market meaning forces of supply/demand operate to set prices

market failure

when free market doesn't allocate resources efficiently, or when resources are used in way that doesn't maximise living standards/welfare

market failures

• Public goods

• Common access resources 

• Externalities 

• Asymmetric info 

public goods

g/s that are available for all people to use, gain benefit from or enjoy

two characteristics of public goods

1. non-rivalrous (my enjoyment of public good doesn’t reduce urs)

 2. non-excludable (hard to exclude consumers, who haven’t paid for the g/s from using the public good)

free rider problem w public goods

where ppl benefit without paying, leads to underproduction of public goods, as producers focus on private goods for higher profits

externalities

when a person is engaged in activity that affects wellbeing of a 3rd party who isn’t involved w activity

Positive Externality

occurs when a 3rd receives benefit from the production/consumption of a product (didn’t pay for)

negative externality

 occurs when a 3rd receives cost from the production/consumption of a product (no compensation)

positive externality - market failure

resources r underallocated to benefits, gov intervention needed to correct this inefficiency

negative externality - market failure

overuse of harmful activities w out gov  intervention, resources are misallocated, causing inefficiency

asymmetric info - gov reg

used to protect consumers from mis info and provides them w specific rights when purchasing products

done thru Aus Consumer Law and Trade Practices Act

common access goods

1. gov regulation

2. gov subsidies

3. indirect taxation

gov failure

when gov  intervention worsens resource allocation, making it less efficient than free market happens due to unintended consequences of the intervention

Unintended consequences can be grouped into three types: brd

1. unexpected benefit (luck) 2. reverse result when intended solu makes problem worse 3. unexpected drawback occurring in + to desired effect of policy

Equilibrium price

Where total QD is = to total QS 

• no shortage (excess demand) or no surplus (excess supply) of the product at this price

Disequilibrium - shortage

• (price below equilibrium price) 

• Price too low, shortage revealed (d>s) 

• Due to shortage, consumers bid against eo so price increases, contraction in demand

• Supply expands (rises) bc suppliers c that higher profits can be made by supplying more 

• Continues until shortage is eliminated and new equilibrium is reached

disequilibrium - surplus

• (price above equilibrium price) 

• Price too high, surplus revealed (s>d) 

• Due to surplus, producers forced to lower price for excess stock to be sold, supply contracts

• Demand expands as price falls - law of demand operates (substitution/incomes) 

• Continues until surplus is eliminated and new equilibrium is reached