Economics U3A1

relative scarcity

The concept that resources are limited while human wants and needs are infinite, leading to the need to make choices.

• Key detail: It necessitates prioritizing certain needs over others.

• Example: Choosing to buy food over luxury items due to limited income.

• Example: A drought causing water scarcity, necessitating water conservation

needs

Goods and services that are essential for survival and maintaining a basic standard of living.

• Needs must be satisfied before most wants because they are necessary for life.

• Food and clean drinking water.

• Basic healthcare and shelter

wants

Goods and services that people desire but are not essential for survival.

• Wants are unlimited and vary between individuals depending on their preferences, income and circumstances.

• Buying the latest iPhone or gaming console.

• Going on an overseas holiday or eating at a restaurant.

opportunity cost

The value of the next best alternative foregone when making a choice.

• Key detail: It highlights the trade-off involved in any decision.

• Example: Choosing to go to college instead of working full time.

• Example: Deciding to spend time studying instead of watching a movie

production possibility frontier (PPF)

A graphical representation showing the maximum output combinations of two goods that can be produced with available resources and technology.

• Key detail: It illustrates trade-offs and opportunity costs visually.

• Example: A PPF showing the trade-off between producing cars and computers.

• Example: A shift in the PPF curve due to technological improvements

three basic economic questions

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

• Key detail: These questions guide economic decisions and resource allocation.

• Example: Deciding to produce more renewable energy technologies.

• Example: Choosing to manufacture goods using sustainable methods

economic efficiency

The optimal production and allocation of resources to maximize outputs and minimize waste.

• Key detail: It ensures the best use of available inputs.

• Example: A company reducing waste in its production process.

• Example: Allocating resources to areas with the highest demand

allocative efficiency

When resources are allocated in a way that maximizes consumer satisfaction.

• Key detail: It occurs when the price of a good reflects its true value to consumers.

• Example: A market where the price of organic produce matches consumer willingness to pay.

• Example: Allocating more resources to popular tech gadgets

productive efficiency

When goods are produced at the lowest possible cost.

• Key detail: It requires optimal use of inputs and technology.

• Example: A factory using automated machinery to lower production costs.

• Example: A farm implementing precision agriculture to reduce waste

dynamic efficiency

Efficiency achieved over time as firms innovate and improve their processes.

• Key detail: It focuses on long-term improvements rather than short-term efficiency.

• Example: A tech company investing in research and development for new products.

• Example: A manufacturing firm adopting new techniques to improve production quality

intertemporal efficiency

The efficient allocation of resources across different time periods.

• Key detail: It considers both present and future resource use.

• Example: Investing in education today to create a more skilled workforce in the future.

• Example: Savings plans that optimize resource use over a person's lifetime

conditions for a free and perfectly competitive market

Many buyers and sellers, perfect information, identical products, and no barriers to entry or exit.

• Key detail: These conditions lead to fair competition and efficiency.

• Example: Local farmers' markets with various sellers providing the same goods.

• Example: Online marketplaces enabling consumers to compare prices easily

law of demand

As the price of a good decreases, the quantity demanded increases, and vice versa.

• Key detail: This relationship creates a downward-sloping demand curve.

• Example: Lowering the price of concert tickets leading to higher sales.

• Example: A sale on clothing increasing the number of purchases

income effect

The change in quantity demanded of a good due to a change in consumer income.

• Key detail: It highlights how purchasing power impacts consumer choices.

• Example: A raise leading to increased demand for luxury goods.

• Example: Losing a job resulting in reduced spending on non-essentials

substitution effect

The change in quantity demanded due to a change in price making a substitute more or less attractive.

• Key detail: It shows how consumers switch between alternatives based on price changes.

• Example: Choosing tea over coffee when coffee prices rise.

• Example: Consumers opting for a generic brand when the branded product's price increases.

demand curve

A graph showing the relationship between the price of a good and the quantity demanded.

• Key detail: It visually represents consumer behavior regarding price changes.

• Example: A downward-sloping demand curve for smartphones.

• Example: A steep demand curve indicating inelastic demand for essential goods.

movements along the demand curve

Changing the price of the good itself leads to a change in quantity demanded.

• Key detail: It indicates how quantity demanded responds to price fluctuations.

• Example: A price drop increasing the quantity demanded of a movie ticket.

• Example: A price hike reducing the quantity demanded of airline tickets.

shifts of the demand curve

Changes in non-price factors such as income, preferences, or prices of substitutes and complements.

• Key detail: Shifts indicate a change in consumer demand at every price level.

• Example: Rising incomes leading to increased demand for luxury cars.

• Example: A new health trend increasing the demand for organic foods.

non-price factors likely to affect demand

Changes in disposable income, prices of substitutes and complements, tastes, interest rates, population demographics, and consumer confidence.

• Key detail: These factors influence how much of a product consumers are willing to buy.

• Example: A decrease in interest rates boosting demand for home loans.

• Example: A population boom increasing demand for housing.

law of supply

As the price of a good increases, the quantity supplied also increases, and vice versa.

• Key detail: This creates an upward-sloping supply curve.

• Example: Higher prices for lumber leading to increased supply from mills.

• Example: A farmer producing more corn when corn prices rise.

profit motive

The incentive for producers to increase revenue while minimizing costs through supply.

• Key detail: It drives businesses to innovate and improve efficiency.

• Example: A technology company streamlining production to boost profit margins.

• Example: A restaurant introducing a new menu item with a higher profit margin.

complements

Two goods or services that are consumed together, where an increase in the price of one leads to a decrease in demand for the other.

• Complementary goods have a negative relationship in demand.

• If the price of petrol rises, demand for cars may fall.

• If the price of printers falls, demand for printer ink may increase.

interest rates

The cost of borrowing money or the return earned on savings, usually expressed as a percentage per year.

• Lower interest rates generally increase consumer spending and demand, while higher interest rates tend to reduce spending and demand.

• The Reserve Bank lowers interest rates, making home loans cheaper and encouraging people to buy houses.

• Higher interest rates encourage people to save more and spend less on non-essential goods.

population demographics

The characteristics of a population, such as age, income, gender, education, and location, that influence consumer demand.

• Changes in demographics can increase or decrease demand for different goods and services.

• An ageing population increases demand for healthcare and aged care services.

• More young families increase demand for childcare, schools, and larger homes.

consumer confidence

The level of optimism consumers have about the future state of the economy and their personal financial situation, which influences their spending decisions.

• Higher consumer confidence generally increases spending, while lower confidence leads consumers to save more and reduce spending.

• Strong job growth increases consumer confidence, leading to higher spending on cars and appliances.

• During an economic downturn, consumers may delay buying expensive items due to uncertainty about the future.

supply curve

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

• Key detail: It visually represents supplier behavior in response to price changes.

• Example: An upward-sloping supply curve for smartphones.

• Example: A supply curve shifting due to new production technologies

movements along the supply curve

Changes in the price of the good itself lead to a change in quantity supplied.

• Key detail: It illustrates how quantity supplied responds to price fluctuations.

• Example: An increase in the price of oil leading to higher oil production.

• Example: A decrease in the price of wheat causing farmers to reduce supply

shifts of the supply curve

Changes in non-price factors such as production costs, number of suppliers, technology, productivity, and climatic conditions.

• Key detail: Shifts indicate a change in supply at every price level.

• Example: Introduction of advanced farming techniques increasing the supply of crops.

• Example: A natural disaster reducing the supply of agricultural products.

effects of changes in supply and demand on equilibrium prices

Changes in supply and demand lead to adjustments in the equilibrium price and quantity traded in the market.

• Key detail: The intersection of supply and demand curves indicates market equilibrium.

• Example: Increased demand leading to higher market prices.

• Example: A surplus caused by overly high supply, resulting in price drops

price elasticity of demand

A measure of how much the quantity demanded of a good responds to a change in its price.

• Key detail: Elasticity can be classified as elastic, inelastic, or unitary.

• Example: Demand for luxury cars is typically elastic; quantity demanded drops significantly with price increases.

• Example: Demand for salt is inelastic; changes in price have little effect on quantity demanded.

factors affect price elasticity of demand

Degree of necessity, availability of substitutes, proportion of income, and time.

• Key detail: These factors determine how sensitive demand is to price changes.

• Example: Essential medications may have inelastic demand regardless of price changes.

• Example: A slight price increase for numerous substitute products like margarine leads to significant switches in demand.

price elasticity of supply

A measure of how much the quantity supplied of a good responds to a change in its price.

• Key detail: It indicates how quickly producers can adjust supply in response to price fluctuations.

• Example: Fresh produce may have elastic supply; farmers can quickly adjust based on current prices.

• Example: Oil production tends to be inelastic; it takes time for producers to ramp up supply following price increases.

factors affect price elasticity of supply

Spare capacity, production period, and durability of goods.

• Key detail: These factors influence how readily suppliers can respond to price changes.

• Example: A manufacturer with extra capacity can quickly increase production when prices rise.

• Example: Seasonal goods like Christmas trees have inelastic supply during off-peak seasons.

role of relative prices

Relative prices help allocate resources efficiently by guiding consumer and producer decisions.

• Key detail: They signal scarcity and help prioritize resource allocation.

• Example: Rising prices of crude oil can lead to increases in alternative energy investments.

• Example: Changes in relative prices of healthcare vs. education can influence policy decisions.

role of free and competitive markets

They promote efficient resource allocation and improved living standards.

• Key detail: Competition leads to better products and lower prices for consumers.

• Example: Numerous grocery stores in a city provide consumers with choices and competitive pricing.

• Example: E-commerce platforms allowing small sellers to compete with larger retailers

types of market failure

Public goods, externalities, asymmetric information, and common access resources.

public goods

Goods and services that are non-rivalrous (one person's use does not reduce another's) and non-excludable (people cannot easily be prevented from using them).

• Because people can benefit without paying (free-rider problem), private firms have little incentive to provide public goods, leading to market failure.

• National defence.

• Street lighting.

externalities

The costs or benefits of producing or consuming a good or service that affect third parties and are not reflected in the market price.

• Externalities cause market prices to differ from the true social costs or benefits, resulting in overproduction or underproduction.

• Factory pollution affecting nearby residents (negative externality).

• Vaccinations reducing the spread of disease (positive externality).

subsidies

A payment made by the government to producers or consumers to encourage the production or consumption of a good or service.

• Subsidies correct market failure by increasing the production or consumption of goods with positive externalities.

• Government subsidies for renewable energy.

• Subsidies for childhood vaccinations.

asymmetric information

A situation where one party in a transaction has more or better information than the other.

• Information imbalances can lead to poor decisions, reducing market efficiency and causing market failure.

• A used car seller knows the car has major faults, but the buyer does not.

• A person buying insurance knows they have a high-risk lifestyle that the insurer is unaware of.

common access resources

Resources that are rivalrous (one person's use reduces what is available for others) but non-excludable (people cannot easily be prevented from using them).

• Because no one owns the resource, it is often overused and depleted (the tragedy of the commons), leading to market failure.

• Overfishing in international waters.

• Overgrazing on common land.

role of government intervention in markets

To address market failures through measures like indirect taxation, subsidies, and regulations.

• Key detail: Intervention aims to correct inefficiencies and promote equity.

• Example: Governments implementing taxes on carbon emissions to reduce pollution.

• Example: Subsidies for renewable energy projects to encourage sustainable practices

unintended consequence of government intervention

Policies that may decrease allocative, productive, dynamic, or intertemporal efficiency.

• Key detail: Sometimes interventions have negative effects on efficiency.

• Example: Price controls leading to shortages in essential goods.

• Example: Subsidizing a failing industry that discourages innovation and efficiency

advertisement

A government strategy that provides information or education to encourage consumers or producers to change their behaviour and improve market outcomes.

• Advertising aims to correct market failure caused by imperfect or asymmetric information and encourage the consumption of goods with positive externalities or discourage goods with negative externalities.

• Anti-smoking and anti-vaping campaigns.

• "Slip, Slop, Slap" sun safety campaign promoting sunscreen use.

direct provision

Definition (flashcard style):
When the government directly provides goods or services rather than relying on the private market.

• Direct provision is used when the private market fails to provide enough of a good or service, especially public goods and some merit goods.

• Public hospitals and government schools.

• Police, emergency services, and national defence.