U3 AOS1 microeconomics

needs

essential g/s deemed necessary for survival

wants

desires for g/s that aren’t usually considered essential

resources

Inputs used in the production of g/s

three types of resources

1. natural (land)

2. labour

3. capital

natural (land) resources

naturally occurring resources

• minerals, water, climate and wind etc

labour resources

• human effort in the production process

• physical power and mental talents

capital resources

• goods produced to help make other g/s

• factories, roads, equipment etc

relative scarcity

all resources are limited (finite) can’t satisfy all the “wants”
- resources are scarce ‘relative to’ human needs and wants 

opportunity cost

value/benefit forgone when scarce resources aren’t directed into nxt best alt use

PPF

diagram at specific point in time

what does the PPF depict

all possible max output points when producing 2 gs by efficient use of all available resources

PPF assumptions

1. only 2 g/s are produced in an eco

2. all resources can be used in production either g/s - easily swapped between production of g/s

3. all resources are fully/efficiently employed

the 3 economic questions

1. what and how much to produce

2. how to produce

3. for whom to produce

what and how much to produce

• what g/s to produce w our resources

• ‘the market’ will determine what g&s are P and in what Qs they will be P at

how to produce

refers to combo of resources used to produce g/s (what mix of capital/labor resources b used to produce g/s)

for who to produce

refers to how g/s are allocated or distributed to society 

efficiency

 measurement of the level of outputs from a certain amount of inputs (resources) 

economic efficiency

concerned with whether production is being maxi + is concerned with whether societys well being is maxi

four types of efficiency

1. allocative

2. productive

3. dynamic

4. inter-temporal

allocative efficiency

ensuring resources are used in producing type of output that best satisfies society’s needs and wants

• maxi eco well being

productive efficiency

biznizs use lowest-cost method of P by employing ‘best practice’ P techniques and minimising resources used 

• invls maxi lvl of output per unit of input 

dynamic efficiency

firms + their staff become adaptive/innovative in P & apply best tech available 

• refers to how quickly an eco can reallocate resources to achieve allocative efficiency

inter-temporal efficiency

where there’s optimum allocation of resources between their use for current consumption and future investment 

perfectly competitive market

• price taker

• homogenous product

• consumer sovereignty

perfect competitive market (conditions)

1. large no. of buyers/sellers, no buyer/seller has market power to influ $ 

2. products sold are homogenous (easily substitutable) 

3. ease of entry into/exit frm market

4. perfect info shared between buyers/sellers

5. businesses seek to profit maxi and buyers seek to maxi utility
   

free market (conditions)

operates w/out gov regulation (intervention) 

- forces of S&D determine equilibrium $ and Q traded 

law of demand

there is an inverse relo between $ and QD for a g/s

inverse relo between P and QD

• as $ decreases, QD increases 

• as $ increases, QD decreases 

why the demand curve is downward sloping from left to right

• income effect

• substitution effect

income effect

existing consumers may increase amount they purchase given their income will ‘go further’ and they are able to afford more of the product

why the demand curve is downward sloping from left to right explanation - income effect

• use their incomes to satisfy as many n&w as possible 

• if $ rise, consumers will be forced to reduce the quantity purchased or not purchase that  g&s at all 

why the demand curve is downward sloping from left to right explanation - substitution effect

• as $ rise faster than incomes more consumers might purchase ‘inferior’ g&s

  which are similar

• to the g&s they usually purchase but cheaper than the g&s they usually purchase 

substitution effect

other consumers may turn away from a rival product and buy the existing product bc it becomes ‘relatively cheaper’

demand non-price factors

PISTICC