year 12 micreconomics - basics

What is the basic economic problem?

Scarcity – limited resources vs. unlimited wants.

What is opportunity cost?

The next best alternative not chosen when you decide to do something else.

What are the factors of production?

Land, labour, capital, and enterprise.

What are economic agents?

Households, firms, and governments who make economic decisions.

What is demand?

The quantity of a good consumers are willing and able to buy at a given price.

What shifts the demand curve?

Income, tastes, prices of substitutes/complements, expectations.

What is supply?

The quantity producers are willing and able to sell at a given price.

What shifts the supply curve?

Costs of production, technology, taxes/subsidies.

What is market equilibrium?

Where demand equals supply (no excess demand or supply).

What are the three functions of the price mechanism?

Signalling, rationing, and incentive functions.

How does the price mechanism allocate resources?

Through changes in prices responding to supply and demand.

What is consumer sovereignty?

When consumer preferences determine the allocation of resources.

What is price elasticity of demand (PED)?

The responsiveness of demand to a change in price.

What is income elasticity of demand (YED)?

The responsiveness of demand to a change in income.

What is cross elasticity of demand (XED)?

The responsiveness of demand for one good to a price change in another.

What is price elasticity of supply (PES)?

The responsiveness of supply to a change in price.

What affects PED?

Availability of substitutes, necessity, proportion of income spent.

What affects PES?

Time, spare capacity, flexibility of resources.

What is consumer surplus?

The difference between what consumers are willing to pay and what they actually pay.

What is producer surplus?

The difference between what producers are paid and the minimum they would accept.

What is allocative efficiency?

When resources are distributed so that consumer satisfaction is maximised (P = MC).

What is productive efficiency?

When goods are produced at minimum average cost.

What is market failure?

When the market fails to allocate resources efficiently on its own.

What is a negative externality?

A cost to third parties (e.g., pollution).

What is a positive externality?

A benefit to third parties (e.g., education).

What are public goods?

Non-rival and non-excludable goods (e.g., street lights).

What are merit and demerit goods?

Merit = under-consumed (e.g., education), Demerit = over-consumed (e.g., cigarettes).

What is information failure?

When consumers or producers lack full information for rational decisions.

What is the purpose of government intervention?

To correct market failure and improve economic welfare.

How do taxes correct negative externalities?

By internalising the external cost and reducing overconsumption.

How do subsidies help with positive externalities?

By lowering production costs and encouraging consumption.

What are maximum and minimum prices?

Max = price ceiling (e.g., rent caps), Min = price floor (e.g., minimum wage).

What is government failure?

When intervention causes inefficient outcomes or worsens the situation.

What is income inequality?

Unequal distribution of income among individuals or households.

What is wealth inequality?

Unequal distribution of assets (property, shares, etc.).

What causes inequality?

Differences in education, inheritance, discrimination, market power.

How can the government reduce inequality?

Through progressive taxation, benefits, minimum wages, and education spending.

What is a progressive tax?

A tax that takes a higher percentage from higher incomes.

What is the Lorenz Curve?

A graph showing the proportion of income earned by cumulative percentages of the population.

What is the Gini Coefficient?

A numerical measure of income inequality (0 = perfect equality, 1 = total inequality).

What is behavioural economics?

A study of economic decision-making that includes psychological factors.

What is bounded rationality?

When individuals cannot process all information, leading to imperfect decisions.

What is bounded self-control?

When individuals lack self-discipline and make short-term decisions that may harm long-term welfare.

What is a nudge?

A policy that changes behaviour without forbidding options or significantly changing incentives (e.g., placing healthy food at eye level).

What is default bias?

The tendency to stick with pre-set options (e.g., pension enrolment).

What is framing?

How choices are presented influences decisions (e.g., “90% fat-free” vs. “10% fat”).