Economics Semester 2 Exam Study

What is opportunity cost?

the cost of the next best use of your time or money when you choose to do one thing rather than another

What is an example of opportunity cost?

A worker earns $40 per hour. Rather than work, she decides to visit a museum for three hours. The visit costs a total of $40. What is the opportunity cost of visiting the museum?

(a) $40

(b) $80

(c) $120

(d) $160

Answer:

D: $160

What are the 3 Factors of Production?

land, labor, capital

What are the 3 questions in the economics problem?

- What and how much to produce

- How to produce

- for whom to produce

Law of Supply

Tendency of suppliers to offer more of a good at a higher price

Law of Demand

A negative relationship between price and quantity demanded.

- As the price of a good rises, people buy less of it.

What are 5 Non-Price Factors affecting Demand?

- Income and Wealth

- The Price of Related Goods

- Tastes and Preferences

- Expectations Of Consumers

- Demographic Factors

What are 6 Non-Price Factors affecting Supply

- Costs of Production

- Technology

- Number Of Sellers

- Expectations of Producers

- Prices of Related Goods produced

- Taxes and Subsidies

What are the two types of changes in graphs with Supply and Demand

A movement along the supply/demand curve = caused by a change in price

A shift along the supply/demand curve = caused by a change in a non-price factor.

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

Substitution Effect

When the price of one good rises, other similar goods become more attractive to buyers because they are relatively cheaper

What is Equilibrium?

The equilibrium occurs where the demand curve intersects the supply curve.

At the equilibrium price, quantity demanded equals quantity demanded

What happens during a Surplus?

A surplus occurs when the quantity supplied exceeds the quantity demanded at a given price.

What happens during a shortage?

Quantity demanded exceeds quantity supplied, leading to upward pressure on prices.

An increase in price will cause a decrease in demand? True or False?

True

What is a Monopoly?

when a single group controls the production of a good or service. (Bunnings)

What is an oligopoly?

A market structure in which a few large firms dominate a market. (E.g. Coles and Woolworths)

What is the Price Elasticity of Demand?

as the responsiveness of quantity demanded to a change in the price of the good or service.

How do you calculate price elasticity of demand?

% change in quantity demanded / % change in price

What does perfectly inelastic mean?

ED = 0

What does inelastic Mean? (Scale)

ED < 1

How should you draw the Inelastic curve?

Steep

How should you draw the elastic curve?

Flat

What does Unitary Elastic Mean?

Ed = 1

What does Elastic Mean? (Scale)

Ed > 1

What does perfectly elastic mean?

ED = Infinite

What is the Total Revenue Formula?

TR = P x Q

Tragedy of the Commons

situation in which people acting individually and in their own interest use up commonly available but limited resources, creating disaster for the entire community

What are the determinants of the Price elasticity of Demand?

- The availability of Substitutes

- Whether a good is a necessity or a luxury

- Proportion of income spent

- A broad or narrow definition of the market

- Time

What are the determinants of the Price Elasticity of Supply?

- Time

- Nature of the Industry

- Ability to store inventories

Price Discrimination

the business practice of selling the same good at different prices to different customers. (E.g. Haircuts for men and women)

What are Public Goods?

What are private goods?

What are Rival Goods?

What are Non-Rival Goods?

What are Excludable goods?

What are Non-Excludable Goods?

What are Club Goods?

What are Common Resources?

Economics

Economics is the study of how individuals, businesses and governments allocate scarce resources to satisfy unlimited wants and needs.

Scarcity

Scarcity is the fundamental economic problem where resources are limited but wants are unlimited

Microeconomics

Microeconomics studies the behaviour and decisions of individual consumers, firms and individual markets.

Macroeconomics

Macroeconomics studies the economy as a whole including economic growth, inflation and unemployment.

Economics

Economics is the study of how individuals, businesses and governments allocate scarce resources to satisfy unlimited wants.

Scarcity

Scarcity occurs because resources are limited while human wants are unlimited.

Resources

Resources are the inputs used to produce goods and services.

Economic Problem

The economic problem is the challenge of allocating scarce resources among competing uses.

Wants

Wants are the unlimited desires people have for goods and services.

Needs

Needs are necessities required for survival and basic wellbeing.

Economic Model

An economic model is a simplified representation of reality used to analyse economic behaviour and predict outcomes.

Production Possibility Frontier (PPF)

The PPF shows the maximum combinations of two goods an economy can produce using available resources efficiently.

Productive Efficiency

Occurs when resources are used to produce the maximum possible output.

Underutilisation of Resources

Occurs when resources are not fully employed or are used inefficiently.

Economic Growth

Economic growth is shown by an outward shift of the PPF.

Market Economy

A market economy is an economic system in which resources are allocated through the forces of demand and supply.

Market

A market is any situation where buyers and sellers interact to exchange goods and services.

Demand

Demand is the willingness and ability of consumers to purchase a good or service at different prices.

Law of Demand

As price falls, quantity demanded rises; as price rises, quantity demanded falls, ceteris paribus.

Quantity Demanded

The amount consumers are willing and able to buy at a particular price.

Demand Curve

A demand curve shows the relationship between price and quantity demanded.

Factors Affecting Demand

Income

Population

Tastes and preferences

Price of substitutes

Price of complements

Consumer expectations

Supply

Supply is the willingness and ability of producers to sell goods and services at different prices.

Law of Supply

As price rises, quantity supplied rises; as price falls, quantity supplied falls.

Quantity Supplied

The amount producers are willing and able to supply at a particular price.

Supply Curve

A supply curve shows the relationship between price and quantity supplied.

Market Equilibrium

Market equilibrium occurs when quantity demanded equals quantity supplied.

Equilibrium Price

The price at which quantity demanded equals quantity supplied.

Surplus

A surplus occurs when quantity supplied exceeds quantity demanded.

Shortage

A shortage occurs when quantity demanded exceeds quantity supplied.

Price Elasticity of Demand (PED)

Measures the responsiveness of quantity demanded to a change in price.

Elastic Demand

A percentage change in quantity demanded is greater than the percentage change in price.

PED > 1

Inelastic Demand

A percentage change in quantity demanded is less than the percentage change in price.

PED < 1

Unit Elastic Demand

The percentage change in quantity demanded equals the percentage change in price.

PED = 1

Total Revenue

Total Revenue = Price × Quantity Sold

Price Elasticity of Supply (PES)

Measures the responsiveness of quantity supplied to a change in price.

Determinants of PES

Time period

Spare capacity

Stock levels

Ease of production

Economic Efficiency

Occurs when resources are allocated to maximise total satisfaction and welfare.

Consumer Surplus

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

Producer Surplus

The difference between the selling price and the minimum price producers are willing to accept.

Total Surplus

Consumer surplus plus producer surplus.

Deadweight Loss

The loss of total surplus caused by market inefficiency.

Underproduction

Occurs when too little of a good is produced compared to the socially optimal level.

Overproduction

Occurs when too much of a good is produced compared to the socially optimal level.

Tax

A compulsory payment to government.

Subsidy

A payment from government to producers or consumers that lowers costs.

Price Ceiling

A legal maximum price set below equilibrium.

Price Floor

A legal minimum price set above equilibrium.

Market Failure

Occurs when the market fails to allocate resources efficiently.

Market Power

The ability of a firm to influence price or output.

Externality

A cost or benefit experienced by a third party not directly involved in a transaction.

Negative Externality

An external cost imposed on others.

Example: Pollution.

Positive Externality

An external benefit enjoyed by others.

Example: Vaccinations.

Public Good

A good that is non-rivalrous and non-excludable.

Free Rider Problem

When people benefit from a good without paying for it.

Common Resource

A resource available to everyone but limited in supply.

Tragedy of the Commons

The overuse of shared resources leading to depletion.

Circular Flow of Income

The movement of income, spending and resources through the economy.

Five Sectors

Households

Businesses

Financial Sector

Government Sector

Overseas Sector

Leakages

Income removed from the circular flow.

Examples:

Savings

Taxation

Imports

Injections

Spending added to the circular flow.

Examples:

Investment

Government spending

Exports