econs - sem 1 exam atar

What is microeconomics?

The study of individual household and firm behavior in decision making and resource allocation.

What is macroeconomics?

The study of the aggregate economy and wide trends like GDP, unemployment, and inflation.

What is the distinction between micro and macroeconomics?

Microeconomics focuses on specific market segments whereas macroeconomics focuses on national/global performance.

What is the economic problem?

Scarcity and choice. The economic problem of scarcity means that society's capacity to produce combinations of goods is constrained by its limited resources.

Define scarcity.

A situation where there is not enough of something to fulfill everyone's needs and wants, forcing people to make choices on how to allocate resources.

What are the two causes of scarcity?

1. Finite resources (e.g., limited time, money, skills) 2. Unlimited wants (humans always desire more).

What are the 4 factors of production?

1. Land (natural resources) 2. Labour (human resources) 3. Capital (man-made resources) 4. Enterprise (leadership/entrepreneurship).

What are the 4 fundamental economic questions?

1. What to produce? Answered by consumers 2. How much to produce? Answered by demand and supply 3. For whom to produce? Depends on income and government provision 4. How to produce? Answered by producers to be the most efficient.

What is ceteris paribus?

A Latin phrase that means 'other things being equal'.

Define opportunity cost.

The value of the next best alternative forgone when a decision is made; due to scarcity, something else is given up.

Define trade off.

Choosing more of one thing means giving up something else. Every choice involves a cost.

What is a PPF model?

A model used by economists to demonstrate the concept of opportunity cost, showing the maximum combinations of two outputs that an economy can produce given its available resources and level of technology.

What are the 4 key assumptions in the PPF model?

1) Resources are fixed 2) Only two goods are produced 3) No tech changes (no improvements) 4) All resources are used to maximum capacity and FOP are efficiently utilized.

Why does the PPF model have a bowed outward shape?

Because of the law of increasing marginal opportunity cost.

What is the Law of Increasing Marginal Opportunity Cost?

As production of a good increases, opportunity cost rises because resources aren't equally efficient across uses.

What does a right shift in the PPF curve indicate?

An increase in the quantity of resources and economic growth.

What does a left shift in the PPF curve indicate?

Economic decline and an increase in unemployment.

Define economic growth.

An increase in the capacity of an economy to produce goods and services, represented as an outward shift on the PPF.

Define market structures.

Firms sell goods and services under different sets of market conditions; helps to explain how firms behave and competition.

What are the characteristics of a market economy?

1. Number of firms in the market 2. Degree of product similarity or difference 3. Ease of exit and entry of sellers.

What are the four types of markets?

1) Monopolistic (imperfect) competition 2) Monopoly 3) Oligopoly 4) Perfect competition.

Define a perfect competition market.

A market structure that is as competitive as possible.

What are the characteristics of perfect competition?

1) Many buyers and sellers 2) Low barriers to entry 3) Buyers and sellers have all relevant product information 4) Prices controlled by demand and supply.

Define monopolistic competition.

Firms sell products that are similar but not perfect substitutes, e.g., hotels in the same tourist destination.

What are the characteristics of monopolistic competition?

1) Many buyers and sellers 2) Products are differentiated through branding, quality, or features 3) Consumers are willing to switch brands if prices change 4) Few barriers to entry 5) Demand is tightly responsive to price changes 6) Firms must keep prices within a competitive range.

Define monopoly.

Single dominant supplier with little or no competition, e.g., Australia Post.

What are the characteristics of a monopoly?

1) Only one firm in the market 2) Products have no close substitutes 3) High barriers to entry 4) Firms are price makers.

Define oligopoly.

A small number of large firms dominate the market, e.g., Coles and Woolworths.

What are the characteristics of an oligopoly?

1) Few firms dominate the market 2) Firms may work together to maintain market power 3) High entry barriers 4) Firms behave strategically.

Define demand.

Buying intentions of consumers.

What is the law of demand?

As price increases for a product, the quantity demanded decreases, ceteris paribus.

Explain the law of demand.

Rational consumers always pay less for goods/services and choose the cheapest option; thus, as price rises, demand falls and vice versa.

What is the income effect?

Consumers are not willing to buy as much of a good because their 'real income' or purchasing power has decreased.

What is the substitution effect?

When the price of one good rises, other goods become more appealing because they are now relatively cheaper.

What are the factors affecting demand?

PIPET: 1. Prices of substitutes and complementary goods 2. Income 3. Population 4. Expected future prices 5. Tastes and preferences.

Define market supply.

Supply by all producers of a given good/service.

What is the law of supply?

As the price of a good rises, the quantity supplied will increase, ceteris paribus.

What happens to the supply curve if there is a change in price?

Movement along the curve (up/down).

What happens to the supply curve if there is a change in a factor other than price?

Right shift = increase in supply; left shift = decrease in supply.

What are the non-price factors affecting supply?

CENTS: 1. Cost of production 2. Expected future prices 3. Number of sellers in the market 4. Technology 5. Supply disruptions/shocks.

Define market equilibrium.

When demand is equal to supply.

Define surplus.

When supply is greater than demand, leading producers to reduce prices.

Define shortage.

When demand is greater than supply, leading to increased prices.

What happens when there is an increase in demand?

Shortage: shift right, price increases, quantity increases.

What happens when there is a decrease in demand?

Surplus: shift left, price decreases, quantity decreases.

What happens when there is an increase in supply?

Surplus: shift right, price decreases, quantity increases.

What happens when there is a decrease in supply?

Shortage: shift left, price increases, quantity decreases.

What is the price elasticity of demand (PED)?

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

What are goods with inelastic demand?

Goods with little to no substitutes, addictive items like medicine or petrol.

What are goods with elastic demand?

Non-essential goods, luxury items, and those with close substitutes.

Define total revenue.

Amount of money paid by buyers and received by sellers: price x quantity.

How does total revenue decrease?

If demand is elastic and price increases, quantity demanded falls by a larger proportion.

What factors affect elasticity of demand?

1. Necessities 2. Number of substitutes 3. Definition of the market 4. Time to respond 5. Proportion of income spent on the product.

Define the price elasticity of supply (PES).

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

What happens to the PES in the short run?

It may be very inelastic as firms cannot quickly increase production.

Define market failure.

When resources are not allocated efficiently; total surplus is not maximized.

What are the four types of market failure?

1. Market power 2. Externalities 3. Public goods 4. Common resources.

What is a free rider problem?

When people enjoy benefits without contributing to costs, leading to under provision of public goods.