Economics

Law of Supply

States that an increase in price results in an increase in quantity supplied and vice versa.

Equilibrium Price (PE)

The price that balances quantity supplied and quantity demanded.

Equilibrium Quantity (QE)

The quantity supplied and quantity demanded at the equilibrium price.

Surplus

The situation when quantity supplied exceeds quantity demanded, typically because the price is above equilibrium.

Shortage

The situation when quantity demanded exceeds quantity supplied, typically because the price is below equilibrium.

Price Mechanism

The process by which supply and demand determine the price and quantity of goods sold in a market.

Market Clearing Price

Another term for the equilibrium price, where all goods are sold, and all buyers are satisfied.

Invisible Hand of the Market

A term coined by Adam Smith describing the self-regulating nature of the marketplace.

Demand

The desire of consumers to purchase goods or services at given prices.

Supply

The amount of a good or service that producers are willing to sell at different prices.

Non-Price factors causing a shift in demand

Level of Disposable Income

Price of Related Goods

Tastes and Preferences

Expectations of Consumers

Demographic Factors

Level of Disposable Income

typically for a ‘normal’ good, demand increases as income increases, the exception for this is inferior goods, such as homebound products which demand increases when income decreases because they are generally cheaper

Price of Related Goods

products you can substitute. If the price of pizza doubles, the demand for kebabs might increase. Some products are complements. If the price of pizza doubles, demand for garlic bread might fall

Tastes and Preferences

For example a trend gearing towards more environmentally friendly products, or health products.

Expectations of Consumers

the price of fuel is expected to rise on Tuesday, so demand for fuel will be higher on Monday. e.g. panic buying of toilet paper

Demographic Factors

The size and age of the population. For example, an older population might demand more cruises.

Supply

the amount of goods and services that producers are willing and able to sell at a particular price at a particular point in time

Law of Supply

As the price of a good or service increases, the quantity of goods or services supplied will also increase when producers new willing and able to sell them. This is due to profit motive

Non-Price Factors affecting Supply

Cost of production

Improvement in Technology

Prices of other Goods

Number of Sellers

Expectations of Producers

Taxes and Subsidies

Taxes of Subsides

Tax will increase costs to producers and decrease the quantity supplied as they are being charged more money. Subsides will make goods and services cheaper to produce so it will increase the quantity supplied.

Expectations of Producers

If a higher price of a good or service is expected in the future, firms will decrease their current supply in order to take advantage of higher prices in the future.

Number of Sellers

If new sellers enter the market, then market supply will increase and the supply curve will shift to the right.

Cost of Production

the amount of money used in the production of a good. It might change due to changers in the price officiators of production.

Improvements in Technology

Use of latest technology in the production of goods or services would improve the productivity and hence the cost of production per unit would decrease and producers would be able to supply more of that product with the same resources.

Price of other Goods

If the price of another good that a producer is able to supply goes up, producers will shift to produce more of that good rater than what they made previously.

Free Good

has zero opportunity cost

why might an economy operate outside the Production Possibility Frontier?

If it is trading with other economies

What are the determinants to PED

Time

Portion of Income

Availability of Substitutes

Definition of a Market

Luxury of Necessity

What are the determinants for PES

Nature of the market

Ability to store inventory

time

Consumer Surplus

The difference between how much buyers are willing to pay for a good what what they actually pay

Total Surplus/Community Surplus

The sum of consumer surplus and producer surplus

Economic Welfare

Refers to how well people are doing in the economy or market

Rival Goods

If a good is rival it means that the consumption by one person reduces the supply availability to others. If I buy some chips, they cannot be consumed by someone else and the availability for consumption has been reduced by one.

Excludable Goods

Means that it is possible to exclude someone from consuming or using the good or service. This is most commonly done through price.

Private Goods

Goods that people can be prevented from using unless they pay and one person’s use reduces the availability for others. Meaning that they are excludable and rival. These are the only goods that are produced and consumed in efficient quantities in a competitive market.

Examples: food, clothing, cars, mobile phones.

Club Goods

Goods that people can be prevented from using unless they pay, but one person’s use does not usually reduce availability for others. This means that they are excludable but non-rival

Examples: Netflix, subscriptions, gym memberships

Common Resources

Goods that are hard to stop people from using, but one person’s use reduces what if left for others. This means that they are non-excludable but still rival

Examples: fish in the ocean, clean water, forests.

Public Goods

Goods that everyone can use and people cannot easily be excluded from using, even if they do not pay. This means that they are non-excludable and non-rival.

Examples: street lighting, national defence, free-to-air radio.

Free Rider Problem

Occurs when people consume goods without paying for them e.g. someone who doesn’t pay taxes can still enjoy public parks. These are public goods. Because no one has incentive to pay towards the cost, notational produce is willing to supply non-excludable goods. Public goods have ti be funded by tax payers’ money and provided by the government. Free riders always create deadweight loss and lead to market failure.

Tragedy of the Commons

Common resources tend to be overused because they are not excludable so people don’t have to pay to use them. Moreover, when a person uses a common resource, only that person benefits, nobody else because they are rival in consumption. Thus leads to things like overfishing and deforestation

Competitive Market

A competitive market is characterised by a large number if buyers and sellers

firms are price takers

very similar (homogenous) products

Easy entry into the market (no barriers to entry or exit)

Non-Competitive or Imperfect Market

Is characterised by:

A small number of firms

product differentiation

firms are price setters, they have market power

Entry into or exit out of a market is restricted

Monopoly

one firm in an industry that has control of the market

Barriers to entry

A barrier to entry is anything that restricts or blocks the entry of new forms into an industry or market

Examples: large set up costs (mining), government legislation, technology advantage (seen with Microsoft), low profit incentive for new forms, product differentiation and brand loyalty.

Circle of Flow Model

Demonstrates the continuous flow of income from firms to households and back again

Consumer Expenditure

spending by households on goods and services

Determinants of Consumer Spending

Disposable income

Household Wealth

Interest rates

Household Confidence and Expectations

Disposable income

The income households have available to spend or save after income tax, plus any transfer payments they receive.

When households have more money available, they can afford higher levels of consumption. When disposable income falls, households usually reduce spending or delay non-essential purchases.

Household Wealth

A value of assets owned by households such as housing, savings, shares, and superannuation, minus debts.

When wealth rises, households may feel more financially secure. This can increase confidence and reduce the need for precautionary saving.

Interest Rates (Households)

The cost of borrowing money and the reward for saving money

Lower interest rates male borrowing cheaper and reduce the return for saving. This can encourage households to borrow and spend, especially on durable goods. Higher interest rates usually do the opposite.

Household Confidence and Expectations

Refers to how positive households feel about the future, including job security, income, and economic conditions.

If households expect strong employment and rising incomes, they are more willing to spend now. If they expect unemployment, recession, or financial pressure, they may delay spending and save more.

What are the determinants of Business Investment

Expected profitability and Rate of Return

New technology research and development

Interest Rates

Business Confidence and Expectations.

Expected profitability and Rate of Return

Firms invest when they expect the investment will generate future revenue and profit. The expected rate of return is the expected profit from an investment as a percentage of its cost.

If extracted profitability rises, more investment projects beep,es worthwhile. If expected profitability falls, firms are more likely to postpone or cancel investment.

New Technology and Research Development

New technology includes improved machinery, software, production systems and innovations created through research and development.

New technology can make existing capital outdates. Firms may invest to remain competitive, improve productivity, reduce costs or produce new goods and services. The introduction of new technology usually increases business investment.

Interest Rates (Firms)

For firms, interest rates represent the cost of borrowing money to finance investment,

A lower interest rate reduced the cis if kaiaks, so more investment projects cab earn a return greater than the cost of borrowing. A higher interest rate makes borrowing more expensive and reduces the number of worthwhile projects.

Business Confidence and Expectations

Business confidence refers to how positive firms feel about future sales, profits, and general economic conditions.

If firms expect strong demand, they are more willing to expand capacity and purchase capital goods. If firms expect weak demand or rising inventories, they may reduce investment.

Government Spending

spending by Commonwealth, State, and local governments on goods, services, and infrastructure. e.g. spending on schools, hospitals, roads, defence, public sector wages.

Net Exports

is exports take imports

Exports: spending by overseas buyers on Australian goods and services

Imports: spending by Australians on overseas goods and services.

Business Investment

Spending by firms on capital goods used to produce goods and services e.g. machinery equipment, factories, research and development. warehouses.

Determinants of Government Spending

Current Expenditure

Capital Expenditure

Current Expenditure

Spending on goods and services now

Capital Expenditure

spending in infrastructure and long-lasting assets

Determinant of Net Exports