economics sac 1 summary

Four types of efficiency: 

• Allocative: Resources used to satisfy society's needs

• Productive: Lowest-cost production methods used

• Dynamic: Quickly reallocating resources

• Inter-temporal: Optimum allocation between current consumption and future investment

Supply movements and curve:

• Movements: price changes cause movement along the curve

• Shifts: non-price factors (e.g., tech, costs) cause the entire curve to move

Non price factors: PISTICC

• Population demo

• Interest rates

• Substitutes

• Preferences and tastes

• Disposable income 

• Complements

• Consumer confidence 

(that affect the demand curve)

• Population demographics - changing size/composition of the population, affected by immigration, birth rates etc 

• Interest rates - the cost of borrowing money 

• Substitutes - price of a product that can be used in place of another

• Preferences and tastes 

• Disposable income - income available to spend after tax is paid 

• Complements - price of products consumed in conjunction with another product e.g phone + phone case

• Consumer confidence - level of optimism of households regarding future employment and income 

Non price factors: 

• Cost of production 

• Tech change 

• Productivity growth 

• Climatic conditions

• No. of suppliers 

(that affect the supply curve) 

• Costs of production  - change to the cost of resources will impact upon a producer’s profitability which influences their willingness/ability to supply g/s 

• Technological change - refers to changes in the way g/s are made 

• Productivity growth - % change in efficiency of businesses in terms of ability to convert inputs into products (total output per input) 

• Climatic conditions - changes to the climate or weather conditions that impact producers ability to supply g/s

• Number of suppliers - more suppliers in the market offering g/s lead to increase in supply, but if firms in industry are making losses, they more likely to choose to leave the market reducing supply and shift supply curve to the left 

Three categories of supply factors - ACE

• Availability of resources

• Cost of production 

• Efficiency of resource use 

Types of government failure 

• Externalities 

• Public goods

• Asymmetric info 

• Common access goods 

Elasticity: responsiveness of change in QD or QS relative to a change in price 

PED: measures responsiveness of changes in QD to changes in price

• small change in price = large change in QD, demand curve said to be elastic

•  large change in price = small change in QD, the demand curve is said to be inelastic

PES: measures responsiveness of changes in QS to changes in price

• small change in price = large change in QS, demand curve said to be relatively elastic

•  large change in price = small change in QS, the demand curve is said to be inelastic

Factors affect PED 

• Degree of necessity 

• Availability of substitutes 

• Proportion of income

• Time 

Degree of necessity - demand more elastic for lux goods as they tend to be “optional extras” whilst inelastic for necessities bc regardless of price demand will not change significantly 

Availability of substitutes - closer substitutes are the more elastic demand is whilst the more unique a good is the more inelastic it is 

Proportion of income - when price takes up high % of income, demand more elastic whereas when product takes up small % of income demand is more inelastic 

Time - the longer the consumer has to make a decision, the more elastic demand is as they are able to seek subs in the short time PED remains relatively inelastic 

Factors affect PES 

• Spare capacity 

• Production period

• Durability of goods (storability) 

Spare capacity - if there’s lots of spare capacity business can increase output w out rise in $ and supply will be elastic in response to change in demand

Production period - supply is more elastic in long run than short run, more time allows easier production adjustment while slow-to-produce goods (like agriculture) have inelastic supply

Durability of goods - if good more durable = lasts longer supply will be elastic, perishables are inelastic

Relative prices: price of any one g/s compared in terms of another g/s

In a competitive market what determines prices of goods and services? 

Prices are determined by supply and demand through the price mechanism. When demand increases or supply decreases, prices rise, signalling producers to allocate more resources to those goods, ensuring allocative efficiency.

Free markets – operate w out  gov  intervention in the market meaning the forces of supply demand operate to set prices 

In a perfectly competitive market, many buyers and sellers make decisions based on self-interest. Producers use price signals to maximize profits, while consumers choose what gives them the most satisfaction. Consumer spending determines what is produced and how resources are used.

The price mechanism represents how the forces of demand and supply determine relative prices of goods and services, which determines the way productive resources (labour, capital and natural) are allocated in an economy.

Market failure - happens when a free market doesn't allocate resources efficiently, or when resources are used in a way that doesn't maximize national living standards or welfare

• Public goods

• Common access resources 

• Externalities 

• Asymmetric info 

Public goods - g/s that are available for all people to use, gain benefit from or enjoy

They have two characteristics

1. They are non-rivalrous (my enjoyment of public good doesn’t reduce ur enjoyment)

 2. They are non-excludable (hard to exclude consumers, who haven’t paid for the g/s from using the public good)

The free rider problem occurs with public goods, where people benefit without paying. This leads to underproduction of public goods, as producers focus on private goods for higher profits.

Externalities - when a person is engaged in activity that affects wellbeing of a 3rd party who isn’t invl in the activity 

Positive Externality-  occurs when a 3rd receives benefit from the production/consumption of a product (didn’t pay for)

Positive externalities cause market failure bc resources are underallocated to these benefits, gov intervention is needed to correct this inefficiency

Negative Externality-  occurs when a 3rd receives cost from the production/consumption of a product (no compensation)

Negative externalities cause market failure by leading to the overuse of harmful activities w out gov  intervention, resources are misallocated, causing inefficiency

Asymmetric info 

gov regulation is used to protect consumers from mis info and provides them w specific rights when purchasing products, done thru Aus Consumer Law and Trade Practices Act

• Can be one by gov ads 

EG: In regards to the used car market, a salesman must provide buyers of used cars with a guarantee of clear title, meaning it is not a stolen car or one with money still owing on it.

Common access goods

1. Government regulation is used to reduce current consumption of CAR thereby promote sustainable development 

• Licensing system - obtaining licence 

• Quota - limit set of quantity 

• Seasonal limits

• Prohibition 

2. Gov subsidies 

used to alter incentives and lead to the development of ‘clean’ technologies that do less harm to the environment and thus multiple common access resources.

3. Indirect taxation can be used to alter the structure of relative prices and therefore change the incentives for producers and consumers so that their behaviour promotes efficiency

Government failure: when gov  intervention worsens resource allocation, making it less efficient than the free market. It can happen due to unintended consequences of the intervention

Unintended consequences can be grouped into three types: 

1. Unexpected benefit:  positive unexpected benefit (luck)

 2. Unexpected drawback: unexpected drawback occurring in addition to desired effect of policy

 3. Perverse result:when an intended solution makes a problem worse

Equilibrium price

Where total QD is = to total QS 

• no shortage (excess demand) or no surplus (excess supply) of the product at this price

Disequilibrium 

• Shortage (price below equilibrium price) 

• Price too low, shortage revealed (d>s) 

• Due to shortage, consumers bid against eo so price increases, contraction in demand

• Supply expands (rises) bc suppliers c that higher profits can be made by supplying more 

• Continues until shortage is eliminated and new equilibrium is reached

• Surplus (price above equilibrium price) 

• Price too high, surplus revealed (s>d) 

• Due to surplus, producers forced to lower price for excess stock to be sold, supply contracts

• Demand expands as price falls - law of demand operates (substitution/incomes) 

• Continues until surplus is eliminated and new equilibrium is reached