Eco AOS 1 Unit 3

Microeconomics:

• An economy on a small scale involving buyers and sellers in specific industries or sectors

Types of resources:

• Labor:

  • Physical and mental efforts of people

• Natural:

  • Derived from the earth

• Capital:

  • Man made

Needs:

• Required for survival

Wants:

• Desired but not required for survival

Relative scarcity:

• The idea of unlimited needs and wants but limited resources

Opportunity cost

• The value forgone when choosing the next best alternative

Living standards:

• Material:

  • Access to Goods and services

• Non-material:

  • Quality of life factors
     

Resource allocation:

• How scarce resources are allocated

Market capitalism:

• Where decisions are made by private owners rather than the government

Market socialism:

• Where decisions are made by the government and not private owners

Production possibility diagram:

• Displays different output options based on allocation of resources

• The PPF represents maximum efficiency

• A point inside the PPF is inefficient

• A point outside the PPF represents a point in the future

Allocative efficiency:

• Where resources are used to produce goods and services that maximize societies living standards

Technical efficiency:

• The lowest cost production methods including minimizing wastage

Dynamic efficiency:

• When resources can be reallocated quickly to changing needs

Intertemporal efficiency:

• Best covers current and future consumption in a balanced way

Competition on efficiency:

• In a market level of competition is usually equal to level of efficiency however too much competition can result in low efficiency 

Market:

• A place where buyers and sellers meet to exchange goods and services

Consumer Sovereignty:

• Means that consumers of goods and services, not governments, dictate how resources will be used 

Homogenous:

• Products are identical

System of allocation:

• Best decides how to deal with relative scarcity

Three economic questions:

• What to produce

• How to produce it

• Whom to produce it for

Perfectly competitive conditions:

• Large number of sellers

  • No individual seller has market power making firms 'price takers'

• Homogenous products

  • No product differentiation encouraging firms to offer lowest price possible

• Ease of entry and exit

  • Easy for firms to enter and exit the market with low barriers and set-up costs

Perfectly competitive assumptions:

• Full information

  • Buyers and sellers have access to all relevant information

• Mobility of resources

  • Resources can easily be reallocated as consumer preference changes

• Maximizing wellbeing

  • Sellers and buyers seek to maximize wellbeing

• Little to no government intervention

  • The government plays a minor role in allocation of resources

Market structures:

Cost:

• What the producer spends to make a product

Price:

• What the consumer pays for the product in the market

Total revenue:

• Price x quantity supplied

Total costs:

• Cost per unit x quantity supplied

Profit:

• Total revenue - total costs

Law of demand:

• As the price increases, the quantity demands decreases

Reasons underpinning the law of demand:

• Income effect

  • Due to limitations of income as the price rises fewer people can afford goods or services

• Perceived utility

  • If the price is higher than what a consumers believes it is worth they will no longer be willing to purchase

• Diminishing marginal utility

  • Over many purchases a product becomes less desirable leading to less willingness to purchase

• Substitution effect

  • If a price becomes too high consumers will use a substitute product

Demand factors:

• Disposable income

  • Total household income minus tax plus welfare

• Discretionary income

  • Disposable income minus necessities

• Price of substitutes

  • If substitutes become relatively cheaper demand for the original product will decrease

• Price of complements

  • Complements are products which are sold separately but are generally used together

• Changes in consumer preferences and tastes

  • If a product is or isn't "in fashion" will influence demand

• Population change

  • The more people in an economy the more demand

• Demographic change

  • Different demographic have different demands

• Consumer confidence

  • Household's level of optimism or pessimism about future employment and income

• Business confidence

  • Business' level of optimism or pessimism about future profits

• Changes in the seasons

  • Certain products are more or less appealing in different seasons

• Changes in government policy and regulations

  • The government can affect the demand for goods and services through subsidies, taxes or endorsement

• Changes in interest rates on borrowed money

  • Businesses and consumers may need to borrow money for expenses and must pay interest on that money to finance their spending. Generally higher interest rates will lower demand price for houses, cars and holidays

Law of supply:

• As the price increases the quantity supplied increases

Reasons underpinning law of supply:

• Profit motive

  • The drive of businesses to make as much money as possible

Supply Factors:

• Cost of production

  • The higher a firms costs the lower their profits

• Productivity growth

  • If more efficient methods of production are used output increases

• Climatic conditions

  • Different climates can alter the production process

• Government restrictions

  • Changes to taxes, regulations, subsidies and other interventions

Equilibrium:

• Where quantity demanded equals quantity supplied

Market price mechanism:

• The operation of the market system which involves a negotiated equilibrium by buyers and sellers, relative prices then change overtime due to non-price supply and demand factors, resulting in profit maximising firms overlooking resource allocation

Relative price:

• The comparison of value between two products

  • Effects

    • Can lead to change in resource allocation if goods become more/less profitable

    • Leads to allocative and technical efficiency resulting in an increase in MLS

    • Can lead to a decrease in NMLS due to profit motive 

Market failure:

• When the operation of a market results inefficient allocation of resources and does not maximize satisfaction of societies needs and wants

Types of market failure:

• Positive externalities:

  • Positive consequences of production or consumption to a third party

• Negative externalities:

  • Negative consequences of production or consumption to a third party

• Public goods:

  • Goods or services that provide positive externalities and are non-rivalrous and non-excludable

• Asymmetric information:

  • When either the buyer or seller has more market knowledge about the good or service being bought/sold than the other

• Common access resources:

  • Resources related to sustainability, meaning future generation will not be able to consume them if we over consume today

  • They are rivalrous, non-excludable and can lead to inter-temporal inefficiency

• Government intervention:

  • Government failure refers to when government intervention in the market, which is intended to improve market outcomes, unintentionally makes resource allocation less efficient

Laws/legislation:

• May promote competition, force a change in behavior or discourage actions

Education/information advertising

• Improving knowledge and awareness for consumers/businesses

Price controls:

• Rules about prices in the market imposed by the government, either through a price floor or a price ceiling

Price ceiling:

• The government sets a max price in the market below the market equilibrium

• Intended to make a product more accessible but fewer people have less access because of the already low supply

• Black markets may arise

Price floor:

• The government sets a minimum price in the market above the market equilibrium

• Intended to increase incomes and living standards for workers but few workers are getting a wage due to low demand

• Unemployment may arise

Subsidies:

• Government pays sellers reducing costs of production and increases supply

• Government pays buyers reducing opportunity cost and increasing demand

Protectionism:

• The government 'protects' local industries by increasing costs of production for foreign firms selling in Australia

Price elasticity of demand (PED):

• Refers to how responsive quantity demand is to a change in price

Elasticity of demand factors:

• Degree of necessity

  • If a product is essential people will maintain consumption even if prices rise

• Proportion of income

  • Products with higher prices make up a larger proportion of incomes, hence consumers see price changes in these products as more important

• Availability of substitutes

  • If a product has many substitutes consumers are more likely to purchase them if price increases

• Minor complements

  • The demand for cheap complements to relatively more expensive products is generally inelastic

• Time period

  • In short term demand is less elastic as consumers go about their shopping in a usual way. In the long term demand is more elastic as consumers have time to seek out relatively cheaper substitutes

Elasticity of supply factors:

• Storability and durability

  • A good that stores well can be saved for another time or suppliers can supply stored goods depending on market price making it elastic

• Production period

  • If a product takes a long time to produce business' cannot quickly raise/lower prices if there is a change

• Spare industry capacity

  • If there is spare capacity in a business, supply can easily respond to a change in price

• Time period

  • Over time businesses can use new methods and resources to better adapt in changes in price