Exam

Question 1

Economic models (hot hands)

Answer 1

Simplified representation of economic reality to better understand our choices and their effect

Question 2

Types of economy

Answer 2

• command/planned = all gov
  -mixed = lots of gov intervention
  -free market = Australia, no gov
  What to produce, how and who

Question 3

Substitution effect

Answer 3

If price of good up, consumers will sub for another good. Demand for good decrease, demand for sub increase

Question 4

Income effect

Answer 4

Price of normal good down, demand up. Price of inferior good down, demand down. (Veblen)

Question 5

Law of diminishing marginal utility

Answer 5

Each additional good consumers buy, happiness down *applies equally to inferior and normal

Question 6

Factors that shift overall demand

Answer 6

• tastes and preferences
• number of consumers
• price of related goods
  -income
  -expectations

Question 7

Consumer surplus

Answer 7

• the benefit consumers get when the price of a good is less than what they were willing to pay.
• CS = (consumers max price - actual price) x quantity bought
• area under demand curve and above price paid, up to quantity boight

Question 8

Law of supply

Answer 8

• costs producers more money to produce higher quantity so higher price is needed to be eonomically viable
• increased demand signals producers can change higher price and earn more profit

Question 9

5 factors that shift supply

Answer 9

• technology
• number of producers
• price of resources
• taxes and subsidies
• expectations
  *- natural disasters

Question 10

Market equilibrium

Answer 10

Occurs when buying decisions of households and selling decisions of producers are equaled.

Question 11

Importance of equilibrium

Answer 11

• market is maximising total surplus
• market is efficient
• price in market will naturally move to reach equilibrium
• equilibrium price is stable

Question 12

Shortage

Answer 12

EXCESS DEMAND
- quantity demanded = more than supply given
- competition amongst buyers bids price up until equilibrium is reached

Question 13

Surplus

Answer 13

EXCESS SUPPLY
- quantity demanded = less than quantity supplies
- competition amongst producers eventually bids down price until equilibrium price is reached

Question 14

Producer surplus

Answer 14

PS = (quantity produced x price producers receive x 0.5)

Question 15

Total subsidy

Answer 15

Quantity produced/consumed x size of subsidy

Question 16

Productions probability frontier (PPF model)

Answer 16

Model showing all possible production combinations, with a set amount of resources / technology.
PPF model illustrates trade-offs, opportunity cost, efficiency in economy, economic growth.

Question 17

Coefficients

Answer 17

Inelastic - elasticity less than 1
Elastic - elasticity more than one
Unitary - elasticity is ome

Question 18

PED

Answer 18

Measure of how responsive consumers are to a change in price

Question 19

Determinants of PED

Answer 19

• availability of close substitutes
• necessities v luxuries
• proportion of income spent
• definition of market (broad / narrow)
• time horizon

Question 20

Total revenue

Answer 20

Amount a firm earns by selling goods / services

Question 21

Percentage change method

Answer 21

Percentage change in quantity demanded DIVIDED by percentage change in price

Question 22

Mid point method

Answer 22

(Change in quantity DIVIDED by average quantity) x (average price DIVIDED by change in price)

Question 23

PES

Answer 23

Price elasticity of supply measures the responsiveness of quantity supplied to a change in price

Question 24

Determinants PES

Answer 24

-time: if producer can respond quickly supply will be elastic
-nature of industry: manufactured goods are more elastic as its easier to increase production
-ability to store inventories : perishable v non perishable

Question 25

Income elasticity of demand

Answer 25

Refers to the responsiveness of demand to a change in consumer income (Percentage change in quantity DIVIDED by percentage change in income) Normal good: positive coefficient or more than one Inferior = opposite

Question 26

Cross elasticity of demand

Answer 26

Measures the responsiveness of demand for one good (a) to a change in the price of a related good (b). Can reveal whether goods are substitutes or compliments (Percentage change in Qa DIVIDED by percentage change in Qb) Substitute = positive

Question 27

Gov setting taxes

Answer 27

Gov sometimes sets taxes on specific goods to counteract unseen costs to society BUT gov doesn’t want tax burden on producers as this leads to unemployment and a low economic growth

Question 28

Market efficiency

Answer 28

The allocation of resources to maximise total surplus

Question 29

Price ceiling

Answer 29

A legislated maximum price that sellers are allowed to charge. Must be set BELOW equilibrium. ALWAYS leads to a shortage

Question 30

Price floor

Answer 30

A legislated minimum price that sellers are allowed to charge. Must be set ABOVE equilibrium price. ALWAYS leads to a surplus

Question 31

Market restrictions

Answer 31

Regulation of a quantity of a good/service supplied e.g. taxi licenses. Causes high prices and excess demand.

Question 32

Taxes

Answer 32

Gov sets a tax on specific goods that have an unseen cost to society that gov pays for. Inelastic goods will have a smaller DWL after tax

Question 33

Subsidies

Answer 33

Gov often subsidises to producers to increase production. Cost of supply paid for by tax payer, DWL represents taxpayers money that didn’t boost economic benefit.

Question 34

DWL

Answer 34

Lost value of transactions that do not occur due to poor allocation of resources.

Question 35

Market failure

Answer 35

An instance where the market does not naturally allocate resources efficiently therefore the market fails

Question 36

Market power

Answer 36

Firms can use market power to exploit market by varying output and changing prices. Monopoly = one Firms with market power have incentive to reduce competition to grow market power ANTI COMPETITIVE BEHAVIOUR -leads to higher PS but lower CS resulting in DWL

Question 37

Externality

Answer 37

Anytime economic activity affects someone outside market its called an EXTERNALITY

Question 38

Negative externality

Answer 38

Market produces MORE than efficient quantity because costs to society aren’t reflected in price consumers pay. Solution = tax

Question 39

Positive externality

Answer 39

Market produces LESS than efficient quantity because benefits to society aren’t reflected in price consumers willing to pay Solution = subsidy

Question 40

Rival

Answer 40

The consumption of the good prevent another consumer from consuming

Question 41

Excludable

Answer 41

A non-payer can be excluded from consuming it

Question 42

Public goods

Answer 42

-non-excludable/non-rival -private producers wont produce these goods because of no profit even though they are often essential

Question 43

Free rider problem

Answer 43

-public goods -non tax payers enjoying benefit of good -to avoid it gov imposes universal taxes so they have enough revenue to fund these goods and make them universally accessible

Question 44

Common property goods

Answer 44

Non excludable but it is rival. Lack of price tag consumers are incentivised to overuse

Question 45

Tragedy of the commons

Answer 45

Overuse of common property goods I.e fishing To avoid this - gov uses regulations such as licenses and quotas to avoid depletion

Question 46

Opportunity cost

Answer 46

Choosing one option over another and giving up the opportunity to get benefits of the other option

Question 47

Production possibility frontier

Answer 47

-model showing all possible production combinations, wth a set amount of resources/technology. Illustrates trade-offs, opportunity cost, efficiency in the economy, econ growth. -points inside/on are attainable, inside inefficient and outside unattainable

Question 48

Anti competitive behaviour

Answer 48

Incentive to reduce competition to grow market power e.g price fixing, collective boycotts, collusion