What is economics?
Economics examines how limited resources are used to produce goods and services to satisfy needs and wants and improve living standards.
Microeconomics
Microeconomics is a branch of economics which examines individual decision making by firms and households, and how this impacts on particular markets for goods or services
Macroeconomics
Macroeconomics is a branch of economics that examines the workings and problems of the economy as a whole.
Living standards
Living standards refer to how well off a nation is overall. Living standards are affected by both material and non-material living standards.
Material Living standards
Material Living standards refer to the economic well being of individuals as affected by actual per capita consumption of goods and services and incomes per year
Non-Material Living standards
Non Material Living standards are subjective but refer to the quality of life and could be affected by the amount of leisure time, happiness, life expectancy, crime rate and quality of the natural environment.
Resources
Resources are productive inputs and include natural, labor and physical capital used by the business. (management, entrepreneurial skills, the risk taker)
Relative Scarcity
Relative Scarcity describes when a nation’s wants are virtually unlimited, but there are not enough resources to satisfy these wants.
Opportunity Cost
Opportunity Cost is equal to the benefit foregone by a decision not to direct resources into the next alternative use.
Production possibility curve
Production possibility curves are used to illustrate the production choices available to society in the ways resources may be used or allocated.
Efficient allocation of resources
An efficient allocation of resources occurs when productive inputs are used to produce particular types of goods and services that best maximize the general satisfaction of society’s needs and wants, well being and living standards.
Market capitalist economy
A market capitalist economy involves the market or price system making decisions about what to produce, how to produce and for whom to produce, with private ownership of most resources.
Market failure
Market failure occurs when the price system allocates resources inefficiently reducing the overall satisfaction of society’s wants, well being and living standards.
Relative prices
The term Relative prices simply means the price level of one good (such as wheat) or service compared with or relative to the price level of another good (such as wool) or service. Changes in relative prices (price signals) affect the relative profitability of different types of goods and services and hence dictate how scarce resources are used or allocated.
Market failure can arise when…(7)
- Competition between firms in markets is weak and there are monopolies and oligopolies
- The market does not produce enough socially desirable public goods and services at a low and affordable price (so everybody can access them)
- Those who do not directly pay for service (such as street lighting) cannot easily be excluded from gaining benefits (the free rider problem). Here it is hard to make profits so there is a underproduction.
- The market over-produces socially undesirable goods and services because some their profits are high.
- There is asymmetric information : one party to a transaction knows more than another, undermining effective decision making
- There is economic instability due to time lags in supply adjusting to demand
- The operation of markets result in a inequality in the distribution of incomes and wealth that is damaging to society
Pure competition
-Many sellers in the industry
-strong competition
-no product differentiation
-ease of entry and exit
-firms are price takers
goods are homogeneous (the same)
-buyers and sellers have perfect information
-mobile resources
Monopolistic competition
- Most common form of market structure
- many buyers many sellers
- product differentiation e.g coca cola and home brand coke
- moderate ease of entry and exit
Oligopoly
- a few sellers in the industry
- some product differentiation
- fairly difficult entry and exit
- e.g coles and woolworths
Pure monopoly
- one seller in the industry
- weak competition
- product differentiation is unimportant
- entry and exit is difficult
- firm is a price maker and has a lot of market power
Why are positive externalities considered to be market failures?
Where positive externalities exist, the good or service may be under-consumed or under-provided since the free market may fail to value them correctly or take them into account when pricing the product. If there are external benefits the market delivers an output below the quantity that maximises social welfare.
The most effcient form of resource allocation is one which…
minimises opportunity cost
Price elasticity
This simply refers to the extent to which the demand or supply of a good or service is responsive to a change in price.
Market Mechanism
Market mechanism is the system of decision making whereby the free forces of supply of and demand for particular goods and services operate to set relative prices at the point of the market equalibrium
Types of elasticity for demand
- Type of item (necessities/non-necessities)
- Substitutability (lots of subs/unique)
- Cost and relative importance (high/low proportion of income)
- Minor complementary items (swimming pool/water, water will be inelastic)
