Microeconomics

• Define Relative Scarcity?

  Unlimited needs/wants, and limited resources
• 3 Resources + example?

  Natural - water, air

  Labour - doctor, programmer

  Capital - Pizza oven, hammer
• Define opportunity cost?

  Value of the next best option that was given up
• Production possibility frontier (PPF)?


  Shows the productive capacity
• 4 types of efficiency?

  Allocative - meeting needs and wants

  Technical - max production, min cost

  Dynamic - How quickly an economy can relocate resources to adjust to market

  Intertemporal - future and current needs/wants
• 4 types of efficiency on PPF?

  Allocative: Specific location on PPF

  Technical: Anywhere on PPF

  Dynamic: Time to move from B -> D

  Intertemporal: Producing at any point on PPF, but in a balanced way

  
• 3 Basic Economical questions

  1. What? How much to produce?
  2. How to produce?
  3. For whom to produce?
• Perfect Market (Competition) features?


  Many buyers and sellers, Homogenous products, ease of entry and exit
• Perfect Market (Competition) Assumptions?


  Buyers and Sellers have full information given and make rational choices

  Resources can be reallocated

  Buyers and Sellers aim to maximize profit and utility
• Law of Demand?

  Price increases, quantity demanded decreases

  Price decreases, quantity demanded increases
• Substitution Effect?


  Consumers switch from expensive products to cheap alternatives
• Income Effect?


  Consumers, at lower prices, can buy more with the same money
• Diminishing Marginal Returns?


  As more of a product is consumed, utility decreases, hence consumers willing to pay less
• Demand Non-Price Factors?

  Disposable income change

  Population Demographic

  Price of Substitute & Complimentary items change

  Trends

  Interest rates

  seasonal changes

  consumer confidence
• Law of Supply?

  Price increases, quantity supplied increases

  Price decreases, quantity supplied decreases
• Supply Non-Price Factors?

  Change in cost of production (resources, rent, subsidies)

  Change in number of suppliers

  Change in technology

  Change in productivity (education)

  Change in climate conditions
• Equilibrium?


  The price where quantity supplied equals quantity demanded

  There is no shortage or surplus

  Market is cleared
• Assumptions of a competitive market?

  Buyers have full information to make rational choices

  Economy's resources are mobile and can be reallocated

  There is a profit motive for buyers and sellers, and purchasers aim to maximise utility
• Private goods are Rivalrous and Excludable

  Public goods are Non-Rivalrous and Non-Excludable
• What is relative prices?

  The price of one good/service measured in terms of the price of another good/service
• Example of relative prices?

  Green smoothie is $5, and vitamin water is $2.5. Therefore 2:1. So for every 1 green smoothie, the opportunity cost is 2 vitamin waters. Vice Versa.
• What is Elasticity?

  The responsiveness of quantity supplied or demanded to a change in price
• Factors of PED?

  Degree of Necessity

  Availability of Substitutes

  Proportion of Income

  Time
• Factors of PES?

  Spare Capacity

  Production Period

  Durability
• What is Market Failure?

  The allocation of resources due to price systems and forces of supply and demand, in a way which does not lead to the production of a g/s which maximises living standards
• What is Revenue?

  Price * Quantity
• Factors of PED?

  availability of substitutes

  time

  degree of necessity

  proportion of income
• Factors of PES?

  durability / storeability

  spare capacity

  production period
• What are Common Access Resources (MARKET FAILURE)?

  Non-excludable

  Rivalrous
• What is Market Failure?

  Where resources are inefficiently allocated and DOES NOT maximise living standards
• Types of market failure?

  Public goods

  Externalities

  Asymmetric information

  Common access resources
• Government Intervention in response to market failure?

  indirect tax

  Subsidies

  Laws/regulations

  Advertising

  Direct provision (Government provides resources themselves)
• What is Asymmetric information? (MARKET FAILURE)

  When one party has more information than the other (in a transaction) - prevents rational decisions being made

  
  

  Eg: Insider Trading & Second hand cars & Life insurance
• What is Public Goods (MARKET FAILURE)?

  Non-excludable and Non-rivalrous, thus Free Rider's stops suppliers from being incentivised to produce them. Thus underallocation of resources and allocative inefficiency.

  Eg: Street Lights, Defence Force, beaches
• Externalities are?

  An impact/cost on third parties from production or consumption of a g/s
• Negative Externalities Template?

  Overallocation, profits are higher and incentivises production of socially undesirable goods and services.

  DUE TO

  Private costs < Social costs (pollution or cigarettes/alcohol)
• Positive Externalities Template?

  Underallocation, socially desirable products.

  DUE TO

  Private costs > Social costs

  eg: vaccinations, training employees
• Non-excludable - no one can be excluded from consuming the good

  Non-rivalrous - Not depletable if used by other people
• Positive externality when consuming?

  Training Employees

  Social Benefits > Private Benefits
• Positive externality when producing?

  Vaccinations

  Social Costs < Private Costs