microeconomics

• demand refers to the quantity of a good or service that consumers are willing and able to purchase or consume at a given price.
• a market mechanism is a basic supply and demand model which will develop skills in making predictions about possible consequences of market changes, and will analyse the degree of competition in markets and the effect on prices, resource allocation and living standards.
• the process of the price/market mechanism:

  1. consumers purchase goods and services. the quantity demanded (QD) will signal to suppliers how much they are willing to pay for a product.
  2. suppliers will then adjust prices by either lowering prices to clear excess supply, or increasing prices to maximise profits on excess customer demand.
  3. continues until market is cleared and equilibrium price is reached.
• relative prices are used to determine how the market system will respond to price changes and resources allocation, rather than just nominal price. consequently, if the relative price of a product falls in relation to another, consumers will demand more of that product because it is cheaper than the alternative.
• relative scarcity is the basic economic problem that addresses how an economy allocates its limited resources to best satisfy society's unlimited needs and wants and improve living standards and overall wellbeing.
• needs refer to goods and services required for survival.
• wants refer to the pleasurable goods and services that provide consumers with utility, but are not essential to living.
• factors affecting decisions of households include:

  • limited disposable income
  • personal preferences
  • advertising and fashions
  • seasonal conditions
  • rational and non-rational behaviour
  • government policy decisions
• factors affecting decisions of businesses include:

  • production costs and profitability
  • competitors' decisions
  • consumer behaviour
  • availability of new technology
  • government policy decisions
• factors affecting decisions of the government include:

  • political survival and election promises
  • voter attitudes and expectations
  • political party's values
  • the desire to solve problems that would occur if nothing was done
• factors affecting the decisions of the overseas sector:

  • production costs
  • quantity and type of resources they have
• resources refer to the productive inputs used to produce goods and services, including natural, labour and capital.
• natural resources are factors of production that occur in nature. e.g. water, land, crops
• labour resources are the skills and effort which humans provide towards the production of goods and services. e.g. employees, doctors, accountants.
• capital resources are previously manufactured machinery and equipment which are used to produce other goods and services. e.g. roads, schools, electricity.
• opportunity cost is the value of consumption or production forgone when resources are allocated to the next best alternative. or what (value) is lost when a decision is made.
• all rational economic agents aim to minimise opportunity costs (what is lost) when decision-making, leading to better decision-making because less resources are lost or wasted.
• production possibility frontier is the illustration of the nation's available choices when resources are used to maximum efficiency at the physical limits or productive capacity to decide how to allocate resources.
• ppf demonstrates the opportunity costs as changing the allocation of scarce resources will impact the alternative choice.
• on the ppf, living standards are optimal because there is no unemployment of resources and opportunity costs are made to best satisfy society's wants and needs.
• what and how much to produce is often answered by consumer sovereignty, seasonality, relative profitability, government laws and regulations.
• how to produce is often answered by replacing labour resources with capital, the most profitable or lowest cost productions methods, government policies.
• for whom to produce is often answered by the level of each individual's income, reflecting personal economic contribution, government's decisions with intervention, producing some free or low-cost goods and services.
• allocative efficiency is when resources are used in ways that maximise society's general wellbeing, no resources are wasted, and it is only one point on the PPF.
• productive (technical) efficiency is using lowest cost production methods, minimising the wastage of resources when making goods and services. to increase output, inputs must increase = maximum efficiency. this can be any point on the PPF. it increases allocative efficiency over time.
• dynamic efficiency is when resources are reallocated quickly in response to the changing needs and wants of consumers, or a structural change in the economy. resources are mobile and there is a flexible workforce with transferable skills to easily reallocate between alternatives when relative prices change. it boosts allocative efficiency and ensures resources are distributed where they are most wanted or valued by society.
• intertemporal efficiency is the optimal balance between satisfying current and future (generations') consumption needs and wants. it considers how consuming scarce resources will impact the future.
• any point within PPF identifies inefficiency of resources as they are not all allocated to production, decreasing living standards.
• any point outside of the PPF identifies that there will not be enough resources to meet production needs, decreasing living standards.
• expanding the PPF is by increasing the volume or efficiency of resources by increasing:

  • foreign investment in the economy
  • level of skilled immigration
  • worker productivity or efficiency
  • technology innovations
  • government expenditure on education and training of the labour force
  • building new infrastructure
  • discovery of new mineral deposits or natural resources
• an economic system is an institution designed to help organise production and the distribution of the nation's goods, services and incomes.
• a market is an institution where buyer and sellers interact to negotiate or exchange the relative prices for each good or service.
• a market best operates as a perfectly competitive market because it enhances the extent to which society's needs and wants are satisfied, as well as general wellbeing and living standards.
• a perfectly competitive market is`when all economic agents are price takers and no individual buyer or seller has the market power to influence prices. it forms the basis of a demand and supply analysis to illustrate the operations of the market mechanism.
• Consumer sovereignty is a precondition of a perfectly competitive market.
• Many buyers and sellers:

  • Too many firms producing homogenous products
  • No market power over prices
  • Minimal % of market share
  • Price-takers
• Rational behaviour:

  • Consumers purchasing at the lowest price (self-interested)
  • Businesses selling at the highest price (seeking profit maximisation)
• Easy entry and exit by sellers:

  • Little to no barriers
  • Government regulations and intervention
• Mobile resources to adjust to changes in consumer sovereignty
• Perfect knowledge of the market:

  • To make rational and informed decisions
  • Increasing utility and efficient resource allocation