Eco DP1

• Relative scarcity is an economic problem arising from unlimited wants and needs but limited resources
• Decisions made due to relative scarcity often lead to an opportunity cost, defined as the benefit forgone by choosing not to direct resources into the next best alternative use
• Resource allocation involves decisions on which goods and services to produce and which wants to satisfy, determined by either the market system or government economic planning
• Efficiency in resource allocation refers to how land, labor, and capital resources are utilized in the production process and the specific combination of goods and services produced by the economy
• Allocative efficiency ensures resources are used in ways that maximize society's satisfaction and minimize opportunity costs
• Types of efficiency include allocative efficiency, productive efficiency, dynamic efficiency, and intertemporal efficiency, all related to the Production Possibility Frontier (PPF) model
• Price elasticity of demand


  The gradient (stepness) of the curve is referred to by economists as its elasticity
• Relatively elastic demand


  The quantity demanded of a good changes by a proportion greater than the change in price
• Price elasticity of demand


  % change in quantity demanded / % change in price
• % change in quantity demanded


  As a response to the % change in price
• Price elasticity of demand measures the responsiveness of the quantity of a product demanded given a change in its price
• Unit elastic demand


  The quantity demanded of a good changes by the proportion as the change in price
• Relatively inelastic demand


  The quantity demanded of a good changes by a proportion less than the change in price
• Unit elastic demand


  Price elasticity of demand is equal to 1
• Elastic demand


  Price elasticity of demand is greater than 1
• Inelastic demand


  Price elasticity of demand is less than 1
• Examples of Public Goods

  • National defense
  • Public hospitals and schools
  • Street lighting
  • National parks
• Externalities occur when the production or consumption of a specific good or service impacts a third party not directly related to it
• Government Regulation to improve market knowledge (asymmetric information)

  1. Insider privacy reporting sensitive information

  2. Requirements for product labeling of potential hazards
• Indirect Taxation to decrease consumption (negative externalities)

  Taxes raise prices of goods and services, reallocating resources towards more efficient and productive goods and services
• Externalities represent extra costs or benefits for third parties when goods and services are produced or consumed
• Public Goods are goods or services socially desirable, non-excludable, and non-rivalrous in nature
• Government Provision of socially beneficial public goods

  Provided in areas such as health education and health services to the community through various branches of the public sector
• Asymmetric Information examples

  • Insider trading
  • Used car market
  • Online transactions
  • Harmful ingredients used
• Subsidies to increase consumption (positive externalities)


  Encourage consumers and producers to change behavior or choose goods and services that are more socially beneficial
• Externalities: Positive


  • Immunizations
  • Education
• Examples of Common Access Goods

  • Fish in oceans
  • Minerals
  • Water
  • Forests
• Asymmetric Information exists when buyers lack complete information to make rational decisions
• Government Regulation to decrease consumption of Common Access Resources

  • fishing licenses
  • carbon tax
• Market failure occurs when the price system allocates resources inefficiently, reducing overall satisfaction of society's wants, well-being, and living standards
• Competitive Markets have consumer sovereignty, no market power, homogeneous products, mobile resources, rational behavior, and perfect knowledge
• Government Advertising to decrease consumption (negative externalities)


  When consumers and producers have knowledge of the impact of their actions, negative externalities are less likely to occur
• Government Regulation to decrease consumption of Common Access Resources

  Use licenses or environmental laws to restrict the amount of consumption of common access resources
• Common Access Goods are natural resources, typically non-excludable but rivalrous
• Competition leading to efficiencies in resource allocation

  Firms in competitive markets need to cut costs, be innovative, responsive to market shifts, and achieve intertemporal efficiency
• Externalities: Negative


  • Generating power releases carbon dioxide emissions
  • Consuming unhealthy products
• Relative Prices can induce income and substitution effects on consumer behavior
• Price Elasticity of Supply helps us understand the behavior of sellers in the market
• Price signal is information conveyed to consumers and producers via the price charged for a product or service, which provides a signal to increase supply and decrease demand for the priced item
• Market failure can occur when resources are not allocated in a way that best maximizes society's living standards