Economics Part B U3 (AoS1)

• The Law of Supply

  As price increases, than so will the quantity supplied (positive relationship)
• Non-price factors that affect supply

  • Changes in the costs of production
  • Technological change and productivity growth
  • Climatic conditions and other disruptions
  • Number of suppliers
• Equilibrium price

  The compromise that is reached in the market (QD = QS)
• Price below equilibrium

  • will result in a shortage
  • more demand than supply
• Price above equilibrium

  • will result in a glut/surplus
  • less demand than supply
• Elasticity

  Considers the responsiveness of a change in one variable to changes in another factor that affects that variable
• Price elasticity of demand/supply (PED & PES)

  measures the responsiveness of the quantity demanded and quantity supplied of a good or service to a change in price of that good or service
• PED/PES= % change in quantity d/s/ % change in price
• high PED/PES (elastic)

  • if absolute value is greater than 1
  • % change in QD/S > % change in price
  • relatively flat
• low PED/PES (inelastic)

  • if value is less than 1
  • % change in QD/S < % change in price
  • relatively steep
• Medium PED/PES (unit elastic)

  • value be exactly 1
  • % change in QD/S = % change in price
  • steep curve
• Factors affecting price elasticity of demand

  • the degree of necessity
  • availability of substitutes
  • proportion of income
  • time
• Factors affecting price elasticity of supply

  • production period
  • space capacity
  • durability of goods
• Price mechanism

  how the forces of demand and supply determined relative prices of goods and services, which then ultimately determine the way our productive resources are allocated in the economy
• How competitive markets affect allocative efficiency

  suppliers pay close attention to price signals and desires of population to avoid being put worse off
• How competitive markets affect technical efficiency

  as consumers attracted to low prices, firms will seek lowest possible production price, resulting in existing resources being used better
• How competitive markets affect dynamic efficiency

  As firms have profit motive, will need to act quickly to get best possible benefits
• How competitive markets affect intertemporal efficiency

  due to profit motive, resources can tend to be used in one time period
• Market mechanism

  a system of the market where the forces of demand and supply determine the price and quantity of g+s traded
• Degree of excludability

  Determines how hard/costly is it to exclude those who don't pay, from receiving the benefit of g+s
• Degree of rivalry (depletable)

  Measures degree to which consumption by one reduces consumption by another
• Public good

  Refers to g+s that is made available to all members of society
• free-rider problem

  a person who receives the benefit from a public good but does not pay for it (e.g fireworks)
• Public goods

  • are non-excludable
  • are non-rivalrous
• Public goods (government intervention)

  • Government subsidies: Provide enough income to firms so can offer for free
  • Direct government provision: take full responsibility of providing public good
• Positive externality

  Occurs when third party receives a benefit from production/ consumption of a product
• Negative externality

  occurs when a cost is imposed on a third party not involved in transaction (or action)
• Private costs

  the money businesses need to spend to make each additional g+s plus opportunity costs
• Social costs

  more holistic view on production
• Private benefits

  relate to marginal utility that a person receives from consumption
• Social benefits

  any consumption activities that provide a third-party with benefit
• Positive externalities in production

  • private costs > social costs
  • e.g. research & development, training
• Positive externalities in consumption

  • social benefits > private benefits
  • e.g. vaccinations, education
• Positive externalities (government intervention)

  • Government regulation: laws that can ban production or consumption of certain activities or impose requirements on producers or consumers if they want to engage in certain activities
  • Advertising: utilise taxpayer funds to create advertising campaigns that promote consumption of g+s that have positive externalities
  • Subsidies: can be used to encourage production and consumption of positive externality
• Positive externalities (government intervention)

  • Government regulation: laws that can ban production or consumption of certain activities or impose requirements on producers or consumers if they want to engage in certain activities
  • Advertising: utilise taxpayer funds to create advertising campaigns that promote consumption of g+s that have positive externalities
  • Subsidies: can be used to encourage production and consumption of positive externality
• Negative externalities in production

  • private costs < social costs
  • e.g. factory (pollution), electricity (coal)
• Negative externalities in consumption

  • social benefits < private benefits
  • e.g. cigarette (smoke), noise pollution
• Negative externalities (government intervention)

  • Government regulation: may include a law that can ban certain production or consumption activities or impose requirements
  • Indirect taxation: raised taxation requirements if want to partake in the production or consumption
  • Subsidies: provide subsidies to goods with fewer negative externalities
  • Advertising: influencing tastes and preferences
• Asymmetric information

  Refers to a market transaction where one party has access to more information than the other
• Situations where seller knows more than buyer

  • can make false claims + hide any defects
  • e.g. vitamins