UNIT 3 AOS 1

• relative scarcity: where there aren't enough resources available to satisfy our needs and wants
• opportunity cost: the cost of the next best alternative use of our resources
• economic efficiency: when there is maximum output gained from a given volume of productive inputs, helping to maximise societies wellbeing
• allocative efficiency: where resources are used in ways that maximises societies satisfaction. resources are diverted to where they are most wanted
• productive/technical efficiency: the situation where a nation's resources are producing the maximum amount possible, at the lowest cost, for a given amount of inputs
• dynamic efficiency: where resources are reallocated quickly in response to the changing needs and tastes of consumers
• intertemporal efficiency: achieved when resources are appropriately allocated between current consumption and future consumption
• resource allocation: involves making choices or decisions about how scarce natural, labour, and capital inputs are to be used or distributed among competing areas of production
• conditions for a free and perfectly competitive market: consumer sovereignty exists, firms have no market power or control over prices, firms have ease of entry or no barriers, the products are homogenous, behaviour is rational, there is perfect knowledge of the market.
• perfect competition: exists when there are many buyers and rival sellers producing an identical product and competing strongly in a market
• monopolistic competition: few rival producers that have a monopoly over their particular product but compete with each other as very close substitutes
• oligopoly: small number of businesses dominate the market and collectively exercise market power by restricting supply and/or rising prices
• market efficiency: relying on competitive markets to make key economic decisions can cause scare resources to be used or allocated effectively
• efficiency: resources are directed to areas where they're most wanted. more national output gained from a given quantity of factor inputs. helps grow a nation's productive capacity, shifting the PPF outwards
• Efficiency


  • More likely to be at its highest where there's strong competition
• Why efficiency is more likely to be at its highest where there's strong competition


  1. Many rivals and no power to set prices

  2. Costs cut and produce more with less

  3. Firms forced to have allocative efficiency to minimise opportunity costs

  4. Firms need to innovate by using latest technology = productive/technical efficiency

  5. Firms need to be responsive to rapid shifts within the market = increased dynamic efficiency

  6. Intertemporal efficiency = right balance between resources allocated for current consumption vs saving for future use
• law of demand: states that the quantity of a certain good or service that buyers are prepared to purchase varies inversely with the change in price
• income effect: if price increases, a greater % of income is required for its purchase
• substitution effect: buyers look for cheaper substitutes or alternatives
• the law of supply: states that the quantity of a particular good or service that sellers are prepared to produce. varies directly with the change in price
• profit motive: a higher selling price means an increase in profits, making the production of the good more attractive than if its sold at a lower price
• non-price factors affecting demand: changes in disposable income, prices of substitutes and compliments, preferences and tastes, interest rates, population demographics, consumer confidence
• non-prices factors affecting supply: changes in the costs of production, number of suppliers, technology, productivity, climatic conditions
• price elastic: measures the responsiveness of the quantity of a good or service demanded or supplied when there is a change in its price
• price elasticity of demand: measures the responsiveness of quantity demanded relative to % change in price
• high PED (elastic): the value is greater than 1. if prices rise, total revenue of consumer purchases decrease
• medium PED (unit elastic): a number is equal to 1. quantity demanded changes by the same proportion as the change in price
• low PED (inelastic): a number that is less than 1. quantity demanded changes by a smaller proportion than the change in price
• determinants of the price elasticity: degree of necessity, availability of substitutes, time period, proportion of income
• price elasticity of supply: measures the responsiveness of quantity supplied to the % change in price
• high PES (elastic): a number that is great than 1. high responsiveness to change
• medium PES (unit elasticity): a number that is equal to 1. proportionate responsiveness to the price change
• low PES (inelastic): a number that is less than 1. low responsiveness to price changes
• determinants of the price elasticity: production period, spare capacity, durability of goods
• market mechanism: the system of decision making whereby the free forces of supply and demand for goods and services operate to prices
• relative prices: refer to the price of one good or service in comparison to another good or service
• market failure: public goods: goods and services that produce positive externalities to society. are non-excludable and non-rivalrous.
• market failure: externalities: the unintended side effects/consequences of an economic activity that affects a third party who is not directly involved in said transaction
• market failure: asymmetric information: where one participant in a transaction has more knowledge about what is being exchanged. leads to a misallocation of resources.
• market failure: common access resources: includes environmental natural inputs and reduces amount available for future generations, resulting in lower living standards and intertemporal efficiency