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Economics Exam
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Resource Allocation
Allocative efficiency Productive efficiency Dynamic efficiency Intertemporal efficiency
Demand factors microeconomics
Disposable income Interest rates Consumer confidence Population demographic Preferences and tastes Price of substitues Price of complements
Supply factors microeconomics
Productivity Technological change Number of suppliers Climatic conditions Cost of production
Price Elasticity of Demand
Need or want Little or many substitutes Small or large percentage of income How fast decision need to be made
Price Elasticity of Supply
How easy to store How durable it is How quickly it can be made
Market failure causes and solution
Asymmetric information - Government regulations Negative externalities - Indirect Taxation - Government Advertising Positive externalities - Subsidies Common access goods - Government regulation
Free and Perfectly competitive market
Conditions: Firms have little market power Firms have ease of entry or exit Products are homogenous Assumptions: Resources are mobile Behaviour is rational Perfect knowledge Consumer sovereignty exists
One contemporary example of government intervention in markets that leads to a decrease in efficiency of resource allocation
Minimum wage
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Opportunity cost
Benefits forgoneby a decision to not direct resources into the next best alternative
Allocative efficiency
Resources are used in ways that maxises society satisfaction and opportunity costs are minimised
Productive efficiency
Using the lowest cost production methods and minimising wastage of resources
Dynamic efficiency
Resources are reallocated quicjly to increase choice and meet the changing neds of consumers
Intertemporal efficiency
The optimal balance between current consumption and spending and future consumption and saving for financial investment
Production Possibility Frontier (PPF)
Outside = unobtainable On the line = efficient Inside = inefficient
Income effect
Change in demand for a good or service, induced by a change in price of a product due to change in purchasing power
Substitution effect
Decrease in demand for a product as its price rises because consumers are switching to relatively cheaper alternatives
Market failure
When the price system allocates resources inefficiently, reducing the overall satisfaction of societys wants, wellbeing and living standards
Minimum wage
To protect living standards of low-income employees to ensure they have access to basic goods and services
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Sectors in flow model
Household sector Business Sector Financial Sector Government Sector Overseas Sector
Four flows
Household to Business Business to Household Aggregate Demand Aggregate Supply
Aggregate Demand Components
C+I+G1+G2 + (X-M) Private consumption Investment Government consumption Government investment Exports Imports
Factors of AD
DICCER Disposable income Interest rates Consumer confidence Business confidence Exchange rate Rate of economic growth overseas
Effects for movement in AD
Purchasing power effect Interest rate effect Import substitution effect
Components AS
ACE Access to resources Cost of production Efficiency of resource use
Factors of AS
PECCTQ Productivity Exchange rate Cost of production Climatic conditions Technological change Quantity and Quality of the factors of production
3 Macroeconomic goals
Strong and Sustainable Economic growth Low and stable inflation Full employment
Variations of CPI
Headline rate of inflation Underlying rate of inflation
Economic growth too low
More cyclical unemployment Weaker government finance and reduced ability to provide adequate services
Economic growth too high
Environmental degradation Higher inflation rates as capacity constraints exist (consumers bidding up prices)
Types of natural unemployment
Structural Seasonal Frictional Hardcore
If unemployment too high
Loss of incomes Loss of GDP Loss of Tax revenue Greater income inequality
If unemployment too low
Loss of purchasing power Damage to international competitiveness Greater income inequality
If inflation is too high
The erosion of purchasing power Development of price wage spiral Distortion of spending and investment decisions Lower returns on investment Loss of international competitiveness
If inflation is too low
Increase unemployment (delayed current consumption)
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Purchasing power effect
Higher prices will reduce purchasing power of savings and incomes
Interest rate effect
Higher prices will increase interest rates, making borrowing money more expensive
Import substitution effect
Domestic prices increasing encourages Australians to purchase cheaper imports of goods and services
GDP
Calculated the sum of the average Production Income Expenditure
Underemployment
People who have a job but work less hours than they prefer or work in positions where their skills are not being utilised properly
Hidden unemployment
Unemployed people who stop actively seeking for work do no appear as an unemployment statistic
Unemployment rate
Unemployed/Labour force
Participation rate
Labour force/working age population
Underutilisation rate
Unemployed + Underemployed/Labour force
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The 3 Big economic questions
What (and how much) goods and services to produce, How to produce these goods and services and for whom to produce the goods and services for
What answers all 3 questions
The Australian economy via the nature of demand and supply, alongside government decision making
Australian economy
Primarily driven by market forces Some government intervention is needed
What (and how much) to produce
Market decides through demand of consumers and ability of producers to meet this demand Government intervenes to manipulate the market to prevent certain goods and services from being produced and encourage certain goods and services to be produced through financial incentives such as subsidies.
How to produce
Market will decide with producers being heavily influenced by relative prices and the various factors of production Government intervenes via implementing various laws and regulations that influence relative cost of factors of production
Whom to produce
Determined by who can afford to buy what is produced which is determined by markets as incomes are determined mostly by a persons economic contribution to the production processes Government intervenes due to its goal to achieve a more equitable distribution of income
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Inflation
3.8% Continued interruptions to global supply chains as the global economy continues to emerge from the COVID-19 period increase disposable income due to stage 3 tax cuts
Economic growth
1% Appreciating AUD since early 2024 contractionary monetary stance with target cash rate of 4.35% (high interest rates) Weaker consumer confidence
Unemployment rate
4.2%
Commodity prices
Decreasing
Terms of trade
decreasing
Current account
deficit increasing
Business cycle
Contractionary phase
Scholarly Assistant's Insights
Study key concepts in economics with flashcards covering resource allocation, market efficiency, and factors affecting demand and supply.
Economics
Microeconomics
Market Failure
Government Intervention
Resource Allocation
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