Flashcards
Chapter 2 Economics
Cards in this deck (81)
- 1What is an economy?An institution or organisation designed to coordinate the production and distribution of goods, services and incomes
- 2What is a market-based capitalist economy?A type of economic system where decisions about the allocation and use of resources are made by consumers through the market system and where most businesses are owned by private individuals. This type of economic system is found in Australia and other countries.
a.k.a private enterprise or capitalist economy - 3What are characteristics of a market-based capitalist economy?- Consumer sovereignty
- Private ownership of businesses - 4What is consumer sovereignty?Where households determine the type and quantity of particular goods and services that are produced through their choices, rather decisions being made through government planning.
- 5What is a market?An institution or organisation where buyers (who create demand for items) and sellers (who organise supply of items) negotiate an agreeable price for particular goods and services.
- 6What are some differences between markets?- there are open, legal or free markets, as well as black markets
- some markets work face-to-face e.g. Dandenong market, whilst others do not e.g. Gumtree
- some markets have a high level of competition (pure or perfect competition), whilst others have little rivalry (perfect or pure monopoly) - 7What is market power?the ability of a businesses to set or control the market price at which it sells a good or service. The degree of power varies between different market structures.
- 8What is market structure?refers to the type or nature of competition and power found different markets.
- 9What are the four main types of market structure found in Australia, in order from strongest competition to weakest?- pure of perfect competition
- monopolistic competition
- oligopoly
- pure or perfect monopoly - 10What is pure of perfect competition?A market structure which exists when there are many sellers of a good or service in the industry and each seller has little market power.
- 11List characteristics of pure or perfect competition- many buyers and sellers (perhaps hundreds or thousands)
- strong competition
- no brand names or advertising as product is identical
- firms are price takers
- ease of entry and exit by firms as there are no barriers like high start-up costs or government regulation - 12What is monopolistic competition?A market structure which exists when there are a moderate number of sellers of each product in the industry, and products sold are similar, but not identical as each firm uses its unique brand name and different product features to sell its items.
- 13List characteristics of monopolistic competition- moderate number of sellers, each selling similar but not identical products
- quite strong competition
- product or brand name differentiation and advertising is important
- moderate ease of entry as there are few barriers or restrictions - 14What is an oligopoly?A market structure which exists when there are relatively few, but large sellers who control the output of an industry, and where there is potential for collusion. Here, the level of competition is limited.
- 15List characteristics of an oligopoly- few but large sellers who control output of industry
- potential for collusion
- sellers often watch rivals when setting prices
- brand and product differentiation are important ways of selling, using advertising
- fairly difficult entry and exit for firms due to high start-up costs and other barriers - 16What is pure or perfect monopoly?A market structure which exists when a single seller controls the output of an industry and competition does not exist.
- 17List characteristics of pure or perfect monopoly- one seller control output of entire industry
- weak competition
- there is no close substitute product
- firm is a price maker
- product differentiation is not important
- difficult entry and exit due to high start-up costs and other barriers - 18Which market structure is considered to be ideal? Why?Pure or perfect competition considered ideal, because strong competition can result in
- lower prices
- better quality goods and superior services
- greater efficiency in using or allocating scarce resources
- higher GDP
- better material living standards - 19Identify the assumptions of a perfectly competitive market- strong competition
- ease of entry
- no product differentiation
- consumer sovereignty exists
- absence of government control and restrictions
- good or perfect knowledge of the market
- firms use resources to try to maximise profits
- consumers behave rationally - 20What are the effects of strong market competition?- higher efficiency in allocating resources
- lower prices and greater purchasing power
- better quality goods and services
- greater output of particular goods and services
- improvement of international competitiveness of local firms
- increased material living standards - 21How does strong competition result in higher efficiency in allocating resources?When competition is weak, there is less need for firms to use resources efficiently or keep production costs low to survive. But where there is strong rivalry, businesses are forced to cut costs and organise production as efficiently as possible.
- 22In what case might strong competition not result in higher efficiency in allocating resources?When having a monopoly or oligopoly allows for mass production costs per unit of the output produced can be lower and spread of over higher production volumes. This shows how bigger firms can achieve higher efficiency and gain economies of large-scale production.
- 23What is an economy of large-scale production?Reductions in per unit production costs that are gained when a firm's fixed costs can be spread more thinly across a larger level of output.
- 24How does strong competition result in lower prices and greater purchasing power of incomes?When there is little competition, prices are often higher. Also, firms in a non-competitive market structure are tempted to collude and set higher prices and exploit consumers, thereby reducing their purchasing power. With stronger competition, this is prevented and consumers can access products are lower, competitive prices.
- 25What is purchasing power?Refers to the quantity of goods and services that can be bought with each dollar of income. It is affected by prices and inflation.
- 26How does strong competition result in better quality goods and services?Businesses are forced to ensure that the quality of their goods and services is equal to or better than competitors.
- 27In what case may weaker competition be beneficial for the quality of goods and services provided?If a large monopoly producer uses its size and financial strength to invest in R&D that would otherwise be beyond the reach of smaller firms.
- 28How does strong competition result in greater output of goods and services?When there is weak competition, the supply of goods and services generally decreases due to the high prices being charged. But in markets with strong competition, where goods and services are offered at competitive prices, production usually rises, meaning higher GDP and less unemployment of resources.
- 29How does strong competition result in improved international competitiveness of local firms?As weak competition leads to to lower efficiency and higher prices, the international competitiveness of local firms is undermined, and exports tend to decrease. Stronger competition has the opposite effect and improved competitiveness by boosting exports, national production and income.
- 30What is international competitiveness?Relates to whether a business or country is able to produce and sell its goods and services profitably at prices that are below those for similar goods or services made abroad.
- 31How does strong competition improve material living standards?By boosting efficiency, resource allocation, output, employment and incomes.
- 32Identify the three key economic questions1. What and how much to produce?
2. How to produce?
3. For whom to produce? - 33How is the "What and how much to produce" question addressed?Consumers decide what good and services will be produced by what they demand or purchase in markets. This creates price signals, and firms respond to these signals by only producing wanted and profitable products.
- 34How is the "how to produce" question addressed?Businesses make decisions about the production methods and resources to be used to make each good or service. Businesses generally use the most efficient, cheapest and profitable methods to produce.
- 35How is the "for whom to produce" ques tion addressed?The distribution of goods and services is influenced by people's incomes and purchasing power.
- 36What is demand?The amount of a good or service that consumers are prepared to purchase at a given price. This varies inversely with price.
- 37When, in a market, does demand occur?When consumers or buyers use their income to purchase a particular quantity of a good or service.
- 38When are buyers more willing to purchase a good or service? What is this observation expressed as?Buyers in a market are more willing to purchase a good or service at a lower price than at a higher price. This observation is expressed as the law of demand.
- 39What is the law of demand?States that the quantity of particular good or service that buyers are prepared to purchase varies inversely (in the opposite direction) with the change in price, assuming that all other factors do not change.
- 40Describe the relationship between price and the quantity of demandInverse relationship
- 41What happens as price increases?There is a contraction in the quantity demanded, causing movement upwards along the demand line
- 42When happens as price decreases?There is an expansion in the quantity demanded, causing movement downwards along the demand line
- 43What does 'movement along the demand line' refer to?the contraction or expansion of demand with a rise or fall in price.
- 44What assumptions are made in the law of demand?- all non-price factors remain constant (and no influences like the interaction of products with each other in the market applies)
- there is only one factor influencing the quantity demanded - 45Would the demand line be a linear line in the real-world?No, it would be a curve.
- 46What is supply?The amount of a good or service that sellers are prepared to produce to sell at a given price. Supply varies directly with price.
- 47When are sellers more willingly to supply a good or service? How is this observation expressed?Sellers in a market are more willing to supply a good or service at a higher price rather than at a lower price. This observation is expressed in the law of supply.
- 48What is the law of supply?States that the quantity of a particular good or service that sellers are prepared to supply varies directly (in the same direction) with the change in price, assuming other factors do not change.
- 49What type of relationship exists between price and the quantity supplied?A direct relationship
- 50What happens to the quantity supplied as price increases?As price increases, there is an expansion in the quantity supplied, causing a movement upwards along the supply line
- 51what happens to the quantity supplied as price decreases?As price decreases, there is a contraction in the quantity supplied, causing a movement downwards along the supply line
- 52What does 'movement along the supply curve' refer to?The expansion and contraction of the quantity supplied along the supply line with a rise or fall in price
- 53What assumptions are made about in the law of supply?- all non-price factors are constant
- there is only one factor affecting the quantity supplied - 54What is equilibrium?When the quantity demanded exactly equals the quantity supplied, and there is neither shortage nor as surplus. This is the natural situation towards which all free competitive markets tend to move.
- 55What is equilibrium price?The unique price for a particular good or service that is determined in a market when the quantity demanded is exactly equal to the quantity supplied.
- 56What happens when prices are below equilibrium?There is market shortage
- 57What is market shortage?Occurs at a price below equilibrium, where the quantity demanded is greater than the quantity supplied
D>S - 58What is market surplus?Occurs at a price above equilibrium, where the quantity demanded is less than the quantity supplied.
S>D - 59What is the effect of new non price demand-side factors or conditions?- cause buyers to purchase a greater/smaller quantity of a particular good or service at all possible prices
- shift position of the demand line horizontally to the right (showing increase in demand) or to the left (showing decrease in demand) - 60What is the effect of new non price supply-side factors or conditions?- cause sellers to produce a greater/smaller quantity of a particular good or service at all possible prices
- shifts position of whole supply line horizontally to the right (showing increase in quantity supplied) or horizontally to the left (showing decrease in the quantity supplied). - 61What may happen if there is alteration in the position of the demand curve, as caused changes in non-price factors or conditions?- change in relative prices (the price level of one particular good or service relative to that of another)
- change in relative profits - 62What is the effect of a higher equilibrium price?- create rise in relative profits
- will normally attract more resources to be allocated to the production of this product due to relatively higher profits (a positive incentive) - 63What is the effect of a fall in equilibrium price?- create fall in relative profits
- will usually cause fewer resources to be allocated to the production of this item due to relatively lower profits (a negative incentive). In so doing, it causes scarce resources to be reallocated among competing uses by their profit-seeking owners. - 64What are factors or conditions of demand?refer to the non-price influences on the quantity of a particular good or service that buyers are prepared to purchase or demand
- 65What are factors or conditions of supply?refer to the non-price influences on the quantity of a particular good or service that sellers are prepared to produce at a given price
- 66Identify the factors or conditions of demand which may trigger changes in demandDISCCO PilGrim FiliGree
Disposable income
Interest rates for borrowed credit
Substitutes
Confidence of consumers and businesses
Complementary good/service
Onset of summer/winter
Population growth
Fashionable and trendy
Government policies (e.g. cash subsidies vs illicit drugs) - 67How can higher/lower levels of consumer and business confidence change levels of demandhigher levels of confidence:
if households feel more confident and optimistic about their future economic situation, they are likely to purchase and invest in a greater quantity of good and services
lower levels of confidence:
if consumers and businesses are pessimistic about the future, there is likely to be less demand as money and resources are conserved. - 68How does change in price of a complementary good or service affect demand?Complementary goods and services are those used or bought at the same time as another item (e.g. cars and fuel). Hence, when the price of one complement falls, the demand for the other complementary good is likely to rise (e.g. a fall in petrol prices leads to a rise in the demand for larger 4WD vehicles), and vice versa
- 69How do substitutes influence demand?Substitutes are a particular good or service that can be easily replaced by another (e.g. margarine is a substitute for butter and cotton for wool) so the price of one affects the demand for the other.
When price of substitute increases, demand for product increases.
When price of substitute decreases, demand for product decreases as people switch between items.
For instance, when the price of margarine becomes dearer, the demand for butter is likely to increase. - 70What is shift in position of the demand line?movement of the demand line either horizontally to the right or left, caused by changes in non-price conditions affecting the quantity of a good or service bought at any given price.
- 71What is shift in position of the supply line?movement of the supply line, either horizontally to the right or left, caused by changes in non-price conditions affecting the quantity of a good or service sold at any given price.
- 72Identify the non-price conditions of supplyResources (cost)
Efficiency
Weather conditions - 73What would happen to supply if resources became cheaper?Supply of particular goods and services would increase and their production becomes more favourable, for fall in cost of resources means that production costs can be minimised and profits maximised
- 74How does the price system answer the 'what and how much to produce' question?- relatively higher market price: if equilibrium price for product rises, higher profits act as a positive incentive, attracting more resources to this area of production
- relatively lower market price: if equilibrium price for product falls (perhaps due to boost in supply at all possible prices), lower profits would act as a negative incentive to repel resources from this area of production
- price signals help determine what consumers most want and which wants to first satisfy - 75What is market failure?a weakness of the price system, where profitable, but socially undesirable goods (e.g. illicit drugs and alcohol) may be overproduced, while unprofitable, but socially desirable goods (e.g. housing, affordable healthcare) may be underproduced.
- 76What may happen in instances of market failure?government intervention, involving regulation of the market through use of taxes to discourage, and use of subsidies to encourage some types of production.
- 77How does the market system answer the 'How to produce' question?- private owners seek to minimise production costs and maximise efficiency to maximise profits.
- therefore, resources rendered at cheaper prices are preferred, and are more readily used for production - 78What is the disadvantage of suppliers using the cheapest production methods?may compromise the wellbeing, health and safety of workers and the general community
e.g. coal for production leads to pollution - 79How does the price system answer the 'for whom to produce question'?- based on the division of incomes
- people with higher incomes tend to sell scarcer resources and can purchase more goods and services
- people with lower incomes tend to provide more abundant, less valued resources and cannot buy as many goods or services - 80What is one problem faced by the free market system when answering the question about how to distribute incomes and goods?income inequality and poverty, which lowers average living standards
- 81What may happen when the market fails to produce fair or equitable incomes?government intervention
- government may narrow income gap between the rich and poor by using heavier progressive taxes
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- Victorian Certificate of Education Economics Flashcards on Chapter 2 Economics , created by Anonymous Kangaroo on 28/02/2021.
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- Anonymous Kangaroo · Feb 2021
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- Mar 14, 2021
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