ECONOMICS ECO3001TM

teacher-marked activities

This is the time to revise the main lessons in this module before you attempt the
teacher-marked activity. You can:
•• take as much time as you need
•• make notes, highlight key points, have another go at the activities
•• contact your teacher if you would like to discuss your work

When you have revised the lessons, you are ready to attempt the teacher-marked
activities, which work towards:
Achievement Standard 91399 Economics 3.1
Demonstrate understanding of the efficiency of market equilibrium

Achievement Standard 91401 Economics 3.3

Demonstrate understanding of micro-economic concepts

The achievement criteria for AS91399 Economics 3.1 are:

Achievement Achievement with Merit Achievement with Excellence

Demonstrate Demonstrate in-depth
Demonstrate comprehensive
understanding of the understanding of the
understanding of the efficiency
efficiency of market efficiency of market
of market equilibrium.
equilibrium. equilibrium.

Demonstrate understanding involves:

•• providing an explanation of:
–– market equilibrium and/or changes in market
equilibrium –– efficiency in the market
•• using an economic model(s) to illustrate concepts relating to the efficiency
of market equilibrium.

Demonstrate in-depth understanding involves:

•• providing a detailed explanation of:
–– market equilibrium and/or changes in market equilibrium
–– impact of changes in markets on efficiency in the market
•• using an economic model(s) to illustrate complex concepts and/or support
detailed explanations relating to the efficiency of market equilibrium.

Demonstrate comprehensive understanding involves:

•• analysing the impact of a change in a market on efficiency by comparing and/or
contrasting the different impacts on participants (i.e. consumer, producer and,
where appropriate, government) in that market
•• integrating an economic model(s) into explanations relating to the efficiency of market

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teacher-marked activities

equilibrium that compare and/or contrast the different impacts.

Efficiency refers to allocative efficiency of market equilibrium which occurs when the sum
of consumer and producer surpluses are maximised (so ‘total surpluses’ are maximised).
This includes recognising that deadweight loss indicates a market is allocatively inefficient.

Market equilibrium includes:

•• market equilibrium as a result of the operation of market forces; or
•• impact of changes on markets, including the impact on consumer surplus, producer
surplus, and total surpluses. This typically includes changes in international trade
markets and/or changes imposed on market equilibrium by government.

The achievement criteria for AS91401 Economics 3.3 are:

Achievement Achievement with Merit Achievement with Excellence

Demonstrate Demonstrate in-depth Demonstrate comprehensive
understanding of micro- understanding of micro- understanding of micro-economic
economic concepts. economic concepts. concepts.

Demonstrate understanding involves:

•• providing an explanation of micro-economic concepts
•• using an economic model(s) to illustrate micro-economic concepts
•• processing and/or presenting data or information related to micro-economic concepts.

Demonstrate in-depth understanding involves:

•• providing detailed explanations of micro-economic concepts
•• using an economic model(s) to support detailed explanations
•• using data or information to support detailed explanations.

Demonstrate comprehensive understanding involves:

•• using a detailed explanation, supported by models and data, and/or
information to justify implications of micro-economics concepts for a
consumer(s), producer(s) and/or government.

Micro-economic concepts refer to: marginal utility and demand, diminishing returns and
supply, elasticity of demand, elasticity of supply, market structures (excluding perfect
competition and monopoly), and role of prices and profits in determining resource allocation.

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 teacher-marked activities

production possibility curve

PRODUCTION POSSIBILITY CURVE
Consumer
goods ( )
A

U^

fig. 1 Capital goods ( )

1. a. If the economy is producing at point A, what is the precise opportunity cost of

moving to point B? Consumer Good production would be lessened

b. Would producing at point A or B result in greater future productivity? Explain your answer.

B. Because at point A the lack of capital goods inhibit economic expansion. And as point b’s economy expands, the
amount of consumer goods produced will eventually overtake As despite it’s focus on them. Thus Point B is a more
productive system.

2. Both points A and B represent production efficiency. Only one of them represents
allocative efficiency. Define:
a. production efficiency Production efficiency is when you produce the maxim amount
of one good you can at the expense of another good. If I had a farm and i could
plant corn or potatoes in my field, Productive efficiency would be to plant only corn
to maximise my production of it.

b. allocative efficiency, Allocative efficiency is when there is a balance between two

goods where you produce the maxiam amount of both you can, To use the farm
again it would be planting one half with potatos and one half with corn.
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 teacher-marked activities

3. On the PPC graph in Fig. 1 label:

a. ‘V’ as a point that is unobtainable with current resources and technology.
b. ‘U’ as a point illustrating under-utilisation of resources.

utility
Brent is the yo-yo king of the junior school. He was asked about the satisfaction he expects from
buying yo-yoes. He measured his satisfaction in dollars and gave the following information:

Number of yo-yoes Total utility $ Marginal utility $

1 24 24
2 42 18
3 52 10
4 54 2
5 54 0

1. Complete the table by calculating the missing values.

2. Identify and give reasons for the trend in Brent’s marginal utility from buying yo-yoes.

Due to the law of diminishing marginal utility marginal utility will always drop for every unit gained (assuming
all other factors remain the same). In this case marginal utility drops rather quickly because the good is not
essential for life or happiness and the usage of this good does not increase in value the more of them you have

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 teacher-marked activities

3. Use the information given in the utility schedule to plot the demand curve for yo-yoes.

fig. 2

4. Brent’s older sister Kara had started working in her first job and could now afford a holiday in
Australia. While she was there she made a shopping trip to Melbourne to buy dresses and shoes.
a. State the consumer equilibrium rule (or formula) Kara should use to ensure she
maximises the total utility she receives from purchasing shoes and dresses.
(Mux /Px) = (Muy / Py) market utility divided by price to be equal to market utility
divided by price of second good. Increasing or decreasing consumption of either
good until equal
 b. Use the table below to determine the quantity of shoes and dresses Kara should
purchase to maximise her total utility.

Assume each dress costs $200 and a pair of shoes costs $100.

marginal utility kara receives from shoe and dress purchases

Quantity of Marginal utility Quantity of shoes Marginal utility
dresses (utils) (pairs) (utils)
1 800 1 300
2 400 2 200
3 200 3 150
4 100 4 75

i. Number of dresses Kara should purchase:

ii. Number of pairs of shoes Kara should purchase:

2

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 teacher-marked activities

c. Look at the changing values of marginal utility in the table on the previous page
and state the law of economics they show.
Law of diminishing marginal utility, Law of demand

d. Use the optimum purchase rule (P = MU) to explain why Kara would buy fewer
dresses if their price increased.
Under the optimum purchase rule Kara will only buy dresses if there price is at or lower then the marginal utility
they receive, therefore as price rises they will buy less as the marginal utility of each item increases if you buy
less

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demand
1. Complete the following sketch graphs to show the effect of the events on the
market demand for electricity. Label your graphs carefully.
a. A campaign to reduce electricity consumption.
b. A price rise in electricity.
c. The price of natural gas falls.
d. The government announces a decrease in income tax.

2. Under each graph give a reason for the effect you have illustrated.
a. P b. P

D D

Q Q

c. P d. P

D D

Q Q

fig. 3
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teacher-marked activities

price elasticity of demand

1. The Reliable Bus Company operates a commuter bus service and is considering raising its
fare from $4.00 to $4.50 per ride to increase revenue. Some directors are arguing that a
fare reduction would attract more passengers and help fill their buses to capacity.

The table below contains the marketing department’s estimation of the number of
trips that would be taken by passengers at a range of fares.

estimated passenger trips at different fares

Fare charged per trip Number of passenger Total expenditure/
trips per day revenue
$5.00 1,500 7,500
$4.50 2,000 9,000
$4.00 2,500
$3.50 3,000
$3.00 4,000

a. Complete the total expenditure column.

b. Use the information in the total expenditure column to recommend whether the Reliable
Bus Company should raise or reduce fares. Explain and justify your recommendation.

c. Explain whether the demand for bus rides in this town is elastic or inelastic.

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