1.2 Flashcards
1.2.1 - Rational Choice Theory
What are the roles for:
Individuals
Firms
Government
Individuals -
- utility- satisfaction from consumption of products and services
- assumption - consumers act to maximise utility
Firms:
- profit- the difference between revenue and cost
Producers act to maximise their profit
Government:
Improve economic and social welfare of citizens
What are rational agents
Agents who utilise theory to guide their decision making
People, government, firms, producers
How do agents make decisions?
A rational agent wants to maximise their utility
A rational consumer will want to consume something up to the point where marginal utility and price are equal
what is meant by demand
the amount of products that will be bought at a given price level
what does the demand curve show
how much will be consumed of a good at each and every price level
if the price is high then the demand is…?
if the price is low then the demand is…?
low
high
its a negative relationship between price and quantity
what does the law of demand state
that there is an inverse relationship between quantity demanded and the price of a good or service, ceteris paribus
what is the market demand curve
the summation of all the individual demand curves
what does a price change cause in a demand curve?
a movement along the demand curve
a price fall causes an_____ in demand
a price increase causes a ______ in demand
extension
contraction
an increase in demand causes a _____ in the demand curve
a decrease in demand causes an _________ ______in the demand curve
shift
inward shift
what is meant by price
what the buyer pays for a specific good or service
what is meant by quantity
the total number of units purchased at that price
what is meant by willingness to pay
desire to pay based on taste and preferences
what is meant by ability to pay
factors in a persons income, and whether or not they can afford the good or service
what is meant by subsitute goods
an increase in the price of one good will increase the demand of the other
what is meant by complement goods
an increase in the price of one good will cause a decrease in the quantity demanded of the other
what is the income effect
when prices fall, consumers can afford a greater quantity of goods/services (assuming income is fixed) so demand for these goods/services increases
what is the substitution effect
when the price of one good falls, consumers will buy more of the cheaper good/service and less of the more expensive ones, so demand increases for the cheaper goods and decreases for the costlier ones.
What is meant by diminishing marginal utility
the extra benefit to an individual of consuming a good or service
what does the law of diminishing marginal utility state
the more an individual consumes, the utility of the good/service decreases with every additional unit consumed
what causes demand to change
income
taste/preferences
time/seasons
advertising
what is meant by elasticities
used to look at the sensitivity of changes in one variable to changes in another
what is the Price Elasticity of Demand
a measure of the sensitivity of the quantity demanded to a change in the price of the good or service