1.2 demand and supply Flashcards
what is utility?
satisfaction
what do consumers seek to maximise?
utility
what do firms seek to maximise?
profit
what is irrational behaviour?
where actions do not maximise utility
explain 3 reasons why agents may behave irrationally
habit
inertia
influenced by others
what is bounded rationality?
rationality within constraints (eg of time, information, computational skill, using rules of thumb)
what is demand?
the amount of a good or service customers are willing to
buy at a given price (over a given time period)
why are demand curves downward sloping?
law of diminishing marginal utility
income effect
substitution effect
what could cause an extension in demand?
an outward shift in supply
what could cause a contraction in demand?
an inwards shift in supply
give the conditions (shifters) of demand
population
advertising
substitutes
income
fashion and trends
intrest rates
complements
what is the law of diminishing marginal utility?
as more of a good is consumed, each additional unit provides less additional satisfaction
what is supply?
the quantity firms are willing and able to sell at a given price (over a given period of time)
why are supply curves upward sloping?
law of diminishing marginal returns
profit motive
attracting new entrants
what could cause an extension in supply?
outward shift in demand
what could cause a contraction in supply?
inward shift in demand
give the conditions (shifters) of supply
productivitiy
indirect tax
number of firms (competition)
technology
subsidies
weather
cost of production
regulations
what is equilibrium price?
the price at which D=S
what is equilibrium quantity?
the quantity at which D=S
what is a shortage?
where demand is greater than supply
referring to extension and contraction, explain how shortages are resolved
price rises, supply expands and
demand contracts
what is a surplus?
where supply is greater than
demand
referring to extension and contraction, explain how surpluses are resolved
price falls, supply contracts and
demand expands
explain the functions of the price mechanism
incentive
rationing
signalling
allocative
what is consumer surplus?
the difference between what a consumer is willing to pay and the price they actually pay
what is producer surplus?
the difference between the price the market is willing to supply at and what they actually supply at
what is total economic welfare?
consumer surplus + producer surplus
