1.2 How Markets Work Flashcards
How are assumptions made when creating economic models
Deduction - start with a hypothesis
Induction - collect evidence
Deductive Assumption Schools
Classical school - Adam Smith
Neo-classical school - Alfred Marshall
Inductive Assumption Schools
Behavioural school - Richard Thaler
Keynesian school - Joan Robinson
Utility
The satisfaction or benefit derived from consuming a good
What are decision makers in classical and neoclassical economics
Rational
How do consumers act rationally
Buying products that maximise utility
How do firms act rationally
Maximising utility though profit
Maximising profit is achieved through producing as efficiently as possible and making things that consumers both want and can afford
What is needed to make rational decision
Time
Information
Ability to process information
Behavioural Economics
School of economic thought based on evidence and observations to develop assumptions of economic decision making
Uses inductive approach
Assumes individuals have bounded rationality (individuals wish to maximise utility but cannot)
What can prevent rational decision making
Habitual behaviour/consumer inertia
People are influenced by the behaviour of others
Consumer weakness at computation
What are the two types of economy consolidation
Nationalisation and privatisation
Nationalisation
Process of bringing economic activity under state control
Industry would be run by public sector instead of private sector
Privitisation
Process of transferring economic activity from state to market
Industry run by private sector instead of public sector
How can we explain changes in prices of goods and services
Develop a model that beings together the two fundamental economic agents that determine the price of a good (consumers and producers)
Demand
The quantity of a good or service purchased at a given price over a given time period
How is contraction shown on a demand curve
Movement along the demand curve to the top left
How is extension shown on a demand curve
Movement on the curve in a top bottom direction
Law of Demand
Ceteris Paribus, as the price of a good increases, quantity demanded decreases
Conversely, as the price of a good decrease, quantity demanded increases
What causes a contraction on a demand curve
An increase in price
What causes an extension on a demand curve
A decrease in price
What does an inward shift on a demand curve show
A decrease in demand
What does an outward shift on a demand curve show
An increase in demand
Conditions of Demand
Population size Price of substitute goods Price of complement goods Population structure Incomes Advertising Tastes/preferences
Substitute Good
A good which can be an alternative product which could be used for the same purpose