1.2 How markets work Flashcards
a) The underlying assumptions of rational economic
decision making:
o consumers aim to maximise utility
o firms aim to maximise profits
a) The distinction between movements along a demand
curve and shifts of a demand curve
b) The factors that may cause a shift in the demand curve
(the conditions of demand)
c) The concept of diminishing marginal utility and how this
influences the shape of the demand curve
a) Understanding of price, income and cross elasticities of
demand
b) Use formulae to calculate price, income and cross
elasticities of demand
c) Interpret numerical values of
o price elasticity of demand: unitary elastic, perfectly
and relatively elastic, and perfectly and relatively
inelastic
o income elasticity of demand: inferior, normal and
luxury goods; relatively elastic and relatively inelastic
o cross elasticity of demand: substitutes,
complementary and unrelated goods
d) The factors influencing elasticities of demand
e) The significance of elasticities of demand to firms and
government in terms of:
o the imposition of indirect taxes and subsidies
o changes in real income
o changes in the prices of substitute and
complementary goods
f) The relationship between price elasticity of demand and
total revenue (including calculation)
a) The distinction between movements along a supply
curve and shifts of a supply curve
b) The factors that may cause a shift in the supply curve
(the conditions of supply)
a) Understanding of price elasticity of supply
b) Use formula to calculate price elasticity of supply
c) Interpret numerical values of price elasticity of supply:
perfectly and relatively elastic, and perfectly and
relatively inelastic
d) Factors that influence price elasticity of supply
e) The distinction between short run and long run in
economics and its significance for elasticity of supply
a) Equilibrium price and quantity and how they are
determined
b) The use of supply and demand diagrams to depict
excess supply and excess demand
c) The operation of market forces to eliminate excess
demand and excess supply