1.2 How markets work Flashcards
Define rational behaviour
a decision-making process that is based on making choices that result in the optimal level of benefit or utility for an individual.
Traditional economic thought
Consumers first gather up all info that’s out there, weigh up the info, take time and make a rational utility maximising decision.
Behaviours economics
However we know that’s not true because people might not have the time to gather info, lack of info, not bothered.
What are some cognitive biases
Anchoring, social norms, framing, loss aversion, herd behaviour, location.
Heuristics defintion
cognitive shortcuts or rules of thumb that simplify decisions, especially under conditions of uncertainty.
Demand definition
Quantity of a good or service consumers are willing to buy at a given price in a time period.
Why is the demand curve sloping downwards?
- income effect
- substitution effect
- Diminishing marginal utility
What causes a movement in the demand curve
A change in price
What causes a shift in the demand curve
PASIFIC (Population, advertising, substitution prices, income, fashion, interest rates, complement price (goods and services commonly brought together and used))
What is the law of demand?
as the price of a good or service decreases, the quantity demanded increases, and vice versa.
Normal good?
income rises, demand rises
Inferior good?
income rises, demand drops
