1.2 How Markets Work Flashcards
what is Homo Economicus
a rational individual that, when making choices, will always go for the option that maximises their utility
what does a rational consumer do
make choices to maximise their utility
what does a rational producer do
aim to maximise their profits (which allows them to maximise their utility to buy more G/S)
evaluation of rational decision making
this idea is flawed, since often people act emotionally, or partly emotionally, not fully rationally
what is demand
the amount of a G/S that a consumer is willing and able to purchase at a given price in a given time period
description of a demand curve
left to right downward sloping
negative/inverse relationship between price and QD
what is the law of diminishing marginal utility
where an individual gains less additional utility from consuming a product, the more of it is consumed
what are the reasons for a perverse demand curve
positional goods
conspicuous goods/goods of ostentation
Giffen goods
what are positional goods
goods which are very scarce and are desired for their ability to show success over other people
what are conspicuous goods
goods people like to buy to show social status or success
what are Giffen goods
staple products that consumers are willing to pay more for even if price rises. this limits RDY, making luxury products even more out of reach so consumption staples rises more as price does
what are the determinants of demand that will shift the demand curve
income - RDY
tastes/fashion
advertising/branding
price/quality of related goods
population + age structure
expectations of future prices
credit availability
seasonal demand
what is a normal good
one where QD increases as RDY increases
what is an inferior good
one where QD decreases as RDY increases
how does income affect demand
RDY directly determines how many G/S a consumer can purchase
how do changes in taste/fashion affect demand
if G/S become more fashionable, demand for them increases
how does advertising/branding affect demand
if more money is spent on advertising or branding, demand for the G/S will increase as more consumers are aware of the product
how does the price/quality of of related goods affect demand
increases in the price or decrease in the quality of substitute goods will increase demand for another good
how does the population/age structure affect demand
increases in population will increase demand overall
changes in the age structure of a population will also affect which G/S are in higher demand
what is marginal utility
the additional utility/satisfaction gained from the consumption of an additional G/S
what is the law of diminishing marginal utility
as additional products are consumed, the utility gained from the next unit is lower than that of the previous unit
how does the law of diminishing marginal utility explain the demand curve
when the first unit is purchased there is utility so consumers are willing to pay a high price, but as utility decreases consumers are not willing to pay as high a price
what is price elasticity of demand (PED)
the sensitivity of quantity demanded to a change in the price of a G/S
what is the equation for PED
%△ in QD / %△in P