1.2 - How markets work Flashcards
when making economics decisions, consumers aim to maximise ________ and firms aim to maximise ________.
Utility and Profits
consumer utility
total satisfaction received from consuming a good/service
two ways consumers make decisions
irrational & rational
limitations of rational
takes longer to make a decision
heuristics
mental shortcuts eg. rule of thumb
factors that shift demand curve
- population
- income
- related goods
- advertising
- tastes/fashion
- season
derived demand
Demand for one good is linked to the demand for a related good
eg. demand for printers leads to demand for ink
composite demand
when good demanded has more than one use, assuming supply stays the same, an increase in one good leads to a decrease in supply of another
joint demand
when goods are brought together
diminishing marginal utility
decreasing satisfaction or usefulness as additional units of a product are required
PED Equation
% change in QD
________________
% change in P
PED
responsiveness of quantity demand given a change in price
Values PED
PED=1 - unitary
PED>1 - elastic
PED=infinity8 - perfectly elastic
PED<1 - inelastic
PED=0 - perfectly inelastic
factors affecting PED
-availability of subs.
-time
-necessity
-proportion % of income spent
-addictive
YED equation
% change in QD
________________
% change in Yincome
define YED (income elasticity of demand)
responsiveness of demand to a change in income
values of YED
YED<0 - inferior good
YED>0 - normal good
YED>1 - luxury good
significance
- important businesses know how their sales will be affected by changes in income of population
- it may impact the type of goods firms produce
XED equation
%change in QD of A
_____________________
%change in price of B
Define XED (cross price elasticity of demand)
responsiveness of demand for one product A to change in price of another product B.
VALUES of XED
XED>0 - substitutes goods
XED<0 - complementary goods
XED=0 - unrelated goods
