1.2 How Markets Work Flashcards
what is the main objective of consumers when making economic decisions?
to maximise utility
what is the main objective of producers when making economic decisions?
to maximise profit
what is the main objective of governments when making economic decisions?
to maximise economic and social welfare
define utility
satisfaction from consumption of products and services
define profit
difference between revenue and costs
define demand
the quantity of a good or service that consumers choose to buy at any possible price in a given period
what is the law of demand?
the inverse relationship between quantity demanded and price of a good or service, ceteris paribus
define marginal utility
the change in total satisfaction form consuming an extra unit of a good or service
what are the main determinants of the demand function?
price, income, tastes and preferences, prices of other goods, seasons, advertising
what would cause a movement along the demand curve?
a change in the price of the product itself
what would cause a shift of a demand curve?
a change in the conditions of demand e.g. change in income, advertising, seasons, competitors price change
what would a price fall on a demand curve show?
extension in demand
what would a price rise on a demand curve show?
contraction in demand
define price elasticity of demand (PED) and give the formula
a measure of the responsiveness of the quantity demanded to a change in the price of the good/service
PED= %change in QD/ %change in P
define income elasticity of demand (YED) and give the formula
a measure of the responsiveness of the quantity demanded to a change in income
YED= %change in QD/ %change in Y
define cross-price elasticity of demand (XED) and give the formula
a measure of the responsiveness of the quantity demanded for one good to a change in the price of another good
XED= %change in QD (good A)/ %change in P (good B)
define a normal good and link to YED
a good where demand increases when income increases – positive YED
define an inferior good and link to YED
a good where demand decreases if income increases– negative YED
define a substitute good and link to XED
a good which is an alternative to another good– positive XED
define a complement good and link to XED
a good which is used with, or purchased at the same time as another good– negative XED
how do you calculate percentage change?
(new-old)/old x 100
range of values for PED
0= perfectly inelastic 0 to -1= relatively inelastic -1= unitary elastic -1 to -infinity= relatively elastic -infinity= perfectly elastic
4 factors affecting PED
–availability of substitutes
–necessity or luxury
–proportion of income spent on the product
–time
