1.2.1 + 1.2.2 Flashcards
Rational consumers make their choices with the aim of …
Maximising utility
Utility definition
The satisfaction or benefit derived from consuming a product
Bounded rationality
When consumers have limited attention, knowledge and ability to understand complex decisions
What do economic agents require to make rational decisions
Time
Info
Ability to process info
Two types of economic consolidation
Nationalisation - process of bringing economic activity under state control
Privatisation - process of bringing economic activity from state to market control
Shared economic incidence definition
Eg. If government put £1 extra tax, seller puts up price by 50p due to competitive local market, and lays 50p to government
What does the rational choice model assume?
- Consumers choose independently
• A consumer has consistent tastes and preferences - transitive preferences
• They gather complete (full) information on the alternatives.
• They always make an optimal choice given their preferences.
Transitive preferences definition
so, if product A is preferred to product B and B is preferred
to C, then A is preferred to C
Rational rule definition
Continue doing something until the marginal benefit equals the marginal cost
Information gaps
When consumers have insufficient knowledge to make an optimal decision
Irrational behaviour
Any decision that goes against or counter to logic
Marginal private cost definition
Internal cost to the consumer of buying another unit
Maximum utility
When marginal utility is zero
Rationality definition
Using all information to make optimal choices
Demand definition
Demand is the quantity of goods and services that consumers are willing and able to buy at a given price in a given time period
Effective demand definition
Effective demand is when a desire to buy a product is backed up by having an ability to pay in other words
Derived demand definition + two example
Derived demand is the demand for a factor of production used to produce another good or service
Eg. Steel demand for steel linked to market demand for cars and construction
Eg. Transport demand declined during pandemic
What is the basic law of demand
- There is an inverse relationship between the price of a good and demand.
• When drawing a demand curve, economists assume all factors are held constant except one – the price of the product itself.
As prices fall/ rise …
As prices fall, we see an expansion/extension of demand. If price rises, there will be a contraction of demand.
Explaining the demand curve:
Reasons as to why demand increases as price falls
- The Income Effect: When the price of a good falls, the consumer can maintain the same consumption for less spending. Assuming good is normal, increase in real income is used to buy.
- The Substitution Effect: When the price of a good falls, ceteris paribus, the product is now relatively cheaper than an alternative and some consumers will switch their spending from an alternative good or service..
Law of diminishing marginal utility
- as more of a good is consumed, the additional utility from each extra unit consumed will fall.
Changes in conditions of demand
- prices of substitute goods
- price of complements
- changes in real income
- changes in consumer tastes/ preferences
- interest rates
- seasonal factors
- population size
Joint demand definition
When demand for one product is positively related to demand for a related good service
Eg, two complementary goods
Cross price elasticity is negative
Composite demand definition
Where a product has more than one use
- increase in demand for one product leads to a fall in supply of the other
Eg, milk or land
Only thing that changes quantity demanded
Price
