1.2.1 + 1.2.2 Rational decision making and Demand Flashcards
What are assumptions we make about economic agents
-Consumers aim to max utility
-Consumers act in own interests
-Producers aim to max profits
-Firms have to meet needs of stakeholders
What is demand
the quantity of goods and services that consumers are willing and able to buy at a given price and given time period
What is the demand curve
Shows the relationship between price and quantity
Slopes downwards as price falls demand rises
Whats the law of diminishing marginal utility
As the consumer increases their consumption of a product the additional utility they derive from each extra unit of the product declines
What is the substitution effect
At higher prices consumers may switch to alternative products
What is the income effect
At lower prices consumers have additional income so may consume more
What are movements
Along the existing demand curve
Caused by a change in price
What is an extension
When a fall in price causes an increase in demand
What is a contraction
When a rise in price causes a decrease in demand
What is a shift
New demand curve
Caused by a change in any non price determinant of demand
What does a rightward shift show
Increase in demand
What does a leftward shift show
Decrease in demand
What are some examples that cause shifts
-Change in price of substitute or complement
-Increase in real income or wealth
-Change in taste or fashion
-Impact of advertising
-Rise in consumer confidence
