1.2.1 - 1.2.3 Flashcards
Rational decision making & Demand & PED
Microeconomics
The study of the behaviour of individuals or groups such as consumers, firms, or workers, typically within a market context
Macroeconomics
The study of the economy as a whole, including inflation, growth, and unemployment
Neo-classical theory
A traditional theory of economics based around the assumption that economic agents will act rationally
John Maynard Keynes
A famous macro economist of the 1920s and 1930s
Rationality
The ability to rank the order of different outcomes from an action in terms of their net benefit to the individual concerned
Economic welfare
The level of well-being or prosperity or living standards of an individual or group of individuals such as a country
Maximisation/maximisers
A key assumption of neo-classical theory in which economic agents attempt to obtain the most net benefit
Utility
The satisfaction or benefits derived from consuming a good or set of goods
Firms
The means by which production is organised. Profit maximisation will be the rational objective for these economic agents
The margin
A point of possible change / where decisions are taken / small changes eg. the impact on utility from consuming more than one unit
Conditions of demand
Factors other than price which shift the demand curve. Examples are income, price of other goods, population, tastes and preferences
Consumer surplus
The difference between how much buyers are willing to pay from a good or service and what they actually pay
Contraction of demand
A movement back up a demand curve as the price rises
Demand curve
The line on a price/quantity diagram which shows the level of effective demand at any given price
Demand
The quantity that will be purchased of a good or service at any given price, given that the other determinants of demand remain unchanged
Effective demand
Demand backed by an ability to pay
Extension of demand
A movement down the demand curve - when quantity demanded for a good or service increases because its price falls
Law of diminishing marginal utility
When the value of marginal utility gained from consuming each additional unit is lower than that from consuming the previous unit
Shift in the demand curve
A movement of the whole demand curve right or left caused by a change in any variable affecting demand other than price
Inverse relationship
When one variable increases, the other decreases
Normal good
The term given to a good where demand increases when income increases
Inferior good
The term given to a good where demand increases when income falls
Increase in demand
An outward shift in a demand curve
Decrease in demand
An inward shift in a demand curve
Substitute good
A good or service which can be replaced by another to satisfy a need or want
Complement
A good or service that is purchased with other goods or services to satisfy a need or want
Paradox of value
When the price consumers are willing to pay for a want (such as diamonds) is higher than the price they are willing to pay for a need (such as water) - first identified by Adam Smith
Point of satiation
Where marginal utility equals zero
PED
% change in quantity demanded / % change in price
Price elastic demand
Absolute value of PED > 1
Price inelastic demand
Absolute value of PED < 1
Unitary elasticity of demand
PED = (-) 1
Perfectly price elastic
Absolute value of elasticity is infinity
Perfectly price inelastic
PED = 0
Total revenue
Price x quantity
Inelastic
Insensitive to price change
Elastic
Sensitive to price change
