1.2.1-2 Flashcards
What are the underlying assumptions of rational economic decision making?
- Consumers aim to maximise utility
- Firms aim to maximise profit
- Governments aim to maximise social welfare
What’s Consumers aim to maximise utility?
- utility is the satisfaction gained from consuming a product.The rational consumer is Homo Econmicus who make decisions by calculating the utility gained from each decision and which one gives most satisfaction.
What is the firms aim to maximise profit?
Economic theory assumes that firms are fun for firms and shareholder to maximise profits in order to keep shareholders happy
Whats governments aim to maximise social welfare?
- Governments are voted by public and work for public so should maximise satisfaction by taking decisions to increase social welfare
What is demand?
- The ability and willingness to buy a particular good at a given price and at a moment in time
What is movement along a demand curve caused by?
- A change in price of any curve
- A shift of demand curve is caused by change in any of the factors which affect demand
What is contraction?
A movement upwards from A to B and the quantity demanded falls because of an increase in price. A to C is an extension in price.
What happens when the demand curve shifts from D1 to D2 or from D1 to D3?
A shift from D1 to D2 represents a decrease in demand, meaning fewer goods are demanded at every price. At price P, only Q2 goods are demanded instead of Q1.
A shift from D1 to D3 represents an increase in demand, meaning more goods are demanded at every price. At price P, Q3 goods are now demanded.
What is the condition of demand?
- Factors which cause the demand curve to shift. A shift to the right is increase and lift is decrease
What are Examples of conditions of demand?
PIRATES
- Population
- Income
- Related goods
- Advertising
- Taste
- Expectations
- Seasons
Explain Population In conditions of demand?
- If population rises we would expect demand for all products to increase so demand shifts to right.More people in country who want the same good
Explain Income conditions of demand?
- If income increases demand increases because a person can afford more to buy product.
Explain related good in conditions of demand?
- If there are substitutes or complements for a good it can cause a shift in price change. Fo example if the price of a nike trainer increases than it would cause an increase for adidas trainers.
Explain Advertising Conditions of demand?
- If a firm carries out good advertisement it is likely for demand to increase and may reduce demand for other comapanies
Explain taste/fashion conditions for demand?
- If something comes more fashionable we expect demand to increase and demand may fall if it goes out of fashion
Explain Expectations for conditions for demand?
- Expectations on what you think will happen in the future can have big dmenad on some of the goods. If people think a shortage will happen or price increases, demand will increase.
Explain seasons for conditions for demand?
- Some will find their demand is affected by the weather. For examples demand will increase for sun creams in summer
What can be explained When the demand curve slopes downwards and theres an inverse relationship between price and quantity
diminishing marginal utility
What is diminishing marginal utility?
- When people spend their money we have assume they will act rationally expecting them to spend it what gives them the most satisfaction
What is total utility?
- The satisfaction gained by a customer as a result of their overall consumption of a good. e.g satisfaction of eating whole bar of chocolate while marginal utility is satisfaction of eating next bite
What does the law of diminishing Utility state?
- The satisfaction derived from the consumption of an additional unit of good will decrease as more of good is consumed.
Why does the demand curve slope downward?
- If more of a good is consumed there is less satisfaction from good. Consumers are less willing to pay high prices as they get less satisfaction
