AC 1.2 (Part One) Flashcards
What is effective demand?
Willing and able to buy
What does a demand curve show?
Quantity demanded at each price.
Why do demand curves slope downwards?
Consumers are only incentivised to buy more of g/s if the price is lowered.
What is the law of demand?
An inverse relationship between price and quantity demanded.
What causes a movement along a demand curve?
The factors or conditions of demand.
What are the two types of movement?
Left & right shift.
What are the factors of demand?
Trends, Rate of interest, Income, Price of other goods, Advertisements.
What does the supply curve represent?
The quantity of a good or service that producers are willing to supply at various price levels.
Define substitutes & complements.
Substitutes are an alternative that satisfy a similar want/need while complements are in joint demand.
What is derived demand?
Firms want the output they produce.
What is the law of supply?
A positive relationship between price & quantity supplied.
Why do supply curves slope upwards?
As price rises, profit margins increase making it more lucrative.
What causes a movement along a supply curve?
Change in ceteris paribus.
What are the factors of supply?
Price, quality or quantity of FOPs.
What is equilibrium?
Demand = Supply
Define consumer surplus.
Difference between what consumers are willing to pay for a good and what they actually pay.
Define producer surplus.
Difference between the price producers receive for a good and the minimum price they are willing to accept.
What is disequilibrium?
Demand doesn’t equal supply.
List the 3 functions of the price mechanism.
Rationing, incentive & signalling.
What do rational consumers seek to maximise?
Utility.
Which 5 behaviours do economists assume rational economic agents exhibit?
- Maximising
- Logical & consistent
- Selfish
- Insatiable
- Responsive
Outline 2 distortions which prevent the invisible hand guiding the market to an allocatively efficient equilibrium.
- Information failures.
- Asymmetric information.
What is bounded rationality?
The ability of economic agents to make rational decisions is severely limited.
What 5 systematic biases suggest economic agents are predictably irrational?
- Anchoring
- Availability bias
- Social norms
- Loss aversion
- Altruism
