Consumer and elasticitiy Flashcards
What are the assumptions about consumer behaviour?
- Consumers act rationally
- Consumers only buy economic goods
- Consumers have unlimited wants
- Consumers have limited incomes
- Consumers try to maximise their utility
- Consumers are subject to the law of diminishing marginal utility.
What are the two types of goods?
- Economic goods
- Free goods
What are the characteristics of economic goods?
- Scarce in relation to demand
- Transferable
- They must give some degree of utility when consumed.
What is the law of diminishing marginal utility?
As we consume more of an item, eventually a point called the origin is reached where the marginal utility of each extra good consumed begins to decrease.
What are the assumptions about the law of diminishing marginal utility?
- Does not apply to medicines or addictive goods.
- The law only applies after a certain minimum has been consumed (1 Unit).
- No time has passed.
What is consumer equilibrium?
Where the consumer has maximised their utility.
What is the law of equi-marginal returns?
In order to maximise utility, a consumer should spend their money so that the ratio of Marginal Utility and price is the same for all goods we buy.
What is price elasticity of demand?
Measures the change in quantity demanded (QD) of a good due to a change in price (P).
What are the categories of price elasticity of demand (PED)?
|-Infinity|—|-1|—|0|:
Perfectly Elastic
Relatively Elastic
Unitary Elastic
Relatively Inelastic
Perfectly Inelastic
What does YED measure?
Measures the change in quantity demanded (QD) of a good due to a change in income (Y).
Who are the stakeholders of elasticity?
- Government
- Producers and retailers
What are the factors affecting elasticity?
- Necessity or luxury good?
- Availability of substitute goods
- Brand loyalty
- Durability
