consumer behavior and demand

Question 1

assumption of rationality (firms, consumers, workers, governments.)

Answer 1

1) Firms aim for profit maximization to maximize returns to shareholders.
2) Consumers aim to maximize their utility
for satisfaction
3) workers aim to maximize their welfare at work
4) governments aim to want to maximize the welfare of citizens

Question 2

reasons why consumers may not aim to maximize utility (5)

Answer 2

• the influence of other people (herding)
• habitual behavior
• inertia (people may be lazy so they do nth)
• poor computational skills to see which prices are better
• framing and bias

Question 3

reasons why firms may not aim to maximize utility (4)

Answer 3

• Non-profit motives, like environmental sustainability
• Risk aversion
• principle-agent problem
• knowledge limitations

Question 4

use of demand curve

Answer 4

shows effective demand

Question 5

relationship btwn price and demand / law of demand

Answer 5

relationship btwn price and demand is inverse

Question 6

how does income effect cause movement along demand curve

Answer 6

when prices are higher -> lower purchasing power of money -> cant afford more goods

Question 7

how does substitution effect cause movement along demand curve

Answer 7

when prices increase -> substitutes become more price competitive -> people switch

Question 8

movement vs shift along demand curve

Answer 8

movement - price
shift - all other factors

Question 9

factors affecting demand curve (PASIFIC)

Answer 9

population
advertising
substitute price
income (consider normal or inferior)
fashion and tastes
interest rates
complements price

Question 10

effect of income change with normal goods

Answer 10

when income goes up, demand will shift right

Question 11

effect of income change with inferior goods

Answer 11

when income go up, demand decrease, shift left.

Question 12

effect of interest rates and demand curve

Answer 12

if interest lower, people can borrow more, buy more, increased demand

Question 13

diminishing marginal utility effect in demand curve

Answer 13

• As the marginal utility of a good decreases with each additional unit consumed, individuals are willing to pay less for each subsequent unit.

Question 14

how does the downward slope of the demand curve show diminishing marginal utility

Answer 14

• downward slope reflects the inverse relationship between price and quantity demanded, driven by the diminishing marginal utility of the good.

Question 15

numerical value of perfectly inelastic demand

Answer 15

PED 0

Question 16

numerical value of inelastic demand

Answer 16

PED btwn 0 and 1

Question 17

numerical value of unitary demand

Answer 17

PED 1

Question 18

numerical value of elastic demand

Answer 18

PED btwn 1 and infinity

Question 19

numerical value of perfectly elastic demand

Answer 19

PED infinity

Question 20

factors influencing PED (7)

Answer 20

availability of substitutes
brand loyalty
width of market definition
time
percentage of total expenditure
addictiveness
durability

Question 21

effect on PED (availability of sub)

Answer 21

: The large number of substitute product ⇒ Elastic PED
: The lack of substitute product ⇒ Inelastic PED

Question 22

effect on PED (time)

Answer 22

In the short run and peak time ⇒ Inelastic PED
: In the long run and off peak time ⇒ Elastic PED

Question 23

effect on PED (width of market definition)

Answer 23

more defined, like pasta - elastic
less defined, like food - inelastic

Question 24

effect on PED (proportion of income spent)

Answer 24

The large proportion of income spent on the product ⇒ Elastic PED
: The small proportion of income spent on the product ⇒ Inelastic PED

Question 25

why are durable goods typically price inelastic? (2)

Answer 25

- they typically dont have many substitutes - since they are long term investments, people are willing to pay more now to not pay later

Question 26

what type of goods are price elastic?

Answer 26

luxury goods as they are discretionary purchases

Question 27

what type of goods are price inelastic?

Answer 27

necessities

Question 28

PED elastic and total revenue

Answer 28

when price is higher, demand decreases by a larger proportion, total revenue decreases and vice versa

Question 29

PED inelastic and total revenue

Answer 29

when price increases, demand decreases by a small proportion, total revenue increases

Question 30

PED unitary and total revenue

Answer 30

when price increases, demand increases by a small proportion, total revenue does not change

Question 31

limitations of PED (2)

Answer 31

consumers dont always act rationally value of PED changes over time

Question 32

numerical value of luxury goods

Answer 32

YED > 1

Question 33

numerical value of necessities

Answer 33

0

Question 34

what does YED tell us?

Answer 34

if a good is normal or inferior

Question 35

how to know a good is normal

Answer 35

is YED is positive

Question 36

how to know a good is inferior

Answer 36

if YED is negative

Question 37

elasticity of normal goods (both more than and less than)

Answer 37

more than 1 = income elastic = luxury normal less than one = income inelastic = necessary

Question 38

YED = 0?

Answer 38

perfectly income inelastic, no relationship

Question 39

elasticity of inferior goods (both more than and less than)

Answer 39

more than 1 = income elastic less than 1 = income inelastic

Question 40

what is income inelastic inferior good

Answer 40

goods are still considered inferior because demand decreases as income rises, but the decrease in demand is proportionally less than the increase in income.

Question 41

How businesses can use knowledge of YED ? (2)

Answer 41

1. Firms can predict sales and adjust production scale. 2. Firms can know which products will perform best given the time

Question 42

disadvantage of >1 being luxury/superior goods and <1 being basic goods

Answer 42

a group of products may be considered basic goods but not every product in the group is necessary.

Question 43

how do you understand two goods are substitutes or complimentary

Answer 43

substitute XED + complimentary XED -

Question 44

numerical value of two goods having price elastic demand (XED)

Answer 44

less than 1

Question 45

what is the relationship between two goods with XED less than 1

Answer 45

price elastic demand = very strongly related

Question 46

numerical value of two goods having price inelastic demand (XED)

Answer 46

more than one

Question 47

what is the relationship between two goods with XED more than 1

Answer 47

price inelastic demand = weakly related

Question 48

numerical value of two goods having price perfectly inelastic demand (XED)

Answer 48

0

Question 49

what is the relationship between two goods with XED 0

Answer 49

nothing

Question 50

Factors That Influence YED

Answer 50

YED is influenced by any factors in an economy which change the wages of workers (bring up the economic cycle, recession and all) (also tax changes and min wage)

Question 51

Significance of Elasticities to Firms (1)

Answer 51

to set optimal prices that maximize profits. (decision on if they shld raise or lower prices, similar to total revenue and elasticity relationship)

Question 52

significance of cross elasticity of firms

Answer 52

how price of substitute products affects demand for their own product allows firms to develop competitive strategies. might adjust pricing if a close substitute experiences a price change.

Question 53

Significance of Elasticities to consumers

Answer 53

can leverage elasticity concepts to make smarter purchasing decisions. (depending on the elasticity they can switch if possible and plan budget)

Question 54

Significance of Elasticities to government

Answer 54

government policies aimed at influencing economic activity and consumer welfare.

Question 55

how does elasticity effect taxation

Answer 55

determine the impact of taxes on consumption and potentially choose products with inelastic demand for taxation to minimize consumer resistance.

Question 56

how does elasticity effect subsidies

Answer 56

allows governments to target subsidies for essential goods that are income elastic, particularly for low-income groups.

Question 57

how does elasticity effect market regulation

Answer 57

Cross elasticity helps assess the impact of regulations on related markets. For example, restricting a good might unintentionally increase demand for substitutes.