Consumer Behavour And Demand Flashcards
What is rational decision making
We assume that, when making decisions, consumers aim to maximise their own welfare
Define demand
Demand is the amount of a good/service that consumers are willing and able to buy at any given price
What factor causes the movement along the demand curve
Price
What do all factors, except price, effect the demand curve
All other factors cause either a positive or negative shift in the demand curve
Define marginal utility
Marginal utility is the additional satisfaction gained by the consumption of an additional unit
What is diminishing marginal utility
Diminishing marginal utility is a theory that states satisfaction decreases as additional units are consumed
Define price elasticity of demand (PED)
PED is the responsiveness of demand to a change in price
How is PED calculated
PED = (% change QD) divided by (% change in price)
What are the bounds for elasticity for PED
- Between 0 and -1 the good is inelastic
1. Below -1 the good is elastic
What does an elasticity value of -1 mean
-1 is unit elastic. This means the percentage change in QD = the percentage change in price
Define income elasticity of demand (YOD)
YOD is the responsiveness of demand to a change in income
How is YOD calculated
YOD = (% change in QD) divided by (% change in Y)
What is a normal good
A normal good is where the demand rises as income rises
What is an inferior good
An inferior good is a good that’s demand rises as income falls
What are the bounds of elasticity for YOD (5)
- 0 - 1 = inelastic normal good
- 0 - 2 = elastic normal good
- 2+ = elastic luxury good
- 0 - -1 = inelastic inferior good
- -1 and below = elastic inferior good
