LS7 and 8

Question 1

What is deductive economics?

Answer 1

Schools that use a hypothesis. They are classics, and neoclassical

Question 2

What is inductive economics?

Answer 2

Schools that use evidence to prove a theory. Schools that use it are behavioural and Keynesian schools

Question 3

Why are assumptions made?

Answer 3

Assumptions must be made about the behaviour of economic agents to create models. These can be from deduction(hypothesis) or induction(evidence)

Question 4

What do classical and neoclassical economists assume about economic agents?

Answer 4

They are rational

Question 5

What is rationality?

Answer 5

Maximising utility(satisfaction from consuming a good) when buying goods and services with their income

Question 6

What is marginal utility?

Answer 6

The benefit gained from consuming one good

Question 7

What is the law of diminishing utility?

Answer 7

For each additional unit of good consumer, marginal utility falls. So a rational customer would want to pay less and less for a good the more they consumer

Question 8

What do economic agents require to make rational decisions?

Answer 8

Time, information, the ability to process the information

Question 9

What is behavioural economics?

Answer 9

A school of inductive economic thought where assumptions are based on observations. They believe in bounded rationality

Question 10

What is bounded rationality?

Answer 10

Individuals wish to maximise utility but cannot because of a lack of time, information and ability to process the info

Question 11

What are the reasons that consumers don’t act rationally?

Answer 11

Habitual behaviour: doing the same thing over and over again
Consumer inertia: resistant to change as it takes too much effort
Influence of others: copying the actions of your social groups or trends
Weakness at computation: people may not be able to process and understand Information or make decisions by calculating costs

Question 12

What is demand?

Answer 12

The quantity of a good or service purchased at a given price over a given period of time

Question 13

What is the law of demand?

Answer 13

Ceteris paribus, as the price of a good increases, demand falls
As price of a good falls, demand increases

Question 14

What does the demand curve show and why does it slope downwards?

Answer 14

It shows the relationship between price and quantity demanded.

Slopes downwards because the higher the price, the lower the quantity demanded(less people are able to afford). The lower the price, more people are able to buy good so demand increases

Question 15

What does a decrease or increase in price lead to?

Answer 15

Decrease in price leads to an extension in demand

Increase in price leads to a contraction in demand

They are both movement along the curve

Question 16

What can shifts of the demand curve be caused by?

Answer 16

A shift left can be caused by a decrease in demand at every price level

A shift right can be chased by an increase in demand at every price level

These can be caused by changes in taste, fashion, real income.

Question 17

What is a normal and real good?

Answer 17

Normal goods: demand increases of real income increases

Inferior good: demand falls as real income rises(eg cheap food)

Question 18

What is the difference between a substitute and complementary good?

Answer 18

A substitute good is an alternative product that could be used for the same purpose. A rise in price of one will increase the demand for a substitute

A complementary good is 2 products that are often bought together. So if price of one goes up, demand of both falls

Question 19

What other factors cause shifts in demand curve?

Answer 19

Increase in advertising, change in age structure, income and tax