Micro LS7-9 Flashcards
Decision making - problem
Assumptions about behaviour of economic agents must be made to create economic models. What assumptions should economists make?
Decision making - solution
Assumptions can be made following 1. deduction (start with hypothesis) or 2. induction (collect evidence)
Classical and neoclassical, decision makers are assumed to be rational. Consumers ?
Buying products that maximise utility.
Utility- the satisfaction or benefit derived from consuming a good
Maximising utility- firms
Utility for firms is taken to be profit.
Maximising profit is achieved through producing as efficiently as possible and making things consumers both want and can afford.
To make rational decisions, economic agents require
Time. Info. Ability to process info.
Behavioural economics
School of economics based on evidence and observations to develop assumptions of decision making, uses inductive approach.
Assume bounded rationality, wish to maximise utility but unable to do so bc of lack of [factors above]
Human behaviour that prevents rational decision making
Habitual behaviour/ consumer inertia
People influenced by behaviour of others.
Consumer weakness at computation.
Demand
Quantity of good or service purchased at given price over a given time period.
Law of demand
Ceteris paribus, price increases = qd decreases and vice versa
Decrease in price = extension/expansion, increase = contraction
Substitute goods
Two alternative products that could be used for the same purpose
Complement goods
Products that are used together
What can affect demand?
Change in population structure
Change in income
Change in consumer taste/ preference
Revenue
income that government or company receives
p x q
Supply
Quantity of good or service that firms are willing to sell at given price over a given time period.
Law of supply
Ceteris paribus, price increases = qs increases and vice versa
Decrease in price = contraction, increase = extension/expansion
