Microeconomics 1.2.1-1.2.4 Flashcards
Reasons why rational decision making doesn’t always apply
Have limited capacity to calculate all costs and benefits of a decision.
Are influenced by their social networks.
Lack self control and seek immediate satisfaction.
Could make emotional choices in cold and emotional states.
Often fall back on simple rules of thumb when choosing.
Satisfy rather than maximise.
Have a strong default to maintain the status quo.
Definition of demand
Demand for a good or service is the quantity that consumers are willing and able to buy at a given price in a given period of time.
Definition of effective demand
Only if demand for a product is backed up by willingness and ability to pay the market price does demand become effective or actual.
What is the basic law of demand
The basic law of demand is that demand varies inversely with price - the lower the price of a good, the higher the quantity demanded and vice versa, ceteris paribus.
Rules for drawing a demand curve
Label the y axis price and the x axis quantity.
Draw demand curve downward sloping from left to right and label (d).
Draw dotted line from given price (p) to quantity (q).
What causes movement along the demand curve
Only changes in price causes movement along the demand curve.
A higher price leads to a contraction of quantity demanded.
A lower price leads to an expansion of quantity demanded.
Shows change in quantity demanded.
What causes a shift in the demand curve
A shift is caused by non price factors.
Shows a change in demand.
Definition of derived demand
Derived demand is the demand for a good or service that is used to produce another good or service.
The demand is not for the good/service itself but for its ability to produce another good or service.
Examples of goods or services in derived demand
The demand of steel is derived to make cars.
The demand for minerals are derived to make components for electric products.
Definition of joint/ complementary demand
Joint or complementary demand is when the demand for one product is directly and positively related to market demand for a related good or service.
The demand is for two or more goods and services which are demanded together.
Examples of things in complementary demands
Petrol and cars.
Smartphones and apps.
Definition of composite demands
Composite demands is where the demand for a good or service is for goods that have more than one use.
The demand is for a good or service to produce more than one type of product.
Examples of things in composite demands
Milk which can be used for cheese, yoghurt, butter, cream.
Land which can be used for farming, recreation or development.
What are the determinants for demands in a market
The type of good.
Consumer incomes.
Seasonal factors.
Consumer fashion and tastes.
How does consumer income affect demand
As the income of consumers increases, demand for normal goods will increase.
This is shown by a shift to the right of the demand curve.
How do seasonal factors affect demand
Consumer increase and decrease their demand for certain goods depending on the season e.g. demand for plants at garden centres is linked to planting seasons.
How do consumer tastes and fashion affect demand
People’s tastes change over time and demand for fashionable products changes regularly, often manipulated by advertising.
As some products become more fashionable there is an increase in demand.
What other factors affect demand
Population changes.
Advertising.
The level of competition in the market.
Interest rates and demand.
Social and emotional factors.
Describe the income effect
A fall in price increases the real purchasing power of consumers.
Allows people to buy more with a given budget.
For normal goods demand rises with an increase in real income.
Define the substitution effect
A fall in the price of goods makes it relatively cheaper compared to substitutes.
Some consumers will switch to good leading to higher demand.
Much depends on whether products are age substitutes.
What is the concept of utility
Utility is a measure of the satisfaction that we get from purchasing and consuming a good or service.
What is total utility
The total satisfaction from a given level of consumption.
What is marginal utility
The change in satisfaction from consuming an extra or additional unit.
Standard economic theory believes the idea of diminishing returns i.e the marginal utility of extra units declined as more is consumed.
How does diminishing marginal utility explain the downward sloping demand
The law of diminishing marginal utility is a law of economics that states that as your consumption increases the satisfaction you derive from each individual unit decreases.
If marginal utility is falling then consumers will only be prepared to pay a lower price.
