The Theory Of Demand (Week 2) Flashcards
What is utility
Satisfaction
What is a consumer’s objective in an economy
To maximise satisfaction (utility) from consumption given these constraints
What does the theory of demand explain
The relationship between price and quantity demanded
What does the theory of demand assume
That when the price of a good or service falls, the quantity demanded increases
What does lower prices encourage the consumers to do
Increase the quantity
What type of relationship is between price and quantity demanded
Inverse relationship (downward sloping as price decreases, quantity increases)
What is the income effect
Assuming that income is fixed, a fall in price will cause the consumer to increase the quantity as the consumer has more to spend in real terms
What is the substitution effect
A lower price will make the good or service relatively cheaper than alternative goods and services (substitutes), increasing the quantity demanded
The demand curve is drawn assuming what
That all factors apart from price which could affect demand are held constant (ceteris paribus). Aka price is the only variable
What is expansion of demand
An increase in quantity demanded (point is moved down the line on the graph)
What is contraction of demand
An increase in price leads to a decrease in quantity demanded. It is shown by a movement along the demand curve (upwards)
Contraction on a graph=
Upwards
Expansion of demand =
Downwards
What does marginal mean
Additional
What is the theory of diminishing marginal utility
It states that as more of a good or service in consumed, the utility from each additional unit (marginal utility) will decrease
