Theme 1, CC3 Flashcards
mortgage
a loan to buy a property
a secured loan which means that if the buyer cannot afford to repay the mortgage, the bank is able to sell the house to get their money back
variable interest rates mortgage
a mortgage where the reapyments change according to the interest rate set by the Bank of England
fixed interest rates mortgage
a mortgage where the repayments stay the same for the whole loan
rational consumer
a person who weighs up the costs and benefits to him or her of each additional unit of a good purchased
rational decision making
where consumers allocate their expenditure on goods and services to maximise utility and producers allocate their resources to maximise profits
total utility
total satisfaction a consumer gets from the consumption of all the units of a good consumed within a given time period
marginal utility
utility or extra satisfaction gained from consuming one extra unit of a good within a given time period
diminishing marginal utility
as more units of a good are consumed, additional units will provide less additional satisfaction than previous units
price mechanism
the mechanism through which price is determined in a free market system
government failure
government intervention leads to an inefficient or misallocation of resources/welfare loss
factors affecting the demand of housing
- higher incomes
- low interest rates/availability of loans
- population
- confidence/speculation
- ‘help to buy’ schemes
factors affecting the supply of housing
- availability of land, materials
- low selling prices (firms don’t want to waste their time if they won’t make as much profit)
shares in a Public Limited Company - PLC
- shares bought and sold on stock exchange
- limited liability: if the company goes bankrupt, shareholders can only lose the amount of money they invested
dividends
- a share of the profits of business
- paid to shareholders to give them an incentive to buy shares in the company
FTSE 100 index
an index of the share prices of the biggest 100 companies listed on the London Stock Exchange
acronym from Financial Times and Stock Exchange as they created it
measured in terms of market capitalism which is the total value of all the shares issued
determination of the share price
- if investors believe the company will make less profit in the future they are less likely to buy shares in that company and more likely to sell shares in that company instead
- so demand for the shares will fall and the supply of the shares will rise, causing the share price to fall
commodities
- soft commodities: agricultural goods
- hard commodities: raw materials eg tin, copper
- demand and supply relatively inelastic
- volatile prices
functions of price mechanism to allocate resources
- signalling
- incentive
- rationing
functions of price mechanism: signalling
- market prices are rising because of stronger demand, signal to suppliers to expand output
- if demand falls, prices fall, signal to producers to supply less, supply falls
functions of price mechanism: incentive
- when the price of a good rises, an incentive for firms to shift production to generate higher profits
- falling prices create incentive to move away from producing a particular good
rationing
- resources are scarce
- if there is a shortage, price increases so only those who can and are willing to pay the higher price get it
two types of decision making
intuitive/automatic:
- from an older part of our brain
- habit
- routine
- unconscious
reflective/rational thinking:
- deliberate
- logical
- critical
- creative
factors affecting purchasing decisions
- habit
- what we feel is the right thing to do (social norms)
- what others are doing (herd mentality)
- consumer weakness at computation
Daniel Kahneman
- Nobel Prize for Economics
- behavioural economics
confirmation bias
tendency to interpret new evidence as confirmation of one’s existing beliefs or theories
loss aversion
framed in the case of a loss, a person will take more risks than in the case of a gain
heuristics
mental shortcut
availability heuristic
- base their assessment of the risk on immediate examples that spring to mind
- ‘Should I spend money on a more secure front door?’ could turn into ‘What is my likelihood of being burgled?’
anchoring heuristic
tendency to use reference points to value items
nudge
deliberate framing of choices to influence the behaviour and decisions of an individual/group of people
nudges for policies
- default settings
- simpflication/framing (more attractive name for healthier food)
- warnings
