Theme 1: How do Markets Work Flashcards
When making economic decisions, consumers aim to maximise their …….. and firms aim to maximise ……..
Utility and Profits
Consumer Utility
total satisfaction received from consuming a good or service
Limitations of rational decision making?
Takes longer despite possibly being fairer.
What are the assumptions of the bounded rationality model?
1- The first satisfactory alternative is selected.
2- The decision maker recognises they perceive the world as simple.
3- The decision maker recognises the need to be comfortable without considering every alternative.
4- Decisions could be made by heuristics.
Ceteris paribus
“All else being equal”
Factors that shift the demand curve are?
Population Income Related goods Advertising Tastes Fashions Expectations Seasons
Derived demand
Demand for one good is linked to the demand for a related good.
Composite demand
When the good demanded has more than one use so assuming supply stays the same an increase in one good leads to a decrease in supply of another.
Joint demand
When goods are bought together.
diminishing marginal utility
Decreasing satisfaction or usefulness as additional units of a product are acquired
equation for price elasticity of demand
% change in quantity demanded / % change in price
unitary elastic
describes demand whose elasticity is exactly equal to 1
inelastic demand
A situation in which an increase or a decrease in price will not significantly affect demand for the product
elastic demand
A situation in which consumer demand is sensitive to changes in price
perfectly inelastic
quantity does not respond at all to changes in price (E=0)
perfectly elastic
demand which falls to zero when price changes
Factors effecting PED
Necessity Substitutes Addictiveness Proportion of income Durability Peak and off peak
If a firm sells a good with an inelastic demand, they are likely to put most of the tax burden on ……………
consumer
If a firm sells a good with an elastic demand, they are likely to put most of the tax burden on ……………
themselves (the firm)
Equation for income elasticity of demand
% change in quantity demanded / % change in income
Luxury goods have a PED of YED ……
> 1 as income increases this causes an even bigger increase in demand/
Normal goods have a PED of YED ……
> 0 as demand increases as income increases
Inferior goods have a PED of YED ……
<0 as they see a fall in demand as income rises.
Equation for cross elasticity of demand
% change in quantity demanded of good X / % change in price of good Y
