THEME 1.2 Flashcards
market
where consumers and producers come into contact with each other to exchange goods and services
utility
the amount of satisfaction obtained from consuming a good or service
rational decision making
where consumers allocate their expenditure on goods and services to maximise utility, and producers allocate their resources to maximise profits
demand
the quantity of a good or service purchased at a given price over a given time period
demand curve
shows the quantity of a good or service that would be bought over a range of different price levels in a given period of time
marginal utility
the utility or satisfaction obtained from consuming one extra unit of a good or service
diminishing marginal utility
as successive units a good are consumed, the utility gained from each extra unit will fall
price elasticity of demand
the responsiveness of demand for a good or service to a change in its price
PED =
% change in Q demanded of good A / % change in price of good A
PED > 1
relatively price elastic
% change in demand is greater than % change in price
ie 10% rise in price may cause 20% fall in demand (PED = -2)
PED < 1
relatively price inelastic
% change in demand is less than % change in price
ie 10% fall in price may cause 5% increase in Q demanded (PED = -0.5)
PED = 1
has unit elasticity
% change in demand is the same as % change in price
10% fall in price may cause 10% rise in demand (PED = -1)
PED = 0
perfectly inelastic
change in price has no effect on change in demand - demand curve is vertical
PED = infinite
perfectly elastic
rise in price causes demand to fall to zero - demand curve is horizontal
total revenue
the price per unit of a good multiplied by the quantity sold
marginal revenue
revenue gained by a firm from selling one extra unit of output
income elasticity of demand
the responsiveness of demand for a good or service to change in real income
YED =
% change in demand for a good / % change in real income
normal good
a good with a positive income elasticity of demand. as real income rises, so does demand for the good
inferior good
a good with a negative income elasticity of demand. as real income rises, demand for the good falls
cross elasticity of demand (XED)
the responsiveness of demand for good B to a change in price of good A
XED =
% change in demand for good B / % change in price for good A
