1.2.1 + 1.2.2

Question 1

Rational consumers make their choices with the aim of …

Answer 1

Maximising utility

Question 2

Utility definition

Answer 2

The satisfaction or benefit derived from consuming a product

Question 3

Bounded rationality

Answer 3

When consumers have limited attention, knowledge and ability to understand complex decisions

Question 4

What do economic agents require to make rational decisions

Answer 4

Time
Info
Ability to process info

Question 5

Two types of economic consolidation

Answer 5

Nationalisation - process of bringing economic activity under state control
Privatisation - process of bringing economic activity from state to market control

Question 6

Shared economic incidence definition

Answer 6

Eg. If government put £1 extra tax, seller puts up price by 50p due to competitive local market, and lays 50p to government

Question 7

What does the rational choice model assume?

Answer 7

• Consumers choose independently
  • A consumer has consistent tastes and preferences - transitive preferences
  • They gather complete (full) information on the alternatives.
  • They always make an optimal choice given their preferences.

Question 8

Transitive preferences definition

Answer 8

so, if product A is preferred to product B and B is preferred
to C, then A is preferred to C

Question 9

Rational rule definition

Answer 9

Continue doing something until the marginal benefit equals the marginal cost

Question 10

Information gaps

Answer 10

When consumers have insufficient knowledge to make an optimal decision

Question 11

Irrational behaviour

Answer 11

Any decision that goes against or counter to logic

Question 12

Marginal private cost definition

Answer 12

Internal cost to the consumer of buying another unit

Question 13

Maximum utility

Answer 13

When marginal utility is zero

Question 14

Rationality definition

Answer 14

Using all information to make optimal choices

Question 15

Demand definition

Answer 15

Demand is the quantity of goods and services that consumers are willing and able to buy at a given price in a given time period

Question 16

Effective demand definition

Answer 16

Effective demand is when a desire to buy a product is backed up by having an ability to pay in other words

Question 17

Derived demand definition + two example

Answer 17

Derived demand is the demand for a factor of production used to produce another good or service

Eg. Steel demand for steel linked to market demand for cars and construction
Eg. Transport demand declined during pandemic

Question 18

What is the basic law of demand

Answer 18

• There is an inverse relationship between the price of a good and demand.
  • When drawing a demand curve, economists assume all factors are held constant except one – the price of the product itself.

Question 19

As prices fall/ rise …

Answer 19

As prices fall, we see an expansion/extension of demand. If price rises, there will be a contraction of demand.

Question 20

Explaining the demand curve:

Reasons as to why demand increases as price falls

Answer 20

1. The Income Effect: When the price of a good falls, the consumer can maintain the same consumption for less spending. Assuming good is normal, increase in real income is used to buy.
2. The Substitution Effect: When the price of a good falls, ceteris paribus, the product is now relatively cheaper than an alternative and some consumers will switch their spending from an alternative good or service..

Question 21

Law of diminishing marginal utility

Answer 21

• as more of a good is consumed, the additional utility from each extra unit consumed will fall.

Question 22

Changes in conditions of demand

Answer 22

• prices of substitute goods
• price of complements
• changes in real income
• changes in consumer tastes/ preferences
• interest rates
• seasonal factors
• population size

Question 23

Joint demand definition

Answer 23

When demand for one product is positively related to demand for a related good service

Eg, two complementary goods
Cross price elasticity is negative

Question 24

Composite demand definition

Answer 24

Where a product has more than one use
- increase in demand for one product leads to a fall in supply of the other

Eg, milk or land

Question 25

Only thing that changes quantity demanded

Answer 25

Price