Micro 3 Flashcards
What is Utility theory
When making economic decisions, consumers aim to maximise their utility and firms aim to maximise profits
What is the law of diminishing marginal utility
When an extra unit of the good is consumed, the marginal utility falls therefore the consumer is willing to pay less for the good
What is Utility maximisation
Maximisation for consumers is when consumers aim to generate the greatest utility possible from an economic decision.
Firms aim to generate the greatest profit possible
What is demand
The amount of goods and services consumers are able and willing to buy at a given price at a given time.
What is the law of demand
When price goes up - demand decreases
When price goes down - demand increases
What is a demand curve
Shows the relationship between price and quantity demanded
What does the term ‘ceteris paribus’ mean
When all other factors remain the same
What happens when price increases on the demand curve
- A contraction along the demand curve
- Quantity demanded decreases
What happens when price decreases on the demand curve
- An extension along the demand curve
- Quantity demanded increases.
What are non-price factors that affect demand
- Income
- Taste and habits
- Price of related goods
- Future price expectation
- Population
What are substitute goods
Goods which perform similar roles so that they can replace one another
What is the income effect
As price for a good or service fall, people can afford to buy more of it with their current level of income
What is the substitution effect
When price increases of goods and services, consumers will turn to substitute goods to meet their wants and needs
