How markets work Flashcards
(14 cards)
What are the assumptions of rational economic decision making?
Consumers aim to maximise utility
Firms aim to maximise profit
Government aim to maximise social welfare
What is utility?
Satisfaction gained from consuming a product
What is Demand?
Ability and willingness to buy a good at a given price and given time
What causes a movement along the D curve?
Change in price
What causes a shift in the D curve?
Change in any factors which affect demand (conditions of demand)
What are the conditions of demand which shift the demand curve?
Population
Income
Related goods
Advertising
Expectations
Taste/fashion
Government legislation
Seasons
What is total utility and marginal utility?
Assume when we spend money, they will behave rationally according to greatest level of satisfaction
Total utility - satisfaction gained from overall consumption of a good
Marginal utility - change in satisfaction from consumption of the next unit of a good e.g another bite of chocolate
What is the law of diminishing marginal utility?
The satisfaction derived from the consumption of an additional unit of a good will decrease as more is consumed
What is elasticity of demand?
Attempt to measure the responsiveness of quantity demanded to changes in other variables: it’s own price, price of other goods, real income
Elastic good - responsive
Inelastic good - unresponsive
What is price elasticity of demand? (PED)
Responsiveness of demand to a change in the price of the good
What is the equation for PED?
%change in quantity demanded
———————————————
%change in price
If the original price was £5 and 100 were sold and the new price is £3 and 130 are sold what is the PED?
20/100 = 20%
(-2/5)*100 =-40%
PED = 20%/-40% =-0.5
Are most PED values positive or negative?
Negative since a rise in price leads to a fall in quantity demanded
Unitary relatively perfectly
