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T1 CC3 (Keywords)
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Price Mechanism
The mechanism through which price is determined in a free market system. The forces of demand and supply to reach equilibrium.
Signalling Function
Changes in price help determine when and how resources are allocated by firms
Incentive function
Changes in price act to encourage or discourage behaviour by economic agents
Rationing function
When demand is greater than supply the rising price acts to reduce demand for goods and services
Utility
Theoretical measure of consumer benefit/enjoyment/satisfaction from using a good or service
Marginal Utility
The change in consumer benefit from each additional unit of a good or service used.
Diminishing Marginal Utility
The assumption that increased consumption of a good or service will lead to reducing additional utility
Rational Consumer
A consumer who makes choices with a focus on maximisation of their private benefits
Behavioural Economics
Adding elements of psychology to traditional Economics to better understand how economic agents make decisions
Herding Behaviour
Where decisions are highly influenced by the actions of the collective group rather than the individual
Habitual Behaviour
Where consumers repeat a purchase or choice, as a default option, without considering alternatives
Computational Weakness
Where consumers make irrational choices, as they are unable to correctly calculate the probability of something happening when they make a purchase or choice