Studied by 3 people
What is the satisfaction gained from consuming a product called
Utility
What is the term for a rational consumer in economic theory
Homo Economicus
What do consumers aim to maximize according to economic theory
Utility
What is the main aim of firms under economic theory
To maximize profit
Why do firms aim to maximize profit
To satisfy owners and shareholders
What do governments aim to maximize according to rational decision-making assumptions
Social welfare
Why do governments aim to maximize social welfare
To increase public satisfaction and meet citizens' needs
Which school of economics questions the assumptions of rational decision-making
Behavioral economics
What do behavioral economists argue about rational decision-making
Economic agents may not always have the information to act rationally
What concept describes consumers not always making calculated decisions
Bounded rationality
What is demand
The ability and willingness to buy a good at a given price and time
What causes a movement along the demand curve
A change in the price of the good
What causes a shift in the demand curve
A change in the conditions of demand
What is a contraction in demand
A decrease in quantity demanded due to a price increase
What is an extension in demand
An increase in quantity demanded due to a price decrease
What does a leftward shift in the demand curve indicate
A decrease in demand
What does a rightward shift in the demand curve indicate
An increase in demand
What mnemonic helps remember the conditions of demand
PIRATES
How does population affect demand
An increase in population raises demand
How does income affect demand for most goods
Higher income increases demand
What happens to demand for inferior goods when income rises
Demand decreases
How does the price of substitutes affect demand
If the price of a substitute rises
How does the price of complementary goods affect demand
If the price of a complement falls
How does advertising affect demand
Successful advertising increases demand
How do tastes and fashion affect demand
Popular goods have higher demand
How do future price expectations affect demand
Expectation of rising prices increases current demand
How do seasons affect demand
Demand for some products changes with weather or seasonal patterns
What is total utility
The total satisfaction gained from consuming a good
What is marginal utility
The satisfaction gained from consuming one additional unit of a good
What is the law of diminishing marginal utility
Satisfaction decreases as more of a good is consumed
How does diminishing marginal utility affect the demand curve
It explains why the demand curve slopes downward.
What does elasticity of demand measure
The responsiveness of quantity demanded to changes in price
What does it mean if a good is elastic
Demand is relatively responsive to changes
What does it mean if a good is inelastic
Demand is relatively unresponsive to changes
What is price elasticity of demand (PED)
The responsiveness of demand to a change in the price of the good
What is the formula for PED
% Change in Quantity Demanded / % Change in Price
What is the typical sign of PED values
Negative (because of the inverse relationship between price and demand)
What does PED = 1 indicate
Unitary elasticity
demand changes by the same percentage as price
What does PED > 1 indicate
Elastic demand
demand changes by a larger percentage than price
What does PED < 1 indicate
Inelastic demand
demand changes by a smaller percentage than price
What does PED = 0 indicate
Perfectly inelastic demand
price changes have no effect on quantity demanded
What does PED = infinity indicate
Perfectly elastic demand
any price change causes demand to fall to zero
How does the availability of substitutes affect PED
More substitutes make demand more elastic
How does time affect PED
Demand becomes more elastic over time as consumers find alternatives
How does necessity affect PED
Necessities have inelastic demand
How does the proportion of income spent on a good affect PED
Goods that take up a small proportion of income are more inelastic
How does addiction affect PED
Addictive goods tend to have inelastic demand.
How does PED affect the incidence of indirect taxes
The more inelastic the demand
How does PED influence government tax revenue
Inelastic demand generates higher tax revenue
What happens to revenue if demand is elastic and price decreases
Revenue increases
What happens to revenue if demand is inelastic and price decreases
Revenue decreases
What is income elasticity of demand (YED)
The responsiveness of demand to a change in income
What is the formula for YED
% Change in Quantity Demanded / % Change in Income
What does YED < 0 indicate
An inferior good
demand decreases as income rises
What does YED > 0 indicate
A normal good
demand increases as income rises
What does YED > 1 indicate
A luxury good
demand increases significantly as income rises
What does YED < 1 indicate
An inelastic good
demand changes less than income changes
Why is YED important for businesses
It helps predict how demand will change with income levels
How does YED influence product focus during economic prosperity
Firms focus more on luxury goods during prosperity
What is cross elasticity of demand (XED)
The responsiveness of demand for one good to the price change of another good
What is the formula for XED
% Change in Quantity Demanded of Good A / % Change in Price of Good B
What does XED > 0 indicate
Substitutes
an increase in the price of one good increases demand for the other
What does XED < 0 indicate
Complements
an increase in the price of one good decreases demand for the other
What does XED = 0 indicate
Unrelated goods
no impact on demand for one good due to price changes of the other
How does the size of the XED value affect the relationship between goods
Larger absolute values indicate a stronger relationship
Why is XED important for businesses
It helps understand competition and the impact of price changes on demand for their products.
What is supply
The ability and willingness to provide a good or service at a particular price and time
What causes a movement along the supply curve
A change in the price of the good
What is a contraction in supply
A decrease in quantity supplied due to a price decrease
What is an extension in supply
An increase in quantity supplied due to a price increase
What causes a shift in the supply curve
A change in the conditions of supply
What does a leftward shift in the supply curve indicate
A decrease in supply
What does a rightward shift in the supply curve indicate
An increase in supply
What happens to supply if production costs increase
Supply decreases
How does the price of other goods in joint supply affect supply
A rise in the price of one good increases supply of the other (e.g.
How does the price of goods in competitive supply affect supply
A rise in the price of one good decreases the supply of the other (e.g.
How does weather affect supply
Good weather increases supply (right shift)
How does new technology affect supply
It increases supply by reducing production costs
How does government legislation affect supply
Regulations can increase or decrease supply (e.g.
How do taxes affect supply
Taxes increase production costs and decrease supply
How do subsidies affect supply
Subsidies decrease production costs and increase supply
What are producer cartels
Groups that restrict supply to raise prices and profits.
What is price elasticity of supply (PES)
The responsiveness of supply to a change in the price of the good
What is the formula for PES
% Change in Quantity Supplied / % Change in Price
What does PES = 1 indicate
Unitary elasticity
supply changes by the same percentage as price
What does PES > 1 indicate
Elastic supply
supply changes by a larger percentage than price
