A level Economics - Booklet 1

Resource allocation

The way in which a society’s productive assets are used amongst their alternative uses

What is demand

The quantity of a good or service that consumers are willing and able to buy at any possible price in a given time period

A market:

Any place where buyers and sellers meet to exchange goods and services. A market does not have to be a physical place

Ceteris paribus

Other things remaining the same, or being equal. In econ it’s used to focus on changes in one variable while holding other influences constant.

The law of demand

A law that states that there is an inverse relationship between quantity demanded and the price of a good or service

What is an extension in a demand curve

An increase

What is a contraction in a demand curve

A decrease

Veblen good

A good for which demand increases as the price increases, because of it’s exclusive nature and appeal as a status symbol

factors of demand

• P - Price of other goods eg substitutes

• I - Income changes

• T - Tastes, fashions ect

• A - Advertising and branding

• Pop - Population changes in size and distribution

Normal good

One where the quantity demanded increases in response to an increase in consumer income

Inferior good

One where the quantity demanded decreases in response to an increase in consumer income

Griffen good

A good for which demand increases as price increases and falls when the price decreases

Substitute goods

Goods whereby the consumers regard them as alternatives, so that the demand for one good is likely to rise if the price of the other one

Complement goods

Goods whereby people consume them jointly. So that the increase in the price of one good can cause a decrease in demand for the other.

Utility

Refers to the level of satisfaction a consumer receives from the consumption of a good or service

Marginal utility equation

Change in total utility / change in no. Of units consumed

Total utility

The amount of satisfaction a person derives from the total amount of product consumed

Marginal utility

The change in the total utility from consuming an additional unit of the product

Diminishing marginal utility

Where an individual gains less extra utility from consuming each additional unit of a good

Elasticity

A measure of the sensitivity of one variable to changes in another variable

Ped value between -1 and infinity

Demand is price elastic

Ped value infinity

Demand is perfectly price elastic

Ped definition

A measure of the sensitivity of qd to a change of the price of a good or service

Factors of PED

• Availability of close substitues

• Nature of the product

• Proportion of income spent

• Durability of the product

• Time period

Total revenue

The total amount of sales of goods and services

Income elasticity of demand

A measure of the sensitivity of quantity demanded to a change in consumer incomes

Income elastic

Those where demand is very responsive to changes in income

Superior good

One for which the YED is positive and greater than 1, such that as income rises consumers spend more on the good

Normal good

One where QD increases in response to an increase in consumer incomes. YED is positive and greater than 0.

cross elasticity of demand

A measure of the sensitivity of quantity demanded of a good or service to a change in price of some other good or service.

Complementary goods

Goods whereby consumers consume them jointly. Increase in price for one good decreases the price for the other