L3 Economics

Factor rewards

Payments to households for factors of production (e.g wages for labour, land earning rent)

Real flows

Flows of actual goods and services

Capital

Money used to build, run, or grow a business

Investment

Purchase of capital resources

Injections into the circular flow

Investment, Govt spending, Export recieps

Withdrawals from the circular flow

Taxes, savings, import payments

What happens when Withdrawals>Injections

AD decreases

What happens when Injections>Withdrawals

Economy grows, increase in AD

Utility

Satisfaction gained from consuming a good/service

Marginal utility

Extra satisfaction gained from consuming one more unit of a good

Negative marginal utility

Consumer will gain no extra satisfaction from consuming an additional good, would prefer not to

Total utility

Total satisfaction gained from consuming all items

Customers will buy a good until

P=MU and will stop buying at P>MU

Law of diminishing marginal utility

The more of a good that is consumed, the marginal utility falls

How to calculate MU/$ and find the optimal quantity for consumers to buy

Divide MU by price

Elasticity

How a change in price/income affects the quantity demanded of a good

Inelastic demand

Quantity demanded falls by significantly less than the increase in price

Inelastic demand examples

Petrol, electricity, groceries

Elastic demand

Quantity demanded falls by proportionately more than the increase in price

Elastic demand examples

Luxury goods, airline tickets, restaurant food

Percentage change method for calculating elasticity

% change in QD divided by % change in price

Mid point method for calculating elasticity

(QD2 - QD1) divided by (P2 - P1) times (P1+P2) divided by (QD1 + QD2)

Determinants of elasticity

Availability of substitutes, nature of the good, proportion of income spent on a good