1.2

• What is the aim of consumers in rational economic decision making?

  To maximise utility
• What does utility represent in the context of consumer behavior?

  Utility is the satisfaction gained from consuming a product
• What is the term used to describe a rational consumer?

  Homo Economicus
• How does a rational consumer make decisions?

  By calculating the utility gained from each decision
• What is the aim of firms in rational economic decision making?

  To maximise profit
• Why do firms aim to maximise profit?

  To keep their owners and shareholders happy
• What is the aim of governments in rational economic decision making?

  To maximise social welfare
• Why should governments aim to maximise social welfare?


  Because they are voted in by the public and work for their satisfaction
• What is currently being questioned by behavioral economists?

  The assumption that economic agents always have the information necessary to act rationally
• What is demand defined as?


  The ability and willingness to buy a particular good at a given price and at a given moment in time
• What causes a movement along the demand curve?

  A change in the price of the good
• What causes a shift of the demand curve?

  A change in any of the factors which affect demand
• What is a contraction in demand?

  A movement along the demand curve caused by an increase in price
• What is an extension in demand?

  A movement along the demand curve caused by a decrease in price
• What does a shift from D1 to D2 represent?

  A decrease in demand
• What does a shift from D1 to D3 represent?

  An increase in demand
• What are the conditions of demand that cause the demand curve to shift?

  • Population: Increase leads to increased demand
  • Income: Increase generally leads to increased demand, but can vary
  • Related goods: Changes in price of substitutes or complements affect demand
  • Advertising: Successful campaigns can increase demand
  • Taste/fashion: Changes in popularity affect demand
  • Expectations: Future price expectations can influence current demand
  • Seasons: Weather can affect demand for certain products
  • Government legislation: Legal requirements can impact demand

  
• What mnemonic can help remember the conditions of demand?

  PIRATES
• How does population affect demand?

  If population rises, demand for all products is expected to increase
• How does income affect demand for most goods?

  If income increases, demand generally increases