1.2

• What are the assumptions of rational decision making?

  • Consumers aim to maximize utility
  • Firms aim to profit maximize
  • Governments aim to maximize social welfare
• How is demand defined in economics?

  Demand is the quantity of a good or service that consumers are able and willing to buy at a given price during a given period of time.
• What causes a movement along the demand curve?

  Changes in price
• What are the factors that shift the demand curve (PIRATES)?

  • Population: Higher population increases demand.
  • Income: More disposable income increases demand.
  • Related goods: Substitutes and complements affect demand.
  • Advertising: Increases consumer loyalty and demand.
  • Expectations: Anticipated price increases boost current demand.
  • Seasons: Demand varies with seasons.
• What happens to the quantity demanded of a good if the price of a substitute falls?

  The quantity demanded of the original good will fall as consumers switch to the cheaper option.
• How does the price of a complement affect demand?

  If the price of a complement increases, the demand for the original good will fall.
• What is derived demand?

  Demand for one good linked to the demand for a related good
• What is composite demand?

  Demand for a good that has more than one use
• How does composite demand affect the availability of a good?

  A higher demand for one use can reduce availability for other uses
• What is joint demand?

  Goods that are bought together
• What does diminishing marginal utility refer to?

  The decrease in satisfaction from consuming additional units of a good
• How is the demand curve related to diminishing marginal utility?

  The demand curve is downward sloping, showing an inverse relationship between price and quantity
• What does the law of diminishing marginal utility state?

  As an extra unit of a good is consumed, the marginal utility falls
• How does the consumption of chocolate illustrate diminishing marginal utility?

  The first bar satisfies the want more than the second bar, leading to a lower willingness to pay for the second