1.2

• What is demand?


  The quantity of a product that consumers are willing and able to purchase at various prices over a period of time.
• What is the demand curve?


  Shows the inverse relationship between the quantity demanded and the price of the product.
• What are the factors that cause a shift in demand?

  • Population
  • Income
  • Rates of interest
  • Advertising
  • Tastes and fashions
  • Expectations
  • Substitutes and complements-prices of other goods.
• What is utility?


  A measure of the satisfaction or benefit that a person derives from consuming a good or service.
• What is marginal utility?


  The change in total utility from consuming an extra unit of a product.
• What is the law of diminishing marginal utility?


  A principle that states that as a person consumes more of a particular good or service, the additional utility (satisfaction) that they derive from each additional unit will eventually decline.
• What is the substitution effect?


  consumers substitute in favour of the good that becomes relatively cheaper; if the price of good x falls, consumers will buy more of good x.
• What is the real income effect?


  (Assuming that income is fixed), it suggests that if the price of good x falls, the consumer buying good x will gain purchasing power; this extra 'income' available for spending can be used to buy more.
• What is supply?


  The quantity of a product that producers are selling and able to supply at different market prices over a period of time.
• What are the factors causing a shift in supply?

  • Productivity
  • Indirect taxes
  • Number of firms operating- and cartels
  • Technology
  • Subsidies
  • Weather
  • Costs of production
  • Legislation
• What is a normal good?

  A type of good or service for which demand increases as consumer income increases.
• What is an inferior good?


  A good or service for which demand decreases as consumer income increases.
• What is a superior/luxury good?


  Goods or services that have a large/high-income elasticity of demand of >1.
• What is the formula for price elasticity of supply (PES)?


  PES= percentage change in quantity supplied

  percentage change in price
• What is price elasticity of supply(PES)?


  Measures the relationship between the change in quantity supplied and the change in price.
• What are substitutes?


  Are goods that can be used in place of each other to satisfy a similar need or desire.

  E.g. Coffee and tea
• What are complements?


  Are goods that are typically consumed or used together because they enhance each others value.

  E.g. printers and ink.
• What is cross price elasticity of demand(XPED)?


  How the responsiveness of the quantity demanded of one good changes in response to a change in the price of a related good.
• What is the formula for cross price elasticity of demand (XPED)?


  XPED= percentage change in quantity demanded for good x

  percentage change in price of good y
• What is economic welfare?


  A measure of the wellbeing of an individual or country.
• Rational firm: 


  Wants to maximise its profits

  -True for single businesses as well as large firms with shareholders.
• Key assumption is that people make decisions in order to maximise their satisfaction (utility) they get from spending a limited budget.
• Rational consumer:


  Want to maximise their economic welfare (satisfaction) when consuming a good or service.
• Objectives of labour:


  Maximise their welfare at work through pay and working conditions.
• Objectives of the Government:


  Make decisions that benefit the welfare of its citizens leading to an increase in economic welfare.
• What is herd behaviour?


  We often make decisions based on who is around us and the choices we make.

  E.g. Smoking
• What is habitual behaviour?


  People don't react to price changes because of habit; even if its more costly.

  E.g. Breakfast choices
• What is behavioural economics?


  Recognises that humans are not always rational and can be influenced by a range of factors.
• XPED= positive - substitute goods

  -when the price of good x rises the demand for good y increases

  • 0-1 =weak substitute
  • >1 = strong substitute
• XPED= negative - complementary goods

  -when the price of good x rises the demand for good y decreases

  • 0- -1 = weak complements
  • <-1 = strong complements
• What are the uses XPED?

  • Marketing strategies
  • If a competitor changes its prices, firms can work out the effect on their demand.
• • >1= price elastic
  • 0-1= price inelastic
  • 0= perfectly inelastic
  • Infinity= perfectly elastic
• What are the factors that affect PES?

  • Spare production capacity-can increase output
  • Spare stock
  • Availability of factors of production
  • Time period-adjust its production levels
• Why is PES inelastic in the short term?

  • Factors of production cannot be switched easily
  • Limited spare capacity
  • Limited ability to hold stock.
• Why is PES elastic in the long-term?

  • Factors of production can be switched easily
  • Spare capacity exists-high factor substitution
  • Can release stock into the market if demand is high.