T2

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What are the underlying assumptions of rational economic decision making
1. Consumers aim to maximise utility 2. Firms aim to maximise profits
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Explain what is meant by a movements along a demand curve
.A movement along a curve is the effect of price change on the quantity demanded. (EXPANSION LOW PRICE-> HIGH QD). (CONTRACTION ^^ P--> LOW QD)
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Explain what is meant by a shift of a demand curve
A shift in the demand curve is when a determinant of demand other than price changes
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List factors that may cause a shift in the demand curve (the conditions of demand)
.Income. Substitues and complementary goods. Changes in tastes. Advertising. Seasonal factor. Population (higher = more demand). Speculation (if shares rise in future, invest now)
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Explain the concept of diminishing marginal utility
as more and more units of a commodity are consumed, the additional satisfaction or utility derived from the consumption of each successive unit will decrease. This is only true if all other factors such as income, time, etc. remain unchanged.
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Explain how the concept of diminishing marginal utility influences the shape of the demand curve
This also helps explain why demand curves are downward-sloping in microeconomic models, since each additional unit of a good or service is put towards less valuable ends
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Explain what is meant by price elasticity of demand
Price elasticity of demand is the responsiveness of demand for a good due to a change in its price
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Give the formula to calculate price elasticity of demand
%ΔQD ÷ %ΔP
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Explain what is meant by a unitary elasticity of demand
The demand curve is unitary elastic, if the percentage change in demand is the same as the percentage change in price. PED =1
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Explain what is meant by a perfectly elastic price elasticity of demand
Perfectly elastic = .In perfectly elastic demand, a small rise in price results in fall in demand to zero, while a small fall in price causes increase in demand to infinity.
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Explain what is meant by a perfectly inelastic price elasticity of demand
Perfectly Inelastic = 0. demand does not change at all when the price changes – the demand curve will be vertical
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Explain what is meant by a relative elastic price elasticity of demand
PED > 1. Relatively elastic means that relatively small changes in price cause relatively large changes in quantity.
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Explain what is meant by a relatively inelastic price elasticity of demand
PED < 1. Relatively inelastic means that relatively large changes in price cause relatively small changes in quantity.
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plain what is meant by income elasticity of demand
Income elasticity is the responsiveness of demand for a good due to a change in income
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Give the formula for income elasticity of demand
YED = %ΔQD ÷ %ΔY
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Explain what is meant by an inferior good
Inferior goods are those which see a fall in demand as income increases. Example are the value options at supermarket. Inferior goods have a negative income elasticity of demand (YED < 0)
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Explain what is meant by a normal good
Normal goods have a positive income elasticity of demand so as income increases so the demand for a good increases (YED > 0)
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Explain what is meant by a luxery good
Luxury goods, an increase in come causes an even bigger increase in demand. Examples are holiday. (YED > 1)
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Explain what is meant by relatively elastic income elasticity of demand
...
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Explain what is meant by relatively inelastic income elasticity of demand
...
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Explain what is meant by cross elasticity of demand
Cross elasticity is the responsiveness in demand for good B due to a change in price of good A
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Give the formula to calculate cross elasticity of demand
XED = %ΔQD good B ÷ %ΔP good A.
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Explain what is meant by a substitues
.Substitutes can replace another good, so the XED is positive(
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Explain what is meant by a complimentary good
.Complementary goods have a negative cross elasticity of demand (XED
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Explain what is meant by an unrelated (or independent) good
.XED= 0. Changes in the price of one good will have no effect on the demand for an unrelated good.For example the price of a bus journey has no effect on the demand for tables
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List factos that influence PED
.Necessity (inelastic) or Luxery (elastics). Substitues (elastics). Addictive or habitual (inelastic).
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Explain the significance of elasticities of demand to firms and government in terms of the imposition of indirect taxes
..
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Explain the significance of elasticities of demand to firms and government in terms of the imposition of subsidies
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Explain the significance of elasticities of demand to firms and government in terms of changes in real income
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Explain the significance of elasticities of demand to firms and government in terms of changes in changes in the prices of complementary goods
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Explain the relationship between price elasticity of demand and total revenue
.Revenue = P x Q. Inelastic goods, meeand firms can raise its price and demand will not fall significantlly. This will increase revenue. elastic curve meanse rise in price = fall in quantity, so revenue reduces
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Explain the significance of elasticities of demand to firms and government in terms of changes in changes in the prices of substitute
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List factors that influences XED
.
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List factors that influences YED
.
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Card 2

Front

Explain what is meant by a movements along a demand curve

Back

.A movement along a curve is the effect of price change on the quantity demanded. (EXPANSION LOW PRICE-> HIGH QD). (CONTRACTION ^^ P--> LOW QD)

Card 3

Front

Explain what is meant by a shift of a demand curve

Back

Preview of the front of card 3

Card 4

Front

List factors that may cause a shift in the demand curve (the conditions of demand)

Back

Preview of the front of card 4

Card 5

Front

Explain the concept of diminishing marginal utility

Back

Preview of the front of card 5
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