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Edexcel Economics Theme 1.2a

Terms in this set (33)

What is utility?
Satisfaction
What do consumers seek to maximise?
Utility
What do firms seek to maximise?
Profit
What is irrational behaviour?
Where actions do not maximise utility
Explain 3 reasons why agents may behave irrationally
Habit, inertia, influenced by others
What is bounded rationality?
Rationality within constraints (eg of time, information, computational skill, using rules of thumb)
What is demand?
The amount of a good or service customers are willing to buy at a given price (over a given time period)
Why are demand curves downward sloping?
Law of diminishing marginal utility, income effect, substitution effect
Illustrate an extension in demand
Sliding down the demand curve
What could cause an extension in demand?
An outward shift in supply
Illustrate a contraction in demand
Sliding up the demand curve
What could cause a contraction in demand?
An inwards shift in supply
Give 3 conditions (shifters) of demand
Population, consumer income, tastes, advertising, price of complements/substitutes, seasons...
What is the law of diminishing marginal utility?
As more of a good is consumed, each additional unit provides less additional satisfaction
What is supply?
The quantity firms are willing and able to sell at a given price (over a given period of time)
Why are supply curves upward sloping
Law of diminishing marginal returns, profit motive, attracting new entrants
Illustrate an extension in supply
Sliding up the supply curve
What could cause an extension in supply?
Outward shift in demand
Illustrate a contraction in supply
Sliding down the supply curve
What could cause a contraction in supply?
Inward shift in demand
Give 3 conditions (shifters) of supply?
Cost of production, ease of production, regulations, expectations
What is equilibrium price?
The price at which D=S
What is equilibrium quantity?
The quantity at which D=S
What is a shortage?
Where demand is greater than supply
Referring to extension and contraction, explain how shortages are resolved.
Price rises, Supply expands and demand contracts,
What is a surplus?
Where supply is greater than demand
Referring to extension and contraction, explain how surpluses are resolved.
Price falls, supply contracts and demand expands
Explain 3 functions of the price mechanism
Incentive, Rationing, Signalling, Allocative
What is consumer surplus?
The difference between what a consumer is willing to pay and the price they actually pay
How do we illustrate consumer surplus on a diagram?
Triangle between axis, demand curve and price
What is producer surplus?
The difference between the price the market is willing to supply at and what they actually supply at
How do we illustrate producer surplus on a diagram?
The triangle between axis, supply curve and price
What is total economic welfare?
Consumer surplus + Producer surplus
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