1.2
RATIONAL DECISION MAKING
TOTAL VS MARGINAL UTILITY
TOTAL UTILITY - total satisfaction from all units consumes
MARGINAL UTILITY - additional satisfaction from consuming one unit extra
law of diminishing marginal utility
when the consumption of a good increases
marginal utility decreases
total utility increases at decreasing rate
ASSUMPTIONS OF ECONOMIC DECISION MAKING
Consumers want to maximise total utility from consumption
utility - satisfaction derived from product
firms want to maximise profits
(in order to keep shareholders happy)
governments aim to maximise social welfare
voted in by public and aim to keep public happy
DEMAND
DEMAND - The ability and willingness to buy a particular good at a given price
and given moment in time
DEMAND CURVE
1.2 1
, EXTENSION AND CONTRACTION
quanitity of demand changes due to change in price
moves along the curve - demand does not shift
increase in price = decrease in demand = contraction
INCREASE AND DECREASE
factors besides the price causes shift in demand
change in overall demand, not just in response to a price change
FACTORS CAUSING A SHIFT IN DEMAND (PIRATES)
POPULATION
Changes in the population size or age demographics can affect demand
e.g - aging population may increase demand of retirement related
products
INCOME
normal goods - demand increases with rising income (e.g - luxury cars)
inferior goods - demand decreases with rising income (e.g - cheap goods)
RELATED GOODS
Complementary goods
a decrease in the price of one leads to increase in demand of
complementary good (e.g coffee and milk)
Subsititute goods
Increase in price of one, increases demand of subtiture (e.g coke and
pepsi)
1.2 2
, ADVERTISING
good advertising increases demand and awareness
TASTE (consumer preferences)
e.g - increased awareness of health, shifts towards healthier foods
EXPECTATIONS
Future expectations about prices, income, or other factors can affect
current demand.
e.g - if something is expected to be in shortage
SEASONS
e.g - summer, ice cream
DIMINISHING MARGINAL UTILITY
as a consumer consumes more units of a good or service, the additional
satisfaction (utility) derived from each additional unit decreases
people value the first unit most
SLOPED DOWNWARDS
people are less willing to buy at a higher price, because they will have less
satisfaction
therefore people will buy more when the price is low
ELASTICITY OF DEMAND
WHAT IS IT
PED - responsiveness to demand in the change of the price of the good
elastic - very responsive, increases or decreases alot
inelastic - not very responsive - increases or decreases a small amount
FORMULA
PED = %change in quantity demanded/ %change in price
1.2 3
RATIONAL DECISION MAKING
TOTAL VS MARGINAL UTILITY
TOTAL UTILITY - total satisfaction from all units consumes
MARGINAL UTILITY - additional satisfaction from consuming one unit extra
law of diminishing marginal utility
when the consumption of a good increases
marginal utility decreases
total utility increases at decreasing rate
ASSUMPTIONS OF ECONOMIC DECISION MAKING
Consumers want to maximise total utility from consumption
utility - satisfaction derived from product
firms want to maximise profits
(in order to keep shareholders happy)
governments aim to maximise social welfare
voted in by public and aim to keep public happy
DEMAND
DEMAND - The ability and willingness to buy a particular good at a given price
and given moment in time
DEMAND CURVE
1.2 1
, EXTENSION AND CONTRACTION
quanitity of demand changes due to change in price
moves along the curve - demand does not shift
increase in price = decrease in demand = contraction
INCREASE AND DECREASE
factors besides the price causes shift in demand
change in overall demand, not just in response to a price change
FACTORS CAUSING A SHIFT IN DEMAND (PIRATES)
POPULATION
Changes in the population size or age demographics can affect demand
e.g - aging population may increase demand of retirement related
products
INCOME
normal goods - demand increases with rising income (e.g - luxury cars)
inferior goods - demand decreases with rising income (e.g - cheap goods)
RELATED GOODS
Complementary goods
a decrease in the price of one leads to increase in demand of
complementary good (e.g coffee and milk)
Subsititute goods
Increase in price of one, increases demand of subtiture (e.g coke and
pepsi)
1.2 2
, ADVERTISING
good advertising increases demand and awareness
TASTE (consumer preferences)
e.g - increased awareness of health, shifts towards healthier foods
EXPECTATIONS
Future expectations about prices, income, or other factors can affect
current demand.
e.g - if something is expected to be in shortage
SEASONS
e.g - summer, ice cream
DIMINISHING MARGINAL UTILITY
as a consumer consumes more units of a good or service, the additional
satisfaction (utility) derived from each additional unit decreases
people value the first unit most
SLOPED DOWNWARDS
people are less willing to buy at a higher price, because they will have less
satisfaction
therefore people will buy more when the price is low
ELASTICITY OF DEMAND
WHAT IS IT
PED - responsiveness to demand in the change of the price of the good
elastic - very responsive, increases or decreases alot
inelastic - not very responsive - increases or decreases a small amount
FORMULA
PED = %change in quantity demanded/ %change in price
1.2 3
