Rational Decision Making and Demand
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Rational Decision Making and Demand

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Questions and Answers

What does a shift to the right in the demand curve indicate?

  • Decrease in demand
  • Increase in demand (correct)
  • No change in demand
  • Increase in supply

    • Which factor is NOT part of the conditions of demand represented by the mnemonic PIRATES?

  • Income
  • Population
  • Advertising
  • Technology (correct)

    • If the price of a substitute good increases, what is likely to happen to the demand for the other substitute?

  • It will increase (correct)
  • It will decrease
  • It will fluctuate unpredictably
  • It will remain unchanged

    • In what scenario would an increase in income result in a decrease in demand?

    <p>For inferior goods</p> Signup and view all the answers

    What effect might a successful advertising campaign have on a firm's demand?

    <p>It will increase demand</p> Signup and view all the answers

    If the population of a country significantly increases, what can be expected regarding the demand for goods?

    <p>Demand for most products is likely to increase</p> Signup and view all the answers

    What happens to the demand curve for DVDs if the price of DVD players decreases?

    <p>Demand for DVDs increases</p> Signup and view all the answers

    What is the primary goal of firms in a market according to economic theory?

    <p>To maximize profit</p> Signup and view all the answers

    Which of the following best describes the concept of cross elasticity of demand?

    <p>The measure of how demand for a good changes as the price of a related good changes</p> Signup and view all the answers

    What does a movement along the demand curve indicate?

    <p>A change in price of the good</p> Signup and view all the answers

    What defines the term 'demand' in economic terms?

    <p>The ability and willingness to buy a good</p> Signup and view all the answers

    When the demand curve shifts from D1 to D2, what does it indicate?

    <p>A decrease in demand</p> Signup and view all the answers

    What is the term used for the rational consumer who makes decisions to maximize utility?

    <p>Homo Economicus</p> Signup and view all the answers

    According to behavioral economists, what is a challenge to the traditional view of rational decision making?

    <p>Economic agents often lack necessary information</p> Signup and view all the answers

    A contraction in demand occurs due to what factor?

    <p>An increase in the price of the good</p> Signup and view all the answers

    What does an extension in demand mean?

    <p>Decrease in price leading to more quantity demanded</p> Signup and view all the answers

    What effect does a successful advertising campaign by Tesco have on its demand compared to Asda?

    <p>Increase demand for Tesco and decrease demand for Asda</p> Signup and view all the answers

    How does government legislation affect demand for car seats?

    <p>It increases demand due to legal requirements</p> Signup and view all the answers

    What is the primary reason for the downward slope of the demand curve?

    <p>The law of diminishing marginal utility</p> Signup and view all the answers

    What happens to demand when consumers expect a future decrease in prices?

    <p>Demand decreases immediately</p> Signup and view all the answers

    In relation to seasonal demand, what effect does a hot summer have on sun cream?

    <p>Demand increases</p> Signup and view all the answers

    What does total utility represent in consumer behavior?

    <p>The overall satisfaction from consuming all units of a good</p> Signup and view all the answers

    What is indicated by the law of diminishing marginal utility?

    <p>Satisfaction decreases with each additional unit consumed</p> Signup and view all the answers

    If a product becomes fashionable, what is the expected impact on its demand?

    <p>Demand is expected to increase</p> Signup and view all the answers

    What does a price elasticity of demand (PED) value of 1 indicate?

    <p>Quantity demanded changes by the same percentage as price.</p> Signup and view all the answers

    If the price of good A increases and the quantity demanded for good B decreases, what type of relationship do goods A and B have?

    <p>Complements</p> Signup and view all the answers

    Which of the following would likely have a price elasticity of demand (PED) less than one?

    <p>Gasoline</p> Signup and view all the answers

    How is cross elasticity of demand (XED) calculated?

    <p>% change in quantity demanded of product A divided by % change in price of product B.</p> Signup and view all the answers

    What is the significance of income elasticity of demand (YED) for businesses?

    <p>It forecasts changes in demand based on population income changes.</p> Signup and view all the answers

    If a product has a PED of -2, how is consumer behavior likely to react to a price increase?

    <p>Quantity demanded will decrease by a larger percentage.</p> Signup and view all the answers

    Which of the following statements about inelastic demand is true?

    <p>The demand curve is steep.</p> Signup and view all the answers

    Which best describes a product with a YED greater than 1?

    <p>It is a luxury good.</p> Signup and view all the answers

    Study Notes

    Rational Decision Making

    • Homo Economicus: The rational consumer that aims to maximize utility.
    • Utility: The satisfaction derived from the consumption of a product.
    • Firms maximize profits: Firms are run for their owners and aim to maximize profit to keep shareholders happy.
    • Governments maximize social welfare: Governments work for the public and aim to maximize their satisfaction by increasing social welfare.

    Demand

    • Demand: Ability and willingness to buy a particular good at a given price and time.
    • Movements along the demand curve: Changes in price cause movements along the demand curve. Increase in price = contraction in demand, decrease in price = extension in demand.
    • Shifts of the demand curve: Changes in conditions of demand, also known as factors affecting demand, cause a shift in the demand curve.
    • Conditions of demand: Factors impacting demand shifts (PIRATES mnemonic)
      • Population: Increase in population = increase in demand
      • Income: Increase in income = increase in demand for most goods
      • Related goods: Complements and substitutes impact demand.
      • Advertising: Effective advertising can increase demand.
      • Taste/Fashion: Changing fashion = changing demand
      • Expectations: Expectations of shortages or price changes can influence demand
      • Seasons: Seasonal products have fluctuating demand based on weather conditions.
      • Government Legislation: Legal requirements can affect demand, e.g., mandatory car seats.

    Diminishing Marginal Utility

    • Law of Diminishing Marginal Utility: Marginal utility decreases as more of a good is consumed, assuming consumption of other goods remains constant.
    • Total Utility: Total satisfaction gained from the overall consumption of a good.
    • Marginal Utility: Change in satisfaction from consuming one additional unit of a good.

    Elasticities of Demand

    • Elasticity of Demand: Measures responsiveness of quantity demanded to changes in other variables.
    • Price Elasticity of Demand (PED): Responsiveness of demand to changes in the price of the good.
      • PED Calculation: % change in quantity demanded / % change in price
      • Numerical Values:
        • Unitary Elastic (PED = 1): Quantity demanded changes by the same percentage as price.
        • Relatively Elastic (PED > 1): Quantity demanded changes by a larger percentage than price, indicating responsiveness to price changes.
        • Relatively Inelastic (PED < 1): Quantity demanded changes by less percentage than price, meaning demand is less responsive to price changes.
    • Income Elasticity of Demand (YED): Responsiveness of demand to changes in income.
      • YED Calculation: % change in quantity demanded / % change in income.
      • Significance: Helps firms understand how sales are affected by changes in consumer income.
    • Cross Elasticity of Demand (XED): Responsiveness of demand for one good to price changes of another good.
      • XED Calculation: % change in quantity demanded of good A / % change in price of good B.

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    Description

    This quiz explores the concepts of rational decision making, utility maximization, and demand dynamics. It covers the roles of consumers, firms, and governments in economic decisions and how various factors influence demand. Test your understanding of these fundamental economic principles.

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