A Level Microeconomics Revision Doc
Rational decision making - consumers aim to maximise utility and firms aim to maximise profits
Demand
Demand is the quantity of that good that consumers are willing and able to purchase at a given price at a given
period of time
Price demanded decreases as quantity increases due to diminishing marginal utility for every extra unit demanded -
marginal utility is the change in total satisfaction from consuming an extra unit of a good or service - beyond a
certain point the marginal utility may begin to fall - and this falls consumers will only be prepared to pay a lower price
Types of demand
1. Effective - desire and ability to pay
2. Latent - desire but not the ability to pay
3. Derived - demand for one good increases due to increased demand for a related good - eg rise in demand
for mobile phones and other mobile devices has led to a strong rise in demand for lithium
4. Complementary - price increase for one good increases demand for another - eg increased demand for
computers leads to increased demand for software
5. Composite - goods have more than one use so an increase in demand for one product leads to fall in supply
of another
What shifts demand
Population
Advertising
City speculators
Interest rates
Fashion
Income (tax)
Complementary goods
Substitute goods
Supply
The quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a
given time period
Types of supply
1. Joint - increase in one good leads to increase in supply of another eg increased beef supply increases beef
hides supply
What shifts supply
,Productivity
Indirect taxes
New entrants
Technology
Subsidies
Weather
Costs of production
,Consumer and producer surplus
Consumer surplus - measure of welfare people gain from consuming goods and services
Producer surplus - measure of welfare people gain from producing goods and services
Price elasticity of demand
Responsiveness of quantity demand relative to a change in price
, What impacts PED
Substitutes (more substitutes = more elastic)
Percentage of income (costs more of income = more elastic
Luxury (more luxury = more elastic)
Addictive (more addictive = more inelastic)
Time (over time may change from peak vs off peak times)
Eg cigarettes very price inelastic
Income elasticity of demand
Responsiveness of quantity demand relative to a change in income
YED > 1 = demand income is elastic = luxury goods
YED = 0-1 = demand income inelastic = staple goods
YED < 0 = inferior good
YED > 0 = normal good
Cross elasticity of demand
Responsiveness of quantity demand of one good relative to the change in price of another good
Rational decision making - consumers aim to maximise utility and firms aim to maximise profits
Demand
Demand is the quantity of that good that consumers are willing and able to purchase at a given price at a given
period of time
Price demanded decreases as quantity increases due to diminishing marginal utility for every extra unit demanded -
marginal utility is the change in total satisfaction from consuming an extra unit of a good or service - beyond a
certain point the marginal utility may begin to fall - and this falls consumers will only be prepared to pay a lower price
Types of demand
1. Effective - desire and ability to pay
2. Latent - desire but not the ability to pay
3. Derived - demand for one good increases due to increased demand for a related good - eg rise in demand
for mobile phones and other mobile devices has led to a strong rise in demand for lithium
4. Complementary - price increase for one good increases demand for another - eg increased demand for
computers leads to increased demand for software
5. Composite - goods have more than one use so an increase in demand for one product leads to fall in supply
of another
What shifts demand
Population
Advertising
City speculators
Interest rates
Fashion
Income (tax)
Complementary goods
Substitute goods
Supply
The quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a
given time period
Types of supply
1. Joint - increase in one good leads to increase in supply of another eg increased beef supply increases beef
hides supply
What shifts supply
,Productivity
Indirect taxes
New entrants
Technology
Subsidies
Weather
Costs of production
,Consumer and producer surplus
Consumer surplus - measure of welfare people gain from consuming goods and services
Producer surplus - measure of welfare people gain from producing goods and services
Price elasticity of demand
Responsiveness of quantity demand relative to a change in price
, What impacts PED
Substitutes (more substitutes = more elastic)
Percentage of income (costs more of income = more elastic
Luxury (more luxury = more elastic)
Addictive (more addictive = more inelastic)
Time (over time may change from peak vs off peak times)
Eg cigarettes very price inelastic
Income elasticity of demand
Responsiveness of quantity demand relative to a change in income
YED > 1 = demand income is elastic = luxury goods
YED = 0-1 = demand income inelastic = staple goods
YED < 0 = inferior good
YED > 0 = normal good
Cross elasticity of demand
Responsiveness of quantity demand of one good relative to the change in price of another good
