Notesale: Turn your study into money

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● Reasons why consumers may not make rational decisions = the influence of
other people’s behaviours, addiction, consumer weakness at computation or
habitual behaviour
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● Market = where consumers and producers come into contact with each other
to exchange goods and services
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● Individual vs market demand
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● You can only move along
the demand curve when
there is a change in
price
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● Marginal utility = the
utility gained from
consuming one extra unit
of a good or service
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● As marginal utility falls from each extra good consumed, it means consumers
will only buy more of it if the price falls - hence the downwards-sloping
demand curve
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● A shift in the demand curve is caused by PASIFICL = Population, Advertising,
Substitute’s price, Income effect, Fashion/tastes, Interest rates, Complement’s
price and Legislation
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Also called the market clearing
price (because there is no excess demand or supply, so the market is
“clear”)
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● Law of demand = as prices rise, quantity demanded falls (and vice versa inverse relationship)
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● Complements effect = if demand for one product (e
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dishwashers) rises,
then demand for related or similar products will also rise (e
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dishwasher
tablets)
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● Elastic = if a price change leads to a considerably bigger change in quantity
demanded
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● Percentage change = (difference/original) x 100
● PED = % change in quantity demanded / % change in price
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● A PED of <1 = inelastic
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● PED of infinity = perfectly elastic
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● Factors that affect PED = Substitutability, Proportion of income spent on the
good/service, Luxuries/necessities, Addictiveness and Time
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➔ On a quantity demanded vs
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g
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➔ Include minus signs in your answer
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● YED = % change in quantity demanded / % change in income
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● If goods have a negative YED, then they are inferior (income rises, so
demand decreases)
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● XED = % change in quantity demanded of good X / % change in the price
of good Y
...
g
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● A positive XED = the goods are substitutes (e
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oranges and tangerines)
...
g
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Supply
● Supply = the amount of a
good or service that firms are
willing and able to supply at a
range of price levels
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● Reasons why the supply
curve is upward sloping =
profit motive (when market
price rises it is more profitable
for businesses to increase

their output)
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● The only factor that causes a
movement along the supply
curve is price
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● An increase in supply OR demand = always a shift to the right
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● Joint supply = when an increase of supply of good x, means more is
automatically supplied of good Y (e
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beef and leather)
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Price elasticity of supply
● PES = a measure of how responsive supply is as a
result of a change in price
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● Momentary (e
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immediately) elasticity of supply will
be zero (perfectly inelastic) because suppliers cannot
instantly meet a change in demand
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● In the long term, PES is relatively elastic
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Price determination
● Equilibrium price = the price where the quantity demanded equals the
quantity supplied for a good or service in a market
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● Excess demand = where the quantity demanded exceeds the quantity
supplied for a good at the current market price
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● ARSI = Allocates scarce resources, Rations excess demand/supply, Signals
that price is too high/low, Incentives to change price
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For example, an
increase in consumer demand for a good or service raises the price and
causes producers to produce more of that good or service to meet demand
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For example, if prices fall due to
PINTSWC factors then this is signalled to consumers with lower prices and
they will respond by expanding their demand
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Also, consumers have more incentive to consume goods after
supply increases as the price will be lower
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Rations supply: when supply decreases
there will also be a shortage so few people can obtain the good or service
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● Producer surplus = the
difference between the market
clearing price that firms receive
and the price at which they are
willing and able to supply
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Indirect taxes and subsidies
● Tax = a compulsory financial contribution to state revenue
...
g
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● Indirect taxes = taxes levied on the expenditure of goods or services (e
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VAT)
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● Specific tax = a tax which is a fixed rate per unit, like the tax on a pint of beer
is 41
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● Incidence of tax = the distribution of the tax paid between consumers and
producers
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Incidence of tax

Subsidies - advantages
➔ Enables greater social efficiency
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➔ If you subsidise public transport, it will encourage people to drive less, and
reduce their negative externalities
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It will encourage firms to develop more products
with positive externalities
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➔ Potential increase in employment within subsidised industries, e
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farming
and the EU CAP
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Some taxation, e
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income tax,
may reduce incentives to work
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g
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➔ Difficult to estimate the extent of the positive externality
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Difficult to quantify external benefits and place a monetary value on
them
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➔ There is a danger that government subsidies may encourage firms to be
inefficient and they come to rely on subsidy rather than improve efficiency
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Producer subsidy and consumer subsidy on a graph

Alternative views on consumer behaviour
● Reasons why consumers may not make rational decisions = the influence
of other people’s behaviours, addiction, consumer weakness at computation
or habitual behaviour
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● BUT the underlying assumptions for all rational decision making is that
customers aim to maximise utility, companies aim to maximise profit and
governments aim to maximise welfare of citizens
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Influences of other people: Rationality assumes people act individually to
maximise their own benefits but sometimes individuals are influenced by
social norms, known as a bias
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Consumers become unwilling to change the bias, even if doing so will benefit

them, if it goes against the norms of society
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One example is the stock
market, and this causes huge market bubbles
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Influence of habitual behaviour: Most people have habits and these habits
reduce the amount of time it takes to do something, because consumers no
longer have to consciously think about their actions
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Habitual behaviour includes addictions and so this influences
people’s decisions, for example consumers will buy more drugs/alcohol even
though they know they should give up
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Also, consumers are sometimes poor at self-control and so do things they
know they shouldn’t
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One example of this
is consumers saving up for their pensions: many put off doing this because
they fail to look long term

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