1 Rational decision making

a) The assumption of rationality in decision making: consumers aim to maximise utility by making rational choices; firms aim to maximise profits.

b) Reasons why consumers may not aim to maximise utility:

• the influence of other people’s behaviour (herding)

• habitual behaviour • inertia

• poor computational skills

• the need to feel valued

• framing and bias.

​

2 The demand curve

a) The concept of ‘demand’.

b) The distinction between movements along a demand curve and shifts of a demand curve.

c) The concept of diminishing marginal utility and its significance for the shape of the individual demand curve.

d) Factors that may cause a shift in the demand curve:

• changes in the price of substitutes or complementary goods

• changes in real income; in tastes; in size and age distribution of the population

• advertising.

​​

3 The supply curve

a) The concept of ‘supply’.

b) The distinction between movements along a supply curve and shifts of a supply curve.

c) Factors that may cause a shift in the supply curve:

• changes in the costs of production

• the introduction of new technology

• indirect taxes (specific and ad valorem)

• government subsidies • natural disasters