Chap 7

• What is the main concept discussed in Chapter 7 of A’Level Economics?

  The concept of the margin
• What are the learning objectives of Chapter 7 in A’Level Economics?

  • Explain the concept of the margin
  • Total and marginal utility theory
  • The law of diminishing marginal utility (demand curve)
  • Explain and calculate marginal values
  • Economic efficiency, productive efficiency, and allocative efficiency
  • Draw diagrams to illustrate total utility and marginal utility
• What does the marginal principle state?

  Economic agents make decisions by considering the effect of small changes from the existing situation
• How do rational economic agents make decisions?

  By weighing up marginal cost versus marginal benefit to maximize their objective
• What is utility in economics?

  Consumer satisfaction
• What is marginal utility?

  Additional utility gained by consuming "one more" unit
• What does the law of diminishing marginal utility state?

  Utility per unit declines as quantity consumed increases
• What is allocative efficiency?

  Society produces an appropriate combination of goods/services relative to consumer preferences: \( P = MC \)
• What is productive efficiency?

  Maximum output at minimum cost, any point on the PPC
• What is economic efficiency?

  Productive efficiency plus allocative efficiency
• What is opportunity cost?

  The value of the next-best alternative
• What are the objectives of economic agents?

  • Consumers seek utility (satisfaction)
  • Firms seek to make profit
  • Governments pursue the welfare of their citizens
  • Workers pursue their own welfare (pay, job security, job satisfaction)
• What does the rational choice assumption imply?

  Economic agents seek to maximize their net benefits
• How do economic agents use the marginal principle?

  They weigh marginal benefit against marginal cost and adjust until \( MB = MC \)
• What is total utility?

  The overall satisfaction gained from consuming a good/service
• What is the relationship between marginal utility and willingness to pay?

  The higher the marginal utility, the more a consumer would be prepared to pay for that additional unit
• What does the law of diminishing marginal utility imply for consumption?

  As the number of units consumed increases, the marginal utility of each additional unit decreases
• What is the MR = MC rule for profit maximization?

  Profits are maximized when marginal revenue equals marginal cost
• How do price signals function in a free market economy?

  Price guides producers and consumers towards market equilibrium and assists in resource allocation
• What happens when there is a shift in the demand curve?

  It leads to an increase or decrease in the equilibrium price
• What is the invisible hand in economics?

  It describes the allocation of resources via price signals in a market economy
• What does productive efficiency ensure?

  Maximum output at the lowest average cost
• What is the relationship between consumer satisfaction and allocative efficiency?

  Allocative efficiency occurs where consumer satisfaction (MU) is maximized: \( P = MC \)
• What happens in the long run when demand increases?

  Increased producer surplus attracts more suppliers to the market
• What is the equilibrium price in a market?

  The price at which no surplus is made on the last marginal unit
• What does the price mechanism ensure in a market?

  That markets clear, with equilibrium reached where \( Q_s = Q_d \)
• What are the two potential situations of disequilibrium?

  Price below equilibrium leads to excess demand, and price above equilibrium leads to excess supply
• What is a market failure?

  A situation where the free market fails to reach an equilibrium price and quantity that achieves allocative efficiency
• What is the role of government intervention in market failures?

  To redistribute resources to protect the vulnerable
• What is not a function of the price mechanism in a market economy?

  To ensure an even distribution of income
• When is a market allocatively efficient?

  When marginal social benefit equals marginal social cost
• When is allocative efficiency achieved?

  When consumer and producer surplus are at a maximum
• What are the key terms related to the concept of the margin?

  • Marginal principle
  • Rational decision making
  • Utility
  • Marginal utility
  • Law of diminishing marginal utility
  • Price signal
  • Allocative efficiency
  • Productive efficiency
  • Economic efficiency
• What are the types of economic efficiency?

  • Productive efficiency: maximum output at minimum cost
  • Allocative efficiency: producing goods according to consumer preferences
  • Economic efficiency: both productive and allocative efficiency
• What diagrams should you be able to draw related to utility?

  • Total utility diagram
  • Marginal utility diagram
• What happens in the long run when demand increases?

  • Increased producer surplus
  • More suppliers attracted to the market
  • Increased supply/competition
  • New equilibrium price and quantity
• What is the marginal principle in decision making?

  • Economic agents weigh marginal benefit against marginal cost
  • Adjustments are made until \( MB = MC \)
• What are the implications of the law of diminishing marginal utility?

  • As consumption increases, marginal utility decreases
  • Affects consumer choices and willingness to pay
• What is the relationship between marginal revenue and marginal cost for firms?

  • Profits are maximized when \( MR = MC \)
  • If \( MR > MC \), increase output
  • If \( MR < MC \), decrease output