consumer behaviour

• what is individual economic decision influenced by?

  • Rationality
  • Incentives
  • Marginal utility 
• when analysing markets, what assumptions are made about economic agents?

   rationality of economic agents involved in the transactions
• what does rational mean in classic economic theory?

  economic agents are able to consider the outcome of their choices and recognise the net benefits of each one. Rational agents are incentivised to select the choice which presents the highest benefits
• how are economic agents meant to act rationally?

  consumers-maximise utility

  producers-sell goods in services in a way to maximise profit

  workers- are meant to balance welfare at work with consideration of both pay and benefits

  governments-place interests of people first to maximise welfare
• what is utility?

  Utility is the satisfaction gained from consumption 
• what is marginal utility?

  • Marginal utility is the additional utility (satisfaction) gained from the consumption of an additional product
• why is the utility from gaining the first unit always higher?

  • For example, a hungry consumer gains high utility from eating their first hamburger. They are still hungry and purchase a second hamburger but gain less satisfaction from eating it than they did from the first hamburger
• how do you calculate total utility?

  • To calculate total utility, the marginal utility of each unit consumed is added together
  • This means that total utility keeps increasing even while marginal utility is decreasing
• what is the law of diminishing marginal utility?

  • The Law of Diminishing Marginal Utility states that as additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit
• how does the law of diminshing marginal utility explain a downward sloping demand curve?

  • When the first unit is purchased, the utility is high and consumers are willing to pay a high price
  • When subsequent units are purchased, each one offers less utility and the willingness of the consumer to pay the initial price decreases
  • Lowering the price makes it a more attractive proposition for the consumer to keep consuming additional units
  • This is one reason why firms offer discounts such as '50% off the second item' 
• when is utility maximisation achieved?

  consumers spend limited income in such a way that they will achieve the most satisfaction from their money
• what does it mean for a consumer to make decisions at the margin?

  consumers weigh whether to consume a little more or a little less of something

  • This involves considering marginal benefit and marginal cost
  • Consumers continue to consume until the extra happiness from each unit equals the extra cost, which is making decisions at the margin 
• why is thinking at the margin fundamental for firms and governments?

  • It guides decisions on how to allocate scarce resources by evaluating the marginal benefit and marginal cost of an additional unit
  • By comparing the best decisions to their costs, the aim is to achieve optimal choices