4.1.2 Consumer Behaviour Theory

• As more units are consumed, the satisfaction from the last unit falls but so long as it is positive the total utility will rise
• As long as MU is positive, TU will rise. When MU equals 0, TU is at its max. MU increases at a decreasing rate, then it decreases at an increasing rate.

  
• Law of Diminishing Utility: the more units of the good that is consumed, the utility received from the last unit will fall
• Consumers are not always rational, they are many factors that will lead to bounded rationality.
• Bounded rationality: people's ability to make rational decisions is severely restricted
• Why do people have bounded rationality:

  • the human mind has limited ability to process and evaluate information
  • the information available is invariably incomplete and often unreliable
  • the time available in which to make decisions is limited