Consumer behaviour

• Consumers aim to maximise utility.
• Firms aim to maximise profit.
• Utility


  The total satisfaction received from consuming a good or service.
• Marginal utility


  The extra satisfaction derived from consuming one extra unit of the good or service.
• The demand curve is downward facing because of diminishing marginal utility; consumer surplus declines with each extra unit consumed. This is because the utility derived from the good or service declines with each additional unit consumed. Therefore consumers are willing to pay less for extra units.
• Utility maximisation


  When consumers aim to generate the greatest utility possible from an economic decision.
• Economic agents respond to incentives, which can allocate scarce resources to provide the highest utility to each agent.
• Rewards = positive incentive = consumers better off
• Inaccurate incentives = misallocation of resources
• EG: An entrepreneur wants to avoid loss and gain profit , which makes them want to innovate. so they can reduce their production costs, and improve the quality of their products. Firms need incentive to engage in risk taking, so they innovate. Without innovation, production will cost more resulting in a misallocation of resources.
• The rational decision making model:

  A) Identify the problem

  B) Establish decision criteria

  C) Weigh decision criteria

  D) Generate alternatives

  E) Evaluate alternatives

  F) Choose best alternative

  G) Implement decision

  H) Evaluate decision

  
• Thinking at the margin is important, because it allows consumers to keep thinking ahead. It prevents consumers thinking about what they've already done, and allows them to consider how to maximise utility now or in the future.
• When making choices, margins can also increase productivity, since the most important tasks which maximise utility the most are the ones which are prioritised.