1. Individual Economic Decision Making - Utility Theory

Question 1

What do consumers always seek to maximise?

Answer 1

Utility

Question 2

What is utility?

Answer 2

The degree of satisfaction or use a consumer gains from a product/service.

Question 3

What is marginal utility and how is it calculated?

Answer 3

This is the extra utility a consumer gains from consuming one more unit of a good/service - simply found by subtracting the utility of the previous unit from the current no. of units being consumed

Question 4

What is average utility and how is it calculated?

Answer 4

This is the average amount of utility each unit of a good/service consumed provides - it is calculated by dividing total utility by the no. of units consumed

Question 5

What will the AU & MU curves look like on a graph and what are the axis?

Answer 5

Y axis = utiles & priceX axis = quantity of units consumedBoth the AU & MU curves will be downward sloping due to the law of diminishing utility

Question 6

In the real world how does price influence utility maximisation by consumers?

Answer 6

In reality goods have prices, rather than consuming every unit until the MU = 0 consumers will consume while the MU they gain from a unit is > or = to the price they pay - when the MU falls below the price a rational consumer wouldn’t buy an extra unit

Question 7

What else does the MU curve show/what else is it and why?

Answer 7

The MU curve is also the demand curve - as prices rise demand will fall bc the no. of units that give more MU than cost to the consumer falls - & vice versaThis means the MU curve is the demand curve bc it shows the quantity of units demanded at a given priceThis explains why the demand curve is downward sloping