1.2.1 - Rational Decision Making

Question 1

Who Are The Economic Agents & What Do They Do?
(3 Points)

Answer 1

~ Consumers -> Maximise their utility.

~ Producers -> Maximise their profit.

~ Governments -> Maximise social welfare.

Question 2

What Is Meant By ‘Utility’?

Answer 2

Satisfaction.

Question 3

What Is Meant By ‘Marginal’?

Answer 3

Extra derived when one more is consumed or produced.

Question 4

What Is Meant By ‘Marginal Utility’?
(3 Points)

Answer 4

~ Extra utility gained when more is consumed.

~ Is equal to the marginal private benefit, when a unit is consumed.

~ Calculated -> Change in total utility.

Question 5

What Is Meant By ‘Average Utility’?

Answer 5

Calculated -> Total utility / quantity.

Question 6

What Is Meant By ‘Law Of Diminishing Utility’?
(2 Points)

Answer 6

~ As quantity consumed increases, the marginal utility derived from each extra unit decreases.

~ E.g. More coke consumed, the more sick somebody will feel.

Question 7

Describe This Marginal & Average Utility Curve
(3 Points)

Answer 7

~ Downward sloping due to the law of diminishing utility.

~ When the first unit is purchased, utility is high and consumers are willing to pay a higher price for more.

~ Total utility is maximised when this consumer gets to the 5th number.

~ MU = MPB = D.

Question 8

Where Is Total Utility Maximised?

Answer 8

When marginal utility is = 0.

Question 9

How Does The Marginal Utility Curve = The Demand Curve?
(2 Points)

Answer 9

~ Increase in price -> less quantity demanded -> less units will satisfy consumers marginal utility -> less consumption.

~ Decrease in price -> More quantity demanded -> more units will satisfy consumers marginal utility -> more consumption.