2. Individual Economic Decision Making

Question 1

What is the traditional, neoclassical economic theory?

Answer 1

Assumes that consumers always act rationally, seeking to maximise satisfaction for every pound spent on each product they buy.

Question 2

What is utility?

Answer 2

The amount of satisfaction or benefit that a consumer gains from consuming a good or service.

Question 3

What is a rational consumer?

Answer 3

An assumption of traditional economic theory that consumers act in such a way as to maximise satisfaction, or utility, when they spend money on goods and services.

Question 4

What is marginal utility?

Answer 4

The satisfaction gained from consuming an additional unit of a good or service.

Question 5

What is diminishing marginal utility?

Answer 5

As individuals consumer more units of a good or service, the additional units give successively smaller increases in total satisfaction.

Question 6

What does the concept of diminishing marginal utility show?

Answer 6

A way of deriving an individual’s downward-sloping demand curve for a good or service.