2.1 Consumer Behaviour Flashcards
What does traditional economics always assume?
That consumers always act rationally
What is rational behaviour?
People making decisions and acting in their own self interests or to maximise their private benefit
For households and the people in them was is being rational?
Maximising welfare, satisfaction or utility gained from the goods and services consumed
What is utility?
Satisfaction(or economic welfare) an individual gains from consuming a good or service
Marginal utility?
The additional welfare satisfaction or pleasure gained from consuming one extra unit of a good or service
With goods and services what do consumers attempt to do?
Maximise their utility
What is total utility?
Total satisfaction gained from consuming
Eg drinking glasses of water
1: 8 units
2: 14 units
3:20 units
Describe the total utility curve?
Upwards and curved as utility is shown communicatively
Why is the marginal utility curve different to the total utility curve?
Shows them as separate data observations for each drink
What is the curve like on a marginal utility graph?
Straight and decreasing
(Like the demand curve)
How does a marginal utility curve show diminishing utility?
The downward slope of the utility curve
How does a total utility curve show diminishing utility?
The diminishing rate of increases of the slope(gradient )
What is something important to note about drawing a marginal utility curve?
The points on the x axis are plotted in between the values not on each x value
What is the point of satisfaction on a marginal utility graph and what does it mean?
Where the curve meets the x axis
-zero marginal utility-total utility has been maximised
What would it be to keep on consuming a product after the point of satisfaction?
Irrational
What is the hypothesis for dimins marginal utility?
For a single consumer, the marginal utility derived from a good or service diminishes for each additional unit consumed
What is the hypothesis of diminishing marginal utility in simplistic terms?
-as a person has more of a product, they get less satisfaction each time they consume it
How is a theory different to a hypothesis?
A theory is proved a hypothesis is not
What did Adam Smith say about diamonds and water?
“Nothing is more useful than water: but scarce any thing can be had in exchange for it. A diamond has scarce in value of use but a great quantity of other goods may be frequently had in exchange for it
What does Adam’s smiths paradox mean?
-things that are essential have small value(water) and unessential things(diamond)have high value
-water is not scarce so it can be consumed up to marginal utility
-marginal utility for diamonds is greater because they are more scarce
When does Adam Smith’s paradox break down?
When one is dying of thirst the marginal utility would be much higher of having water than getting another diamond (until they are no longer thirsty)
What is utility maximisation consistent with?
T radiation all economic theory
What is the opportunity cost of drinking a fourth glass of lemonade?
-lose the money
-lose the satisfaction from drinking it
When does satisfaction occur?
When no more utility can be gained from consuming the good
What are the constraints for peoples choices?
-limited income
-given set of prices
-budget constraint
-limited time available
Constraints:Limited income ?
Utility spend on one good cannot be spend on another, it creates an opportunity cost
Constraints: given set of prices?
Consumers cannot change market price by their own actions
Constraints: the budget constraint?
-assuming everything is spend on spending a consumer can’t buy everything(opportunity cost)
Constraints: limited time availability?
-can’t consume two different goods at the same time
What is the margin
current level of consumption or production of a good or service
Can we actually measure a person’s utility ?
No
Who came up with revealed preference and what is it?
Paul Samuelson
-work backwards from observing how consumers actually behave to OBSERVING THEIR PREFERENCES
-consumer preferences are revealed by the goods they buy(with their level of income and at given prices)
What is the margin?
Change in a variable cussed by increasing another variable by one unit
What is the marginal cost?
Additional cost of producing more one unit of a good
Marginal revenue?
Additional revenue of selling one more of a good
Marginal cost?
Additional cost of producing more one unit of a good
Marginal product?
Additional output of adding one more unit of an input
what does the total utility curve look like?
axis: x:glasses of lemonade
y:units of utility
what does the marginal utilty curve look like?
x axis: glasses of lemonade
y axis:units of utility
graph for relating marginal utility to changes in price and the shape of a demand curve
