2.1 Consumer Behaviour

Question 1

What does traditional economics always assume?

Answer 1

That consumers always act rationally

Question 2

What is rational behaviour?

Answer 2

People making decisions and acting in their own self interests or to maximise their private benefit

Question 3

For households and the people in them was is being rational?

Answer 3

Maximising welfare, satisfaction or utility gained from the goods and services consumed

Question 4

What is utility?

Answer 4

Satisfaction(or economic welfare) an individual gains from consuming a good or service

Question 5

Marginal utility?

Answer 5

The additional welfare satisfaction or pleasure gained from consuming one extra unit of a good or service

Question 6

With goods and services what do consumers attempt to do?

Answer 6

Maximise their utility

Question 7

What is total utility?

Answer 7

Total satisfaction gained from consuming

Eg drinking glasses of water
1: 8 units
2: 14 units
3:20 units

Question 8

Describe the total utility curve?

Answer 8

Upwards and curved as utility is shown communicatively

Question 9

Why is the marginal utility curve different to the total utility curve?

Answer 9

Shows them as separate data observations for each drink

Question 10

What is the curve like on a marginal utility graph?

Answer 10

Straight and decreasing

(Like the demand curve)

Question 11

How does a marginal utility curve show diminishing utility?

Answer 11

The downward slope of the utility curve

Question 12

How does a total utility curve show diminishing utility?

Answer 12

The diminishing rate of increases of the slope(gradient )

Question 13

What is something important to note about drawing a marginal utility curve?

Answer 13

The points on the x axis are plotted in between the values not on each x value

Question 14

What is the point of satisfaction on a marginal utility graph and what does it mean?

Answer 14

Where the curve meets the x axis

-zero marginal utility-total utility has been maximised

Question 15

What would it be to keep on consuming a product after the point of satisfaction?

Answer 15

Irrational

Question 16

What is the hypothesis for dimins marginal utility?

Answer 16

For a single consumer, the marginal utility derived from a good or service diminishes for each additional unit consumed

Question 17

What is the hypothesis of diminishing marginal utility in simplistic terms?

Answer 17

-as a person has more of a product, they get less satisfaction each time they consume it

Question 18

How is a theory different to a hypothesis?

Answer 18

A theory is proved a hypothesis is not

Question 19

What did Adam Smith say about diamonds and water?

Answer 19

“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

Question 20

What does Adam’s smiths paradox mean?

Answer 20

-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

Question 21

When does Adam Smith’s paradox break down?

Answer 21

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)

Question 22

What is utility maximisation consistent with?

Answer 22

T radiation all economic theory

Question 23

What is the opportunity cost of drinking a fourth glass of lemonade?

Answer 23

-lose the money
-lose the satisfaction from drinking it

Question 24

When does satisfaction occur?

Answer 24

When no more utility can be gained from consuming the good

Question 25

What are the constraints for peoples choices?

Answer 25

-limited income

-given set of prices

-budget constraint

-limited time available

Question 26

Constraints:Limited income ?

Answer 26

Utility spend on one good cannot be spend on another, it creates an opportunity cost

Question 27

Constraints: given set of prices?

Answer 27

Consumers cannot change market price by their own actions

Question 28

Constraints: the budget constraint?

Answer 28

-assuming everything is spend on spending a consumer can’t buy everything(opportunity cost)

Question 29

Constraints: limited time availability?

Answer 29

-can’t consume two different goods at the same time

Question 30

What is the margin

Answer 30

current level of consumption or production of a good or service

Question 31

Can we actually measure a person’s utility ?

Answer 31

No

Question 32

Who came up with revealed preference and what is it?

Answer 32

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)

Question 33

What is the margin?

Answer 33

Change in a variable cussed by increasing another variable by one unit

Question 34

What is the marginal cost?

Answer 34

Additional cost of producing more one unit of a good

Question 35

Marginal revenue?

Answer 35

Additional revenue of selling one more of a good

Question 36

Marginal cost?

Answer 36

Additional cost of producing more one unit of a good

Question 37

Marginal product?

Answer 37

Additional output of adding one more unit of an input

Question 38

what does the total utility curve look like?

Answer 38

axis: x:glasses of lemonade
y:units of utility

Question 39

what does the marginal utilty curve look like?

Answer 39

x axis: glasses of lemonade
y axis:units of utility

Question 40

graph for relating marginal utility to changes in price and the shape of a demand curve

Answer 40