2.1 Consumer Behaviour Flashcards
What is the utility theory?
- When making economic decisions, consumers aim to maximise their utility and firms aim to maximise profits.
- A consumer’s utility is the total satisfaction received from consuming a good or service.
What is marginal utility?
- Marginal utility is the extra satisfaction derived from consuming one extra unit of the good.
Why is the demand curve downward sloping?
- because of diminishing marginal utility.
What does the law of diminishing marginal utility say?
-The law of diminishing marginal utility suggests:
- that consumer surplus generally declines with extra units consumed.
- This is because the extra unit generates less utility than the one already consumed.
- Therefore, consumers are willing to pay less for extra units.
Define utility maximisation?
- Maximisation for consumers is when
consumers aim to generate the greatest utility possible from an economic decision. - Firms aim to generate the highest profits
possible. - It is assumed that economic agents only act in their own interests.
-Some firms might have philanthropic owners who seek to maximise the utility of others.
What are Economic Incentives?
- Economic agents respond to incentives, which can allocate scarce resources to provide the highest utility to each agent.
-For the entrepreneur in a firm, the incentive for taking risks is profit.
What are rewards and penalties an example of?
- Rewards are positive incentives which will make consumers better off.
- Penalties make them worse off.
What occurs when incentives are not given properly?
- resources will be misallocated.
What is the role of prices in market economies?
- Provide signals to buyers and sellers, which is an incentive to purchase or sell the good.
- This changes their behaviour.
-For example, a high demand and high price for a good will give an incentive to firms
to allocate more resources to producing that good. - An entrepreneur wants to avoid loss and gain profit, which makes them want to innovate, so they can reduce their production costs, and improve the quality of their products.
- Firms need an incentive to engage in risk taking, so they innovate.
- Without innovation, production will cost more and there will be a misallocation of resources.
Define rational economic decision making
- A firm or an individual can make decisions using intuition or rationally.
- Intuition uses the feelings or instincts of the consumer and does not use facts. Businesses use this when they do not have access to facts or when making the decision is difficult.
- A rational decision is made using several steps, and it involves analysis and facts.
What are the steps of rational decision making?
- Identify the problem
- Find and identify the decision criteria
- Weigh the criteria
- Generate alternatives
- Evaluate alternative options
- Choose the best alternative
- Carry out the decision
- Evaluate the decision
What are the limitations of rational decision making?
- This is not always the most realistic way for firms to make decisions.
- might be fairer than making an intuitive decision
- but it takes significantly longer to decide, which is not practical in a firm with strict time constraints.
What does “thinking at the margin” mean?
- It means thinking about the effect of an additional action.
- An action could involve a marginal increase in product or a marginal cost.
-(For example, working for one extra hour could produce 6 more units of output-However, each extra unit of output costs 10 minutes)
Why is it important to think of the margin when making choices?
- It allows consumers to keep thinking ahead.
- It prevents consumers thinking about things they have already done
- It allows them to consider how to maximise their utility now or in the future.
- When making choices, margins can also increase productivity, since the most important tasks which maximise utility the most, are the ones which are prioritised.
