2.7 THE CONCEPT OF THE MARGIN Flashcards
whats the utility theory
- concerned with the satisfaction that an individual derives from consuming a good or service
what is the unit of measurement for utility
utils
what is total utility
the aggregate amount of satisfaction an individual derives from consuming a good or service
what is marginal utility
the amount of satisfaction an individual derives from consuming one extra unit of a good or service
what does total utility do over time
diminish or decrease
as individuals increase the amount of satisfaction (or utils) that they receive what happens ?
consumption will decline
what’s the formula for marginal utility
change in total utility /change in the number of units consumed
as consumption increases what happens to marginal utility
it diminishes
importance of the margin when making choices …
- individuals will only choose an option if the marginal benefit is greater than the marginal cost
- if the marginal cost is greater than the marginal benefit then total utility will fall
when does maximisation occur
when an economic agent tries to obtain the most that they can from the economic activity that they undertake
what do consumers wish to maximise
utility (personal satisfaction)
what do firms wish to maximise
their profits
what do governments wish to maximise
welfare of the population
