3) the objectives of economic agents Flashcards
What is marginal utility
the additional utility gained from the consumption of one additional unit of a good
What is the theory of diminishing marginal returns?
the marginal utility gained from each additional unit consumed/ time spent decreases
How do the objectives of consumes differ among consumers
-depending on the consumer, their utility might be maximised by spending their income straight away, or by saving, investing, and spending later on
Why can considering objectives be useful or not useful??
Useful- can be used by other economic agents to build a picture of their preferences and how they will respond to economic changes
not useful- makes unrealistic assumptions about the knowledge consumers have about their own preferences or options
What are the objectives of firms in the long and short term and why?
Most firms have the main objective of maximising profits in the long term- where MR=MC, this ensures the business can survive, and reinvest its profits into improving quality and quantity of further profits.
In the short term, it may be advantageous for firms to maximise sales to increase brand awareness and market share, which may be done by making a loss in the short term. Shareholders and management will dictate these objectives
What are the objectives of the government and why??
split up into a number of objectives
- low inflation
- low unemployment
- economic growth
- equal balance of payments
all of which are to maximise the welfare of society
to what extent does profit maximisation of a firm benefit the economy??
The extent to which profit maximisation is positive for other economic agents depends on how competitive the market is; a more competitive market ensures more choice, higher quality and lower prices for consumers.
-monopolies and oligopolies profit maximise and can charge higher prices whereas monopolistic competition tend to be in competition to lower prices due to hit and run entry to the market (low barriers to entry)
How might government objectives be bad for the economy??
trade off between policies- Policies that help one macroeconomic objective may hinder the achievement of others – increasing economic growth and achieving full employment conflict with achieving low inflation; higher and more incomes can cause demand-pull inflation increasing the price level.
