3.2.1 - Consumer Behaviour

Question 1

What is utility?

Answer 1

The pleasure or satisfaction obtained from consumption.

Question 2

What is marginal utility?

Answer 2

The additional pleasure obtained from consuming one more unit of something.

Question 3

What do total and marginal utility curves both show?

Answer 3

The same information, demonstrated in different ways.

Question 4

How do marginal utility graphs differ from total utility graphs?

Answer 4

Marginal utility graphs plot the data as separate observations, whereas total utility shows the data cumulatively.

Question 5

What is the marginal utility in reference to the total utility?

Answer 5

The marginal utility is the difference of n₂ - n₁

Question 6

What is diminishing marginal utility?

Answer 6

The decrease of satisfaction due to overconsumption, (added consumption of each item)

Question 7

Where is the point of satiation on a marginal utility curve?

Answer 7

The point at which it crosses the x-axis.

Question 8

What is the point of satiation on a total utility curve?

Answer 8

The crest of the graph.

Question 9

What do economists have to assume about the point of satiation?

Answer 9

Consumers will cease consumption of that product as it is irrational for them to do so.

Question 10

What is the ‘hypothesis of diminishing marginal utility’?

Answer 10

For a single consumer, the marginal utility that comes with consumption of a good or service diminishes for each additional unit consumed.

Question 11

What was Adam Smith’s diamonds and water paradox?

Answer 11

Nothing is more useful than water: but; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may be frequently had in exchange for it.

Question 12

What did Adam Smith’s paradox mean?

Answer 12

Practical items have a value in use, but often have little or no value in exchange.
On the other hand, impractical items have almost no value in use, but have a very high value in exchange.

Question 13

Why does Adam Smith’s paradox work?

Answer 13

Diamonds have a very low supply, hence their value is very high. In most areas of the world, water is not scarce, so the value is very low.

The marginal utility of having one diamond is far higher than a glass of water as it is worth far more.

Question 14

At what point does Adam Smith’s paradox break down?

Answer 14

If one is dying of thirst, the marginal utility of a glass of water is far higher than the marginal utility of an added diamond, at least until the thirst is quenched.

Question 15

What is the link between marginal utility and an individual’s demand?

Answer 15

If an item has a value, you will consume the item/s to the point of satiation until the marginal utility is lower than purchasing another item.

As price of a given item increases, the marginal utility of buying more of it reduces.

Essentially, the higher the price, the lower the quantity that is demanded.

Question 16

What is utility maximisation?

Answer 16

Economic agents decide their market plans in order to maximise a target goal in the pursuit of self-interest.

Question 17

What is the difference between maximising vs. minimising behaviour?

Answer 17

There are two ways of thinking about any objective.

Maximising = the utility gained from the set of goods consumed
Minimising = reducing the outlay or cost of obtaining the same combination of a bundle of goods and/or services.

Question 18

What are the constraints of choices consumers make in the market?

Answer 18

Limited income
A given set of prices
The budget constaint
Limited time available

Question 19

How does limited income cause a change in the choices of consumers?

Answer 19

No-one has an infinite income so income spent on one good cannot then be spent on another good.

Question 20

How does a given set of prices cause a change in the choices of consumers?

Answer 20

Consumers in and of themselves cannot actually affect market prices. Given this assumption, consumers are ‘price-takers’ rather than ‘price-makers’

Question 21

How does the budget constraint cause a change in the choices of consumers?

Answer 21

Essentially the opportunity cost of consumption. If you purchase one good, you must forgo the opportunity to purchase another good.

Question 22

How does the limited availability of time cause a change in the choices of consumers?

Answer 22

It is impossible to consume more than one good at a time, and you cannot store an infinite number of goods for later consumption.

Question 23

What is the margin?

Answer 23

The current level of activity.

Question 24

How can an economic agent maximise a desired objective?

Answer 24

An economic agent must undertake an activity to the point at which the marginal private benefit is equal to the marginal private cost incurred due to production of the good.

Question 25

How do consumers maximise utility?

Answer 25

Consume a good up to the point at which MU = P.

Question 26

Can utility be measured?

Answer 26

No, you cannot actually measure the utility gained for each unit of a good consumed.

Question 27

How have economists got around the problem of utility measurement?

Answer 27

Paul Samuelson conceptualised ‘revealed preference’.

It works by observing how consumers behave in reference to their preferences. Consumers reveal a preference buy choosing items at a given price for given levels of income.

Question 28

What is (effective) demand?

Answer 28

The desire to buy a good or service and willingness to pay for it.

Question 29

What can shift a demand curve to the right?

Answer 29

Incomes

External Shocks (Recession, Economic Booms etc.)

Change in people’s tastes / seasonality

Prices of complementary goods (printer / ink cartridges)

Prices of substitute goods (competition)

Derived Demand (changing the demand of a product changes the price of the raw material)

Composite Demand (a raw material can be used for multiple applications, therefore the application that has the most demand will have the most raw materials rerouted to that application.) (e.g. oil can be used for petrol and plastics. If the price of petrol rises due to demand, more oil will be rerouted to that application, with less oil for plastic, therefore the price of plastics will increase.)

Question 30

What is derived demand?

Answer 30

Derived demand is the demand as a result of what the raw material can do for you.

(i.e. demand of fencing increases therefore price of wood will increase)

Question 31

What are Veblen Goods?

Answer 31

Goods that we demand because they are expensive. Seemingly irrational behaviour.

Question 32

What is the difference between Giffen Goods and Veblen Goods?

Answer 32

Nothing, they are the same name for goods that are demanded because they are expensive.

Question 33

How can an economic agent maximise a desired objective?

Answer 33

An economic agent must undertake an activity to the point at which the marginal private benefit is equal to the marginal private cost incurred due to production of the good.