4.1.2 Individual Economic Decision Making

Question 1

rational behaviour

Answer 1

acting in pursuit of self-interest, which for a consumer means attempting to maximise the welfare, satisfaction or utility gained from the goods and services consumed

Question 2

utility

Answer 2

the satisfaction or economic welfare an individual gains from consuming a good or service

Question 3

marginal utility

Answer 3

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

Question 4

hypothesis of diminishing marginal utility

Answer 4

as a person receives more of a good, the additional utility gained from each extra unit of the good received decreases

Question 5

restrictions to maximising utility:

Answer 5

• limited income
• a given set of prices (consumers are price takers)
• the budget constraint (opportunity cost)
• limited time available

Question 6

marginal cost

Answer 6

extra cost of production that a firm incurs when producing one more good or service

Question 7

marginal product

Answer 7

amount of extra output produced by an extra unit of input

Question 8

marginal tax

Answer 8

extra tax a firm/consumers/workers have to pay for each extra good or service produced

Question 9

marginal revenue

Answer 9

change in total revenue from selling an extra good or service

Question 10

Total utility

Answer 10

total satisfaction received from consuming a given total quantity of a good or service

Question 11

Difference between total and marginal utility

Answer 11

Total utility is the total satisfaction received from consuming a given total quantity of a good or service, while marginal utility is the satisfaction gained from consuming an additional quantity of a particular good or service.

Question 12

price signalling

Answer 12

buyers with imperfect information often think that price signals product quality