4.1.2.1 Consumer behaviour

Question 1

What is are two assumption of Economic agents?

Answer 1

Economic agents are assumed to be rational
Individuals aim to maximize satisfaction (utility) from spending income, while businesses aim to maximize profits.

Question 2

What is rational behaviour?

Answer 2

Making independent choices based on fixed preferences and complete information.

Question 3

What is utility?

Answer 3

Represents the satisfaction derived from purchasing and consuming a product.

Question 4

What is total utility?

Answer 4

Total satisfaction obtained from a specific level of consumption.

Question 5

What is marginal utility?

Answer 5

Change in satisfaction from consuming an additional unit.

Question 6

What is the diminishing marginal utility hypothesis?

Answer 6

States that beyond a certain point, the marginal utility decreases as more units are consumed. e.g. Having one desert is nice however if you consume an additional desert you feel sick

Question 7

What are implications of the marginal utility?

Answer 7

Consumers are willing to pay less as marginal utility decreases, explaining the downward slope of demand curves.

Question 8

What are some importance of margins in decision making?

Answer 8

Marginal Benefit: Change in total private benefit from an additional unit.
Marginal Cost: Change in total private cost from an extra unit.

Question 9

What constraints are on consumers making them irrational?

Answer 9

• Income
• Information failure
  etc…

Question 10

What is utility maximisation?

Answer 10

The concept that individuals and firms seek to get the highest satisfaction from their economic decisions.