A2 The theory behind Competitive Markets Flashcards
What is meant by the concept of the margin?
The margin principle is the idea that economic agents (firms,consumers, government) make decisions by considering the effect that small changes will have on an existing situation.
What is rationality, in relation to understanding the behaviour of economic agents.
Assuming that economic agents will make decisions that will maximise their objective (e.g profit maximising for most firms), so they set their marginal benefit to their marginal cost.
evaluate the concept of rationality as a way of understanding the
behaviour of economic agents.
Economic agents may not always act in their best interest, consumers may buy things based on impulse, acting against their interest, for example the consumption of demerit goods e.g tobacco.
Firms may not set out to maximise profits, they may have the objective of sales-revenue maximising.
evaluate the extent to which the marginal principal theory is useful to
economic agents in decision making
.The marginal principal theory is based on the idea that economic agents are rational which is not always the case.
What is utility?
The satisfaction received from consuming a good or service
What is marginal utility?
The additional utility (satisfaction) received from consuming an extra additional unit of the good or service.
Explain the law of diminishing marginal utility
The more units of a good that are consumed the lower the utility from consuming those additional units.
What is the equi-marginal principal
This allows the consumer to get the maximum satisfaction with the money that they have available. To do so the goods should be consumed at a point where the ratio of their marginal utilities is equal to the ratio of their prices.
What are the limitations to the marginal utility theory?
Utility is not something that can be measured, there is no objective way of valuing utility as each consumer is different so comparing two peoples utilities is impossible.
It is difficult to measure marginal utility when measuring one consumers marginal utility across several goods.
What is the budget line?
The boundaries of an individuals possible combinations of goods to consume given the amount of money available to spend and the prices of the goods.
What is the income effect of a price change
This shows the way a change in price of a good affects purchasing power.
What is the substitution effect of a price change
Reflects the way that a change in price of a good affects relative prices, essentially this shows how the opportunity cost of consuming good x can increase if the price of good y falls, so a consumer will consume more of good y.
Do consumers always act rationally?
Behavioural economics builds on the psychology of human behaviour in decision making and shows that people don’t always focus on economic influences which can lead them to act on impulse or according to their feelings.
