Chapter 5 Flashcards
Utility
Refers to the benefit that an individual gets from consuming a good/service
Total utility
Refers to the total benefit that an individual gets from consuming a number of goods/services
Marginal Utility
Refers to the extra benefit that an individual gets from consuming an extra unit of a good/service.
The Law of Diminishing Marginal Utility (LDMU)
States that as a consumer consumes more units of a good/service, that extra satisfaction/marginal utility derived from each additional unit consumed will eventually decline. This law does not refer to addictive goods or medical goods.
When does the LDMU apply to a good/service
The LDMU only applies after a certain minimum amount has been consumed, (E.g. bar of chocolate), must be homogenous and no time has passed.
The Equi-Marginal Principle of Consumer Behaviour.
States that a consumer who wants to maximise utility will allocate their limited income so that the ratio of marginal utility to price is the same for all of the goods they consume. Mu/P = Mu(infinity)/P(infinity)
The assumptions we make about a consumer
Consumers have a limited income but unlimited wants
They can make choices
Assumed to be rational
Economic goods
They give us utility, they are scarce and they are transferable. They are not beauty, health, talent and skills.
What is relative elastic demand?
Demand for a good is relatively elastic if the percentage change in price is outweighed by the percentage change in quantity demanded. E.g. water bottle
What is relative inelastic demand?
Demand is relatively inelastic if the percentage change in price outweighs the percentage change in quantity demanded. E.g. petrol and tobacco
What is unitary elastic demand
Demand for a good/service is unitary elastic if the percentage change in quantity demanded os equal to the percentage change in price.
