Chapter 7: Prices, resource allocation and concept of the margin

Question 1

Define marginal principle

Answer 1

The idea that economic agents may take decisions by considering the effect of small changes from the existing situation

Question 2

Define rational decision making

Answer 2

A decision that allows an economic agent to maximise their objective, by setting the marginal benefit of an action equal to its marginal cost

Question 3

Define utility

Answer 3

The satisfaction received from consuming a good or service

Question 4

Define marginal utility

Answer 4

The additional utility gained from consuming an extra unit of a good or service

Question 5

Define law of diminishing marginal utility

Answer 5

It states that the more units of a good that are consumed, the lower the utility from consuming those additional units

Question 6

Define price signal

Answer 6

Where the price of a good carries information to producers or consumers that guides the market towards equilibrium and assists in resource allocation

Question 7

Define allocative efficiency

Answer 7

Achieved when society is producing the appropriate bundle of goods and services relative to consumer preferences - this occurs when price equals marginal cost

Question 8

Define economic efficiency

Answer 8

A situation in which both productive efficiency and allocative efficiency have been reached