Consumer Behaviour Flashcards
What is satisfaction measured in?
Utils
Define Marginal Utility.
The additional satisfaction resulting from a one-unit increase in the consumption of a product within a time period. It is calculated using: ∆TU/∆Q.
Define the Law of Diminishing Marginal Utility.
The more a person consumer of a particular commodity, the smaller the additional satisfaction gained from consuming each extra unit.
What is the main assumption in Consumer Behaviour?
We assume that people are rational when making decisions people are assumed to weigh up the various opportunity costs and make that choice that will yield the highest level of satisfaction. People will make consumption decisions after considering all the costs and benefits.
What is the formula for the Equi-Marginal Principle.
MUx/Px = MUy/Py
It implies that a consumer will distribute their income on various commodities in a manner that marginal utility derived from the last unit money spent on each good is equal. This is done to regain maximum total consumer’s surplus and maximise TU.
One must buy less of that product whose rise has risen. As less units are purchased, the MU per £ spent on the product increases.
Buy more of that product whose price has relatively decreased. As more units of purchase, MU per £ spent decreases until equilibrium is re-established.
What does a budget line show?
A budget line shows the possible maximum combinations of two goods that can be purchased at given prices and for a given budget.
The slope of the budget line measures the price of one good in terms of the other or the opportunity cost of one good in terms of the other.
Give TWO reasons why the budget line can parallel shift to the right.
- Both prices must have decreased by the same rate
- The income available for spending must increased.
