Consumer Behaviour 2.1

Question 1

What is the definition of utility ?

Answer 1

A consumers utility is the total satisfaction recieved from consuming a good or service

Question 2

What is the definition of marginal utility ?

Answer 2

Marginal utility is the extra satisfaction derived from consuming one extra unit of the good

Question 3

What is the law of diminishing marginal utility ?

Answer 3

The AD curve slopes downwards because of diminishing marginal utility. The law of diminishing marginal utility suggests that consumer surplus generally declines with every extra unit consumed. This is because every init generates less utility than the one already consumed. Therefore consumers are willing to pay less for every unit

Question 4

What is utility maximisation ?

Answer 4

Maximisation for consumers is when consumers aim to generate the greatest utility possible for an economic decision. Firms aim to generate the highest profit possible
It’s assumed that economic agents act only in their interests

Question 5

Explain what is meant by rational economic decision making and economic incentives ?

Answer 5

Economic agents respond to incentives, which can allocate scarce resources to provide the highest utility to each agent
For an entrepreneur in a firm, the incentive for risk taking is profit
Rewards are positive incentives which will make the consumer better off, whilst penalties make them worse off
Where incentives are not given properly resources can be misallocated leading to partial market failure
Prices in market economies provide signals to buyers and sellers, which is an incentive to buy and sell a good. This changes their behaviour

Question 6

Describe the rational decision making model

Answer 6

1) Identify the problem: for a firm this may be falling profits
2) Find an identify the decision criteria: the firm may have to find information or criteria which will increase their profits e.g. fire X number of workers
3) Weigh the criteria: The firm will have to rank the criteria based on their relative importance. They may think keeping all their employees is most important
4) Generate alternatives: the firm may consider alternate options. For instance they might move the business to somewhere with cheaper labour force
5) Evaluate alternative options: The firm may now consider which option meets their criteria best and help them increase profits most
6) Choose the best alternatives: Now the firm will choose the alternatives they think meet the criteria
7) Carry out the decision: The firm will now see what the consequences of the decision are
8) Evaluate the decision: After seeing the what effect the decision had on the firm, they consider wether it was the best option or not

Question 7

What are the limitation of the rational decision making model ?

Answer 7

This is not always the most realistic way for firms to make decisions. Although it might be fairer than making an intuitive decision, it takes significantly longer to decide, which isn’t pratical for a firm under time constraints