Consumer Behaviour - 26/09

Question 1

What is utility

Answer 1

A measurement of overall satisfaction of wellbeing

Question 2

Who introduced the concept of utility

Answer 2

Danial Bernoulli

Question 3

As wealth increases utility …

Answer 3

increases
but utility is not solely derived from wealth states

Question 4

Example of utility

Answer 4

bottle of water:
James is thirsty from the gym
—> would pay up to $5
tina sat on the sofa
—> would pay no more then 65p

Question 5

Why does utility differ between people

Answer 5

People value goods differently, they derive different levels of utility

Question 6

what is rational decision making

Answer 6

Where economic agents respond to economic incentives

Question 7

examples of rational decision making

Answer 7

landlord puts rent up
—> more likely to move house

Question 8

traits of homo economicus “economic human”

Answer 8

• narrow minded and self interested (only cares to maximise his own utility)
• Rational (use all available information to arrive at best decision)
• Perfect computaion

Question 9

what is homo economicus for consumers

Answer 9

Maximise utility

Question 10

What is homo economicus for firms

Answer 10

Maximise profits

Question 11

how do economic agents maximise utility when the world is more complicated

Answer 11

Using marginal utility

Question 12

The margin definition

Answer 12

Adding or taking away just a little amount from the current situation

Question 13

Why do we care about the margin

Answer 13

economic decisions are made on the margin

Question 14

Marginal utility definition

Answer 14

The utility received from purchasing an extra unit of a good

Question 15

Law of diminishing marginal utility definition

Answer 15

The marginal utility received decreases as a consumer buys more units of the good

Question 16

Perfect information definition

Answer 16

When buyers and sellers have complete information concerning factors that could influence decisions to buy and how to produce a good

Question 17

3 information both producers and consumers need to know in order for it to be a perfect market

Answer 17

• product quality
• product prices
• costs of production

Question 18

how is perfect information linked to homo economicus

Answer 18

perfect information allows economic agents to make the most informed decisions
–> links to homoeconomicus who uses rationality and perfect information for the best decision

Question 19

Imperfect information definition

Answer 19

Where economic agents are not able to access all of the relevant information about a market

Question 20

Why does imperfect information matter

Answer 20

–> very few markets have imperfect information
–> leads to Market failure in many markets

Question 21

Asymmetric information definition

Answer 21

Where the buyers and sellers in a market have access to different amounts of market information

Question 22

who wrote about the used car market (market for lemons)

Answer 22

George Akerlof

Question 23

Why does the market for lemons fail

Answer 23

market breaks down because average prices for cars of different qualtites are being offered which sellers know their car is worth more so they don’t sell… process repeats

Question 24

How does Asymetric information lead to moral hazard

Answer 24

Gets insurance on her laptop and incentivizes her to take less care of it because the insurance company has no way of tracking what she does with it

Question 25

money definition

Answer 25

allows for economic activity by providing a unit of account, a medium of exchange and a store of value

Question 26

what does a unit of account mean

Answer 26

Is a nominal monetary unit of measurement. or currency used to value the cost of goods, services, assets, liabilities, income and expenses

Question 27

what does medium of exchange mean

Answer 27

An item that buyers will exchange with a seller when they want to purchase goods or services to avoid the inefficiencies of a barter trade system

Question 28

What does store of value mean

Answer 28

provides individuals with the ability to accumulate their wealth in any form, at any time can convert this money into goods and services.

(a price tag)