Decision making and Utility theory

Question 1

Rational behaviour

Answer 1

Acting in pursuit of self interest - maximising welfare, satisfaction and utility from goods and services consumed.

Question 2

Market demand and individual demand curves

Answer 2

In theory, each person is able to make their own individual demand curves for a good depending on their preferences. All of these demand curves make the market demand for a good.

Question 3

Utility

Answer 3

The satisfaction or economic welfare gained from consumption of a good or service. We consume because we gain utility from goods and services and we try to maximise it

Question 4

Marginal utility

Answer 4

The addition satisfaction, welfare or utility gained from the consumption of one extra good. The extra pleasure derived from extra goods usually “falls off”

Question 5

Marginal utility example and graph

Answer 5

https://docs.google.com/document/d/1dfs_POk38VeNIRz6xN9B6w5mjbCkrwa0v2_POg2rO_A/edit

Question 6

Utility graph notes

Answer 6

-Marginal utility points are plotted halfway whereas total utility is cumulative and on the point
-The point at which marginal utility is 0, total utility is maximised

Question 7

Hypothesis of diminishing marginal utility

Answer 7

Economic theory that suggests that when an individual increases consumption of a good, the utility derived from each decreases

Question 8

Point of satiation

Answer 8

The point where total utility is maximised and marginal utility isn’t negative. The rational individual wont consume beyond this point as it will reduce their utility.