Margin And Rationality Flashcards
Define rationality
Economic agents act to maximise utility
Define marginal principle
Idea of economic agents may make decisions by considering the effect of small changes from existing situations
Define rational decision making
A decision that allows an economic agents to maximise their objective by setting the marginal benefit of an action equal to its marginal cost
Utility
The satisfaction received from consuming a good or service
What is marginal utility
The additional utility gained from consuming an extra unit of a good or service
Define Law of diminishing marginal utility
States that more units of the good that are consumed the lower the utility from consuming the additional units
what is equi marginal principle
that a consumer does best in utility terms by consuming at the point where the ratio of marginal utilities from 2 goods is equal to the ratio of their prices
what is the budget line
shows the boundaries of individuals consumption set, given other amounts available to spend and the prices of the goods
what are behavioural economies
a brand of economies that builds on the psychology of human behaviour in decision making
what is ‘The Margin’
change in a variable caused by an increase in 1 unit of another variable
what it total utility
overall benefit gained from consuming a good
what will happen to the price a consumer is willing to spend as marginal utility decreases
decreases
what do we assume economic agents are regarding utility
maximisers
what do households do regarding utility
incentivised to maximise satisfaction by consuming products that increase utility relative to their price. Opportunity cost- consumption of the next best alternative is sacrificed. If prices fall households will consume more as this will increase utility
what do firms do regarding utility
competition incentivises them to reduce prices to increase sales to households to maximise profit
