Micro 25 - marginal utility theory. Flashcards
What is the concept of marginal utility?
The satisfaction you gain from consuming an extra unit.
define the law of diminishing marginal utility?
The satisfaction decreases as we consume and extra unit.
Explain how the law of diminishing utility can be applied to the consumption of chocolate bars?
The first bar has 20 utils, but utils decrease each time we have an extra chocolate bar, where 6 bars only get you 47 utils.
What does the marginal utility curve look like?
what is the neo classical belief of consumer rationality?
That consumers will only pay a price which is equal to the utility the derive from it. If they overpay, they are being irrational.
why is the marginal utility curve the same as the demand curve?
The demand curve and marginal utility curve are both inversely proportional. As the quantity of chocolate bars increases, the Marginal utility decreases. At a low price, quantity increases and at high price, quantity decreases. At low price consumers are willing to purchase more because it gives them more utility.
3 criticisms of the marginal utility theory?
- It cannot be measured.
- considers goods in isolation.
- Rationality may not explain consumer behavior.
explain “it cannot be measured” as a criticism of the MUT?
There is not objective way of valuing utility, as it varies from individual to individual. One person may gain different utility to another and there is no way to compare. Makes it hard to form a market demand curve.
explain “considers goods in isolation” as a criticism of the MUT?
It is difficult to compare utility as consumers often face a choice between multiple goods.
explain “rationality may not explain consumer behaviour” as a criticism of the MUT?
Behavioural economics suggests people do not always focus on purely economic influences when making decisions, but rather act on impulse or in response to feelings.
