Micro 3 - Consumer Behaviour, Utility And The Demand Curve

Question 1

Consumer behaviour

Answer 1

> Traditionally, economists tend to operate under the basic assumption that consumers of goods and services will act in a way that will maximise their own personal utility.
Most decision makers will value utility experienced in the present or near future over the same level of utility experienced in the distant future.

Question 2

Ways to measure utility

Answer 2

> Measure amount of laughter, pleasure and stress hormones in the bloodstream, number on a happiness chart.

Question 3

What is the national unit measurement of utility?

Answer 3

Utils

Question 4

Utility maximisation- definition

Answer 4

> This means that with the resources you have, you will have acted in such a way as to gain as much personal pleasure as possible.
This is how classical economists predict we behave.

Question 5

Marginal Utility - definition

Answer 5

> Satisfaction gained from consuming one more unit of a gained.
‘On the margin’ = cost or value as oppose to utility.

Question 6

Market - definition

Answer 6

> Any place where goods and services are exchanged between buyers and sellers.
Can be a physical location but also can exist online.

Question 7

Marginal Utility example

Answer 7

> As long as the (next scoop of ice cream) opportunity cost of the money spent on the () is lower than the utility derived from eating it, you should eat more.

Question 8

Diminishing Marginal Utility

Answer 8

> The phenomenon whereby, as the units of a good or service consumed are increased, the marginal utility of each new unit consumed will diminish (reduce in value).

Question 9

Equi-marginal utility

Answer 9

> When one understands that a consumer aims to maximise their personal satisfaction or their utility, and when one understands the theory of diminishing marginal utility, equi-marginal utility is a natural consequence.
In traditional economic theory, consumers behave in accordance with this principle.
The equi-marginal principle states that consumers will choose a combination of goods to maximise their total utility. This will occur where:
Marginal Utility of A ÷ Price of A = Marginal Utility of B ÷ Price of B.

Question 10

Demand - definition

Answer 10

> The quantity of a good or service that consumers are both willing and able to buy at a range of prices over a given period of time.

Question 11

Demand detail

Answer 11

> When discussing demand, economists are referring to to effective demand.
This is significant in that it is not enough to say consumers want a certain amount of a good or service, they must also have the means and willingness to pay for it.
Willingness AND able.

Question 12

Shift - definition

Answer 12

The movement of the entire demand curve.

Question 13

Contraction/extension- definition

Answer 13

> The movement along a demand curve caused by price changes.

Question 14

Shape of the demand curve

Answer 14

> The shape of the demand curve clearly demonstrates that as the market price of a good or service increases, ceteris paribus, the quantity demanded of that good or service decreases.
Visa versa.

Question 15

What are the 2 main impacts that a change in price has on quantity demanded?

Answer 15

1. Income effect

2. Substitution effect

Question 16

Income effect

Answer 16

> The income effect states that as prices for a good or service fall, people can afford to buy more of it with their current level of income, so more are consumed.
Constitutes lower/higher proportion of income.
Opportunity cost - consumer can afford more/less despite having had consumed the good/service.

Question 17

Substitute effect

Answer 17

> The substitute effect occurs when there are other goods available which can act as replacements (substitutes) for the good in question.
If the price increases, then consumers may turn to these other goods to meet their wants and needs.
If the price of a good decreases, then consumers may give up the goods they were previously consuming and buy this good instead.

Question 18

Substitute goods - definition

Answer 18

> Goods which perform similar roles such that they can replace one another in use or consumption.

Question 19

Traditionally, what causes consumers to switch products?

Answer 19

> Utils per pence/price causes switch of products.

Question 20

Demand vs quantity demanded?

Answer 20

> This is an important distinction.
Demand (D) is described by the demand curve - how much people are willing and able to pay at a range of prices.
Quantity demanded (Qd) is determined by both the position of the demand curve and where on the demand curve we happen to be (determined by price).
If D shifts to the right, then Qd is likely to increase but Qd can also increase with a price change.

Question 21

Q. Using a diagram, explain how a rise in price will affect the quantity demanded of McDonald’s burgers. 9 marks.

Answer 21

1. Diagram showing contraction.
2. Intro: define demand and indicate to diagram.
3. Increase in price = fall in Qd. Fig.1. P1 > P2, Q1>Q2. There are 2 main reasons.
4. Income effect.
5. Substitution effect.
6. The phenomenon of diminishing marginal utility.

Question 22

Q. Using a diagram, explain how a rise in price will affect the quantity demanded of McDonald’s burgers. 9 marks.
>Income effect.

Answer 22

> Rise in price, ceteris paribus = constitutes a higher proportion of income = unable to buy as many with the money they have.
Plus burger now has a higher OC = consumer can afford less having had burger.

Question 23

Q. Using a diagram, explain how a rise in price will affect the quantity demanded of McDonald’s burgers. 9 marks.
>Substitution effect.

Answer 23

> Rise in price, CP, consumers will choose to substitute consumption of that product for the consumption of a similar product, which can also meet wants and needs of consumers.
E.g. burger king.

Question 24

Q. Using a diagram, explain how a rise in price will affect the quantity demanded of McDonald’s burgers. 9 marks.
>The phenomenon of diminishing marginal utility.

Answer 24

> The phenomenon of diminishing marginal utility explains further why consumers will buy less of a product as its price rises.
MU (define) of a burger decreases as the person eats more burgers.
So the more consumed, the less pleasure they will derive from eating another so they will be willing to spend less money on the next burger.
So if the price rises, burger will provide a lower MU and will no longer be consumed as consumers won’t think it’s worth the money as more utility could be gained from spending elsewhere,
Total ‘’ consumed over a given time decreases.

Question 25

Changes in Qd

Answer 25

> Changes in Qd mean the current quantity of a good or service people are willing and able to buy has changed.

Question 26

Changes in deomand.

Answer 26

> Changes in D means the amount of the good people are willing and able to buy across a range of prices in a given period of time has changed.

Question 27

Demand and price

Answer 27

> Prices of a good do not affect ‘D’ for that good.
If we say demand has increased or decreased this means, at the same price, people are now going to buy more or less of a product.
Change in demand causes a shift in the demand curve.

Question 28

Reasons for shift in the demand curve

Answer 28

1. Changes in taste and fashion.
2. Changes to people’s real income = increase in normal goods, decrease in inferior goods, distribution of income = affects luxury goods.
3. Changes in demand in one market can affect demand in another. Interrelated market.
4. Substitute goods, complementary goods, new products, derived demand, composite demand.

Question 29

Extra

Answer 29

> The fewer available substitutes and more uou need it, the less likely a price change changes Qd.
When it constitutes a lower proportion of your income, lower OC.