section 2 Flashcards
utility
a measure of satisfaction from consumption
rational behaviour
acting in pursuit of self interest
how do different sectors of the economy follow rational behaviour
consumers - maximise utility gained from goods + services consumed
workers - maximise welfare at work (e.g. pay, security, satisfaction)
firms - maximise reward for ownership (profits)
governments - maximise welfare of citizens
marginal utility
the additional pleasure or satisfaction obtained from consuming one more unit of something
how do we measure utility
it is not measurable in a objective sense
law of diminishing marginal utility
that as a person increases consumption of a good, whilst keeping consumption of other products constant- there is a decline in the marginal utility derived from consuming each additional unit of good
rational choice theory
individuals have complete information, act in their own self-interest, and make decisions that maximise their own welfare
believed by classical not behavioural economics
utility maximisation
where consumers seek to achieve the highest satisfaction or benefit from their economic decisions within a limited budget
what constraints might restrict consumers rational choice ability
imperfect information
limited income
a given set of prices
the budget constraint
limited time available
imperfect information
utility maximisation assumes that if individuals possess perfect information they will make decisions that maximise their utility
limited income
income spent on one good, cannot be spent on another good, as income is limited
given set of prices
consumers are ‘price-takers’ and have to pay the market prices to obtain goods and services
the budget constraint
limited income and set prices income budget constraints on consumers’ freedom of action in the marketplace (based on all income being spent, not saved and there is no borrowing, a consumer can only purchase more of one good or service by giving up another, which represents the opportunity cost of consumption
limited time available
consumer choices have to be made as it is often impossible to consume more than one good at a time or to store more than a limited number of goods for consumption
