The margin and rationality

Question 1

What is the margin

Answer 1

The change in a variable caused by an increase of one unit of another variable

Question 2

Common examples are margins

Answer 2

Marginal cost, marginal revenue, marginal utility

Question 3

What is marginal and total utility

Answer 3

Marginal utility is the benefit gained from consuming one more unit, and total utility is the total benefit from consuming a good

Question 4

What is the law of diminishing marginal returns

Answer 4

As we consume one more unit, the marginal utility falls. gets to a point where MU is 0, and then becomes negative. Explains why demand curve slopes down.

Question 5

Definition of rationality

Answer 5

Economic agents maximising utility

Question 6

Definition of margins principle

Answer 6

The idea that economic agents will make decisions based on the impacts of small changes

Question 7

Define rational decision making

Answer 7

A decision that allows an economic agent to maximise their objectives, by setting marginal benefit equal to marginal cost.

Question 8

Define equi marginal principles

Answer 8

A consumer does best in utility terms by consuming at the point where the marginal utlities from 2 goods are equal to the ratio of their prices eg a £50 good and £10 good, 5x utility gained from 1 additional £50 good

Question 9

define budget line

Answer 9

Shows the boundary of an individual consumption set given the amount available to spend and the prices of the goods

Question 10

Define behavioural economics

Answer 10

A branch of economics that builds on the phsycological behaviour of humans

Question 11

Why rationality might be useful

Answer 11

Govt- make predictions of govts with respect to incentives
Firms- Make predictions of firms with respect to incentives
Households- allows us to build supply and demand diagrams to model buying behaviours

Question 12

Why rationality may not be useful

Answer 12

Govt- made up of individuals with competing incentives which may not be captured by assuming rationality

Question 13

Why concept of margin could be useful

Answer 13

Govt- allows govt to make incremental improvements to spending decisions
Firms- allows firms to decide when to stop increasing production to maximise profits
Households- allows households to decide when to stop consumption or offer more labour