Unit 5: Consumer Behaviour

Question 1

Consumer behavior

Answer 1

refers to the study of how individuals make decisions to allocate their resources towards the consumption of goods and services.

Question 2

Law of diminishing marginal utility

Answer 2

as a consumer consumes additional units of a commodity, the marginal utility i.e. satisfaction, derived from each additional unit decreases, assuming all other factors remain constant

Question 3

Utility

Answer 3

refers to the satisfaction or benefit a consumer gets from consuming a good or a service

Question 4

Marginal utility

Answer 4

the additional utility gained from consuming one more unit of a good or service

formula: change in total utility/change in quantity

Question 5

Diminishing effect

Answer 5

the first few units of consumption typically provide higher satisfaction, but as consumption increases, the additional satisfaction from each subsequent unit becomes smaller

Question 6

Describing utility

Answer 6

Increasing utility: occurs when each additional unit of a good or service consumed provides greater satisfaction than the previous one

Diminishing returns: occurs when each additional unit of a good or service consumed provides less satisfaction than the previous one

Negative utility: occurs when consuming additional units of a good or service results in dissatisfaction, reducing total utility

Question 7

Saturation point

Answer 7

highest point of satisfaction i.e. MU=0

Question 8

Consumer maximizing utility

Answer 8

maximize satisfaction by buying:

1. the quantity where the difference between TU and total spending is at its highest.
2. MU is higher or equal to price
3. Marginal cost is higher or equal to 0

Question 9

Entrepreneur maximizing utility

Answer 9

maximize profit by selling:

1. the quantity where the difference between TR and TC is at its greatest
2. MR is higher or equal to MU
3. Marginal profit is higher or equal to 0

Question 10

Marginal utility curve

Answer 10

graphically represents the relationship between the quantity of a good consumer and the marginal utility derived from consuming each additional unit of that good. same as the individual demand curve

Downward slope: reflects law of diminishing MU

Question 11

Principle of Equilibrium Marginal Utility

Answer 11

explains how a rational consumer allocates their limited income across different goods and services to maximize total utility.

a rational consumer spends more on a good yielding the highest MU/eur

MU1/P1=MU2/P2….

Question 12

Low PED

Answer 12

consumers are less responsive to price changes even significant price changes result in small changes in quantity demanded, MU diminishes less drastically with consumption

Question 13

High PED

Answer 13

consumers are more responsive to price changes even small price changes result in changes in quantity demanded significantly, MU diminishes drastically with consumption

Question 14

Water and diamond paradox

Answer 14

diamond is viewed as scarce while water is seen as abundant, hence, MUd>MUw. However, TUw>TUd. Price is determined by MU, hence why Pd>Pw

Question 15

Budget Line

Answer 15

shows all combinations of any 2 goods attained by an individual if all money is spent

Question 16

Position of the budget line

Answer 16

depends on:

1. money/income allocated for spending purposes
2. price of both goods

associated with what is/isn’t afforded, the further away from the origin, the more one can afford.

Question 17

Gradient of budget line

Answer 17

Gradient measures the opportunity cost of one product in terms of the other

Question 18

Parallel shift

Answer 18

1. change in income
2. change in the price of goods