utility Flashcards
total utility
overall satisfaction that a consumer obtains from the consumption of particular goods and services
marginal utility
benefit that a consumer receives from consuming one additional unit of goods or services
what is utility
satisfaction
difference between marginal and total utility
total utility represents the total fulfilment received by the consumer from consuming various units of a commodity, whereas marginal utility denotes the additional utility derived from the intake of an additional unit of a commodity
law of diminishing utility
as quantity consumed increases, the marginal utility derived from each extra unit decreases causing a downwards slope on a graph
what does derived mean
obtain
average utility
the utility that is obtained by the consumer per unit of commodity consume
average utility formula
total utility/ quanitity
what is marginal utility equal to
marginal private benefit
what is marginal private benefit
benefit that a consumer receives from consuming one additional unit of goods or services
when is total utility maximised
when marginal utility is 0
what do firms want to maximise
profits
what do the government want to maximise
social welfare of citizens
what do workers want to maximise
welfare they obtain from work
what do consumers want to maximise
their utility when making consumption decisions
what is a marginal cost
extra cost of producing an additional unit of a good or service
theory of consumer behaviour
every consumer behaves rationally
every consumer has different preferences
every consumer is under a budget constraint
every product has a price
every consumer behaves rationally explanation
Consumers try to get the ‘‘most for their money’’ to maximise their total utility
every consumer has different preferences explained
Consumers have clear preferences and can determine how much marginal utility they get from consuming more units of a product
every consumer is under a budget constraint
All consumers face a budget constraint therefore must make a decision about what they brought on their limited budget
every product has a price explained
Every product has a price so consumers must weigh their purchasing decisions based on their marginal utility from consumption and the price of the goods they consume
Efficiency
occurs when units of goods are being supplied at the lowest possible average total cost at the fastest rate
allocative efficiency
optimal distribution of goods and services, taking into account consumer’s preferences.
rational decision making (4)
people use all of the information available to them
people try to maximise total satisfaction
people make independent choice
consumers have stable preferences
what does the traditional (neo-classical) economic theory assume
consumers always behave rationally
what may consumers compare when buying a product
the extra (marginal) benefit they will receive from a spending decision to the extra (marginal) cost
rational choice theory
assumes people have the perfect amount of information about the options available and the consequence of each option
issue with rational choice theory
people have imperfect or incomplete information
what is behavioural economics
challenges neo-classical economics
adds relevance to the real world.
argues rational decision making isn’t always realistic e.g an impulsive purchase that might not always maximise utility
what is rationality often bounded by
limited time to make decisions
too many choices
incomplete or inaccurate info
too much info (could be overwhelming by consumers)
people have different levels of information given to them
consumers may lack self-control (e.g when they smoke or gamble)
what makes us question the assumption of rationality
social network may influence our choices
emotions may take over logic
we have a desire for an instant reward
people often stick to default choices
giving to help others- no return e.g charity
What can influence consumers decisions according to behavioural economic theory
social network/social norms
buying a particular brand
emotion- making decisions based on our feelings
altruism- making decisions based on kindness and not purely self interest
steps government could take to deal with negative externalises of production
Excise tax
Regulation/legislation
Tradeable permits
what is Excise tax- correcting market failure
per unit tax on a good meant to reduce the supply to a more socially optimum level
by reflecting the true social costs of production or consumption and by increasing the cost of goods that impose negative externalities, excise taxes encourage producers and consumers to internalize these costs and consider alternative, less harmful options. This can lead to a more efficient allocation of resources and a shift towards cleaner, less harmful production and consumption patterns.
Regulation/legislation- correcting market failure
laws limiting the quantity of a good produced or be required to be produced in an environmentally friendly way
Tradeable permits- correcting market failure (and definition)
issuing permits to producers of goods which create negative environmental externalities will create a limit on the amount of pollution or harmful activity reducing the overall cost to society of the activity
(where the government gives firms a permit which allows them to produce up to a set amount of a good each year)
what is market failure
a misallocation of resources
information provision- correcting market failure
addressing the asymmetry of information between buyers and sellers.
what is the margin
the focus on the cost or benefit of the next unit or individual, for example, the cost to produce one more widget or the profit earned by adding one more worker.
how can subsidies help correct market failure (positive and negative externalities explanation)
Positive externalities: Subsidising the production or consumption of goods with positive externalities (e.g., education, healthcare, renewable energy) can encourage more investment and consumption, leading to increased social welfare.
Negative externalities: Subsidising the adoption of cleaner technologies or practices (e.g., renewable energy, pollution control measures) can incentivise firms to reduce harmful emissions or pollution, thereby mitigating negative externalities and promoting environmental sustainability.
why do the government intervene in markets to correct market failure
markets may not always allocate resources efficiently or achieve socially desirable outcomes on their own
what does social welfare mean
the general well-being and happiness of people
what is the spillover effect
the impact that an activity, event, or transaction has on parties that are not directly involved
private optimum consumption
marginal private benefit= marginal private cost
positive externalities of production examples
Receiving a college education makes the consumer more likely to contribute to the well-being of society as a whole
Riding a bike to work reduces congestion
Getting a vaccine against communicable disease reduces the chance of you getting others sick
Could benefit third parties
