Utility, efficiency, consumer surplus and producer surplus

Question 1

Define utility

Answer 1

A measure of the satisfaction/benefit that we get from purchasing and consuming a good or service

Question 2

Define total utility

Answer 2

The total satisfaction/benefit from a given level of consumption of a good or service

Question 3

Define marginal utility

Answer 3

The change in satisfaction/benefit from consuming an extra unit of a good or service

Question 4

Define diminishing marginal utility

Answer 4

As we consume additional units of a good or service that the satisfaction/benefit that we derive from each additional unit declines or diminishes.

Question 5

How do we quantify utility

Answer 5

Subjective, no units of utility, overcome this problem by using the idea of price, it is assumed that the price we would be willing to pay for a good or service represents the utility that we think we’ll derive from it

Question 6

Define consumer surplus

Answer 6

The difference between what consumers are willing to pay for a good or service and the price they actually pay. It represents the excess or surplus utility derived from the purchase over and above what has been paid for.

Question 7

What does the demand curve represent

Answer 7

What people are willing to pay for this good

Question 8

What is the equilibrium price

Answer 8

This represents the price they have to pay

Question 9

Define producer surplus

Answer 9

The difference between market price which firms receive and the price at which they are willing to supply

Question 10

Define allocative efficiency

Answer 10

Allocative efficiency occurs when the welfare of society is maximised. It is concerned with whether resources are used to produce the goods that consumers wish to buy