Utility & The Consumer Surplus Flashcards
What is utility?
The benefit derived from consuming a good
What is the principle of diminishing marginal utility?
The more you consume, the more your utility increases – but it increases at a decreasing rate
What are the conditions for consumer equilibrium?
Always spend all of your money
Maximise your benefits/utility
What is marginal utility and how do you calculate it?
The extra utility gained from consuming one more unit of a good/service
It can be found by dividing the change in total utility by the change in quantity
How do you calculate utility?
Divide the increase in utility by the increase in output
How will a change in income change the budget constraint?
A change in income will shift the budget constraint parallel
How will a change in price influence the budget constraint?
A price change will lead to a pivot on one axis, and a change in the slope of the BC
What is the consumer surplus?
The difference between what you are willing to pay and what you have to pay for each unit (the market price)
What is the formula for the consumer surplus?
How does the consumer surplus relate to the demand curve?
Demand curve is derived from the consumer’s (or market’s) willingness to pay
The difference between the demand curve and the price that we pay allows us to find our consumer surplus
Label the different parts of the consumer surplus
What impact will a price decrease have on the consumer surplus?
A decrease in price will lead to an increase in consumer surplus because:
o All the units originally being purchased cost less
o In addition, we are purchasing more, and there are extra units where there is a difference between consumer surplus and price
What impact will a price increase have on the consumer surplus?
An increase in price will lead to a decrease in consumer surplus because:
o All the units originally being purchased cost more
o In addition, we are purchasing less, and there are fewer units where there is a difference between consumer surplus and price
