Micro 3: Consumer behaviour, utility and the demand curve

Question 1

What is utility maximisation?

Answer 1

With the resources you have, you will have acted in such a way as to gain as much personal pleasure as possible from your decisions.

Question 2

What does it mean when economists talk about decisions by economic agents being made ‘on the margin’?

Answer 2

When facing a decision regarding how many hours to work, how much to charge for finished cars etc., the people performing these activities will attempt to measure the value or cost of the next unit produced or consumed.

Question 3

What is a market?

Answer 3

Any place where goods and services are exchanged between buyers and sellers. It can be a physical location but also can exist online.

Question 4

What happens to the marginal utility of ice cream scoops as more are consumed over time?

Answer 4

It goes down.

Question 5

What happens to the total utility of ice cream scoops as more are consumed?

Answer 5

It comes up then goes down.

Question 6

Assuming the ice cream scoops were free and you wanted to maximise utility, where on the graph would be the rational number of scoops for you to stop eating more scoops?

Answer 6

When it hits 0.

Question 7

If the marginal utility of eating an additional scoop is negative, what does that mean?

Answer 7

You wouldn’t choose to do it.

Question 8

What is diminishing marginal utility?

Answer 8

The phenomenon whereby, as the units of a good or service consumed are increased, the marginal utility of each new unit will diminish (reduce in value).

Question 9

What is marginal utility?

Answer 9

The additional satisfaction gained by consuming one more unit of a commodity.

Question 10

What is demand for a good or service?

Answer 10

The quantity of that good or service that consumers are able and willing to pay at a range of prices over a given period of time.

Question 11

What do increases or decreases in demand represent?

Answer 11

An increase in demand means the curve has shifted to the right (outwards).
A decrease in demand means the curve has shifted to the left (inwards).

Question 12

What happens to the demand curve when the price increases ceteris paribus?

Answer 12

There is a contraction along the demand curve, and quantity demanded decreases.

Question 13

What happens to the demand curve when the price decreases ceteris paribus?

Answer 13

There is an extension along the demand curve, and quantity demanded increases.

Question 14

What are the two main impacts that a change in prices has on quantity demanded?

Answer 14

The income effect and the substitution effect.

Question 15

What is the income effect?

Answer 15

This states that as prices for a good or service fall, people can afford to buy more of it with their current level of income, so more are consumed.

Question 16

When does the substitution effect occur?

Answer 16

It occurs when there are other goods available which can act as substitutes for the good in question. If the price increases, then consumers may turn to these other goods to meet their wants and needs. If the price of a good decreases, then consumers may give up the goods they were previously consuming and buy this good instead.

Question 17

What are substitute goods?

Answer 17

Goods which perform similar roles such that they can replace one another in use or consumption.

Question 18

What is demand vs quantity demanded?

Answer 18

Demand (D) is described by the demand curve- how much people are willing and able to pay at a range of prices. Quantity demanded (Qd) is determined by both the position of the demand curve and where on the demand curve we happen to be (determined by price). If D shifts to the right, then Qd is likely to increase but Qd can also increase with a price change.

Question 19

What do changes in quantity demanded mean?

Answer 19

The current quantity of a good or service people are willing and able to buy at the same price has changed. This could be the consequence of price changes.

Question 20

What are changes in demand?

Answer 20

The amount of the good people are willing and able to buy across a range of prices in a given period of time has changed. Prices of a good do not affect ‘demand’ for that good.

Question 21

Seeing as demand shows how much people will buy across a range of prices, what does this mean about prices?

Answer 21

Prices of a good do not affect demand for that good. If demand has increased or decreased this means, at the same price, people are now going to buy more or less of the product.

Question 22

How would a change in demand be represented?

Answer 22

By a shift of the demand curve (rather than the movement along it).

Question 23

How would you represent an increase in demand?

Answer 23

D would shift to the right.

Question 24

How would you represent a decrease in demand?

Answer 24

D would shift to the left.

Question 25

What are four factors that might cause demand to increase or decrease?

Answer 25

Increase:
1) Rise in price of a substitute good
2) Successful advertising campaign promoting the good
Decrease:
1) Rise in the price of a complement to the good (eg. gas and cars)
2) Fall in the real disposable income for households

Question 26

What is the difference between the term ‘increase in demand’ and ‘increase in quantity demanded’?

Answer 26

A change in quantity demanded is a movement along the existing demand, caused by change in the price of a product. This is the willingness to purchase, so it can be changed by a change in price. A change in demand is a shift of the entire demand curve, caused by a change in anything that affects your willingess/ ability to buy, other than the product price. A change in the price will never change the demand.

Question 27

What is equi-marginal utility?

Answer 27

A consumer will consume any product up to the point where the last unit they consume will provide the same utils per pound as all the other last units of the product they consume.

Question 28

What is the acronym used to state things that affect the demand curve?

Answer 28

Complements
Advertising
Trends
Population
Interest rates
Substitution
Seasons

Question 29

What factors determine the shape of the demand curve?

Answer 29

Income effect
Substitution effect
Diminishing marginal returns