4.1.2.1 Consumer behaviour

Question 1

Rational behaviour

Answer 1

When individuals act in their own self-interest and choose the options which maximises their own personal utility

Question 2

Utility

Answer 2

A measure of the satisfaction (utility) gained from consuming a good or service

Question 3

Utility theory

Answer 3

assumes that consumers choose the basket of goods and services that will maximise their total utility subject to constraints (eg-limited income, limited time, limited budget)

Question 4

Total utility

Answer 4

The cumulative sum of satisfaction (utility) that an individual gains from consuming a good or service

Question 5

Marginal utility

Answer 5

The extra satisfaction (utility) gained from consuming one more unit (i.e. one extra) of the good or service

Question 6

The law of diminishing marginal utility

Answer 6

As the consumption of a good increases, each additional unit of the good provides less utility than the previous unit

Question 7

What are the 3 assumptions behind economic models and optimal decision making?

Answer 7

1) People are rational
2) People respond to incentives
3) Optimal decisions are made at the margin

Question 8

altruism

Answer 8

unselfish regard for the welfare of others

Question 9

If MB > MC then…

Answer 9

they will decide to consume the additional unit

Question 10

If MB < MC then…

Answer 10

They will decide not to consume the additional unit

Question 11

Utility is maximised at the point where…

Answer 11

MB > MC

Question 12

rational economic decision making

Answer 12

choosing an action in which the benefits are greater than the costs

Question 13

Examples of making rational economic decisions

Answer 13

consumers try to maximise the satisfaction of consumption, firms maximise profit, workers try to secure the highest wage possible, etc.

Question 14

What does it mean to be thinking at the margin ?

Answer 14

Thinking at the margin is thinking about the effect of an additional action such as eating one more biscuit

Question 15

Why is thinking at the margin important?

Answer 15

Thinking at the margin is important as it allows consumers to keep thinking ahead, it prevents consumers thinking about things they have already done & allows them to consider how to maximise their utility now or in the future

Question 16

Entrepreneur rational decision

Answer 16

For the entrepreneur in a firm, the incentive for taking risks is profit.
-Where incentives are not given properly, resources will be misallocated.

An entrepreneur wants to avoid loss and gain profit, which makes them want to innovate, so they can reduce their production costs, and improve the quality of their products.