MICRO - Utility & the Margin Flashcards
(19 cards)
What is utility in economics?
The total satisfaction gained from consuming a good or service.
what do consumers and firms aim to maximise?
Consumers aim to maximize utility, and firms aim to maximize profit.
What is the law of diminishing marginal utility?
As you consume more of a good, your extra satisfaction (marginal utility) decreases.
What is utility maximisation?
Consumers make choices to get the most satisfaction. Firms make decisions to get the most profit.
What does “acting in their own interest” mean?
Economic agents choose what benefits them most, like buying the best value product or charging the highest price.
What does on the margin mean?
Looking at small changes - for example, adding one more unit and seeing the effect.
What is the paradox of value?
Some essential goods (like water) are cheap, while luxury goods(like diamonds) are expensive.
Why does the paradox of value happen?
Water is abundant and diamonds are scarce - so people pay more for diamonds.
What is demand?
The amount of goods people are willing and able to buy at a given price and time.
What does the law of demand state?
price up - Demand down, price down - demand up.
what does ceteris paribus mean?
All other factors remain the same, used when analyzing one variable at a time.
What is a demand curve?
A graph showing the relationship between price and quantity demanded.
What is a contraction of demand?
higher price - demand falls - moves up the demand curve.
What is an extension of demand?
Lower price - demand rises - moves down the demand curve.
What are non price factors affecting demand?
Income, fashion, substitute goods, expectations, population.
What happens if income increases?
People buy more normal goods - demand curve shifts outward.
What happens if income decreases?
People buy less normal goods - demand curve shifts inward>
How do substitute goods affect demand?
If a substitutes price increases, demand for our good increases.
How do complementary goods affect demand?
If the price of a complement falls, demand for out good increases.
