Utility Flashcards
(10 cards)
What 3 characteristics must a commodity have to be an economic good?
Scarcity, utility and transferability.
List 3 assumptions governing consumer behaviour.
1) The consumer will act rationally. 2) The consumer has a limited income. 3) The consumer is subject to diminishing marginal utility.
List 3 reasons why consumers buy goods.
1) Functional demand - to carry out a specific task e.g a camera to take photos with. 2) Exclusive demand - Consumers may purchase goods because of the status attached to them. 3) Bandwagon Effect - Consumers may purchase goods that other people have been seen to buy / goods that have become fashionable.
What does the Law of Diminishing Marginal Utility state?
The Law of Diminishing Marginal Utility states that as a person consumes additional units of a good, the satisfaction or marginal utility gained from each additional unit consumed will eventually decline.
List 2 assumptions underlying the Law of Diminishing Marginal Utility.
1) Beyond the Origin - It only applies after a certain point called the origin, we assume a minimum quantity has been consumed or the law will not hold. 2) No time-lapse has occurred - We assume no time-lapse has occurred where circumstances may have changed e.g change in tastes.
List 2 goods which the Law of Diminishing Marginal Utility does not apply to.
1) Goods of Addiction. 2) Medicine
What is the Law of Equi-Marginal returns?
The Law of Equi-Marginal Returns states that to enjoy maximum utility, a rational consumer will spend their income in such a way that the ratio of marginal utility to price is the same for all goods.
What is consumer equilibrium?
Consumer equilibrium is when the ratio of marginal utility to price is the same for all types of goods the consumer purchases, there is no way the consumer can change their spending pattern to increase their total utility (the consumer is said to be in equilibrium).
What is consumer surplus?
Consumer surplus is the benefit to the consumer due to the difference between what a consumer actually pays to consume a good and the maximum price which they would have been willing to pay rather than go without the good.
What was Adam Smith’s Paradox of Value?
Smith drew a distinction between value in use and value in exchange to explain that some goods which are not necessary to life, such as gold, were exchanged for large sums of money, whereas essential commodities such as water have a low price (this was the paradox of value).
