Utility and Rational Behaviour Flashcards
utility definition
the enjoyment or satisfaction people receive from consuming goods and services
assumptions of traditional consumer theory
People seek to maximise their utility
People are rational: their choices are consistent with utility maximisation
assumptions for rational people
they have full information
they have perfect foresight
they are fully able to process this information and make the decision consistent with utility maximisation
they act in self interest
the utility curve
as we consume more of a good, utility increases at a decreasing rate
eventually it begins to decrease
marginal utility
the change in utility from the last unit consumed
eventually, there is a point where the change approaches zero, or goes
from being positive to becoming negative = this is where utility is maximised
utility is maximised when
the MU of the last unit consumed equals zero
just before the MU becomes negative
the first unit yields the greatest utility whereas the last has the smallest
choice and constraints
budget constraints
choice constraints
- they have to allocate their scarce resources across many goods and services,
and each of these yield specific utilities which diminish at specific rates
allocative efficiency
consumer equilibrium
where utility is maximised given the budget constraint
MUx / MUy = Px / Py
