Utility Theory Flashcards
If there is a change in demand suddenly what happens to supply
When demand shifts suddenly there is an immediate price rise and the supply gradually increases so the price of the good can decrease to form a new equilibirum
In the immediate term, supply is fixed and cannot change overnight
- change takes time
Explain stabilising speculation
Firms try to predict where prices are going and take actions on these expectations. If prices are going to change suddenly business adjusts supply and demand. Their decisions based on the expected price and their current price. Business avoids massive equilibirum fluctuations and subsequent adjustments
Explain destabilising speculatio Throught the example of an expected price drop
The business may speculate that price will drop more or that demand/supply will differ and they can create a bigger gap than they would have had without their speculating - over compensating
Speculated actions affect the business and decisions
Define total utility
Total satisfaction a consumer gets from the consumption of all the units of a good consumer within a given time period ex: a cup of coffee in the morning vs your 3rd one that day
Define marginal utility
extra satisfaction gained from consuming one extra unit of a good within a given time period
Explain diminishing marginal utility
More of a good are consumer, additional units will provide less additional satisfaction than previous units
On A graph where good is constant price what happens as units consumed increase
More units = more utility but less marginal utility
Define marginal consumer surplus
Excess of utility from the consumption of one more unit of a good over the price paid
Define total consumer surplus
Excess of a person’s total utility from the consumption of a good over the amount the person spends on it
Define rational consumer behavious
Attempt to maximise total consumer surplus
Rise averse
Conservative and doesn’t take a chance even if the expected value is positive - the loss would do more impact than the good would
- natural
Define risk neutral
Rational views and indifferent. If I have above average odd logically it makes sense
Define risk seeking
Will bet on something even if odds are against because its more valuable to this person than the loss
Utility curves (utility to income) and why utility does not increase at same rate as income
Utility doesn’t increase at the same rate as income
People are naturally risk-averse for these reasons
If they lose out it would affect your utility more than you would gain from it if you won
Why is insurance important in discussing utility
People are risk averse
Insurance is a protection mechanism.
Allows consumers and businesses to get maximal utility they want from their funds taking the risk away.
Feeling certainty form insurance goves extra utility
