Download Consumer & utility

Consumer & utility
Exam Questions
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2006 sq 6
2005 sq 4
Assumptions made about consumers
consumers act rationally
2. consumers have limited incomes
3. consumers aim to get their maximum
utility from the way they spend their
incomes
4. consumers are subject to
The Law of Diminishing Marginal Utility
1.
Utility

is the amount of
benefit or
satisfaction
derived from the
consumption of a
good or service.
Marginal Utility

is the increase in
benefit or
satisfaction
derived from the
consumption of an
extra unit of the
good or service.
The Law of
Diminishing Marginal Utility

states that as a consumer
consumes extra units of a good,
then at some stage the marginal
utility will decrease.
Assumptions underlying the law of
diminishing marginal utility
1. Other factors affecting utility do not change:
 The law assumes that other factors which
affect a consumers utility do not change
including;
 Income levels
 Nature of successive units of the product
 Consumers taste
2. It does not apply to addictive goods or
medicines:
 The MU of addictive goods continuously
increase as consumption increases.
 With medication you may not get full utility
until the last tablet is consumed.
3. It applies only after a certain point called
the origin:
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The “origin” is the minimum quantity
which can be used effectively.
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Until this stage has been reached,
marginal utility may not diminished.
 Eg. a full apple not a bite.
a full bowl of cereal not a spoonfull.
4. Sufficient time has not elapsed between
consumption of successive units:
 If a person eats a number of apples, each
addition apple will give diminished utility if
eaten one after the other on the same day.
 However , if they are eaten one per day
then the MU may not diminish.
Equilibrium
 Means the ideal situation to be in under
any given set of circumstances.
 When consumers are in equilibrium it
means that they are getting the maximum
possible utility from their income.
The Principal of Equi-Marginal Utility
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The Law of Equi-Marginal Returns:
States that a consumer will be in
equilibrium when his/her income is spent
in such a way that the ratio of marginal
utility (MU) to price (P) is the same for all
goods.
MU coke
= MU crisps
= MU choc
Price of coke
Price of crisps Price of choc
DEMAND CURVE
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The shape of the normal
demand curve reflects the
equi-marginal principle.
If the price of one good
falls while the other remain
constant, more of the
relatively cheap good will
be bought until the MU/P is
the same for all goods
bought.
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100
Exam Questions
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2011 Section B Question1
Give
Rational choice theory
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Self-interest
Use reason “rational calculator”
Make choices
How – benefits v costs & marginalism
Yesterday is gone tomorrow hasn’t
happened yet so focus on now
Utility/satisfaction
Humans
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As you make choices something is going to
happen to you
Diminishing returns
i.e. songs 3 minutes – get fed up
Films 2 – 3 hours or mini-series…..
Cost rise as you make choices (PPF)
Consumer Demand
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Constraint – income
Options – freedom of choice
Self-interest
Cost & benefits
Cost (social) – price
Benefit (individual)
Market mechanism
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Compete I want to pay low price, they
want the highest
Price (scarce) – level of technology & all
the producers
Revealed preference
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Individual focuses a lot of energy on
the costs however they must think of
other things.
Most efficient choice build in all the info
necessary to choose
S, C, Ex, Y,…….
Elasticity
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If price change how do these rational
choice makers change their behavior?
If price chances that changes your
rational calculator
Inelastic – don’t care
Elastic – really interested