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9 Cards in this Set
- Front
- Back
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Def of marginal utility |
This is a theory of consumer behaviour that analyses individual satisfaction. This examines the additional satisfaction gained from consumers additional unit of a product at a particular moment of time |
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Def of utility |
This is the satisfaction obtained form the consumption of a product at a particular moment in time. |
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Def of total utility |
This is the total satisfaction gained from consuming all units of a product at particular moment of time |
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Def of marginal utility + dxnaple |
This is the additional satisfaction gained form consuming additional unit of a particular product within a particular moment in time. When an individual consumes a given unit of a product, a player consuming 4 bottles of water after training |
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Def of maxmimum utility |
Individual total utility will be at maximum when the MU is 0 which means that when MU is positive, TU is increases |
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Mention the assumption of this theory |
This theory is based on the assumption that consumers are rational, they have limited income and they aim to maximize their total utility |
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What can we derive by this + Def of law of diminishing marginal utility |
This concept can be used to derive an indiviso demand curve and market demand curve. This stated that when the consumption of of a product increases, the additional satisfaction gained from each unit consumed will eventually decrease. |
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Explain how can we use the law of diminishing marginal utility to explain how the demand curve can be obtained |
For example, assuming a player consumers 6 bottles of a drink, the diagram below summarises the MU obtained from each unit. The above diagram, shows that the first unit of a drink gives the highest MU, while any subsequent unit consumed give less MU as shown. The 6th unit, the MU is negative. This means the consumer is dissatisfied. Any rational consumer will maximise their TU when MU=0. This concept can be used to derive an individual demand curve. In order to do this, we assume that MU of a product can be measured by the amount of money an individual is prepared to pay for it. The fire This means P=U. From the above example, the player is prepared to pay the highest price for the first unit of drink consumed (P1=MU1), and for any subsequent unit consumers, the player will be prepared to pay less. This is because the MU obtained from each unit decreases. We can use a table to summarise this. From the above table, we can see that there is an inverse relationship between the price an individual is prepared to pay and the utility consumed. This gives a perfect individual demand curve From ten sober individual demand schedule, it’s possible to derive a market demand schedule. This is the sum of all individuals demand. |
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What is the equi marginal principle |
The concept of marginal utility focuses more on one product. However, a rise in the price of one good may affect the amount of income left to purchase all other products. Therefore this will have an impact on consumer demand for substitutes and complements. Since this theory assumes that conumsers are rational and have limited income, they will allocate their expenditures across all products to ensure maximum satisfaction. This is explained by the equilibrium marginal principle. This states that a rational individual seeking to maziming their TU will allocate their expenditure amongst different products. This is to ensure that the satisfaction gained from the last unit of money spent on each hood is the same. For example consumare spening on Good X and Good Y will achieve equilibrium MUx |
