4.1.2.1 Consumer Behaviour
● Rational economic decision making and economic incentives
● Utility theory: total and marginal utility and the hypothesis of diminishing marginal
utility
● Utility maximisation
● The importance of the margin when making choices
Rational Behaviour:
- Orthodox economic theory assumes that economic agents are rational. This means
that they:
● Choosing independently of one another
● Have fixed and stable preferences
● Have access to complete and accurate information on all the available
alternatives
● Respond to incentives to make optimal choices
The key assumption is that people make choices to maximise the satisfaction (utility) they
get from spending their income. Furthermore, and similarly, businesses aim to maximise
their profits.
Utility
Utility measures the satisfaction obtained from purchasing and consuming a product.
Total utility: is the total satisfaction from a given level of consumption
Marginal utility: is the change in satisfaction from consuming an extra unit
- The hypothesis of diminishing marginal utility supposes that beyond a certain point,
the marginal utility of extra units declines as more is consumed. On the table,
diminishing marginal utility happens with the 4th unit where the marginal utility is 12.
The 8th unit represents the point of satiation where there is no more utility to be
gained. Not shown on the table, but any consumption beyond this point would be
negative and would be irrational, even if the goods were free.
- As the marginal utility associated with the consumption of each additional unit is
falling, then the price rational consumers will be willing to pay will be also falling. This
helps explain the downward sloping demand curve for most goods or services.
● The margin is very important in making rational economic choices. The margin
means having a little bit more or less of something
1. Marginal benefit: is the change in total private benefit from one extra unit
2. Marginal cost- is the change in total private cost from one extra unit
Rational consumers for example are assumed to calculate the marginal cost and the
marginal benefit for each decision. In reality, these choices are subject to constraints. One
such as income.
Marginal analysis feature throughout the syllabus- for example in the theory of the firm and
labour market analysis
● Rational economic decision making and economic incentives
● Utility theory: total and marginal utility and the hypothesis of diminishing marginal
utility
● Utility maximisation
● The importance of the margin when making choices
Rational Behaviour:
- Orthodox economic theory assumes that economic agents are rational. This means
that they:
● Choosing independently of one another
● Have fixed and stable preferences
● Have access to complete and accurate information on all the available
alternatives
● Respond to incentives to make optimal choices
The key assumption is that people make choices to maximise the satisfaction (utility) they
get from spending their income. Furthermore, and similarly, businesses aim to maximise
their profits.
Utility
Utility measures the satisfaction obtained from purchasing and consuming a product.
Total utility: is the total satisfaction from a given level of consumption
Marginal utility: is the change in satisfaction from consuming an extra unit
- The hypothesis of diminishing marginal utility supposes that beyond a certain point,
the marginal utility of extra units declines as more is consumed. On the table,
diminishing marginal utility happens with the 4th unit where the marginal utility is 12.
The 8th unit represents the point of satiation where there is no more utility to be
gained. Not shown on the table, but any consumption beyond this point would be
negative and would be irrational, even if the goods were free.
- As the marginal utility associated with the consumption of each additional unit is
falling, then the price rational consumers will be willing to pay will be also falling. This
helps explain the downward sloping demand curve for most goods or services.
● The margin is very important in making rational economic choices. The margin
means having a little bit more or less of something
1. Marginal benefit: is the change in total private benefit from one extra unit
2. Marginal cost- is the change in total private cost from one extra unit
Rational consumers for example are assumed to calculate the marginal cost and the
marginal benefit for each decision. In reality, these choices are subject to constraints. One
such as income.
Marginal analysis feature throughout the syllabus- for example in the theory of the firm and
labour market analysis
