Economic Objectives (1.5)

What is the utility theory made about economic agents?

When making economic decisions, consumers aim to maximize utility and firms aim to maximize profits

What is meant by acting rationally?

When economic agents make decisions SOLELY based on trying to gain maximum utility possible.

What is marginal utility?

The extra benefit gained from consuming one additional unit of a good.

What is total utility?

Overall benefit gained form consuming a good/service

What is the law of diminishing marginal utility?

The law of diminishing marginal utility states that all else equal, as consumption increases, the marginal utility derived from each additional unit declines.

How do consumers act rationally?

By choosing to consume a good at the point where marginal utility = price.

Eg if the utility a person gains from eating a chocolate biscuit is worth 10p,then a rational consumer will pay 10p for it.If utility from consuming a 2nd biscuit is worth 8p consumer will pay 8p. SO MU (utility they get) = price

What is the law of diminishing marginal utility ?

Suggests that as a person consumers more a particular good or service the additional utility they derive from each additional unit will rise at a decreasing rate to the point where it reaches zero.Consumers are willing to pay less for extra units(chocolates)

Why does the demand curve for marginal utility slope down?

Due to the law of diminishing marginal utility. MU decreases with w every extra good consumed

Explain total utility curve and why it is upwards sloping?

As consumption increases so does total utility however TU increases at a decreasing rate to reflect law of diminishing MU. TU is maximized when marginal utility equals 0.

How do consumers maximise utility?

Consumers maximise utility from an economic decision

What are ways firms maximize utility?

Maximizing profit

Some firms have owners who seek to maximize the utility of others (rewards to workers,giving to charity)

How can governments maximize utility?

By using there resources to work in the best interest of people needs and wants eg. boosting economic growth, full employment, low inflation, equilibrium in BOP

What is the formula for average utility ?

Total utility / quantity

What is the point where total utility is maximized and marginal utility is 0

Point of satiety