1.2.1 + 1.2.10 Rational decision making

Law of diminishing marginal utility

As consumption increases satisfaction increases but at a slower and slower rate

Herd/Peer behaviour

When individual behaviour is based on peer effects/ social norms

Habitual behaviour

When consumer behaviour is based on routine and inertia

Computational weakness

When consumer behaviour is based on poor numeracy

Reasons why a consumer may not act rationally

Herd metality/habitual behaviour/computational limitations/availability bias/ imperfect information/anchoring bias/ framing effect

Consumer seek to maximise

Utility

Total Utility

the overall satisfaction or benefit from consuming goods/services

Marginal Utility

The extra utility gained from consuming one extra unit

When is Total utility maximised

When marginal utility is 0 as the additional benefit from consuming the good is nothing

Diminishing marginal utility

As more units of a particular good is consumed each additional unit proves less utility

Disutility

When consuming more of a good leads to the total utility decreasing

Producers seek to maximise

Profit

Government seek to maximise

Social welfare

Workers seek to maximise

Wage/Working conditions

How can the government influence an individuals behaviour

By subsidising positive goods or by taxing/banning negative goods