Microeconomics NCEA Level 3 Economics

definitions

utility

a rational consumers spends their income in the way that gives the greatest amount of utility

total utility (TU)

shows the aggregate (total) satisfaction gained from consuming successive quantities of a good or service

marginal utility

shows the extra satisfaction resulting from the consumption of one more unit of a good or service.

optimum purchase rule

in order to maximise total utility, a rational consumer will continue to purchase a good up to where P=MU

P<MU

if P<MU, the consumer should continue to purchase the good as the extra satisfaction gained is greater than the price paid

P>MU

once P>MU, it is not worth purchasing the good as the price paid would be higher than the extra satisfaction gained from consuming it

law of diminishing marginal utility

successive equal additions to the quantity of a good or service consumed provides smaller increases in total utility (as consumption increases, MU falls)

demand

the amount of good/service a consumer is willing & able to buy at a range of prices

utility theory

the use of the law of diminishing marginal utility & the optimum purchase rule to derive the concept demand

things that cause a change in demand

1. taste & preference

2. income

3. change in price of substitutes

4. change in price of complementary goods

consumer equilibrium

helps economists see what a rational consumer will do with a limited budget and how they will seek to maximise utility for two or more goods

will occur where MU per $ of all goods purchased is equal

consumer equilibrium formula

MU/P (a) = MU/P (b)